Gerdau SA (GGB) 2014 Q4 法說會逐字稿

(interpreted) Good afternoon, and welcome to Gerdau's conference call to discuss the results for the fourth quarter of 2014.

(Operator Instructions)

We would like to emphasize that any forward-looking statements 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 its comments are based on reasonable assumptions, there is no guarantee that future events will not affect this evaluation.

Today, with us are Mr. Andre Gerdau Johannpeter, Director, President, and CEO, and Mr. Andre Pires, VP and IR Officer.

With no further ado, I would like to turn the floor to Mr. Andre Gerdau Johannpeter. Please, Mr. Andre?

(interpreted) Good afternoon, everyone. Welcome to our conference call for Gerdau's results. We will start with an overview of the world landscape for the steel industry. Then, we'll talk about Gerdau's performance in the 12 months of 2014 and in the fourth quarter of the year. After that, we will give you some details on investments for 2015.

It's important to stress that we will analyze the performance of consolidated results of 2014 and 4Q14 vis-a-vis the same period of the prior year. After that, Andre Pires will present Gerdau's financial performance. And then, we will be available for your questions.

For those of you that are following us on the internet, on slide 2 we are going to talk about steel in 2014. We have faced significant challenges in the world and overcapacity of around 690 million tonnes of steel and a weaker steel demand in markets like Brazil and other countries in Latin America, causing a high volatility in the results.

In Brazil, there was low economic growth in 2014, which has impacted steel-consuming markets such as civil construction, manufacturing, and the auto sector. According to the Brazilian Steel Institute, the apparent consumption of steel in the country in 2014 was the lowest since 2009, amounting 24.6 million tonnes, 6.8% down.

In Latin America, except for Brazil, the steel industry was affected not only by a slowdown in the economy but also by the increase in steel imports, according to the Latin America Steel Association, Alacero. Latin America is the second region with the largest volume of rolled steel imports from China, second only to South Korea.

In the American market, Gerdau's steel demand was higher vis-a-vis 2013, with highlights in manufacturing and non-residential construction sector. But we remain concerned about the high imported steel inflow. Just to give you an idea, imports of long steel in the US went from 17% of total consumption in 2013 to around 20% in 2014. And the specialty factor that we highlight the continuous growth of the auto market in the US.

Also, there has been a gradual development of European and India markets.

On the other hand, Brazilian auto industry is still negatively impacting long steel sales -- rather, specialty steel sales in the domestic market.

Now, on slide 3, let's talk about the main figures of Gerdau for 2014, starting on shipments. We have a consolidated of 17.9 million tonnes of steel in 2014, 3.5% lower vis-a-vis 2013, mainly due to weaker steel demand in Brazil and other Latin American countries. Shipments in the fourth quarter amounted 4.4 million tonnes, 3.4% less than 4Q 2013.

Net sales has reached BRL42.5 billion, 6.7% higher than the prior year, especially because the expansion of revenue in the American market and the positive foreign exchange effect in the currency conversion of revenues from foreign operations. In the fourth quarter, net sales amounted BRL10.8 billion, 5.1% higher vis-a-vis the same period of 2013.

Earnings before interest, taxes, depreciation, and amortization, also known as EBITDA, was BRL5.1 billion in 2014, 7.1% higher vis-a-vis the prior year.

This performance was impacted by earnings from the sale of our interest in the American Gallatin Steel, totaling BRL637 million, and by the impairment of assets in Latin America, in the amount of BRL339 million. Not factoring both operations, adjusted EBITDA was BRL4.8 billion, stable vis-a-vis 2013 and despite the challenging scenario of the world's steel market.

In the fourth quarter, EBITDA was BRL1.5 billion. Net of nonrecurring items, of BRL1.2 billion, a drop of 9.6%.

Net income was BRL1.5 billion, 12.2% lower vis-a-vis 2013. And in the last quarter of 2014, net income totaled BRL393 million, a drop of 20% when compared to the same period.

On page 4, we'll talk about investments. In 2014, they totaled BRL2.3 billion. Those are investments in fixed assets. The amount was 21% lower than initially planned for 2014, in line with the Company's position, which we talked about along the year, to be judicious in investments approvals. It's important to highlight that investments made in 2014 were towards projects already approved, that were ongoing projects, in addition to planned maintenance, both in Brazil as well as abroad.

For 2015, Gerdau plans to invest BRL1.9 billion in fixed assets. And that mirrors the global landscape of the steel market, marked by the installed overcapacity. Also, we will continue assessing the economic scenario and its impact in operations in order to adjust, if needed, total investments to market moves.

