Gerdau SA (GGB) 2014 Q3 法說會逐字稿

Good afternoon and welcome to Gerdau's conference call to discuss the results for the third 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 are Mr. Andre Gerdau Johannpeter, Director, President and CEO of the Company; and Mr. Andre Pires, CFO and IR Officer.

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

Thank you. Good afternoon everyone and welcome to our conference call to talk about Gerdau's results. I would like to initiate our analysis with an overview of the world steel landscape. After that I will talk about Gerdau's performance in the third quarter of 2014. And I will give you then details about the investments in the period. It's also important to highlight that we will analyze the performance of the third quarter vis-a-vis the same period of the year before. Further on Andre Pires will give you details about the financial performance of Gerdau and later on we will be available to take your question.

For those of you who follow us on the web, I will start by discussing the very challenging landscape of the steel industry with increasing competitiveness, margin pressures and great volatility. And that's because we are still facing an overcapacity of the steel production, while at the same time we face a lower pace of growth of global steel consumption. Just to give you an idea that the industry has an overcapacity of approximately 690 million tonnes of steel a year, which will be the equivalent to approximately one-third of the total installed capacity in the world.

On the other hand the good piece of news is the continuity of the recovery of the United States market and I would like to highlight both the industry and non-residential construction sectors, which are important consumers of Gerdau's steel. In Brazil there was reduction in the demand for steel motivated by the economic slowdown affecting the civil construction industry, the industry in automotive sector according the Instituto Aco Brasil, the apparent consumption of steel in the country was down by 11% in the third quarter of 2014 vis-a-vis the same period of the year before going from 7.1 million tonnes to 6.3 million tonnes.

Latin America, except for Brazil also experienced a slowdown in demand with the slowdown in the economy and it was greatly impacted by the growing introduction of imported steel in the region according to studies by [Ala Cedup].

Latin America is the second region with the largest inflow of rolled steel from China, second only to South Korea. In the first eight months of 2014 imports of rolled steel from China into Latin America totaled 5.4 million tones, which is 54% more than the same period of the previous year.

Now referring to specialty steels, the automotive industry in Brazil has experienced a reduction in the output and shipment which impacted the entire chain. On the other hand the North American market also experienced a significant growth where the demand in Europe and India are also presenting a gradual evolution.

Now, I would like to refer to Gerdau's performance in the quarter. Starting with shipment, totaling 4.6 million tonnes of steel, this volume is 4.5% lower than that posted in the third quarter of 2013 mainly caused by reductions in demand for sale in Brazil and in the other countries of Latin America.

Now net sales was BRL10.7 billion, up by 2% vis-a-vis the same period of the year before. This growth was mainly due to better performance of the operations in United States. Now, EBITDA was BRL1.2 billion, 13% lower when compared to the third quarter of 2013.

Now, net income was BRL262 million, down by 59% stemming from a lower operating result and lower financial result and also the adhesion to a program of tax reduction known as Refis on profits generated abroad amounting to a net value of BRL87 million.

Even though this is an event that occurred after the quarter under analysis, I would like to speak about the sale of our joint venture, Gallatin Steel in the United States, where we had 50% stake. This initiative is in line with our strategy to concentrate our efforts in the longs and specialty sales in North America. The proceeds from Gallatin's divestment will also be added to Gerdau's balance sheet. The transaction was concluded in October together with our other partner in this joint venture, ArcelorMittal, the company was sold to Nucor Corporation for an of $770 million.

Gallatin is a flat rolled steel mini mill with a capacity for 1.8 million tonnes of [shorts] a year located in the state of Texas in the United States.

Now, about investments in the third quarter. They amounted to BRL438 million and year-to-date BRL1.6 billion. In Brazil, the main highlight was the start up of our finishing line of coiled hot rolled strips in Ouro Branco Minas Gerais which occurred in October. This investment will be detailed in our next slide.

In the United States there was a start up of a new continuous casting operation at the Saint Paul's mill increasing the installed capacity of that plant growing from 520,000 to 620,000 tonnes up through a year.

