Gerdau SA (GGB) 2014 Q2 法說會逐字稿

Good afternoon. Welcome to Gerdau's conference call about the results for the second quarter of 2014.

(Operator Instructions)

We would like to emphasize that any forward-looking statements that might be made during this conference call related to Gerdau's business outlook, projections and financial and operating goals, are mere assumptions based on management's expectations related to the future of the company. Even though Gerdau believes that its comments are based on reasonable assumptions, there is no guarantee that future events will not affect this evaluation.

Here today with us, we have Mr. Andre Gerdau Johannpeter, Director, President and CEO; and Mr. Andre Pires, CFO and IR Officer.

With no further ado, I would like to give the floor over to Mr. Andre Gerdau Johannpeter. You may proceed, sir.

(interpreted) Thank you. Good morning everyone. Welcome to Gerdau's earnings conference call. We've got our analysis by addressing Gerdau's performance in the second quarter of 2014. Then we'll talk about the main investment made by the Company in the current quarter.

Please note that we will be making comments on the quarter's performance on a year-on-year basis. Afterwards, Andre Pires will give further detail on Gerdau's financial performance. And then we'll go -- be here to take your questions.

For those of you who are following us over the web, we're now on slide two. As you know, right now there is a lot of volatility in the steel industry worldwide. The scenario of access install capacity of steel worldwide and the pressure of margins have affected the industry at large. However, it is important to highlight that during the second quarter, the market in North America kept on growing, particularly the non-residential construction sector.

On the other hand, there was a drop in demand for steel in Brazil due to the weaker economic activity which was also affected by fewer working days during the World Cup. With slower growth in Brazil, has already been perceived in several economic sectors like civil construction, the manufacturing industry, and agribusiness just to mention a few.

In other Latin American countries, the demand also went down, affected by slower economic growth and an increase of imported steel brought to the region. We've been watching this phenomenon very closely. That is from the Latin American Steel Association, Alacero, point to growing import from China.

In the first five months of 2014, imports amounted to 3.4 million tonnes or 81% than the previous year. As a specialty sediment, there is a gradual evolution of European and U.S. markets. However, the automotive industry in Brazil, a consumer of Gerdau's specialty steel, has shown significant reduction in production therefore affecting the whole chain.

On slide three, let us address now Gerdau's numbers and performance in the second quarter. It's important to mention our [gratitude] to geographically diversified its assets. It has brought more stability to our performance. In the current quarter, the rebound of the U.S. market where the Company's sales increased by 6.9% allowed us dilute the impact of the lower demand in some of the markets where the Company operates.

Volume or shipment totaled 4.5 million tonnes of steel or 2.4% lower than Q2 2013, particularly due to the lower demand for steel in the domestic market in Brazil and in other Latin American countries. And also the lower level of exports from Brazil. As to the net sales, they amounted to R10.4 billion growing 5.7% year-on-year.

This growth stems from continued growth in steel demand in North America, which is one of the Gerdau's biggest markets in the world, as I mentioned before.

As to earnings before interest taxes, depreciation and amortization, known as EBITDA, it amounted to R1.2 billion or 2.2% lower than the second quarter of 2013 due to the lower operating results in Brazil and specialty steel operations. As to net income, it amounted to R393 million, a reduction of 2%, in line with the EBITDA.

Now let us move on to Gerdau's investments on slide four. Starting with investment in PP&E or CapEx which amounted to R478.7 million due to investments in this period, and year-to-date investment amount to R1.2 billion. In Brazil for instance, it's important to say that there has been a lot of investment in cost reduction and productivity improvement in our manufacturing plants.

In the U.S., investments are focused on [St. Paul] in Minnesota, where a new [conteano] casting operations will get started expanding their full capacity, improving product quality, and productivity at the mill.

In more Beaumont, Texas, investments are earmarked to improve product quality; and in Midlothian for structural shapes. Our goal is to increase install capacity. Here in the U.S., where the specialty steel segment, we are investing in Monroe Mill in Michigan in order to increase the mill shop production capacity and improve the rolling and finishing operations.

I would also like to underscore that considering the volatile result achieved by the steel industry we are revisiting our investment disbursement program) for 2014, which dropped from R2.9 billion to R2.4 billion as disbursement for this year.

