Gerdau SA (GGB) 2015 Q2 法說會逐字稿

(interpreted) Good afternoon and welcome to Gerdau's conference call to discuss the results for the second quarter of 2015. At this time, all participants will be on listen-only mode during the Company's presentation and later we will begin the question-and-answer session. (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, and Harley Scardoelli, Financial and Corporate Director and also IR Officer.

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

(interpreted) Thank you. Good afternoon everyone and welcome to our earnings conference call to discuss Gerdau's results. We will start our analysis by looking at the global landscape of the steel industry, next I will comment on Gerdau's performance in the second quarter of 2015, and then I will talk about our investments in the period.

I would like to emphasis that we will discuss the performance of the consolidated results of the second quarter vis-a-vis the same period of the year before.

But before I begin this presentation, I would like to say welcome to Harley Scardoelli. He is just beginning. This is his first earnings conference call, but I'm sure you are all very familiar with him. I just want to welcome Scardoelli who will join me in this conference call and will have a presentation shortly. He will talk about the financial performance of Gerdau and right after that, we will be available to take your questions.

For those of you who are following us through the net, I will go to page 2, where I will talk about the worldwide landscape. We are certainly experiencing a very challenging moment for the steel market, as we have already mentioned in the previous quarter.

According to the World Steel Association, the global demand for steel is supposed to grow slowly in 2015 and 2016. The numbers are the following; concerning steel, consumption is expected to grow 0.5% in 2015 and 1.4% in 2016, reflecting the slowdown in China and also the structural adjustments that are taking place in some economies around the world.

In addition to that, there is an excess installed capacity worldwide of about 720 million tonnes, which puts pressure on margins and hurts the profitability of the industry as a whole. Most of this excess capacity, 425 million tonnes, is in China. This is the equivalent of six times the annual output of all Latin America and this surplus causes China to export record volumes of steel in order to maintain the activity and jobs.

This is a clear reality in markets of Latin America and North America. Just to give you an idea, Chinese exports to Latin America grew 137% from the year 2000 to 2015, whereas in the period the price was down 24%. In the US, we also saw an increase in imports of steel. This situation has caused significant damage to some markets due to unfair competition.

This serious issue of unfair competition has recently been tackled by means of a coalition of the associations of steel producing companies in Brazil and also other centers in Latin and North America, and together we are seeking competitive conditions of local producers and we hope that they are re-established.

In Brazil, I should mention the affects of the economic slowdown on the demand for steel, particularly in the industry, in the construction and in the automotive sector. Added to that is the impact from steel imports in the domestic market. In North America, the highlight comes from non-residential construction segment, which is still strong despite the heavy pressure of imported steel in the region.

If we look at the specialty steel segment in the United States, sales of light and heavy vehicles continued to grow, reaching some record numbers, even though the energy gas and oil and gas is going through a significant downturn. Europe shows a gradual recovery in the automobile market. However, it faces slow demand in the oil and gas industry.

In India, the market for light and heavy vehicles continued to rise and demand is supposed to increase, mainly led by infrastructure and mining sectors. In Brazil, as you well know, we've seen a significant reduction in the production and sales of vehicles.

On page 3, I would like to refer to the large figures and comment on the performance of the second quarter of 2015. Consolidated -- I mean shipments amounted to 4.3 million tonnes, down by 6% when compared to the second quarter of the previous year. This drop in shipments stems from lower volumes shipped from the specialty steel operation and also in North America.

Now, net sales reached BRL10.8 billion, growing 3% when compared to the same period of last year. This growth is mainly explained by the foreign exchange effect when converting into reais the dollars generated by the operations abroad and also exports from Brazil.

Now SG&A expenses; the management efforts of the Company are clearly seen in the 6.2% reduction of SG&A expenses when compared to the same period of the year before. Now, excluding the effect from the exchange variation, the reduction of expenses was approximately 14%.

EBITDA amounted to BRL1.2 billion and remained flat despite the adverse worldwide scenario of oversupply of steel and the economic hardships in Brazil. This reflects the improved result of the North American operation and also our global effort to reduce SG&A expenses.

Net income was BRL265 million, down by 33% when compared to the second quarter of 2014 and this drop stems from weaker operating result and higher financial expenses in the period.

Now, I would like to refer to investments in the quarter, that's page 4. Investments amounted to BRL648 million and this is for CapEx. I would to now refer to three important investments. One is the installation of the heavy plate rolling mill in Ouro Branco, the continuation of the melt shop construction in Argentina and the startup of the coke plant and the power generation plant in India.