Thank you. And now, I'll turn the floor to Andre Pires.

(interpreted) Thank you, Andre. Good afternoon, everyone. I will start on slide number 6, for those of you that are following us on the webcast, and I'll talk about the results and annual consolidated performance. And then, I'll talk about each business operation. And I will close the presentation talking about capital structure.

In the consolidated, the adjusted EBITDA and adjusted EBITDA margin for 2014 were rather stable, regardless lower number of shipments. That stability was mainly due to the positive effect of the exchange rate variation in the period in foreign operations and exports from Brazil. Here, it's important to highlight the rebound of North America BO which has contributed to a consistent EBITDA, offsetting the lower EBITDA in Brazil BO.

Now, turning to slide number 7 and talking about the fourth quarter of 2014 and starting by Brazil, we see that the uncertainty about the economic scenario is causing a lower demand which is impacting our business. In 4Q 2014, shipments dropped 3% vis-a-vis 4Q 2013, and the internal market had a drop of 4%, especially in civil construction and manufacturing.

In comparison to 3Q 2014, sales volume grew 5%, with increased exports 31% higher in the period because of the improvement in the international market of semi-finished products and also a quicker devaluation of real.

Analyzing the EBITDA for the fourth quarter of 2014, the absolute amount was down 13% vis-a-vis 4Q 2013. Let me remind you that in the last quarter of 2013, there were earnings from sale of real estate amounting BRL98.6 million. Net of this effect, EBITDA and EBITDA margin were stable in the comparison for both periods.

Vis-a-vis 3Q 2014, EBITDA was up 26% in 4Q 2014, and the margin increased from 16.5% to 20.3%, thanks to greater fixed cost dilution with exports increase and to a lower cost of iron ore in Ouro Branco mill.

In the US, the economic scenario continues to be positive, but the growing pressure from imported products added to the seasonality of the period resulted in shipments down by 5% in the 4Q 2014 vis-a-vis 4Q 2013 comparison and by 15% vis-a-vis 3Q 2014.

4Q 2014 EBITDA grew 43% vis-a-vis 4Q 2013, going from BRL139 million to BRL199 million, mainly thanks to the metal spread gain in addition to the exchange rate variation in the period. So, the EBITDA margin went from 4.5% in 4Q 2013 to 5.7% in 4Q 2014.

Vis-a-vis 3Q 2014, EBITDA and EBITDA margin dropped due to lower volumes sold, and that was because of seasonality of our business. It is important to stress that the results of this operation in 4Q 2014 did not take into account the equity in earnings from Gallatin Steel Company once the sale of that was done in 2014.

In Latin America, 4Q 2014 shipments were down 7% vis-a-vis 4Q 2013, due to increased imports inflow, especially from China and Turkey, and slower economic growth in the region. 4Q 2014 EBITDA was lower vis-a-vis 4Q 2013 due to lower shipment volume and higher operating expenses in the period. When compared to 3Q 2014, EBITDA was stable.

In the specialty steels BO, shipments in 4Q 2014 were down 5% both vis-a-vis 4Q 2013 as well as 3Q 2014, and that was due to lower demand in Brazil. Consolidated EBITDA increase for specialty steel in 4Q 2014 vis-a-vis 4Q 2013 was thanks to higher net sales per tonne, basically driven by specialty steels mills from the US. Therefore, EBITDA margin was up, from 10% in 4Q 2013 to 12% in 4Q 2014.

For iron ore, comparing 4Q 2014 to 4Q 2013, shipments grew 5% thanks to higher volumes sent to Ouro Branco mill. Vis-a-vis 3Q 2014, even facing a challenging scenario, sales increased with already scheduled shipments for the period. A drop in the EBITDA and in the EBITDA margin for [4Q 2014] vis-a-vis 4Q 2013 and also 3Q 2014 was due to lower international prices for iron ore.

Now, turning to slide number 8 and talking about the consolidated results in the quarter, the adjusted EBITDA amounted BRL1.2 billion, 10% lower when compared to the same period of the prior year. The top chart shows the reduction was due to lower volumes sold, higher costs, partially offset by a higher net sales per tonne. Therefore, EBITDA margin went from 13.3% in 4Q 2013 to 11.4% in 4Q 2014.

The bottom bridge chart, we see the consolidated net income in 4Q 2014. It was lower than 4Q 2013, due to reduced operating results and higher negative financial result, partially offset by the net effect of nonrecurring events.