On slide five, a couple of comments on our mill that is being built in Mexico. It is about to be concluded with [civil] works. And this is being led by joint venture of Gerdau Corsa. The new annual capacity will be 1 million tons of steel and 700,000 tons of rolled product. The mill ship is scheduled to start up in Q4 this year. This venture will mainly cater to the metallic construction and manufacturing industry in the country with structured profiles.

This concludes my part. And now I give the phone to Andre Pires and then I will be back.

(interpreted) Thank you Andre and good afternoon everyone. For those of you who are following us on the web and you can see our slides, I would like to begin with screen number seven and I will refer the performance results of each field in the second quarter of 2014 and later I will elaborate more on the consolidated results. I will go through my presentation talking about the capital structure.

Starting with Brazil, I would like to highlight that shipments of steel in the second quarter of 2014 were down by 10% vis-a-vis Q2 of 2013 mainly due to lower demand in that area and also due to the slowdown during the World Cup. The relationship to Q1 2014 shipments were relatively stable but leaning more towards the foreign market because of the weaker performance of the domestic market, particularly in June.

Looking at the EBITDA of the second quarter of 2014, the Absolute value was down by 15% when compared to Q2 of 2013 due to reductions in shipment which in turn caused lower dilution of fixed costs for the market mix. Or in other words, more export and less shipment (inaudible) specific market. As a consequence EBITDA margin was down from 19.1% to 17.4%.

However, when to look at the consolidated EBITDA in the first half of 2014, we see a lot of different growth when compared to the same period of the previous year and also an improvement in the EBITDA margin going from 16.8% to 18.7%. In North America, unlike Brazil, sales in second quarter of 2014 were up by 7% vis-a-vis second quarter of 2014.

Fiscal growth was due to increases in demand in that period caused by the continuity of good performance in the industrial side and also there is a recovery of nonresidential construction industry when we compared to the first quarter of 2014. That increase of 14% in shipment occurred due to improve in the market in addition to the lower margin of comparison because of the very severe winter early this year.

Looking at the good recovery of sales EBITDA the second quarter of 2014 increased by 78% when compared to the second quarter of 2013. This increase was (inaudible) due to gains in metal spread and that's the difference between the average price of steel and the cost of (inaudible) during the period. Therefore the EBITDA margin was up 7.8% in the second quarter of 2014 presenting a very significant recovery when compared to the second half of 2013 and the first quarter of 2014.

Now talking about Latin America where shipments in the second quarter of 2014 had a reduction of 13% and 7% vis-a-vis the second and the third quarter, the second quarter of 2014 and the first quarter of 2015. The reductions were mainly due to increases of course during that year. Only imports from China grew 81% during the period as Andre mentioned.

On the other hand, EBITDA and EBITDA margin in the second quarter of (2015) were very stable when compared to Q2 of 2013 due to higher net sales per ton sold during the period and also other efficiency gain projects that had been deployed in the region.

In the (inaudible) sales in the second quarter of 2014 had a slight reduction of 2% vis-a-vis second quarter of 2013 due to lower volume sold in the (inaudible) unit, however, offset by growth in sales in the other geographies.

This sale reduction in Brazil, which reflect the 24% drop in the production of vehicles in the second quarter of 2014 versus the second quarter of 2013 were the main impacting factor causing the reduction of 7% in consolidated EBITDA in the specialty field deals. With that the EBITDA margin which was 13% in the second quarter of 2013 is now 10.5% in the second quarter of 2014.

Now when we look at the first quarter of 2014, there was a slight improvement in shipment in Brazil which caused a positive impact in EBITDA in the second quarter of 2014. Now talking about iron ore, (inaudible) in the second quarter 2014 vis-a-vis the second quarter of 2013 had a significant improvement of 94% mainly due to a significant growth coming from iron ore to third parties in the second quarter of in the third quarter of 2013. There was only geared towards our own use.

Now in terms of the first quarter of 2014, there was a 40% reduction in sales to third parties mainly due to the drop in international prices and also due to logistic construction and production was partially offset by sending more iron ore to Gerdau's unit due to the rebound in the production of the furnaces of (inaudible).

EBITDA in the second quarter of 2014 had an increase of 15% in terms of Q2 of 2013 due to increases in volumes. Now when you draw comparison with the first quarter of 2014 EBITDA was down by 15.6% in Absolute value and also 13.8 percentage points in the EBITDA margin due to lower volume sold into production in international prices.