For the second half of the year, investments in CapEx should be lower when compared to investments in the first half of the year.

With that, I conclude this part of the presentation and I will give the floor to Harley Scardoelli and then I will come back for the final remarks.

(interpreted) Thank you, Andre, and good afternoon. I will now refer to slide 6, when we talk about the financial results and the performance of each business operation in the second quarter of 2015 and later I will elaborate on the consolidated results of the Company. I will conclude the presentation referring to the capital structure.

Starting with Brazil, the uncertainties in the economic environment are causing a slowdown in demand, which has also affected our business. Shipments of steel in the second quarter of 2015 were down in relation to the same period of 2014 due to weaker level of demand in the domestic market, offset by increased exports in the second quarter of 2015.

Looking at EBITDA in the second quarter of this year, the absolute value was down by 25% in relation to the second quarter of 2014, mainly due to lower shipments in the domestic market and the poor performance of exports. These effects also affected the EBITDA margin, which went from 17.4% in the second quarter of 2014 to 13.9% in the second quarter of 2015.

The North America operation shows a positive economic environment. However, there's a growing pressure over imported products and the comparison with higher shipments in the second quarter of 2014 resulted in a 6% reduction in shipments when we compare the second quarter of this year with the second quarter of 2014. It's worth mentioning that in relation to the first quarter of 2015, shipments increased 11%, boosted by the growth in the non-residential construction industry.

EBITDA in the second quarter of 2015 amounted to BRL413 million, the highest since the third quarter of 2008. Compared to BRL281 million in the second quarter of 2014, it was up by 47%. This improvement is mainly attributed to gains with the metal spread, which is the difference between the sale price and the scrap utilized, in addition to the exchange variation in the period. The higher metal spread contributed to the growth in the EBITDA margin from 7.8% in the second quarter of 2014 to 10% in the second quarter of this year.

The Latin America operation shipments remained flat in the second quarter of 2015 vis-a-vis to the second quarter of 2014, with different behaviors in the countries where Gerdau operates despite the high level of imports in the region. Thus, EBITDA margin in the second quarter of 2015 was stable compared to the second quarter of the year before, remaining at 8.3%.

At specialty steel, shipments in the second quarter of this year were down by 7% vis-a-vis the second period of 2014 due to strong weakening of demand in Brazil and also due to the learning curve of the new rolling mill in Monroe in the United States.

The reduction in the consolidated EBITDA of the specialty steel operations in the second quarter of 2015 in relation to the same period of the year before occurred due to a weaker result in the specialty steel operations in Brazil and North America. Therefore, the EBITDA margin decreased 10.5% in the second Q of 2014 and 9.5% in the second quarter of 2015. On the other hand, the India operation had its first positive EBITDA this quarter resulting from the progress in the learning curve and investments done in this operation.

In our iron ore business operations, sales in the second quarter of 2015 when compared to the second quarter of 2015 increased by 13%, mainly due to higher volumes directed to Gerdau's units, which was the Company's focus to compensate for low prices of iron ore in the international market.

The EBITDA reduction in the second quarter of 2015 vis-a-vis the second quarter of 2014 reflected the lower prices in the market and lower shipments of iron ore through third-parties. On the other hand, the EBITDA margin showed a slight progress, reaching 25.9% in the second quarter of 2015 due to a better sales mix, larger volumes directed to Gerdau's units and also due to lower cost of iron ore shipments.

Now moving to slide 7, we refer to the consolidated results. This consolidated result showed EBITDA of BRL1.2 billion in the second quarter of this year, remaining flat when compared to the second quarter of 2014. We would like to call your attention to the fact that the better performance of North America business operation contributed to a better EBITDA margin.

If you look at the upper side of the bridge chart, we see that the (inaudible) of EBITDA was due to lower shipments and they were offset by better net sales per tonne and also a 6% reduction of SG&A, previously mentioned by Andre. Therefore, the EBITDA margin remained at 11% in the second quarter of 2015.

In the lower part of the bridge chart, we see that the consolidated net income in the second quarter of this year was down vis-a-vis the second quarter of 2014. That was mainly due to lower operating income, which was impacted by depreciation and also higher financial expenses -- both items were impacted by the exchange variation.

In terms of dividend based on results, in the second quarter of 2015 the Company will pay out dividends of BRL8.1 million through shareholders of Metalurgica Gerdau S.A., BRL0.02 per share, and interest on capital of BRL84.3 million through shareholders of Gerdau S.A., equivalent to BRL0.05 per share. These proceeds will be paid on September 4 based on the positions of closing of trading on August 24.