Now, talking about dividends, considering 4Q 2014 results, BRL28.4 million in dividends will be paid to shareholders of Metalurgica Gerdau, BRL0.07 per share, and BRL119 (sic - see press release, "BRL119 million") to shareholders of Gerdau S.A., also BRL0.07 per share. These will be paid on March 26, recorded at close of business on March 16.

Now, slide 9. Let's talk about indebtedness and liquidity of the Company. Gross debt end December 31, 2014, was BRL19.2 billion, higher than in September of 2014 due to the exchange rate variation. Net of this effect, gross debt would have dropped around BRL412 million. When compared to December of 2013, gross debt increased, especially due to exchange rate variation.

The average debt cost was 6.5% a year, with an average amortization term of 7.1 years.

Cash increase of BRL1.1 billion from September to December 2014 was mainly caused by proceeds received from Gallatin's sale. That increase more than offset the growth of the net debt in the period, reducing the net debt-EBITDA ratio from 2.7 times in September to 2.4 times in December of 2014.

Now, turning to slide number 10, I will talk specifically about working capital. And if you look at that chart, you see that the absolute amount is around BRL10 billion in 2014, and a stable cash conversion cycle of around 85 days. Comparing December 2014 to September 2014, working capital decreased BRL100 million. It's important to stress that the exchange rate variation is accounted for in this drop. And not factoring in this variation, the cash effect of the working capital reduction was BRL469 million.

Now, I will turn the floor back to Andre for his final remarks.

(interpreted) Thank you, Pires. To conclude, I would like to stress that 2014 was a very challenging year for Gerdau and the steel industry, mainly due to the installed overcapacity worldwide and also to the lower demand in relevant markets, especially Brazil and other Latin American countries.

Just to give you an idea, the use of installed capacity of the steel industry in the world is decreasing on a yearly basis. It has reached 91%, its peak, in 2008. And in the following years, the average was 75% to 80%. And in January of this year, it has reached 72% of use in the industry. These are data from the World Steel Association.

On the other hand, we were able to minimize the effects of this scenario in Gerdau's operating performance. We have improved the performance of our operations under this difficult landscape. We have divested from non-strategic assets; for instance, the interest in Gallatin Steel. And keeping selective when investing in fixed assets.

Regardless the lower net income in 2014, our management efforts can be seen by our adjusted EBITDA level stable vis-a-vis the prior period.

About the sector perspectives, we expect the world steel industry will keep on facing slow consumption growth and installed overcapacity.

In other countries where we operate, we believe the developed markets offer positive scenarios. The economy in the US should grow in 2015, boosting steel consumption in the country. The expansion of non-residential segment should continue, given increasing private investments in the US. Infrastructure investments should be moderate, in line with a modest growth of financing available in the public sector.

But the continuous increase of imported steel inflow will keep on pressing margins and results of companies in the industry.

Brazil's perspective for 2015 is a [deficit] one, taking into consideration the potential impact of the economic downturn to consumption levels. Added to that, the country's systemic problems: elevated tax burden, cumulative taxes, electric power costs, and also an appreciated exchange rate. All of those have been impacting the main productive sectors.

In addition, other economies in Latin America should have different level growth in 2015, impacting also the apparent consumption of steel in the region.

About specialty steels, specifically here, perspectives are of modest growth in the auto industry in Brazil, impacting the demand for specialty steels.

On the other hand, North America should continue the development of the auto industry, expanding manufacturing of light and heavy vehicles, therefore increasing the demand of specialty steels in the region.

But the oil price drop is already impacting the oil and gas industry, another great consumer for specialty steels.

In the European market, a slow and gradual rebound of the economy should allow for boosted production of light and heavy vehicles in 2015.

And in India, there should be an increased production of light and heavy vehicles, which could also expand the consumption of specialty steels in the country.

About the iron ore market, the oversupply of 2014 has impacted the sales of the raw material, and that should remain the case in 2015. Under this scenario, we should follow our strategy of focusing on the iron ore production to supply Ouro Branco mill, increasing its competitiveness.

We also consider the chance of continuing experiencing margin pressure in the international market and the possibility of steel imports expansion in almost all markets we operate in -- an important point of attention to the sector, no doubt. Also, geopolitical conflicts are affecting the economic growth of some regions in the world, impacting steel consumption and sales.

[Fixing] this landscape, we will keep on seeking to adjust our operations to the world's steel market movement, sustaining the operation-efficient work and also aiming to ensure business stability.

We now conclude our presentation and are available to answer your questions. Thank you very much.

(interpreted) (Operator Instructions) Milton Sullyvan, Brasil Plural.

(interpreted) I have two questions. First, about Brazil operations. Can you tell us what we could expect in terms of costs ahead? Specifically and strategically speaking, what kind of production we can see from Acominas and what kind of impact we should expect?