Now going to screen number eight and now referring to the consolidated figures and other facts that influence these figures. Consolidated EBITDA was R1.2 billion in the second quarter of 2014 which was down by 2% year-on-year. (inaudible) the most bridge chart in the upper part of the slide what you will see is the growth of net sales per ton was not enough to offset the impact caused by the decrease in shipments and also increase in the cost of sales.

Thus EBITDA margin was down from 12.1% in Q2 of 2013 to 11.2% in Q2 of 2014. However, if we look at consolidated EBITDA in Q1 2014 it grew 18% year-on-year. And with EBITDA margins going from 10.5% to 11.3%. In the bridge chart in the lower part of the chart, of the slide, we see that the consolidated net income in Q2 2014 was slightly down when compared to Q2 2013 in keeping with the lower operating results.

Now referring to dividends based on those results of the Company and their performance in Q2 2014, there will be a dividend payout of R21.4 million to shareholders of Gerdau with diluted (inaudible). The equivalent to 0.7 per share and R102.3 million for shareholders of Gerdau S.A. which is 0.6 per share. These dividends will be paid out on August 21st based on credit of trade on August 11th.

Now on screen nine, talking about indebtment, the gross debt on June 30, 2014 was R16.4 billion which was stable when compared to the margins in March 2014 and also December of 2013. The nominal weighted average of the cost of debt was 6.5% a year with an average in motivational terms of 7.4 years. The increase in the cash provision of R443 million between March and June of 2014 was driven by cash generation in the quarter and also by the liability managing management operation concluded in April of this year with net debt of over R80,000, 2.4 times, which is the lowest level since March 2012.

Slide ten now referring to working capital and looking at the working capital chart, we see that the variations in the Absolute value of working capital in last five quarters have fluctuated between R9.3 billion and R10 billion, keeping the cash conversion cycle relatively stable varying between R80 billion and R85 billion. Now when we compare June 2014 to March 2014 and also June 2013, variations of working capital were comparable to those of consolidated net sales.

Now slide 11 and before closing I will like to briefly comment on the liability management operations that we concluded in April of this year. Some things that I have already mentioned in the previous call and going to elaborate more on it now. Back then we issued a bond of $500 million with a 30-year maturity and a coupon of 7.25% a year for the purpose of extending the debt.

Have of these resources will be used for a tender offer of bond to mature in 2017 and 2020. I would like to express that this was our first 30-year bond issuance with a demand 13 times the value of the issuance. All together we did an exchange offer of part of the bond with maturity in 2017 and 2020 where a new issuance of bonds amounting to $1.2 billion to maturity in 2024 and a coupon of 5.893%.

These transactions was very successful, have the support of several banks which allowed us to extend the coupon off of that, therefore improving our capital structure. Now I will give the phone back to Andre for [his] final remarks.

(interpreted) Thank you, Andre Pires. Well to conclude I would like to restate that our due process of [reciprocation] of the assets contributed to our performance in the period. In terms of the country where we operate we noticed that the developed market has a confident outlook considering the recovery of Europe and also the continued economic growth in the United States which has a positive outlook for the second half of the year.

On the other hand, the emerging markets are cycling to a reduction in the face of the economic growth. The exceptions are China and maybe India as well. we also work with the possibility of a continued cost pressure in the international market and also possibility to grow to imports in almost all of the markets where we're offering, which is a point of concern for the industry as a whole.

An important aspect related to the potential increase in imports is that current of two political conflicts in some regions of the world that certainly affects consumption in steel production flow? Due to all of these factors, we do believe that the growth in world steel consumption should be more compared to estimates announced earlier this year considering that there will be a reduction in the global GDP growth in 2014.

And while concerns work out we will continue to work focusing on increasing our operating efficiency in all businesses of the Company, optimizing working capital to demand level, and also revealing our investment and CapEx.

Now I would like to proceed to our Q&A session. Thank you very much.

(Operator Instructions)

Our first question comes from Thiago Lofiego from Merrill Lynch.

(interpreted) Good afternoon everyone. I have two questions. My first question is about Brazil. We saw a drop in the unit sales, about 3% over the quarter year-on-year. So could you talk more about this drop? If there is an effect from the product mix that better explain this drop? Or is this only to the discount? That's my first question.

The second question is about the U.S. Could you comment on the sustainability of margin close to 8% already or if there is a potential related to inventory costs or sales to third party that might be to lower margins. And what about a macro spread for the second quarter and where the macro spread is right now.