In terms of specialty sales in the first quarter of 2015, we will have the start up of a new rolling reheating furnace in the Monroe mill in Michigan. Both investments will allow for the expansion and the improvement in the quality of products and productivity of the unit. In terms of mining, our focus has been in the production of ore for our own consumption, which has also increased the competitiveness of the Ouro Branco mill located in Minas Gerais.

In view of the current situation of the global market, the pace of all of the investments in mining are still being revisited. I would also like to mention that considering the global landscape of the steel industry and volatility in the result of this sector, we once again reviewed our disbursement program of investments or our CapEx program for 2014 going from BRL2.4 billion to BRL2.1 billion in CapEx.

Now, about the new finishing line of the coil hot rolled strip in Ouro Branco, as I said before, it started operating in October. I would like just to remind you that coil hot rolled strips are used in the following industry distribution; agriculture, highway, civil construction, pipes and machines and equipment. With this new finishing line we will be able to grow our share in other segments such as auto parts, compressors, packaging, and containers.

Now, I will refer to the mill in Mexico, which should start operating at the end of this year with the beginning of the [melt shop] production. This initiative is being conducted through our joint venture Gerdau Corsa. The new mill will have an annual stock about 1 million tonnes of steel and 700,000 tonnes of rolled products. The rolling mill should start production in early 2015. The plant will supply civil construction in the industry both in Mexico and also in NAFTA.

With that I conclude the first part of my presentation. I will give the floor to Andre Pires.

Thank you Andre and good afternoon everyone. Now, I will talk about the results and the performance of each of our BOs in the third quarter of 2014, and later I will give you more details about the consolidated figures and at the end I will close by talking about our capital structure.

Now, looking at slide 8, for those of you who follow us on the web and starting with Brazil, the uncertainty environment vis-a-vis the economic environment is also causing demands to go down and this has affected our business. By the end of Q3 of 2013, there was a reduction of 13% in shipments when compared to Q3 2013, a drop of 11% in the domestic market especially in civil construction industry.

In terms of Q2 of 2014, the sales volume had an increase of 4.5% due to greater exports. In the domestic market shipments were more stable; however, our sales of long rolled products posted an increase of approximately 5% vis-a-vis Q2 of 2014 improving the product mix in this market.

Looking at EBITDA in the third quarter of 2014, the actual volume post reduction of 37% in relation to Q3 of 2013 due to lower sales volumes causing lower dilution of fixed cost. As a consequence, the EBITDA margin went from 23.5% to 16.5%. When we look at EBITDA of the first quarter of 2014 vis-a-vis Q2 of 2014, we noticed that the absolute value was very similar even though the margin was slightly lower.

In North America the economic environment remains positive and shipment grew 2.5% when we compare Q3 of 2014 to Q3 of 2013. This growth was due to better demand in the period caused by the good performance in the industrial sector and also the recovery of non-residential construction.

EBITDA in Q3 of 2014 increased 161% vis-a-vis Q3 of 2013, going from BRL129 million to BRL337 million. This increase is due to gains in metal spread and also the increase in volume sold in the period of comparison. With that the EBITDA margin went up to 9.1% in Q3 of 2014, which is an important recovery when we compare it to Q3 of 2013.

In Latin America, shipments in the third quarter of 2014 were down by 10% vis-a-vis Q3 of 2013 due to increases in the import, especially import from China and Turkey and also the lower pace of economic growth in the region.

EBITDA in Q3 of 2014 was down vis-a-vis the Q3 of 2013 due to the drop in the sales volumes already mentioned. Now, in terms of the second quarter of 2014 EBITDA remained stable.

In our specialty steel BO, shipments in the third quarter of 2014 were stable vis-a-vis Q3 of 2013, but increase of shipments in our units abroad offsetted the lower demand in Brazil.

