Gerdau SA (GGB) 2011 Q1 法說會逐字稿

(interpreted) Good morning and welcome to Gerdau's First Quarter of 2011 Earnings Conference Call. All participants are now connected in listen-only mode and at the end of this presentation we will start the Q&A session. (Operator Instructions).

We wish to say that any forward-looking-statements made during this call referring to Gerdau's business outlook operating and financial targets and projections are based on the Company's management's expectations regarding the future of Gerdau. Although Gerdau believes that its forward-looking-statements are based on reasonable assumptions there are no guarantees that future events will not affect this evaluation.

We have with us today Mr. Andre Gerdau Johannpeter, President and CEO, and Osvaldo Schirmer, Vice President and IRO. I would now like to give the floor to Mr. Andre Gerdau Johannpeter. Mr. Johannpeter you may proceed.

(interpreted) Thank you good afternoon and welcome to this Gerdau conference call. It's wonderful to have you with us today at this First Quarter 2011 Conference Call.

As we always do we will start our analysis by evaluating the steel world scenario and then we will discuss Gerdau's performance and then Mr. Schirmer will talk about the financial performance of the Company. And then we will be at your disposal to answer your questions.

Throughout our presentation we will discuss Gerdau's performance during the first three months of 2011 as compared to the previous year and we will also at certain points discuss comparative data with the fourth quarter of 2010, thus allowing you to have a better vision regarding the recovery of the markets where we are present. For those on the internet we are now on page two, screen two, world context in the first quarter of 2011 compared to first quarter of 2010.

So first of all the world steel output, 371.5 million tonnes, an increase of 9% when compared to the first three months of 2010. This is data from the World Steel Association.

The Chinese steel output grew 9%, 170 million tonnes. China accounts for 46% of world steel production during this period. Steel production in the United States, 21 million tonnes a growth of 7%. Steel output in India, a growth of 9%, totaling 18.2 million tonnes. According to the ILAFA, steel output steel output in other countries of Latin America except Brazil grew 15%, totaling 7.9 million tonnes. Brazil grew 6%, a total of 8.5 million tonnes. Therefore we can clearly see that production has grown in emerging countries and this reflects a growth of demand in these regions.

On page three we have Gerdau's main figures. Here in this first quarter we have had a better performance in shipments and the best since the end of 2008 when the world economic crisis started. This confirms that our previous expectation of a good year - a positive year - recovering margins and even in a scenario of cost increases.

Our consolidated shipments totaled 4.7 million tonnes, a growth of 16%. The consolidated output of steel, a growth of 9% totaling 4.7 million tonnes. Net sales BRL8.4 billion a growth of 18%.

During the first three months of the previous year EBITDA BRL1.1 billion in this first quarter, 21% decline or reduction vis-a-vis this previous year. However, if we compare the fourth quarter of 2010 there has been a 35% growth which reflects the growth of the markets where we are present.

Net income BRL409 million in the first quarter, 29% reduction vis-a-vis the first three months of 2010. When compared to the period of October to December 2010 the drop of net income of 3% occurred, compared to the fourth quarter of last year because of non-recurrent gains.

Dividends, Gerdau will pay out BRL102 million to shareholders and BRL41 million to the shareholders of Metalurgica Gerdau.

Recently we just concluded an equity offering which was successful. It was a global offer of Gerdau SA stock, a total of BRL5 billion involving a primary offer of BRL3.7 billion and a secondary offer of BRL1.3 billion. This transaction which might still have a supplementary amount of shares will later be detailed by Mr. Schirmer. In the quarter BRL333 million of investments were carried out, 73% for Brazil.

And now I would like to say a few words about the markets in which we are present on slide number four. First of all an overview, the outlook for the world economy is positive 4.4% of the growth of the GDP -- the world GDP is expected according to IMF figures. World consumption of steel would be 1.36 billion, a growth of 6% vis-a-vis 2010 and Brazil steel consumption should total 27.8 million tonnes, 5% higher when compared to 2010. This is data from the Instituto Aco Brasil. However, if we consider the expansion of the consumption of long steel for Brazil the growth is more. There will be a growth of 7% in 2011, a total of 11.5 million tonnes.