(interpreted) Hi, Thiago, thank you for your question. Andre Pires speaking. To answer your first question about Brazil, basically what we can tell you right now about profitability is the mix. Like I said before during my presentation, our mix was slightly worse so to speak. A little bit weaker with more exits and lower volume to the domestic market.

(inaudible) have a good day. The (inaudible) sales per ton goes down. And for the U.S. we believe that the margin level is sustainable. This improvement in market and operational market has been consistent. You can check the numbers off the tune the total to peak growth of early numbers consumer discretion is at two digits, 10.8%. So this is a consistent.

As to the metal spread, today the metal spread is over $400 or 10 or 410 on average, that's what we see today. So that's an integral level that was broken in recent months. And we consider it to be consistent.

(interpreted) Andre just to make it clear, my first question was the domestic market excluding [passport]. I would just like to better understand the dynamics of the sales percentage. Any effect of the product mix or any other reason to justify the drop in sales per ton in Brazil more specifically.

(interpreted) Right, Thiago. [MI] as well. A little bit more sales of semi finished product and a weaker mix vis-a-vis the domestic market.

Our next question comes from Renato Antunes from Brasil Plural.

(interpreted) Good afternoon. Thank you for taking my question. My question is still related to the Brazil operation.

Could you comment on the demand you mentioned in your presentation and the release in June affected by the World Cup. What about the demand for long steel in Brazil after the World Cup? It is something that could be compared to what we had in April or May or we haven't got yet to such recovery?

My next question is when you check the cash flow statement we also have the sales about property. Is it something about 30 million that's been included in the Brazil operations? I know it's hard to talk about this topic but I wonder if you could give us some flavor of what you still have to do in Q3 or the potential to have cash by doing this kind of operation. That would be interesting to know. Thank you.

(interpreted) Good afternoon Renato. Andre speaking I will be addressing Brazil demand and Andre Pires will answer your second question.

Actually it is very hard to envision the behavior of the market. In the first quarter, the first quarter had good delivery, good results and afterwards it started to get worse in the second quarter. In April and May and June and we also have the World Cup in that.

In addition we also have a strong impact of inventories in general in the industry. Also on construction and real estate. So it takes some time to adjust. Not to mention automobiles off 45 days and the usual number is 30, if I'm not mistaken.

And also other tax evasion, so it's very hard to put it in what will happen in the future. We will leave June affected by the World Cup which is over now but also a general economic impact. The economy grow less than 1% or (49.1%) (inaudible) as a factor.

(interpreted) Hi, Renato, Andre Pires speaking. To answer your question about the contribution to the cash flow, in reality there are 28 million. The highest is not real estate but the sale of a business that we had in North America, which was railway expansion in Oklahoma when we bought the (inaudible) mill way back when. This was part of the company (inaudible). So the railway extension came with that.

Now these (inaudible) dollars after the sale which is approximately R21 million and we have R7 million of real estate in (inaudible) which was also sold. So this is not the best the (inaudible) offers but just opportunities that come up and sometime we benefit from that.

In other words, there is no specific strategy for the future. And once again, obviously made no sense to continue have this railway extension that was not related to the steel making activity. That's why we divested. Because the opportunity came up and the same goes for the (inaudible) because there is no current use for it. That's why we divested to (inaudible).

So this results, just to make it clear, based on the TDM business product data. It is very clear in the legislation and that's why it is actually in our results.

(interpreted) Perfect. Thank you.

Our next question comes from Carlos de Alba from Morgan Stanley.

Thank you very much gentlemen for taking my question. The first one you can give us some comments on the outlook in the next few quarters for the specialty division. We saw a nice recovery but it was given the outlook that you were mentioning for then steel sector. We wanted to see sustainable the [entire] margin is. So what your expectations are going forward?

Also we would read recent comments about potential [beat] for Gallatin Steel. Can you mention if the Company is considering selling this joint venture or the risk taking this joint venture? Thank you.

I will translate the question by Carlos de Alba.

(interpreted) So you were referring while you wanted to comment on the outlook for specialty field and the second question refers to the Gallatin Steel. We'll answering the question about specialty steel, in fact in the second quarter, we were impacted in Brazil by a drop in production. There were two main factors that contributed to that drop of production.

One was a drop in demand and also increases in inventories that took place to our, you know the last quarter last year and the first quarter of this year. So in terms of the outlook for specialty steel I would like to highlight the fact that we have a very diversified portfolio in the many geographies where we operate.