And second question, still on costs. Can you tell us a little bit about scrap price? What kind of price we should expect for scrap in Brazil, considering you already have some discounts in specialty steels? And is there are any pressure because of prices abroad?

(interpreted) This is Andre Pires. Let me see if I well understood your first question. If there are more opportunities to send our production to Ouro Branco to Acominas?

Yes, this has been our strategy and we have been successful in it. I believe this strategy has proven to be efficient, when we look at the EBITDA margin of Brazil operation in 4Q 2014. So, the scenario is still favorable. Iron ore has not increased from [back there] to today. And so, I think we could manufacture [cold] steel using our Ouro Branco mill.

About scrap price, it has been stable. It is not as much related to the international price. But obviously, there is no high pressure right now. And the price in the last month has been rather stable.

(interpreted) Thank you.

(interpreted) Carlos de Alba, Morgan Stanley.

First question has to do with working capital. Year on year, comparing December 2014 versus December 2013, the cash conversion cycle increased about three days. And I wonder if you can comment how do you see the conversion cycle in 2015? And how much money do you think you can generate from either controlling or hopefully reducing the cycle?

And the second question, also, on iron ore. How much volumes of iron ore do you expect to produce in 2015? And if you can give us a sense of the split between internal use or consume iron ore in Ouro Branco and how much would you be able to export, if you have any commitments to export, that would be very useful.

And just finally, I guess that under the current scenario of iron ore prices, the expansion on the iron ore business is off the table, right? Just to confirm that?

(interpreted) Well, let me translate Carlos' question. He's asking about the working capital and the cash conversion cycle, because there was an increase of three days in the conversion cycle in 2014. And what is our expectation for 2015? How much we could optimize in terms of working capital for 2015? The following question, it's about iron ore and I'll turn it to Andre.

Now, let's talk about working capital. Really, we have started 2014 with a better expectation in terms of production volume -- or shipment volume -- for Gerdau vis-a-vis what happened in the year. There was a drop of 4% in the shipment volume in the year. Therefore, the adjustment in the working capital has not been fast enough as we would like it to be in 2014. And that's why the conversion cycle was three days higher than the closing of 2013.

For 2015, we do not have a forecast. But obviously, we are working with a very realistic expectation in terms of the deliveries -- or the shipments -- for consolidated ones. We are working in the long-term objective of bringing the cash conversion cycle to lower than 80 days, getting closer to 75 days. This is our long-term goal. We don't have a short-term goal for this, yet. But if we analyze the way we are working, we believe that in the long term we will be able to bring down the cash conversion cycle to below 80 days.

Now, let me turn to Andre and he will talk about the iron ore.

(interpreted) The question was about the iron ore and about production. How much is going to go to Ouro Branco export, and the trend of expansion, if that is going to continue or if it under analysis?

We are not going to disclose information about volumes right now, but 80% to 90% of what is going to be manufactured is going to be used by Ouro Branco mill. Our focus is iron ore to be used in our own mill. We might have some shipments if that is feasible, but right now we are concentrated in taking our production to Ouro Branco and not -- we do not intend to grow exports.

About the expansion project, we are reassessing it, as we said. We don't have any further information to provide you right now. Once again, our focus is to bring production of iron ore to supply our mill.

And we do not have any commitment. You have asked if we have commitments in terms of railways, ports. No, we don't have anything. That gives us flexibility to decide what we wish to do ahead, when we wish to do it, if the scenario changes. But if nothing happens, we will keep on supplying to Ouro Branco. That helps us very much in the competitiveness of that mill.

Thank you.

(interpreted) Leonardo Correa, BTG Pactual.

(interpreted) My first question is about the streamlining of assets. We have seen efforts from you, from Brazil, closing capacities of higher costs, of the less competitive ones, and they have been providing good results. We see cost controls in Brazil.

But if I think globally, considering the impairment that you've done in Latin America, what can we expect? Do you still have idle capacity abroad? Anything relevant? I would just like to understand if there is anything similar to what you have done in Brazil? If you were studying, if you were considering anything, especially Latin America and United States? That was my first question.

And my second question, still about the US. Of course, there was a negative impact on the volumes in the quarter on quarter. It was seasonal. But it might have been some cost impact -- it might have been. But I just would like to understand. We are crunching some numbers here, and it looks like maybe you have some nonrecurring costs in North America? I just want to make sure if -- just want to understand if that makes sense. Did you have anything nonrecurring in costs in the US?

These are my two questions.