The numbers signal therefore that there should be a growth in steel consumption even with the lower growth expected of the GDP which according to the Central Bank will be of 4%.

And now some important segments - civil construction, the GDP should grow 5.2% in 2011 which shows once again that this is a good moment for civil construction in Brazil. Processing industry should have a good performance as well, a growth with 3.6%. This data comes from the Central Bank as well.

On page five here we have North America then we will talk about Latin America and then Specialty Steels.

In North America our operations have shown a good performance with operating improvements and sales recovery because of the greater demand for steel particularly in industrial and energy sectors. Throughout the first quarter the United States GDP increased 1.8%. This is still preliminary data and the estimate for the year is a growth of 2.4%. Preliminary data also mentioned that the GDP of Canada has grown 4% in the first quarter and the outlook for the year is a growth of 2.8%.

The data from the Institute for Supply and Management, ISM which is one of the most important indicators for the North American industry - it confirms the recovery of the sector totaling 61.2 points in March 2011 and anything above 50 points is already considered growth. But in the construction sector which is still below the historic levels we already have signs of recovery. Some examples are civil construction projects which have to do with energy, roads and sanitation. The Architecture Billings Index, the ABI is an economic indicator of civil construction which exceeded 50 points in March, a growth compared to February.

In view of this scenario the estimates for the World Steel Association show considerable growth of steel consumption in the region. In 2011 the steel consumption in the United States should reach 90.5 million tonnes, 13% higher than 2010. For Canada the estimate is 3.9% increase in steel consumption.

Latin America, the most important countries in Latin America are growing considerably. There is economic recovery which shows the increase of the GDP during the first quarter. This is still preliminary data but outstanding is Chile - growth of 9.1%, Argentina 7.3%, Peru 7.8% and Mexico 5%.

The outlook for the steel markets in Latin America are very positive for the year. The region's GDP should grow 4.7% in the year in this region. And the consumption of steel will be 38 million tonnes, 8% above 2010.

Now, our Specialty Steels - reminding you that this includes Brazil, United States and Spain - starting in North America, United States where auto production, light and heavy commercial vehicles is growing. It totaled 3.5 million units, a growth of 15.8% almost 16% in the first quarter of 2011 when compared to the same period the previous year. This includes Canada, the United States and Mexico. The market expectation according to available statistics is that the output of the auto industry in the region should grow 10% in 2011.

Besides this really good moment in the auto industry we also experienced good demand in other segments like distribution, energy, agriculture and construction equipment in the United States. Therefore we are very bullish vis-a-vis the special bar quality market, the SBQ, medium and long term.

Now, in Specialty Steels in Brazil the auto production has grown 8% during the first three months of 2011 exceeding 900,000 units. According to Anfavea, the country's output should total 3.7 million units in 2011. This week also a record of auto sales was published in April 289,000 vehicles.

Now, Spain in Specialty Steels the number of commercial vehicles registered the European Union grew 14.7% when compared to the same period last year. Outstanding was Germany 31% and France another 12%. And these markets have grown considerably in the auto segment. And this growth of demand has led to good performance of our operations in Spain.

Now, regarding the Spanish market, the registry of autos dropped 2.7% vis-a-vis the first quarter of 2010. However market statistics show that the European production of light, medium and heavy vehicles in Europe should grow 2% in 2010. Also we must mention that there is growth in other segments like energy and equipment in Spain.

Now, a little bit about investments. On page six we have a chart here summarizing our main investments already approved and ongoing and some still being studied and analyzed. We will talk about the investments in Brazil and other countries.

Today we are announcing BRL718 million to be concluded by 2013 in the State of Sao Paulo. The focus is to meet the expansion of the auto industry and civil construction. These resources are earmarked to expand the Pindamonhangaba Mill and to improve Aracariguama Mill, and install a new ready-to-use products mill in civil construction also in Pindamonhangaba.

This investment package includes the installation of a new specialty steel rolling mill in Pindamonhangaba with an installed capacity -- annual capacity of 500,000 tonnes of round bars. This new equipment will start up operations in 2012 and the focus is to meet the needs of the Brazilian market.