The North American market has a very positive outlook. The automobile industry is at record levels in terms of automobile production vis-a-vis the prices. In our North American plant we are operating at full capacity when it comes to specialty fields.

Your right, there has been a recovery. The automobile market in Europe is growing every month and it's already 5% higher than the year before. So the outlook is positive. In India with our more recent political change, the outlook for India is also very positive.

In Brazil the landscape is still a bit undefined because of the elements that I mentioned earlier on and exploits vehicles to Argentina. In terms of Gallatin we cannot comment on market speculation. Thank you.

Our next question comes is from Leonardo Correa from BTG Pactual SA.

(interpreted) Good afternoon and thank you. My first question referring to domestic markets and demand. I know when Andre talked about it and it's very difficult to have any visibility in an election and usually you know the figures are downward.

But if you could possibly give me a breakout per segment when we look at the IBR figures and we look at the sales of the domestic market for either fled and long, we see you know 4% drop or 4.5% drop in the accumulated figures.

So it may not be very intuitive to us to see some similar decreases, maybe long as a more resilient demand shouldn't be experiencing this landscape. So if you talk a little bit about you know residential and nonresidential construction and agricultural machinery. If you could seem to elaborate a little bit more on the domestic market landscape.

Then the second question relates to pricing. I know that you never talk about pricing (inaudible) during the call but I was just like to have an idea on the premium for rebars into the domestic market and what is your calculation. That would help us.

And also what will be a presentable level for premium products. And if you allow me another question I would like to know a little bit more about perhaps prices in the domestic market and also the behavior of that market in Brazil. Thank you.

(interpreted) Hi, Leonardo, this is Andre. Well I will try to give you an idea of figures for a segment and you're right when you talk about the figures for us in Brazil showing a drop of 4% to 4.5% in domestic sales.

I will start by referring to construction market. There has been a drop in sales in the real estate market. It has been a decrease of about 25%. In terms of launches, there has been a reduction of about 10%. So in the second half of the year, we believe that the landscape will improve. So the first quarter was good and then in April there was slight decrease and then may and June, there was evidentially a World Cup effect but we expect to rebound maybe in the third and fourth quarters.

If we look at infrastructure also there was you know a (inaudible) during the World Cup period but things are picking up now very gradually. And this is an industry that consumes a lot of fields. So it should grow. Let me see what else I have here related to all the various segments. Agricultural machinery is also down. The industrial construction market is also down.

So in general, the accumulative figures for the first quarter is that it was up the first and down the second quarter. There was a lot of inventory in the patios of all of automobile companies and it will take some time until things get you know to a fine-tuning but it will certainly depend on consumer behavior and the fact that consumers are a bit reluctant to buy right now.

So I'm just giving you a general overview of how we kind of see the different industries. In terms of premium prices, we do not comment on that. And in terms of [prepped] prices we see some you know low down trend or a trend towards decrease. Thank you.

Our next question is from [Apen dep niedo Itta woa BBA].

(interpreted) Good afternoon everyone. I have two questions. The first question is about CapEx. In the earnings for the [eta] said that you lower CapEx budget for 2.4 c -- billion. I thought about a higher number.

So I wonder if this was due to the worse outlook or if you decided to postpone the CapEx for next year. And in the same question, maybe you could mention CapEx for 2016 which is to follow the same trends this year or if it would go down a little bit more. Thank you.

(interpreted) Andre Pires speaking. In reality the lower CapEx disbursement ultimately has to do with the scenario which some expense is not so visible. So it is excluded.

So to see, to focus on our balance sheet and on our free cash flow generation and therefore, it's lower as the first of this year. I'm (inaudible) we did carefully any projects, any ongoing (inaudible). It's just to say we're trying to go slow and see if we have better visibility in a more clear scenario.

As to 2015, it's too early to tell anything. but as you will see in the closing to the markets, the level of CapEx disbursement this year might not be so different compared to 2013, maybe a little bit lower but not so different. But with 2015 it should also be similar. So we don't expect to see any significant changes upward when it comes to CapEx in 2015 and probably the level that we're announcing today is expected to remain at as the first quarter 2015 (inaudible) but obviously it is very dynamic.

(interpreted) Now about the U.S. the margin increased a lot, around 8%. Could a comment more on what you see as a trend by year-end. Do you believe that this is sustainable, the margin being at 8%? Or might we even have a lower dilution of (inaudible) and a shipment going high in the U.S., the margins could be close to 10% or even over 10%.