Now, in terms of Q2 of 2014, there was a reduction of 5% in sales mainly due to the seasonality period in Spain or the summer vacation in that location. The reduction of consolidated EBITDA in our specialty sales operation in Q3 of 2014 vis-a-vis 2013 occurred due to a larger stake of the units abroad in terms of our total shipments, with that EBITDA margin went down 13% in Q3 of 2013 to 11% in Q3 of 2014. In terms of the second quarter of 2014 both EBITDA and specialty steels BO remained stable.

Now referring to iron ore BO shipments in the third quarter of 2014 vis-a-vis third quarter of 2013 posted an increase of 85% mainly due to an increase in the production capacity, which occurred as of September of 2013. In terms of the second quarter of 2014, increases in ore shipments were due to sales from the Ouro Branco unit EBITDA posted reduction of 80% both in relation to Q3 of 2013 and Q2 of 2014 due to lower international prices associated to higher sales cost.

Now, moving on to slide number 9 and now referring to consolidated figures, EBITDA was BRL1.24 billion in the third quarter of 2014, down by 13% when compared to the same period a year before.

Now if we look at the bridge chart, on the upper part of the slide we can also notice that this reduction occurred due to lower volumes sold and higher costs partially offset by higher net sales per tonne. Thus, the EBITDA margin was down from 13.5% in Q3 of 2013 to 11.4% in Q3 of 2014. However, if we verify the accumulated and consolidated EBITDA in the first nine months of 2014 there was a growth of 5.2% vis-a-vis the same period of the year before with an EBITDA margin still remaining relatively stable. It is important to highlight the recovery of North America, which has paid a more consistent contribution to the Company's EBITDA.

In the bridge chart, in the lower part of the slide, we can also notice that the consolidated net income in the third quarter of 2014 had a reduction vis-a-vis the third quarter of 2013 due to lower operating results and also a higher negative financial result in addition to all of the affects of our Refis program over profits generated abroad amounting to a liquid amount of BRL87 million in the third quarter.

In terms of dividend and based on the results obtained on the third quarter of 2013 the Company will pay out BRL16.3 million of dividends to the shareholders of Metalurgica Gerdau S.A. the equivalent of BRL0.04 per share and interest on equity of BRL85.2 million to shareholders of Gerdau S.A., the amount will be paid on November 27th based on closing positions of November 17th.

Now moving on to slide 10 and referring to indebtness and liquidity of the Company, our gross debt on September 30th 2014 was BRL18.1 billion higher when compared to June of 2014 due to the affect of the exchange rate variation. Net of that variation the gross debt would have been stable. The weighted average cost of the debt was 6.5% a year with an average amortization term of 7.2 years.

Cash increase of BRL708 million from June to September 2014 occurred mainly because of cash generation in the quarter and also due to exchange rate variation in the period. With that, net debt over EBITDA ratio went to 2.7 times.

Now looking at slide 11 and now referring more specifically to working capital and looking at the chart we can see that variations of the absolute value of working capital in the last five quarters have fluctuated between BRL9.3 billion and BRL10.2 billion maintaining a stable cash conversion cycle with variations between 80 days and 85 days. More particularly referring to the comparative analysis between September 2014 and June 2014, an increase in working capital of BRL320 million contemplates the exchange rate variation particularly over the working capital of companies abroad. Net of the variation of the cash effect was a reduction in working capital of BRL277 million.

Before concluding I would like to comment on some recent measure adopted to optimize our assets in addition to the sale of Gallatin already mentioned by Andre. In September, we did a combination of the operations between Inca a joint venture where we already had a stake in the Dominican Republic and Metaldom. This combination seeks more efficiency gains and higher competitiveness in the Caribbean and Central American region in addition to ensuring the supply of steel products for the construction sector in the Dominican Republic.

Moreover, on September 30th Gerdau sold the assets of Forjanor (inaudible) located in Spain to [High Group] of Germany, concentrating then the focus of our production on specialty longs in Europe. The proceeds of this sale of BRL12 million is already recognized in our EBITDA from the specialty sales deal in the third quarter of 2014.