Besides that we have scheduled another investment in the Municipality of Pindamonhangaba a new ready-to-use products for civil construction will be built. We will thus increase the -- or improve the process for our clients. They will be able to reduce time -- time to market and cost. It will be completed by 2013.

Still in the State of Sao Paulo there will be investments to improve the rolling mill in Aracariguama. The installing of a new GG50 rebars and rolls mill and this will come into operation in 2012.

The new investments which we are announcing today will generate approximately 2.6 direct jobs 330 direct jobs and 1,480 indirect along the supply chain and 780 temporary jobs during peak times.

In the United States until 2014 BRL560 (sic) will be invested in installed capacity of rolling mills and finishing in the specialty steel mills in Monroe, Michigan, Fort Smith, Arkansas, Jackson in Michigan and St. Paul in Minnesota. These investments are to meet the growth of auto and industrial markets in North America.

The annual installed capacity of specialty steels will grow 600,000 tonnes by 2014 and this amount is additional to the investments announced at the end of 2010 to expand the installed capacity of Monroe by 200,000 tonnes. So, this will -- much has already been announced plus what we are announcing today, the total growth is 600,000 tonnes of specialty steels for North America.

I would also like to mention new investments which are being under study both in Brazil and North America, the installation of two new steel mills in Brazil, one in the north-northeast region and the other in the Midwest. Each one of these undertakings will have an annual installed capacity of steel between 500,000 to 700,000 tonnes to meet the needs of civil construction and industry.

And also we are studying the implementation of a new rolling mill in the south of the country with an annual installed capacity of 600,000 tonnes per year. The building of a new specialty steel mill in North America with an annual installed capacity of 700,000 to 800,000 tonnes to meet the needs of the markets in the region, this is also under study.

Now, my final remarks on page seven, for the second quarter the signs that we have seen in the markets in the different countries point to maintenance and a trend towards improvement of the demand. However, we have been monitoring the effects of the world economy of the tragedy occurred in Japan, of the financial situation of some countries in Europe, of the political crisis in the north of Africa and Middle East and also the growth of inflation in emerging countries like Brazil, China and India.

So, our objective is to continue investing in the expansions of our current operations to fully meet the needs of our clients with flexibility and speed. But also we wish to continue with our management efforts to increase productivity and reduce costs and always improve our operating margins.

As far as Brazil goes we will continue with our investments to achieve self-sufficiency in ore and to start production in flat steel in Brazil. These are scheduled for 2012 and focused on our Acominas Mill in Minas Gerais which we have already communicated to you beforehand.

And with the production of flat steels we will start the production of coiled hot-rolled strips and then of heavy plates increasing our mix of products. And if we also decide to monetize part of the surplus of our mineral resources in Minas Gerais, this project is also ongoing. These initiatives will allow Gerdau not only to diversify its activities but also expand its financial margins and our competitiveness in the market.

Now I conclude my remarks and would like to ask Mr. Schirmer to continue with his and then I'll come back for questions. Thank you very much.

(interpreted) Thank you very much Andre.

Good afternoon everybody. Now let's see the screen number eight, the consolidated performance of Gerdau. I will start by our consolidated results and then I will explain about the business operations and capital structure and I will make a few remarks about our recent public offering.

On screen number eight consolidated net sales for the first quarter was BRL8.4 billion as was said by Andre, which represents an 18% growth year-on-year, an increase of BRL1.3 billion as you can see on the second bar of the bridge chart. And this increase in net sales comes from the higher volumes sold during the period, a 16% increase during the period.

And the cost of sales increased by BRL1.5 billion in the first quarter of 2011 on the third bar of the chart, the vertical bar, which represents a 26% increase year-on-year. This increase in the cost of sales is due to the higher volumes sold and also to the increase in raw material prices in the different business operations. The mismatch between the price increases for the raw materials and the capacity to transfer the prices to the steel products resulted in a reduction of the consolidated gross margin, which was 20% in the first quarter of 2010 to 14% in the first quarter of 2011.