Moving to slide 8, we refer to our debt indicators during the quarter and we will also refer to the Company's liquidity position. On June 30th of 2015, the gross debt was BRL22.6 billion, lower when compared to March 2015 and also due to the positive effect from the exchange rate variation in the period. The weighted average cost of the debt was 6.7% a year with an average amortization term of 6.6 years. It is also important to say that 70% of our long-term debt will only mature as of 2018, but mostly -- the major part of it is up to 2021.

The net debt over EBITDA ratio was 3.1 times in June 2015 due to exchange rate variation that had a positive effect on EBITDA during the quarter and also caused by the devaluation of the Brazilian real vis-a-vis the dollar during the quarter. I would also like to mention that on July 9, 2015 the Fitch rating agency reinstated the investment grade of Gerdau S.A. with a stable outlook.

Now, moving to slide 9, I would like to refer to our working capital. In June of 2015, the cash conversion cycle was reduced when compared to March 2015 due to a 6.4% reduction in working capital, which is the equivalent to BRL755 million in reduction mainly due to inventory reductions and effect from the exchange variations compared to a 3% increase in net sales. With that, our cash conversion cycle went to 101 to 90 days.

Now, moving on to page 10, we talk about our positive free cash flow position in the second quarter of 2015. In the upper chart of the slide, we see that in the second quarter the Company had BRL642 million of positive free cash flow. A part of the EBITDA generation of BRL1.2 billion was used to pay for CapEx of BRL649 million, BRL98 million to pay for income tax, BRL252 million in interest on debt and working capital added BRL457 million to the Company's cash already excluding the effect of the exchange rate variation.

Now going to slide 11, which is the last slide of my presentation, I refer to the advances that we made in the simplification of processes and ownership structure. Considering the current landscape of high competitiveness and the progress achieved in simplifying processes and the ownership structure, on July 14 the Company communicated the following decision; changes in the structure, going from five to four business operations that will come into force as in the third quarter of this year and the intent is to look for synergies in the operations of the business -- and the new operations will be Brazil, North America, South America and also specialty steel.

The second point is the evaluation of the mergers of Seiva, Itaguai, Gerdau America Latina S.A. by Gerdau S.A. to promote further cost reduction. The third point is the acquisition of minority interest in operating companies to support their future merger and also based on a long-term view.

Amongst the benefits, we may mention the consolidation of receipt of dividends, lower cost due to the simpler corporate structure, in addition to improving the Company's agility in the capital market, which can also be translated into financial benefits to the Company.

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

(interpreted) Thank you, Scardoelli. To conclude, I would like to once again highlight the good results we had in the North America operations, which reduced the impact from the weaker demand in Brazil and this really shows the importance of our strategy of geographic diversification. Moreover, we are operating in several fronts to prepare Gerdau for the current and future challenges of the market so as to be more competitive in this worldwide scenario of oversupply and lower demand, particularly in Brazil.

This is already apparent through a more stringent discipline of cost and expense reduction and a more selective investment program CapEx. And as I mentioned before, we had a significant reduction of 6.2% in SG&A expenses in the second quarter, and if we exclude the exchange variation, it will be 14%.

And I would also like to refer to our Gerdau 2022 project. This is a worldwide initiative that involves the simplification of operations and internal structures, the modernization of our business culture and also the reassessment of the potential to optimize the return on assets according a long-term strategic view.

With that, I conclude the presentation and we are available now to take your questions. Thank you very much.

(interpreted) Ladies and gentlemen, we will now proceed with the question-and-answer section. (Operator Instruction) Thiago Lofiego, Merrill Lynch.

(interpreted) I have two questions. The first refers to the domestic market. If you could please talk a little bit about the outlook for the third quarter related to the shipment, how is the performance of shipment in July and August and whether you can probably see any sign of recovery or whether it's too soon to tell?

And the second question, Andre, is whether you can comment on the strategy of capital allocation -- maybe you think about some divestments? Also, if there are opportunities in the domestic market and the long market, would you consider that or do you see that as an opportunity to go to market or given the trend -- leverage that you have today, this is not in your radar for the moment?

(interpreted) This is Harley. And to answer the first part of your question about the market conditions and what we anticipate for the third quarter, we see a situation now that is very similar to the one that we had in the second quarter. The situation in Brazil has deteriorated throughout this first half of the year.

On the one hand, we cannot see further deterioration, we do not see any signs of improvement. And therefore, the expectations for the Brazilian market are those.