And now we would like to give the floor back to Andre for his final remarks.

To conclude, I would like to once again comment on the over capacity of the world's steel industry and this will continue to impact the industry in the next coming years. In addition the world's steel consumption is expected to be lower when compared to the initial forecast due to the slowdown in emerging economies, despite the better performance coming from developed economies.

In terms of the markets where we operate, we see a positive outlook coming from the US market that should increase the consumption of apparent steel in the region. But the Brazilian landscape will remain challenging given the outlook of slow economic growth impacting segments which Gerdau operates, so the construction industry and automotive sectors. On the other hand the prospect for economic growth is valid for the other Latin American countries at different levels.

However the region will continue to be impacted by high steel imports, especially imports from China. The European economy on the other hand should continue to advance in its recovery process, as well as India, which presents an outlook of growth.

Gerdau will continue to focus on adjusting its operations to the developments in the world steel industry, which is still impacted by over capacity and also margin pressure. This challenging landscape of the global market has motivated us to maximize our efficiency and seek for further reductions in operating costs as well as adjusting the level of CapEx in 2014, as I said before which also includes mining activity.

Now, we will move on to our Q&A session. Thank you very much.

Ladies and gentlemen, we will now begin our Q&A session. (Operator Instructions) Thiago Lofiego, Merrill Lynch.

I have two questions, the first one refers to your BO in America. Could you please refer to your margin sustainability in the US, whether it is possible for us to achieve margins around 8% to 12% as being the sustainable margins considering there are some ups and downs in some quarters.

And the second question is about scrap prices in Brazil, whether you could tell me a little bit about this scrap market, whether we could envision a gain in the metal spread in Brazil in the fourth quarter considering these two variables out for steel price.

Well, North America in referring to sustainability of that margin. It is a bit difficult to give you a forecast for the next quarter because some factors must be taken into account. On the positive side, we still see great consistency in the recovery of the economic growth in North America, particularly the United States. We also see an increase in the number of non-residential constructions if we get the information from -- if the growth in the last 12 months until September is 8.7%, which shows consistency in this recovery process.

But by the same token there is also the issue of the international price of longs in general and also imports that still play an important role in the US market. So it is an equation between a firm demand, but also very aggressive of -- of products coming into the US market. And you must also factor in seasonality, the price of scrap is stable, which improves the margin, but we have the seasonality impact of the winter season. Therefore, I think it's too soon to tell or to give you any outlook of consistency or speak about its sustainability capacity.

Still referring to the United States, if we were to talk to you about a year ago, your margin was close to zero, almost something like that, and we knew that you will get close to 10%, which is indeed what you delivered and that's what happened. So, today we can understand that what could have been done to improve your position in the market was done. So, whatever increases will not be too large. So, are we close to a margin equilibrium?

It's difficult to give you a precise answer Thiago. In terms of our internal measures to improve efficiency gains and to promote cost reduction this is something that we can continue to do and we will do so, but it will depend on the level of imports and also the competition capacity of the US market vis-a-vis imported goods. And it also depends on the international prices.

There is pressure coming from the international market as Andre referred to in his presentation, with this overcapacity in the global market, and this pushes down on the supply side. But we believe that if things remain the same, this margin could be consistent. But it's difficult now to make a projection and tell you how things will be in the three quarters. I think this is the point.

Now referring to scrap in Brazil, we have seen a stable movement, also slightly down, it's difficult to speak about a target for spread in Brazil because when you calculate costs in Brazil, you have to factor some things in, but referring to the price of scrap, there hasn't been any specific pressure.

Marcelo Aguiar, Goldman Sachs.

My two questions are related to the strategic side of the business and the question is addressed to Andre. If you look at the evolution of Gerdau's leverage, I have seen a very big effort in the last quarter spread, your net debt over EBITDA level hasn't changed too much if you compare it to other quarters, nothing has changed despite everything that has been done in the last quarter.