The participation of SG&A in relation to net sales was kept at around 7% in spite of the increase in expenses driven by the higher level of activity in this period when compared to the previous year, as you can see on the fourth vertical bar of the chart.

Considering these variations the EBITDA of the first quarter of 2011 reached BRL1.1 billion, 21% lower year-on-year. And as a consequence the EBITDA margin was 13%. It was 10% in the fourth quarter of 2010. The higher contributions for this operating cash generation were the business operations of Brazil and North America with 36% and 30% contribution respectively. Consolidated net income was BRL409 million in the first quarter of '11, vis-a-vis BRL573 million in the first quarter of '10, stemming mainly from the lower operating result, which I have just explained.

Now, I would like to invite you to check screen number nine. This is operation Brazil, and afterwards we will tell you about each one of the business units.

Let's start with Brazil where the sales volume in the first quarter was 1.7 million tonnes, an 11% increase year-on-year, of which 31%, about 526,000 tonnes, went to the foreign market, as you can see on the chart on the left. Semi-finished guarded exports accounted for the higher sales, mainly due to the higher demand for slabs in the Asian region. Net sales reached BRL3 billion in the first quarter of '11, a 3% increase, as you can see on the right on this chart.

This business operation contributed with 35% to the consolidated sales for the quarter. Exports accounted for BRL610 million to the overall net sales of the period and the higher volumes sold in the foreign market growing by 40%, mainly in semi-finished products, which have their prices lowered to the mix of products sold in the domestic market added to the discounts granted to clients in the domestic market over the fourth quarter of '10 had a major impact on the first quarter of '11 margins. Additionally, the higher costs, mainly due to the scheduled maintenance of the Acominas mill convertors, also impacted the margins for the period, and with that the EBITDA margin for the Brazil business unit went from 28% in the first quarter of '10 to 13% in the fourth quarter of '10 and also in the first quarter of '11.

Slide number ten, North America business unit, the 22% increase in volume sold in the first quarter of '11, vis-a-vis '10, as you can show on the left is a consequence of a major recovery of the industry and of the energy sector as well. And the construction sector still has demand levels that are lower than the historical levels but already with signs of a rebound. Net sales from the North America operation, the first quarter, reached BRL2.6 billion, 31% higher year-on-year, mainly due to the effect of increase of higher volumes sold and also the higher net revenue per tonne sold. And this business operation contributed with 31% to the overall consolidated net sales for the quarter.

EBITDA margin went -- increased by 10% to the first quarter of '10, going to -- increased from 10% to 13% year-on-year, consequence of the higher volumes sold and a better net revenue per tonne sold. And regarding the fourth quarter of '10, we see a major recovery with the margin more than doubling and EBITDA going from BRL136 million to BRL332 million.

Slide number 11, Gerdau in Latin America - in Latin America sales amounted to 631,000 tonnes in the first quarter, 17% higher year-on-year, and the highlights were the units of Argentina increasing by 40% and Chile increasing by 34%. Net sales of the Latin American operation were BRL1 billion in the first quarter of '10, vis-a-vis BRL803 million in the first quarter of '10, and this means a 28% growth. And this growth is driven by the higher volumes sold and, to a lower extent, a better net revenue per tonne sold. This business operation contributed with 12% of the consolidated net sales for the quarter.

EBITDA margin was 12% in the first quarter, relatively stable year-on-year, however, much higher than the 6% delivered in the fourth quarter of '10. In relation to the last quarter of the year, of '10, the improvement in margin is due to the higher volumes sold and better prices in the region.

Specialty Steel in -- on screen number 12, Specialty Steel business operation had net sales of -- with an increase of 22%, stemming from an increase in shipments increased by 15% and also better prices. The higher sales volume is due to the good levels of demand from the automotive sector in the US and the improvement in the export volumes of our Spain operation.

In Brazil, we had a temporary movement of realization of inventory since the fourth quarter of '10, which caused a reduction in the volumes sold in the first quarter of '11. This business operation, Specialty Steel, contributed with 22% to the overall consolidated net sales in the quarter as a consequence of the reduction in volumes sold and the increase in cost because of the scheduled maintenance down time, both in Brazil. The first quarter of '11 EBITDA was BRL244 million, 16% lower year on year, and the EBITDA margin went from 20% in the first quarter of '10 to 14% in the first quarter of '11, as you can see on the right on the lower part of the chart.