The positive side is that the North American operation is performing well, there's a positive outlook and the second and third quarters in North America are traditionally good quarters. Therefore, we anticipate a good performance in North America -- and that is what we attribute a part of our results.

I just want to clarify one point. In terms of the third quarter, we have seen other companies more in terms of flat still, but they have been referring to a drop, a more substantial drop in the third quarter. And so things will continue to get worse.

(interpreted) But I don't think you see the same landscape.

(interpreted) Well, I would like to reiterate that in our market, particularly in Brazil, we do not believe that this deterioration will persist. I think it will be stable. We do not anticipate worse numbers, but I think it will be stable. But we are already at low levels.

(interpreted) Thiago, this is Andre. To answer your question about the assets, throughout the years -- and you've been following our performance, we -- considering this worldwide landscape and changes in the steel capacity and so many different challenges in the different geographies, we re-evaluated every operation, every country and each business line and therefore we are currently analyzing what we will do.

We don't have anything clear to communicate at the moment, but we are strongly firm in our position to analyze the different positions to find out what decisions we will make in the future. This could involve a joint venture or maybe a partial sale or -- we are open. What is important to say is that we are open to re-assess our geographic position and the position of several operations in view of this new landscapes of the steel world market. But I do not want to make any comments referring to each particular geography because we don't have anything to say at this point.

(interpreted) Thank you.

(interpreted) Rodolfo de Angele, JPMorgan.

(interpreted) I would like to hear something about prices in the domestic market. How do you see the landscape in the third quarter and if you could comment the situation whether you see room to increase and prices of long?

And also I would like to ask Andre to elaborate more because I know you just said that you could not be very specific in terms of each operation, but maybe you could give us more detail about what you just called Gerdau 2022? Can you tell me how you are evaluating your asset? You have a certain return rate or whatever is below that return rate you will reassess it and along these lines, could you please talk a little bit about CapEx? Do you anticipate any changes? What should we expect to see by the year-end and towards 2016?

(interpreted) This is Harley, and I will answer your first question about price rate. Traditionally -- we think that it's very complicated to comment on price trends, particularly considering the current levels of the market. There has been a lot of oversupply all over the world and the Brazilian market is going through a very -- and a lot of hardships in the economy. Prices are volatile. That's why it's complicated to make any more specific comments. And prices are impacted by this scenario that has been mentioned throughout our call.

And I think Andre now can talk about Gerdau 2022.

(interpreted) Referring to 2022, this initiative about optimizing the return on assets, the metric we use is return on capital employed and what is the possibility of having returns in the future and then we will make decisions according to whether there will be or not returns. Nothing has been decided to-date. There has been some initiatives. And when things happen, we will certainly communicate it to you. But basically we focus on return on capital employed.

And also you talked about CapEx. Our initiative is to invest less in the second half when compared to the first half. We had a number of BRL1.9 billion, which was announced in November, and this continues to be the target. However, given this exchange rate variation and volatility, we may not reach that number in real and we will continue to pursue the goal in dollars.

As we announced in reais, there may be a mismatch in terms of reais and dollars. So we will invest less in the second half of the year and so there may be changes in this number depending on the exchange variation. A lot of our CapEx is denominated in US dollars. That's why they are impacted by the exchange variation.

(interpreted) Thank you.

(interpreted) Marcos Assumpcao, Itau BBA.

(interpreted) Congratulation for your results. My first question refers to net sales per tonne. In Brazil in the domestic market, we see an evolution quarter on quarter. Can you please elaborate more on that evolution, whether that refers -- that is due to mix or price increases? And also I would like you to comment on the premium in the domestic market vis-a-vis imported materials?

The second question, a bit more conceptual, Andre, is whether you can tell me a bit about the recent measure taken by China when they depreciated their currency? And so what is the impact of that in the current prices or whether that should lead to an increase in protectionism measures or some antidumping manifestations concerning that recent measure taken by China?

(interpreted) It's Harley. I will answer the first part of your question about prices and increases in net sales per tonne in the Brazilian market. Basically, this is due to product mix. This is the most relevant part of that change in that sales per tonne.

The second part of your question was about a premium on international prices. In this environment with the current exchange moves, that we would say that the premium is very low and in fact it does not interfere in the market because it is indeed very low.