(interpreted) This is Andre Pires. About streamlining of assets, as you asked. Really, in the second half of last year, we tried to optimize our assets in Brazil, focusing on the less competitive operations in terms of cost and efficiency. And this is still our goal, not only in Brazil but also when we look at our global footprint.

So, we are still focusing on that, and we do not have any specific plan, anything to disclose. But we do have to take that into consideration. Depending on the scenario, we might take other measures in that sense, not only in Brazil but also in other areas.

In North America, there is nothing nonrecurring in the fourth quarter. What happened was a lower volume. Therefore, there was a lower dilution of fixed costs. That's why you end up having higher costs.

Also important to say here is that when we compare to the fourth quarter of 2014 -- [when] the fourth quarter of 2013, we still had equity from Gallatin. We don't have that any more. That was something relevant. So, this might be an explanation of something that may have drawn your attention.

(interpreted) Okay.

(interpreted) Roy Yackulic, Merrill Lynch.

In the CapEx budget for next year, your estimate of BRL1.9 billion, how sensitive that is to FX? How much of it is US dollar denominated? And does it include any iron ore CapEx?

And then, my second question is regarding, I guess, the construction industry in Brazil. There was an article out today that 2014 and 2015 are supposed to be the worst years for the construction industry since 1992. Now, I think construction declined about 6% in 2014. What are the expectations for 2015? And then, in addition, the auto sales are supposed to decline 10%. So, are we looking for a pretty bad domestic year in Brazil?

(interpreted) This is Andre Pires. Thank you for your question and I'll translate it. The first question is about a CapEx estimate for 2015 of BRL1.9 billion. And the question is how sensitive that CapEx is to FX. And if we are here considering anything from mining within that figure.

Andre will talk about the construction sector in Brazil and also the auto sector, which was the second question.

But let's start by CapEx. Of course, there is sensitiveness to FX, but there are a lot of investments made here in Brazil, investments in which we are at our final stage. I'll give an example; you know it very well. It is the construction of our heavy plate rolling plant. We are in the assembly phase already. That investment is totally made in reais. Equipment is already bought.

We have investments done in Latin American countries that end up being impacted by the same factor that real is impacted, because these currencies are also depreciating.

So, there is sensitiveness, but it's not as high. That's why we are talking about figures in reais, because with the exchange rate and volatility it's difficult to have a dollar estimate of that figure in a scenario in which part of the CapEx and the dollar are done in different currencies and the real has depreciated vis-a-vis the dollar.

About mining CapEx, if there is anything for mining in the figure? Very little. I would say that for mining it's only maintenance. We don't have anything for mining expansion within that figure.

Now, let me turn to Andre. The other question is about the construction market and the auto market, as well. He talked about this year and next year being difficult years in terms of growth.

(interpreted) Yes, we see a difficult landscape. We see drops in [sale launches]. That happened already in 2014. And it's very difficult to forecast if this is going to stay like this or if we are going to see a rebound. But this is a difficult year for construction, especially civil construction.

We see a little bit of infrastructure that has worked. It has gone forward last year. But now, the construction companies and with all the investigations for the "Car Wash Operation" -- and Petrobras itself is a major consumer in the construction sector. So, all of that is causing an impact. It is a cautious scenario and difficult to forecast.

In the auto sector, we have seen sales drops. That, we saw in January, as well. But in the auto sector we have a possibility of exporting, because with the exchange rate close to BRL3 per one dollar, there's still a chance we could start exporting; there is this possibility.

But the whole auto sector is having that possibility of exporting, as well, due to the FX effects. So, differently from construction, in the auto sector there is this possibility. Gerdau, with steel and also auto parts that could be exported. This is a possible scenario for 2015 and 2016, because we believe dollar is going to go stronger.

(interpreted) Andre Pinheiro, Itau BBA.

(interpreted) I have two questions. First, considering the depreciation of the exchange rate and we have seen it stronger now in the beginning of the year, what could we expect for the sales mix for the first quarter of Gerdau? Should we see more exports in the mix? And how do you expect that to progress from now on?

And the second question is about the metal spread in the US. How do you see that in the beginning of the year? And what do you expect to see the metal spread progressing from now on? Will you see more imported products coming in and the steel price going down worldwide? And how is that going to impact the metal spread?

(interpreted) About the FX and the export mix, now, from the third quarter to the fourth quarter there was already a growth in exports, and this should be a trend for this first quarter of 2015 and for the subsequent ones, as well. And despite of the drop of price worldwide, the depreciation is increasing. That is deeply related in the world. So, we become more competitive. So, I would say the trend is to increase exports.