Some remarks about the indebtedness and liquidity of the Group, screen number 13, gross debt at -- on March 31st, 2011, was BRL14.2 billion, a BRL400 million -- almost BRL500 million reduction -- BRL435 million to be exact reduction compared to 31st of December 2010.

Of the amount of the gross debt, I can tell you that almost 90% of the debt is long-term and the remainder short-term. As to the currency, 23% was in reals, 41% in foreign currencies, contracted by companies in Brazil and 36% in different currencies contracted by our subsidiaries abroad. Most of the gross debt, 51% to be exact, has its origin in the capital markets debentures and bonds. And another important part of the debt, 30%, has its origin in loans taken from commercial banks.

The average nominal cost of the gross debt on March 31st, 2011, was 5.8%. As such, 8.3% for the debt in reals, 5.7% plus the exchange rate variation for the debt in foreign currency from the companies in Brazil and 4.3% for debt for companies abroad.

Regarding our cash on March 31st, it amounted to BRL2.4 billion and of which 71% were invested in reals and the remainder in different currencies, essentially in US dollar.

The cash conversion cycle, which was 84 days in March 2011, had a ten-day drop year on year and a ten-day drop in relation to December 2010 with a 7% increase in net sales and a reduction of 5% in working capital. Net debt in March 2011 amounted to BRL11.8 billion compared to BRL12.5 billion on December 31st, 2010. And afterwards, I will make a remark about capital injection and what these figures will be after this capital injection.

And still about debt and EBITDA on screen number 14 some debt indicators at the end of end of March, the main debt indicators for Gerdau were kept at comfortable levels as compared to the financial covenants of the Company, established with our banking financing contract. Gross debt/EBITDA ratio was 2.9 times and net debt EBITDA ratio 2.4 times. Now, EBITDA on -- over financial expenses ratio remained at 4.3 times, and EBITDA over net financial expenses exceeded 5.7 times.

The debt amortization schedule, as you can see on the chart on the right, shows also a comfortable situation up to 2012. On March 31st, 2011, there were debts amounting to BRL1.2 billion due in 2011 and BRL2.3 billion due in 2012. These amounts are much lower than what is expected as cash generation for these two periods and part of the debt was amortized in April last, as I will tell you afterwards. And at the end of the year, the average term was 5.2 years for debt repayment.

On screen number 15, some remarks about our public offering, recent capital increase and the figures and indicators after this capital injection. On April 12th, the Board of Gerdau approved the issuance of 61 million common shares and 135 million preferred shares, amounting to a capital increase of BRL3.7 billion, realized as a primary public offering. We also had a secondary public offering with a total of 69 million preferred shares of Gerdau SA, which belonged to Metalurgica Gerdau SA amounting to BRL1.2 billion, which was used -- totally used -- which was used to underwrite common stock in the primary offering.

The stock issuance price in this book-building process was BRL15.60 per common stock and BRL19.25 for preferred stock of Gerdau SA. And the greenshoe offering process is still open, which has to do with the option to issue up to 10 million common stock and 20 million preferred stock for up to 30 days, and this will end in May 2013. And, as you can see in the final prospectus, the funds raised by this offering will be used for investment in the improvement and expansion of installed capacity for cash reinforcement for the Company and for the advanced payment of the loan taken by the fully owned subsidiaries in North America.

And on April 18th, the financial settlement of the offering was made with a net inflow of BRL3.6 billion of the Company's cash. Of this amount, BRL2.1 billion were already used for the advanced payment on April 21st of the loan taken abroad and the balance was incorporated through the Company's cash.

And considering all these events, the pro forma debt, gross debt, immediately after April 21st would be BRL12.2 billion and net debt BRL8.2 billion. Thus, the gross and net debt indicators over the cash generation ratio would be 2.5 and 1.7 times respectively on March 31st, 2011.