(interpreted) Now, Marcos, about China and the devaluation, well, the Chinese Central Bank had been pursuing a very gradual depreciation of their currency or devaluation that was -- I mean it was a surprise that -- I think that the clear objective had to do with the competitiveness of the Chinese industry. Whether this will affect prices is something hard to say now in terms of the international prices of iron ore and steel and also the depreciation of other currencies. That's why it's important that in Brazil things continue to depreciate so that we can maintain our competitiveness. This becomes like an exchange war, so to speak.

So let's wait and see whether this will unfold or whether this will have other effects. What I've heard is that there might be a fluctuation range, but it's hard to say whether this will have any domestic impact.

(interpreted) That's it. Thanks.

(interpreted) Ivano Westin, Credit Suisse.

(interpreted) The first point refers to North America. You referred to a strong recovery of the EBITDA margin by 10%. So where do you see the metal spread and how do you expect prices of steel, scrap and shipments in the region to go to and whether it's reasonable to expect a flat position quarter-on-quarter and seasonally a bit lower in the third and fourth quarters of this year? This is the first question.

The second question is that I would like your comments about Brazil. You talk about hardships and challenges in the local industry and early this year you announced disposing of capacity and you were indicating that shipments could be flat quarter on quarter. So it should be reasonable to expect that you will not have any additional closing of capacity.

And thirdly, just to clarify, this dollar denominated CapEx for the year, which is the target, whether you can break down that figure?

(interpreted) This is Harley. Well, answering your question referring to North America, you have a correct reading. We should expect the seasonality trend in the North American operation and the third quarter should be more similar to the second quarter. And as traditionally happens, the fourth quarter is usually lower. But this is part of the normal trend and seasonality of North America.

In terms of metal spread, I think we can say that vis-a-vis last year it's probably slightly lower if you compare both periods. But in the beginning of this year, it got better. There was an improvement in the second quarter when compared to the first quarter of 2015. And this is also very much related to seasonality. We are benefiting from lower prices of scrap from earlier this year.

And then you asked about capacity in Brazil. The adjustments that had to be done were already done. So you should expect stability in our production capacity for Brazil until the end of the year particularly to cope with demands that we anticipate from now on. But currently we do not anticipate any additional move.

And to answer your last point about CapEx, in fact we don't like to refer to that number in dollars, but what we can say is that the pace we had in the first half of the year should improve -- I mean should go down in the second half of the year. But the devaluation of real should put some pressure in the number.

But we -- in terms of new approvals, we cannot analyze the first half and have that as [safest] for the second half, because the trend is to reduce CapEx in the second half of the year.

(interpreted) Roy Yackulic, Merrill Lynch.

Can you help me to understand your slide on free cash flow and working capital. And I note that you see in the first half of the year that working capital was very -- I think I'm -- like BRL58 million change in terms of -- and in terms of being very minor and actually being for a slight drain. And then if I go back to the previous slide and I see that the working capital, it looks like -- from the first half of the year the working capital was about BRL900 million.

So if I do free cash flow for the first half of the year, I get about BRL880 million negative because I have BRL209 million of (inaudible) and I have about almost BRL900 million increase in the working capital. And then I have the same thing this year for CapEx (inaudible) and the interest expense. So really the working capital -- I don't understand how are you saying working capital is BRL57 million as opposed to almost BRL900 million. Thanks.

(interpreted) The first question was about our working capital trend and the effect of free cash flow. In fact, I understand that your question refers to the difference of the effect of cash flow and our variation of working capital versus the nominal variation of working capital.

Usually what happens is in our free cash flow we do not consider the effect of the exchange rate. We look at the cash effect. And whereas in the previous slide when we look at the nominal working capital, what we see is that there was also an exchange variation. In the second quarter, there was a reduction in working capital of BRL755 million. And when we exclude the exchange variation, we see -- we still have a positive free cash flow generation. And basically due to such, a reduction of BRL457 million.

Therefore, this trend towards reducing working capital is a trend that the Company will pursue until the end of the year because we believe that this is an important source of cash flow generation for the Company.

Okay, thank you.

(interpreted) Leonardo Correa, BTG Pactual.

(interpreted) I have two questions and the first refers to your profitability level in exports. We saw a high level of exports in the second quarter and you were still minimizing in a very efficient way this very strong drop in the domestic market and exports are growing about 50% quarter on quarter.

I would like to hear whether you still have additional room to increase the level of exports or whether -- of what you shipped in the first quarter and whether you could comment on the possibility of exports considering this current level of exchange rate of 3.50. And that is becoming -- exports are becoming more important in your result.

In the past, we had very low levels of profitability, in some cases it was even negative. I would just like to know how you are balancing things considering this new exchange scenario.