So, I just want to understand what else the Company could do so that we could see Gerdau generate a more relevant free cash flow, and I know that prices in the market cannot be controlled by you, but what is it necessary for us to see Gerdau within a net debt over EBITDA around 1.5 or something like that and also if you could tell me something about your CapEx for next year would be nice.

And my next question refers to something that has been mentioned by Andre in several other occasions related to this very bad moment in the overall steel market because the Company has been carrying over relevant assets in Latin America which deteriorates the return on capital and the situation tends to get worse because the markets are open to imported products.

I just want to understand up to what point Gerdau is comfortable in carrying over these assets in your balance sheet because I don't think that the global steel market will change any time soon.

In referring to net debt over EBITDA, I don't know whether I agree with you when you said that there hasn't been any changes in that number from January to now, but if you consider the exchange rate variation was more than 15%. If you recall, in the first quarter of 2013 our net debt over EBITDA ratio was 3.2 times with an exchange rate -- or with the real much more appreciated than it is now as 70% of our debt is denominated in US dollars, exchange variation is very important and significant when we convert that debt into real.

Therefore, I mean, certainly in our view there was an important change in terms of this growth of net debt over EBITDA ratio, it was about 2.5 times in the last quarter -- it was 2.4 times and now it's 2.7 times and mostly due to exchange rate variation. And I think that we have done something to that end to change that level and one measure was the divestment from Gallatin which met two objectives, one was to leave an activity that was not part of our core business and also we decided to focus on our balance sheet.

This generated an important effect and this effect will only be posted in the fourth quarter because the proceeds were only posted at the end of October and certainly this level will come down. I think that we are doing our own homework and what I can also say is that another measure that the Company adopted that was announced today is our CapEx review. We are reviewing the CapEx to about BRL2.1 billion this year and this level should not change much next year.

We have been very selective in terms of CapEx, we are focusing on our balance sheet, optimizing our assets, there were other smaller transactions like the sale of Forjanor, but I would say that we are focusing on our P&L to seek for the numbers that you referred to.

Now, about the general global steel scenario, I will give the floor to Andre.

Marcelo, referring to the global steel landscape, what we see is that there is a lower demand and data from the world steel shows that there was a growth of 2% in apparent consumption, whereas IMF shows the general GDP at 4%, so it's growing less than GDP. This is just a reference number.

And we have seen the optimization of the steel industry in terms of capacity of around 75% to 76% depending on the region and also the route to be integrated to scrap, in our case it's around 70% to 75%. So, this is a very challenging landscape, as I said before, and it will be so in the next few years and I agree with you, but this is the landscape we have to work with.

But referring to Latin America, there are nine countries in Latin America where we operate in joint ventures or partnerships and every country is very unique. When you talk about carrying the assets you have to be more specific in terms of what assets and what country. It's difficult to compete because of high steel input, all I can say is EBITDA for Latin America from last year to this year in nine months was up by 13%.

So that was an improvement in the performance of Latin America which demonstrates part of the work we did. There are some other moves and one of them was a merger with Metaldom in the Dominican Republic and this is the optimization to improve efficiency in the region of the Caribbean and Central America and that's why we did that joint venture. These are (inaudible), others refer to investing more and also optimizing assets. So the result is better this year than the year before and this is because of all of the work that we have been doing, and you have to look on a country by country basis. Thank you.

Ivano Westin, Credit Suisse.

Referring to the Brazilian demand or demand in Brazil, I think Andre you already referred to a very challenging landscape for next year. And if we look at the landscape, I think we can also add another competitor in terms of your longs mills. Could you please tell me what is the volume or the shipment expectation year-on-year until 2015, whether the best scenario would be flat or whether there is more room to increase exports, so that by the end of the year in terms of Brazil's consolidated figures it would be flat year-on-year?

And I think that you are already closing your budget for next year and so this will be my first point. And the second, referring to mining, I think you already said that the landscape is challenging, a competitor of yours, a few days ago, talked about possible reduction in the costs around $5 to $10, I would like you also to tell me whether you see some room for maneuver that in, in terms of expansion with this possible delay, what about your volumes for the period 2015-2017 and CapEx for the mining area?