It's difficult to mention figures, but we have increased that already from the third quarter to the fourth quarter, from the fourth quarter to the first quarter. Slabs and billets, as we have seen. Also, some exports of rolled products are there already.

(interpreted) About the metal spread -- and here, is Andre Pires -- it is still there, even with recent price reductions in the US, above [$420 and $430] per short ton. Of course that when there is a price drop, the first effect is a margin reduction. Then, later on, it tends to normalize due to the drop in the scrap.

So, the average I believe for the metal spread should be stable in 2015 vis-a-vis 2014. We do not believe that the import pressure in the US is going to go down. We believe more imported products are going to go in. The consensus of the several agencies that estimate around non-residential construction, they say that there should be a growth of 7.7% and 8.2% in 2016. So, the demand should be consistent, and imported products should keep on going in.

And there is another driver here that helps this high import, which is the dollar that is strengthening. So, we believe the metal spread should be consistent to what it was in 2014, around [$420] for short ton.

(interpreted) Thank you.

(interpreted) Christina Ronac, HSBC.

Can you remind me if you hedge your US dollar bonds into real? And then, a follow-up on that, I have calculated you have about $5 billion of bonds, and I think you record that on your balance sheet at BRL12 billion. Is that fair?

(interpreted) The question was about our bonds, our dollar debt, if they are hedged to reais. And if I'm not mistaken, the second question is about what we have issued -- [BRL5 billion] in bonds and in our balance sheet is BRL12 billion.

Let me clarify these figures. The first answer to your question is that, no, we do not have an effective hedge vis-a-vis our dollar debt to reais. What we use -- the net investment hedge methodology, which is allowed by the IFRS. By using this methodology, since we have dollar investments due to our operations in the US, we assign those bonds issues to finance investments in the US.

By doing that, the exchange rate -- [the costs] do not impact our P&L, our results. And they go straight to our equity. So, that's why you do not see a major FX variation in our income statement, because that is transferred to our equity.

So, what you see in terms of exchange variation are some debts that we have in foreign currencies, maybe a dollar operation, or some payable accounts that are in dollars, and they are subject to FX variations but they are small.

About the debt of our bonds, they're in dollars. They are around $4 billion. And basically, we have $1 billion for our American operations and $4 billion to the Brazilian operations. So, those would total the $5 billion that you mentioned. That is equivalent to BRL13 billion in our balance sheet.

Thank you.

(interpreted) Marcelo Aguiar, Goldman Sachs.

(interpreted) My first question is about your exposure to heavy construction sector. Can you remind me what is the mix? If we analyze the long steel sales, what's your retail exposure? What is your exposure for residential industry, heavy construction, so that we can have an idea of the fluctuations of your domestic shipments for 2015?

And my second question is, Brazilian companies will have cost pressure this year due to inflation, energy costs, and so on. I would like to understand from the energy or the power [side of view], what is your exposure considering all these changes in terms of taxes and tariffs that the government is going to launch in the next year? So, there is going to be an increase of costs with electric power. And analyzing the exchange rate at BRL3, would you have an opportunity to rework on prices in Brazil?

(interpreted) This is Andre Pires. Now, let me remind you of our mix. What is a [small] consumption, that represents basically 40% of long steel. What goes to production, 40% is [small]. And the other 60% are distributed to residential, commercial, and infrastructure.

When you talk about heavy construction, I think you are talking about infrastructure. So, that represents 20% of 60%; so, 12% in the last years. It has represented even more with the increased structure awards -- pre-World Cup and also with the concessions that we had in the last year. That infrastructure is of around 12%, usually, but now it's at 15%.

Of course, depending on what happens related to infrastructure and construction, that might have an impact. That small consumption is more stable. It tends to fluctuate more even with unfavorable situations.

So, that is -- just to repeat: construction, 60%. Of those 60%, 40% are small; 20%, residential; 20%, commercial; and 20%, infrastructure.

And Andre will talk about costs.

(interpreted) About costs, and you mentioned inflation, electric energy, and if the exchange rate might impact prices.

So, first, about inflation. We are strongly working and we have started last year and we still are to review all contracts of material supplies, services, wages -- always aiming to be lower than inflation, restructuring, and trying to lower costs under that scenario, which is a cost and margin pressure scenario. So, we have been doing a consistent work of reviewing contracts, services, and so on.

So, inflation is there. It is going up. We've seen the numbers, but we are trying to go the other way around, not allowing inflation to impact our figures.

On the energy sector, and let me remind you that it has 5% impact in our final price. So, it is important. We do work in it, but that's not the main cost.