(interpreted) Hi, [Idre]. The answer is yes. Aggressively speaking again, we believe this level of margin for the U.S. is sustainable. We see bonds (inaudible) consistent with. As I said before and to Thiago's question, the macro spread would be on $40 for short term.

Then another (inaudible) piece of information is that capacity 80% of use now. We've said in the past that we also had to improve our capacity in order to have a better leverage in our operation. Obviously we believe we have opportunity to increase it but it is at 70% it's already (renewed). And there are also other companies in the U.S. market talking about a recovery for (inaudible). I think that's a reality.

But you can see for the second quarter a 12% beyond expectation. So this is a very positive moment in the U.S. market. That's why we think today, once again we believe the rebound is not only a recovery due to very weak first quarter but it's a specific recovery

(interpreted) Perfect thank you..

The next question comes from the line [Marcello Adia] from Goldman Sachs.

(interpreted) Thank you for taking my question. My question is more related to the margin in North America. Just wanted to clarify it. I know you have already answered many questions about it but do you see any kind of pent up demand affecting the third quarter?

In other words, does it compare to say foreclose and shipment in North America in third quarter, would it be bias then to see because third quarter is usually strong than usual due to winter time or do you see better shipment in the third quarter compared to second quarter.

The second question you mentioned (inaudible) and we recently we had an increase of $10 due to the (inaudible) and other restitution and also a drop in (inaudible) price. What is your expectation? What about macro spread throughout this December? Should it be better than because of (inaudible)?

My last question is about iron ore. Could you talk about a shipment expectation for third party? (inaudible) over the second quarter.

(interpreted) Hi, Marcello, Andre Pires speaking. We do believe if the performers of the second quarter, the recovery of demand is not (inaudible) due to a weak first quarter. (inaudible) consistent. What are the elements that show us this is a reality?

First of all, if we look at our structure shape secondly which is our operation from the old (inaudible) in Texas it is at full capacity. (inaudible). So that's an example that we do have (inaudible) and full demand for the future.

On the other hand when we track the backlog for downstream and (inaudible) the U.S. we also have (inaudible) an increase of backlog both on our (inaudible) project, and that's why we have both projects. So our understanding is that this factor is specific as the (inaudible). Yesterday we announced an increase in our (inaudible) dynamics which was published.

This is a sign that the market is an important moment as we convey that we have a turnaround and the worse is over. So we're comfortable in that regard. Now I will give the phone to Andre to talk a little bit about iron ore.

(interpreted) Good afternoon, Marcello. About iron ore, this quarter we had some constraints but this (inaudible), particularly in (inaudible) mine to transfer to (inaudible) but also railways, in particular in the quarter there was eventually affected deliveries to third-parties as you can see from the first through the second quarter.

The outlook for the future is we will come back to same numbers I will say to third party be it export or domestically which was more specific this quarter. Maybe to in fact if you like but we especially (inaudible). It's very hard to predict the future. They were over 90 and now they're 96 or 97 for iron ore. Very hard to tell what will happen in the future. Thank you.

(Operator Instructions) Our next question comes from Renato Antunes from Brasil Plural

Hello and thank you for my second round of questions. I would like you to talk a little bit about specialty steel in Brazil in particularly. In the second quarter I think the performance was better than expected. So what can you tell me in terms of the second half of the year in terms of demand?

And now asking in more structural question, when you hear today about some Chinese rebar manufacturer being more aggressive exporting rebars, which is something new, can you tell us something about it or whether that should be a matter of concern. Or is it something that did change on the trading landscape for rebar. I would just like to understand your view of that.

(interpreted) Hi, Renato. This is Andre Pires. In terms of specialty steel, in fact if you were to mention or highlight Brazil within that industry of specialty steel I would say that it's still maybe too soon to be able to review a mid to long term view in that industry. Inventories are still very high. Historically speaking, both for light vehicles and also trucks but at any given moment, levels of inventory will have to come down.

So we still see some opportunities to change that landscape especially regarding to the purchase of those specialty steel. So the third quarter will still be a challenge and the opportunities ahead should be a bit difficult.

Once again I would like to reinstate what I said before in our K we are in a better position because we are very diversified all over the world, geographically speaking. We are in the U.S. and in Europe we see a consistent recovery that started early this year.