Well, about the landscape in Brazil, we never give any guidance about what we believe that could be the growth in the market. In Brazil steel has had a 1.5% growth, from now and to 2015, which is pretty much in keeping with what we see. It is about 1% growth of GDP is what people are talking about. So this number that Aco Brazil mentioned seems to be reasonable.

But the landscape is still very cloudy, it's very hard to tell and depending on the exchange rate variation and then you mentioned something important which is, the issue of imports, we think that depending on how the exchange rate will vary, we will have more possibilities to export and this could probably help us to increase our shipments, this is an opportunity but it's still depends on the movements of the currency, but now I will ask Andre to talk about that mining.

Referring to mining let's just recap today. Our installed capacity is 11.5 million tonnes. And the expansion plan there was announced is for in 2016 grow to 18 million tonnes and by 2020, 24 million tones. This is the plan that has been reviewed and we just said that we are reviewing that CapEx vis-a-vis the global landscape, this is for CapEx.

Now in terms of volume, it's very difficult to predict at the moment, because it will depend on how much we will export or not and the profitability, the profitable margins and that has to include several factors, one of them being the price of ore, but also logistics, internal movements, there is the port, ocean freight, and we are looking at all the possibilities to see whether that is feasible and this will impact volume. But what I would like to highlight is that mining is very important to our ore supply in Ouro Branco.

With the drop in the price of ore, this will have an important impact in Ouro Branco's competitiveness, which will then be able to start importing slabs or selling slabs at a profit. So the effect of coal and iron ore, which is right next door to our mill in Ouro Branco, has been very helpful because it has helped us to increase competitiveness. The volume next year will go to our mill and then we will see whether we will grow exports or we will do any exports or not.

Thank you very much. Andre. Thank you for your answer. I would just like to follow-up on a particular point, when do you think that you will finish your CapEx review and when will you will announce it to the market. And Pires, when you talk about steel imports, could you tell me about what would be a good level of exchange rates that would give you a more profitable position?

Starting with mining CapEx, in fact there is no date, the market is very dynamic and you know it very well, we know that price variation happens in a very dynamic fashion. We are now constantly monitoring but we do not know yet when we will make the decision to go on, or to continue to review it. So to answer your question we do not have any particular date to announce it. And also I would like to reinstate what Andre said, our position, it's very comfortable.

We don't have any major obligation or we do not have any firmly developed business when it comes to ore exports our CapEx, the CapEx at the moment is good enough to fulfill, I mean to supply to our needs, it caters to our needs. And we are not in a hurry to make any decision because we find ourselves in a comfortable situation and at this profitable level, which is lower than last year continues to give us a return, a good return on equity.

Now speaking about exports, it's hard to say how much if you look at the current exchange rates, it is becoming more interesting but it will depend on the international market, but at this level of exchange rate, we can see some good possibilities to export that, and we -- and --

Andre Pinheiro, Itau BBA.

I have two questions. We have heard in some other conference call from competitors that some of them are talking to the government to supervise and to look at imports of other materials and this would be affecting the market. Are you also engaged in these debates, do you see any possibilities of seeing an increase in import taxes and are you taking any measures to supply, I mean to say about the domestic market?

And the second question is still talking about sales of non-core assets and the optimization of your asset base as you did with Gallatin more recently, do you see any further possibilities of doing anything else that -- or maybe any assets that could be sold or what would be the potential size of non-core assets? Thank you.

Hello Andre, referring to imported products, at Aco Brazil, we are doing some work with them with the [ABNTO], the institute of standards and norms. We want to ensure the products that come in to the country are certified and comply with the standards and with, I mean we work together with the customs authorities and we are helping them to monitor the import of products.

We have to verify whether they comply with the standards or maybe there is any alloy in the product that changes the composition, it changes sometimes slightly but it changes the category, so this is something that we have been doing on a regular basis and Aco Brasil is also participating in that. In terms of exports, I don't have anything to tell you at the moment.