And then, we have several contracts at spot price. We have contract negotiation. We have alternatives for own generation of energy in Goias and Rio Grande do Sul. We have Ouro Branco [route]. We're 70% self-energy generation. And we have mills all over the country. So, it is very difficult to provide you a number in terms of the impact, depending on the region.

But I could tell you that we are well positioned in terms of geographic areas. The integrated routes to Rio Branco and self generation of energy. We have good strategy to face that difficult scenario of energy.

About prices, once again, we will not mention anything about prices. That is a market matter.

(interpreted) Thank you.

(interpreted) Alex Hacking, Citibank.

My question is on your balance sheet. Obviously, we know that a weaker real is going to increase your gross debt, all things being equal. How do you see the net debt to EBITDA ratio evolving in 2015? I know that you've always looked at 2.5 as sort of a ceiling there. Is that something that you think is realistic?

And then, the second part of the question would be, are there any other asset sales that you are considering or are possible, similar to what we saw with Gallatin Steel this year?

(interpreted) This is Andre Pires. Alex's question is about the balance sheet and the impact of the exchange depreciation in the increase of our debt and how we would have the net debt-EBITDA ratio. And the second question has to do with asset sales such as we have done with Gallatin last year.

So, about the first question, obviously in a depreciation environment, a real depreciation, as we have a high percentage of debt in dollars, yes, that has an impact in our net debt-EBITDA ratio and also gross debt. But do not forget, 70% of our shipments are in dollars. So, we do have a snapshot impact of the balance sheet depending on which moment this snapshot is taken.

But the economic impact is limited due to the fact that we have a natural hedge. Once again, 60% of our shipments right now are in dollars considering our North American operation, part of North American for specialty steels, and also exports leaving Brazil.

We still have the objective of working with a net sales-EBITDA ratio of 2.5 times. I believe this is still a goal for us. It's also -- obviously, it depends where the exchange rate is going to go.

We should remind you that we have other leverages that we have been using. Andre, in his speech, talked about our CapEx expectation this year. That is below what it has been in 2014. And remember, when we started 2014, we expected a CapEx in reais that was higher, BRL2.9 billion. So, we are also working with investment plans that are very selective.

And once again, working capital. There was already a question about this. I believe that we can do more with working capital. We had a significant reduction in 2013. 2014, the reduction was not as significant as we expected. But, yes, there is an opportunity to work with working capital.

About asset sales, we do not have anything in the pipeline, but we are always analyzing as we always study any possibilities. We are always reviewing our portfolio. And should we understand that there is an interesting opportunity, we should consider it as a possibility.

Thank you.

(interpreted) Thiago Lofiego, Merrill Lynch.

(interpreted) I have two questions. First, about costs. Can you tell us a little bit more? In the fourth quarter, there was a sound performance in Brazil BO, Acominas especially. And I would like to understand if this is recurring? Or, is it specific to the quarter? And under that scope of cost cutting, what do you expect for 2015 to optimize your cost base?

Second question, about infrastructure market in the US. Can you tell us how that market is going? We know that this is very important for you, and I would like to hear more about it. We know that non-residential is there, also. But if you could talk about infrastructure, I would appreciate.

(interpreted) This is Andre Pires. Well, first, about Brazilian costs and all the initiatives we have been taking. We have started a plan along the second half of 2014. We already mentioned in the call there was: asset optimization; we closed some units; and initiatives we are working on to adjust our structure to the business reality, not only in Brazil but globally as well.

So, there's nothing nonrecurring in the fourth quarter. We believe this is part of a plan, of a strategy, that is an ongoing one, and we will keep on working very much concentrated on costs as well as in SG&A.

So, these are topics in our balance sheet that will really be important in the next years, not only in Brazil but also in [ex] operations.

Infrastructure in the US. Yes, this is one of the tripods of the American recovery, that is still slower than the others. We have three areas: non-residential construction, industrial construction, and infrastructure. The industrial was first one. Non-residential is now growing stronger in the last two years. And infrastructure is a little bit slower.

(interpreted) Thank you. Andre, can you tell us what is the --? Can you give us a range for cost cutting potential?

(interpreted) No. We do not have a goal or a figure that we could give you. This depends upon initiatives we take on a daily basis.

(interpreted) Thank you.

(interpreted) Renan Criscio, Credit Suisse.

(interpreted) Two questions. First, about specialty steels. We saw a significant improvement, and I would like to know if possible, can you let us know where that improvement came from? You had an increase in 10% in the EBITDA.

And the second question is about mining. [With] the exchange rate depreciation, the drop [of freight price], what is the iron ore from Gerdau delivered to China? At what level of price you change to sell -- sell here more or to export more?