So we also have a very positive outlook for India considering the risks and the political changes here. We see, I mean we see a good outlook for the other geographies. Now Andre can talk about input.

(interpreted) Well regarding to China, and we report to changes in China imports which increase over 90%. These are staggering figures (inaudible) over 167% Argentina, 157% Brazil, 138%. So China in the first half of the year has been a very active player, much more than on the other side, you know. (inaudible).

Things are (inaudible) not so much focus on infrastructure because the economy is migrating more toward consumption and that's why there is more still left than what is exported. But with the current prices, we do not believe that these prices can be sustainable for a long period of time because these prices are very low.

If you look at prices of the raw materials so in the middle long run this level of exports will not be sustainable at this kind of level of prices. But in China they have a whole economy geared towards keeping jobs so they will continue to work.

More in particularly referring to rebar, we haven't seen a lot of Chinese rebar. We have seen you know the export of wire rod and flat. And China is exporting to the entire region not only to us. Thank you.

Our next question is from [Allen Gleddar, Gleddar QBBR]. Mr. Allen the line is yours.

Good afternoon. I have two questions. The first referred to as specialty steel. I do understand that there has been a rebound within the region with an increased participation of Brazil and also the U.S. and Europe.

I understand that in Brazil profitability is better when it comes to specialty steel but I would like to understand what explains that improvement in margin. We saw it going from 9 % to 10.5% and (inaudible) you know having a better stake because the margins are better. So what is the dynamics here and whether they're in convergence of margins from the other regions to the Brazilian margin.

So that would be my first question. Along the same lines, I would like to understand the impact in India and so how is that moving along, especially in specialty steel and what was the stake in the shipment from that region. Secondly, I would like you to elaborate more on the exports of long in the U.S. and how do you see things occurring now and whether you can anticipate any recent changes.

(interpreted) Hello Allen. This is Andre Pires. Thank you for your question. In fact, I think your analysis on specialty steel is very correct. Brazil tends to have larger margins or bigger margins than usually this bigger margin takes the consolidated margin upward.

So what happens in the between the first and second quarters, the first quarter was very weak in terms of profitability because seasonality and also some maintenance set up that occurred.

In the second quarter things improved so that slight improvement from the first quarter to the second quarter lead to improvements in our consolidated EBITDA margin you know looking at the scenario in the first quarter and second quarter.

But there are two good opportunities and your question about margin in all of those geographies, convergence of the margins overall, I would say that we see opportunities of better margins particularly in the U.S. where we are operating very close to full capacity. Certainly it's a very competitive market but with some of the investments in that area, more related to the efficiency of our production (inaudible), we see as very significant possibility of incremental margins.

Now I will refer to Andre for - oh there was a third question. Let me just conclude this with the third question referring to long field in the U.S. At the end of last year and earlier this year, we saw the increase in exports in the U.S. even after producers at (inaudible) port emptied them, the measures and that will be something that in September of this year.

This movement of continuous increase was felt by us in the last few months. And during some particular moments we experienced a decrease in that process especially regarding export licensing. So we do not see, while we see probably a more stable phase and leaning towards a drop in the number of licenses.

I would like to recall that in India our capacity of 300,000 tons of specialty steel rolling products as an integrated mill you know (inaudible) R&R we also generate energy and we're building a coke plant that will house those in making of the low cost.

This is in keeping with our normal learning curve process. We've been operating the rolling mills for about a year and also the entire plant. We were able to certify new products in specialty steel products for the clients. But we (inaudible) challenges especially related to the politics of the states where we are located.

But I can say that the outlook in the few years of the market were good and with the new President in India, the trend is that we now see a much more positive environment. People are talking about a GDP of 6% whereas in the past, the estimate was 4.5%. The automotive industry is a focus of our business.

Now we just put a (inaudible) quality inspection line in that plant. So specialty steel still needs you know to fulfill timing. So we anticipate production feasibility in a year and a half time. Thank you very much. Thank you.

This concludes the a question-and-answer session. I would like to give the floor to Mr. Andre Gerdau Johannpeter for the closing remarks.

(interpreted) Thank you very much again for your interest and your questions. If there are any further questions don't hesitate to contact our IR department. I invite you all to next call on November 5th when we will be announcing the earnings of the third quarter 2014. Once again thank you very much. Have a good day.

This concludes Gerdau conference call. Thank you all for joining us. Have a good afternoon.

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 this Event.