This is Pires. In relation to non-core assets, we don't have anything else from Gallatin. It's difficult to say whether there are other opportunities -- opportunities from now on of other operations similar to Forjanor, like I mentioned, they will always exist and we are always looking. There is nothing in the radar, but we are still focused on the optimization of the assets that we may have that are not necessarily linked to our core business in the case of Gallatin, it was much bigger and something of that magnitude is more difficult.

Thank you. Very clear now thank you very much.

Milton Sullyvan, Brasil Plural.

I have two questions. The first is related to the domestic market, the prices in the domestic market increased quarter on quarters. Could you tell us a little bit what should be expected or what could be understood in addition to the change in the mix and how do you see prices evolving from now on?

And the second question is on specialty steel. We see that the truck market is not showing signs of recovery. And to that end, I would like to ask two things; first, how do you see the volumes and margins of specialty steel from now on and whether you can tell me anything about the price negotiation with the automotive industry because we've been hearing some news lately about that?

In terms of price, this is basically change in the mix, lower sales of finished goods in the third quarter and also I talked about a 5% growth in finished longs. And this improved the mix allowing the net sales per tonne increase. So we do not have any particular outlook but we'll continue to work to improve our mix.

I think your second question was about specialty steel. And I'll give the floor to Andre.

Hi Milton. Referring to specialty steels, the numbers about trucks that you mentioned and also vehicles are so far very similar to what we've seen throughout the year, with a decline vis-a-vis the year before because it was a year of the World Cup and election. So after this period we hope that next year we should experience some growth.

We do not have any figures yet but we've heard the government saying that there might be some incentives or lower taxes to boost the sales of vehicles and trucks, maybe allowing for more credit; measures that had an effect in the past. But then we see that there will be (inaudible) and then a decline. So the forecast is 1% of GDP; GDP last year which is relatively low and this should have an impact on the automotive industry after the election when the elections are over.

But it's still too soon to tell whether there will be substantial changes. But we think that Brazil will resume growth going beyond 1%. Thank you.

Leonardo Correa, BTG Pactual.

I have just some very particular questions. And the first refers to your business in the United States. Can you please comment on the metal spread level? When we look at the prices on the screen, scrap, there has been a stronger variation on recent prices of scrap.

Some said there will be a drop of $20 to $30 in November but in the year there was a decline of about $80 in the scrap prices in the last few months. I just want to hear from you whether you see a landscape of metals spread increases and what will be the level of the third quarter?

And the second question is about capital allocation. We saw a reduction of BRL300 million in your CapEx to BRL2.1 billion. So what should we expect for the next few years? In your speech you seemed to be cautious in terms of the economic landscape in Brazil, low productivity. I just want to understand whether there is any change in the heavy plate projects from now on?

And another question refers to the ore business. How to allocate the excess capacity that you have or your transfers to Ouro Branco, whether whatever is [welcome] and you could be allocated to the domestic market and whether the domestic market will be able to accommodate all of that supply because the export market is still a bit complicated with the spot price below $80? Thank you.

About North America, today the level of metal spread in the third quarter was about $425, $430 per short ton. And you have to convert it to metric. I mean I think the lowest levels occurred in the last few weeks. And there is always a delay in terms of the benefits that you have or you do not have whenever there is any price decline. But today our metals spread is around that level.

If you recall, about a year ago, the level was below $400 per short ton, it was about $380, $390. So there has been an improvement in the metals spread in the last 12 months which was a very significant improvement. Now I think Andre can refer to CapEx and the heavy plates.

Leonardo, about heavy plates that you mentioned, the project is still on and by the second quarter of 2016, it will start to operate.

Now referring to CapEx and amounts, we [promoted] our second review this year, which is BRL2.1 billion. And I would say the next year we should see something similar to that; maybe slightly above that. But there is also the exchange rate effect; we talked about reals but most of our CapEx is denominated in U.S. dollars because of equipment from other countries. But I would say that it would be around this number between BRL2.1 billion, BRL2.2 billion or BRL2.3 billion. This is what we believe the CapEx will be. And this is also related to 70% to 75% in optimization of assets. So we still do have a lot of assets to be utilized.