(interpreted) This is Andre Pires. About specialty steels, in fact, this better result, the EBITDA growth vis-a-vis the same quarter of the prior year, is basically thanks to our North American operation that offset that drop in Brazil and also thanks to our Spain European operation. And India has a role to play there, but India's negative result has decreased it a lot. So, there was a share of these three elements: North America, Europe, and India.

Now, let me turn to Andre for the other question.

(interpreted) Well, the iron ore, before the drop in price, we were working with breakeven figures of $80 to $85. And then, the iron ore went to $60 to $65, as we have seen it. It was not possible any more. It is very difficult to give you today a new breakeven figure, because there are four or five factors that impact there.

First, our OpEx and the mine logistics costs, internal costs to load, to the railroad, to the port, the port prices, and then the sea freight. We see that all of those shares of the costs have dropped and are adjusting themselves, but not to the point of being able to export at this iron ore price right now.

We are still assessing that, analyzing everything, and we would just resume those operations if they become profitable. Our focus, once again, is internal supply to Ouro Branco. That has helped us a lot in terms of competitiveness, in terms of costs and the integrated route there in Ouro Branco.

(interpreted) That is clear.

(interpreted) Alan Glezer, Bradesco BBI.

(interpreted) I have two questions. First, about energy Brazil. I have seen that realized prices and net sales per tonne has dropped 2% quarter on quarter in the fourth quarter. Is there any effect there of mix change because you closed some plants in Brazil? Did you have any pressure in the mix change that brought the price down? Or, if this is a policy of price reduction in the quarter? If you could take this opportunity to explain the price of the exported steel and the domestic price for steel, I think it would be interesting.

And the second is about LatAm BO. I understand imports are a problem, but haven't you be able to -- but the volume has grown 3% on the fourth quarter and the margin is above 7%. So, what is the trend for 2015? Do you see more pressure that could change that dynamic?

These are my two questions.

(interpreted) This is Andre Pires. About your first question about the price per tonne, it has to do with mix effect. As I said before, we had more exports. Therefore, we have different prices, lower margins in some situations. And at the same time, we have greater dilution of fixed costs, and that helps costs. So, basically, this is mix. There is no reduction policy or discounts that have happened along the fourth quarter of last year.

About the imports, we don't like to talk about premiums, because that depends on special details from the product, where it comes from, and so on. But it's obvious that in an environment where we have real depreciated vis-a-vis the dollar, it is less competitive for the imported product than when the real is appreciated.

So, I would say that imported today has a lower competitiveness due to real's depreciation and also due to the volatility that makes predictability difficult for the importer.

Now, Andre is going to talk about Latin America.

(interpreted) About Latin America, you mentioned the volumes year on year. There was a reduction there. But now, in the third and fourth quarters, they are stable, with some growth in the fourth quarter.

Actually, in Latin America, 2014 was a difficult year due to the economic growth, and 2015 will be also. But just like in Brazil, when each country is a little bit different. But in all these countries, currency is depreciating vis-a-vis the dollar. Therefore, competitiveness increases in terms of the imported product and that generates more volume.

So, we foresee a possibility there in LatAm for some gains, some volume expansion due to this -- thanks to this higher competitiveness because of the exchange rate. And countries such as Peru, Chile, and Colombia that are suffering just as Brazil with the depreciation of the currency. That helps the steel sector and the whole chain.

So, there is this possibility for LatAm in 2015 to grow a little bit in volume with lower imports. But once again, that is going to depend on the international market's price. But that depends also in the exchange conversion.

(interpreted) A follow-up, please, about the realized price. When I mentioned real per tonne in Brazil BO, I was talking about shipments in the domestic market, the volumes for the domestic market. Can you tell us anything about the product mix [stowed] in the domestic market? Has that changed in the quarter? And because of that, this would explain a change in the costs?

(interpreted) Yes. In fact, when I talked, I was not as specific. But if we analyze the domestic market, there was a higher share of the semi-finished here. That's why we see that small drop in the net sales per tonne. This is a mix in there. We had more semi-finished products.

(interpreted) Thank you very much.

(interpreted) Right now, we conclude the Q&A session. I would like to turn the floor to Mr. Andre Gerdau Johannpeter for his final remarks.

(interpreted) Thank you very much for your participation. Thank you for your questions. Should you have any questions or if we were not able to address any of them, our IR team is available. And I would like to invite you for our conference call on May 5th to disclose the results for the first quarter of 2015.

(interpreted) Gerdau's conference call is concluded. Thank you for your participation, and have a nice afternoon.

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