And with these remarks, I would like to close my participation in this call. And, together with Andre, now I will be available to answer any questions that you might have.

(interpreted) Thank you very much, ladies and gentlemen. Now, we will start the Q&A session. (Operator Instructions). Our first question comes from Mr. Ivan Fadel from Credit Suisse.

(interpreted) Good morning, Andre, good morning Schirmer. Two questions, one has to do with the imports of long steel in Brazil. Is there any room for the participation of imports going up again? Or, do you believe that a lower level will be kept from now on? And what about the premium of long steel in the domestic market, vis-a-vis the imported and what is sustainable? This is the first question.

(interpreted) This is Schirmer. Good morning.

As the market, as you must have observed, following the -- what is published, there has been a very important drop in the import level of long steel. So, there's been a drop, if you we take January-March of 2011 over 2010, of 34%. This was the drop. And the long steel sector is much more exposed to this, but -- and the numbers have dropped also in this indicator.

Without any premium levels, it's coming back to the historic levels when the importation practically was not on the -- not in the particularly relevant way.

Your question is whether this situation will be -- keep steady throughout the year. The example in this first quarter where we had this reduction and a reasonable -- there has been a reasonable maintenance. We believe that this scenario will be maintained because of the price of international prices and domestic prices. We think that this bill is something to be monitored. We must keep an eye on it, so we cannot say for sure. But, we think it's -- it is well under control.

(interpreted) Well, could you quantify this, this premium, vis-a-vis the historic goal, 15%, 20%?

(interpreted) About 15%.

(interpreted) A second question, which has to do with the inventories in the chain, long steel especially, so what about -- well, in line with the historicals for the industry and whether in this context of less imports, the normalized stock is as -- any special -- is there a -- can the market absorb an increased price or not?

(interpreted) We believe that not. You are quite correct. Normalized inventories, imports under control and there is not much room for price increases.

The next question?

(interpreted) Mr. Marcos Assumpcao from the Itau BBA Bank.

(interpreted) Good morning. My first question -- well, a follow-up of the previous question, you talked or you mentioned during -- in your release that the March price in the domestic market was a little above the January price. So, what could we expect regarding prices in the second quarter, regarding the first quarter? It'll be higher, right, with more as a same difference. Can you price this for us, Mr. Schirmer? Can you give us the figure?

(interpreted) This is Andre speaking. Regarding prices, well, I'll go back to last year when there was a price reduction announced around September and October and this continued during four or five months because these things did not happen from one moment to the next. And at the beginning of the year, we removed some of the discounts that had been given, and this is occurring during the quarter, February, March and should occur as well in April and May, we will remove some of the discounts.

So, this is a situation that takes some time. Between announcing before it has actually -- takes on until the end -- until the price is actually reduced. So, there will still be some price reaction throughout the chain in April and May. Thank you.

(interpreted) And perhaps you could also say at what level do you think the sustainable EBITDA margin will be because of the new situation, market situation, which is a little bit more difficult market regarding imports, a lower premium and also perhaps higher costs here in Brazil and in the world?

(interpreted) Well, as you know, we -- it's always very difficult to give guidance because when we modeled it -- numbers with great fidelity. Well, there has been a great recovery in the first quarter with a trend of improving and also for the next quarters but the visibility level is still, globally speaking, is difficult. But margins are recovering both in Brazil, the numbers of the first quarter show this, and North America.

North America has been the most important of all. It went from less than two digits to above two digits and the trend is of volume growth. And as the market knows, North America has adjusted its operation, the size of its operations and it depends on volumes to improve its profitability.

A growth of almost 22% in the quarter was a fantastic reaction and unfortunately we cannot ensure that it will continue during the same pace throughout the year but the expectation is that it will continue to grow and this will bring back the margins that were lost during 2010 after the crisis as well. So, very much more than that I would not be able to give you more accurately.

(interpreted) Thank you very much Schirmer. One last question regarding terms expectation for the monetization of the -- that you mentioned, of the surplus.

(interpreted) As we had said in the roadshow and also was included in Andre's remarks, we are considering that very carefully. It is somewhat urgent but we must do some things, like for instance quantify the growth of Acominas so that we know exactly what will be a surplus that can be monetized and draw up a correct design of the process on the processing, the logistics and what involves ports and railroads.