And there is also some strategic investments, one being heavy plates. We also announced that we will review our mining CapEx and everything will be reassessed. The first thing refers to the review of the disbursement and we will now verify what project will continue and what will be approved next year.

About mining, could you please repeat it because your question was not very clear. I think you were talking about domestic consumption and sales.

Yes, I just want to understand your strategy because when we break down Gerdau's cost in the export market, we see a level of cash cost delivered in China over $30. Therefore, I think that the possibility in the domestic market is much higher today considering this price level. So I just want to know whether you have buyers to accommodate all of this material in the domestic market.

No, we do not have buyers to buy all of this volume. And a great part of what we sell is exports. And our focus with this price is or is to supply to ourselves so that we can be more competitive in our Ouro Branco mill which is important to continue to export and also to offer billet to other markets. We do not have a large enough domestic market to accommodate the entire volume.

Thank you very much.

(Operator Instructions) Alan Glezer, Bradesco.

I have two questions. First about Latin America. We've noticed that net revenue per tonne in dollars was up by $47 per tonne quarter on quarter in this third quarter. And so given the amount of imports that we've seen coming from China, how is it possible to increase the net sales per tonne that way? I understand that the cost per tonne was up just the same way and the margins were not improving but on the contrary I just want to know what happened in the market that led to this increase in net sales per tonne the way it happened.

And the second question is about the strategy of selling slabs to the foreign market rather than the domestic market. I just want to know whether you could please tell me the difference, the difference between the profitability margins of slabs and exports of iron ore. Can you give us something that allow us to differentiate these two strategies? So these are my questions, thank you.

Well, first referring to Latin America, as Andre said earlier on, in Latin America we are in nine countries and each country is very peculiar and very specific. In some instances there are countries where inflation moves faster than the exchange rate we use to translate the results into our balance sheet. Therefore there might be distortion that is a fact, so this is my answer in terms of Latin America.

But now speaking about slabs and ore, we do not have any specific calculation that considering the price of ore, is worth it selling slabs or if the level changes, it is more worth it to export ore but we just have to look at the opportunities where the exchange rate is favorable to export slabs and when the foreign market has a consistent and stable demand at good prices that allow us to have a positive margin. So, this is what we consider in our decision making process, but we do not consider increasing the export of slabs just because there was a decrease in the price of ore.

[Milton Sullivan, Bruses Gudao].

Thank you for the follow up. I have two other questions. First going back to Latin America and looking at the global market, I would like to know whether you have any expectation concerning what we have just heard about a possible removal of tax incentives from China related to tax reimbursement, that's the first question.

The second question is, even referring to the parity now, even with the exchange rate depreciation and we see a drop in prices of steel in Turkey, how do you see this parity now and how do you see the evolution of the Turkish steel prices from now on?

Well, inputs from China to Latin America and the rebate which is a discount to import, that's one of the practices that we monitor not only in Brazil, but in the other countries of Latin America and also producers are constantly looking to see whether that is happening and that has to be avoided. So, this is one of the things that we monitor. We have that also for iron ore.

In terms of the parity of the exchange rate, well, it's difficult to talk about prices around the world, you talk about Turkey, but what is your question about risk rate, this fluctuates according to the market. So, we do not have any specific comments about that.

Now we conclude our Q&A session. I would like to give the floor to Mr. Andre Gerdau Johannpeter for his final remarks.

Well, thank you all very much for your interest, for your questions. If you still have any remaining questions that -- or if we didn't answer your questions, please refer to our IR team and I would like to invite you to participate in the results for our fourth quarter on March 4th of 2015. Thank you very much and have a good day.

Gerdau's conference call is now over. I would like to thank you all very much for participating and have a very pleasant afternoon.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event