We would imagine that about six months or so of work will be taken until we can format what the market calls, let's say a mock up, let's say or a model and discuss exactly how we are going to use this. How we can do it. And during this time ideas will come up about how we will do this, through an association, sale of the output of the mills. Anyway, we don't have this all decided yet but it will take some time. Not before five or six months before we have the model.

(interpreted) Thank you Schirmer, thank you very much.

(interpreted) - Barros from Deutsche Bank.

(interpreted) I have two questions. First of all thank you very much for the call.

The first one has to do with iron ore. Could you expand on the quality of the assets more and more in talks with mining companies and prospective buyers, they talk about whether it is more friable, more compact and what about the reserves, how many tonnes? So could you say a little bit more about the characteristics of this asset please?

(interpreted) Good afternoon Rodrigo, this is Andre. I will give you some facts that we actually did mention but perhaps some points we didn't mention.

It's -- the iron ore is 42% and the quality of the ore is considered very good too -- good to very good because much of it is friable. It can be processed, and we have experienced in the mill which we have today. We are putting in a second mill so we have mastered this process and what we are doing is expanding the capacity to be processed. So this, as far as quality goes.

Regarding your question of the resources and the reserves, it is practically half of our reserves and I think this is a good assumption but it is not a proven, scientific number.

You know, we're always researching and evaluating. We have some confirmed data, some indicators and some only inferred in the process. So this is what - it leads us to have these numbers and as we research and further and analyze we will have better data, more accurate data, and this also will be a part of the work which we are carrying out also to search the better alternative. Whether we will do it through a partnership, association, we will have -- we must have these more accurate data and more real data after longer studies.

(interpreted) Thank you Andre. Well, the friable ore seems to have a greater interest than the compact one, regarding the potential buyers.

Now, my second question, could you say a little bit about the costs for the second quarter and greater focus on scrap and pig iron in the Brazilian market?

(interpreted) Well, Rodrigo, as we see it the costs will keep, hold steady. Scrap has been very volatile, in fact all raw materials, if you follow the market. Ore and coal, there were problems also because of the climate which -- the prices went up but it has all been volatile. But we think that the costs then will keep steady in the second quarter, now, of scrap and pig iron. Thank you.

(Operator Instructions). Our next question comes from Mr. Carlos de Alba from Morgan Stanley.

Yes, thank you very much. You had a couple of maintenance stoppages in Acominas and also in the Brazilian steel operations that affected your numbers in Q1. Could you quantify how much higher your EBITDA would have been had you not had these issues? That will be my first question.

My second question is, if you see any supply disruptions coming from the earthquake in Japan, affecting your specialty steel business when you supply to the automotive industry?

(interpreted) There were two questions in English. The first one was, what was the impact of the stoppage at Acominas cause on the EBITDA, or in other words, what would the margin be if there had been no stoppage? And the second question was, if the supply disruption mainly because of Japan, if this impacted our specialty steel business?

(interpreted) I am going to answer in Portuguese, both questions, as I was instructed.

Regarding the EBITDA, our estimate is that if we had not had the scheduled stoppage the EBITDA would have been 1.1% higher than it was in the first quarter.

Regarding the supply disruption and how much this impacted our specialty steel business I can tell you with confidence that the supply of steel from Japan and the interruption on the part of some suppliers created some difficulty to the market.

However, our view for the specialty steel market in the US, taking into account the book, the order book for 2012 and for 2011 as well which is very positive.

We can prove that we are working very strongly revising our CapEx investments for North America and the indications are very strong. And there is a recovery of the industry, it is on the rebound curve and there is an increase also in the volume of cars sold and this will impact our operation. It does not depend only on the automotive industry, of course, but it has a strong correlation with the performance of the automotive industry.

So the positive impact is higher and goes beyond any consequences of any disruption in supply.

Our next question comes from Rene Kleyweg from UBS.

Good afternoon gentlemen. A follow-up, just clarify the 1.1% higher EBITDA margin presumably relates to the EBITDA margin in Brazil. If you could confirm that.

And secondly, could you talk a little bit more about the new projects you have in the US and also, going back to the fourth quarter, there was a project for rolling capacity in Santa Cruz and some work in the melt shop and dedusting in the US; have those projects come to -- are you not going ahead with those projects or are those projects moving forward or not?

(interpreted) The question asked by Mr. Rene Kleyweg refers to the EBITDA margin and the impact on the EBITDA margin whether -- which was mentioned during the previous question regarding the stoppage and he wants more details about the Cosigua in Santa Cruz and other projects already announced and Andre will be talking about that later. I take the opportunity to confirm that the 1.1% difference refers to the Brazil business operations.

And now Andre will talk about the investments.

(interpreted) Regarding the investment announced in Rio de Janeiro in March, this investment -- I think you're mentioning one in Santa Cruz at the Cosigua mill, was announced, which would be the rolling mill. The new rolling mill which is being installed at the mill, about 600,000 tonnes for producing rolls. So, this will continue, it has been approved, it will be done. And in that larger package in Rio de Janeiro there are other investments announced for the next five years.

Particularly of the investments we are announcing today in the United States there are investments in the specialty steel mills, four mills, 400,000 tonnes in investment and an investment in the amount of BRL560 million. And we are announcing this, in expansion which we had announced at the end of last year, 200,000 tonnes in Monroe, so 200,000 announced plus 400,000 -- 600,000 new tonnes for specialty steels in North America to meet this growing demand.

So I think this is what you're interested in sir.

(interpreted) Our next question comes from Mr. Renato Antunes from Barclays Capital.

(interpreted) Good afternoon thank you for the question.

My question has to do with Acominas. Maybe you could go into detail about the Acominas operation, utilization and the stoppage whether it was a one-shot or whether you are going to have other stoppages scheduled and will there be any further impact of stoppages? And what about the costs of Acominas, what level of cash costs do you have?

The second question has to do with RUS, the US operation, the metal spread, what do you see as the metal spread for the next few quarters?

(interpreted) Renato, about Acominas, the stoppage was in January-February so it's over already. It were the convertors and in March it went back in operation and from April onwards it's completely normal and the level of utilization is 75% to 80%, the use of our assets there.

Costs, we do not disclose this kind of information. What I can tell you is that we are managing very strongly in order to use our own iron ore. It will have an impact because it has a direct impact on our overall stocks and also the purchase of coals because it's very volatile and all our management efforts regarding cost control. But that is as far as I can go, I cannot disclose to you any more specific value.

And now Schirmer will answer your other question about spread.

(interpreted) Spread in the US, the second part of your question, it's around $400 and some and the capacity of the industry is very important and in spite of the volatility of scrap in that market it's very important to keep this spread. So the trend for the next quarter is that the industry will continue to operate the surcharge mechanisms with the same efficiency that was possible in the previous quarters and we do not expect any major changes in this spread higher than $400.

Thank you very much.

(interpreted) Our next question comes from Mr. [Renato Coutts] from [DLM Invista]. Please stand by while we wait for the question. Please stand by while we wait for questions. Our next question comes from Mr. Daniel Moreira from Arbela Investimentos.

(interpreted) Good afternoon. I would like to have a better understanding of the increase in revenue per tonne in the United States which was quite high even in reals, in the first quarter. Was there an effect of the product mix or any other factor? And what about price adjustments in dollars, for that region?

(interpreted) The mix was slightly changed and there is a slight rebound in the sale of structured steel products of Chaparral that were lower than expected so there was an important rebound there. But what has really helped is the maintenance of our spreads with the use of surcharge in order to offset the volatility of scrap.

The mix was not very much changed but there was an important increase in restructured steel there, in the mix. Thank you.

(interpreted) (technical difficulty) - available to you, and I would like to invite you to our next call on August 4, when we will be announcing the results of the second quarter.

Thank you very much and we wish you all a very good day.

(interpreted) Thank you very much. The Gerdau Conference Call is closed. We thank you very much for your participation and wish you all a very good afternoon.

Thank you.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring the Event.