And the second question refers to protectionism. In revisiting this topic of depreciation and the large amount of Chinese imports -- it's about BRL100 million or even more the level of imports in China -- so how do you see protectionism? We often hear about some more one-off moves in Brazil and in the industry. So given the current scenario of prices and unemployment, maybe the move will be closer to IBR and protectionism.

What I want to hear from you is whether you seen probably increase in tariffs or how do you analyze the global scenario? We see several economies in Asia and in the America imposing some protectionism barriers and how do you see this new global trend in Brazil when markets are becoming more protectionist?

(interpreted) This is Harley. I will refer to the first part of your question about export profits. Our export volume for the third quarter should probably go down a bit. This possibility is coming down, but certainly that with a dollar at 3.50 the scenario may change a bit. Things will improve. This still help us to dilute fixed costs. But even then we will be very selective in terms of the volumes exported. Our view at the moment is that probably it should go down a bit vis-a-vis the second quarter.

About protectionism, Andre will answer that part.

(interpreted) Okay, about international trade and the recent move by China, in all the countries where we operate, we have been working with the governments, the local governments to help fight unfair trade. Certainly, China has a very strong export policy, and as I said, the number is close to about BRL110 million in exports in the world. And China is what caused the unbalance of international flows, because -- they export a lot more because their domestic consumption has fallen.

And in Brazil and in other countries all the steel associations are getting together and also they are working with the governments to try to mitigate that. There is a flow of import and export, but things have to be done according to the rules of the World Trade Organization and the rules of fair trade.

We, in Brazil, work also together with the government to enforce the international standard. This is not done by Brazil only, but by other countries because this move by China is improportional and this is affecting volumes and margins and the profitability of the industry as a whole, even putting at risk the entire sector if they continue to grow exports from China. But there are other countries, Korea, Japan, Russia, Ukraine and there are others. But I would say that China is the largest one.

(interpreted) Okay, Andre. Only to confirm with you, so there is already an agenda or there is something going on in Brazil. And what will be the means of protection? Will there be a tariff on imports or maybe some specific ban in some markets? Do you know what will be the way to protect the industry?

And still referring to protectionism, which is a topic that is gaining momentum, in the US we saw in the past few weeks first a movement on galvanized and then cold coil and then yesterday hot coil. But we do not see anything in long. But I think you have been saying that maybe we should expect something down the road. But is there anything new to be reported? Do you see any moves even in the US to prevent imports of long?

(interpreted) I will answer in a more general way because there are several measures and alternatives according to the legislation on international practices. They could involve an antidumping measure, countervailing duties or something like that. We, as a Company, monitor and we follow the different markets. You mentioned North America and Brazil. If we see excess volume and we see that the prices are lower and they are even below cost, then we will certainly take action. We do not have anything specific to announce, but we are monitoring because volumes are increasing in the case of North America. This is a reaction from the local producers to that over -- excessive exports at the moment.

(interpreted) Thank you.

(interpreted) Victor Penna, Banco do Brasil.

(interpreted) My first question, I just ran a very quick calculation of net sales per tonne in the North American market and if you look at the dollar number, we see a drop vis-a-vis the first quarter of 2015. Is this a reflection of a drop in international prices or this is part of a strategy of the Company to increment your sales volume in the country to gain market share or has to do with products of lower added value?

And the second question refers to the new corporate structure. You said that your purpose is to find synergies and cost reduction. What unit will be more greatly benefited from these activities?

(interpreted) This is Harley. About prices in North America, this drop in price in North America, the market has a different dynamic when compared to that of Brazil. We monitor the metal spread, that's the difference between the product sold and the price of scrap. What we said is that from the beginning of the year to now in fact -- I mean the price of our products decreased a bit due to market conditions, mix. But also scrap prices fell down a bit more. That's why we showed some improvement. We were able to capture better margins because of the fact that the decrease in our prices was lower than the scrap price. So the dynamics are different in terms of North America and Brazil.

Regarding synergies and the simplification, we clearly know that there are synergies and they are being pursued. But we are being very careful and we never disclose synergies or any particular figure because we do not want to stir up expectations about timing and risks related to synergies. But they exist and we are looking into them.

(interpreted) Leonardo Shinohara, HSBC.

(interpreted) In the Congress, there is a proposition to reduce FGTS to fund the housing program. This will impact Minha Casa Minha Vida program. Given the fact that civil construction is an important market for you, do you have any idea of how much that will impact your business?

And the second question refers to iron ore. In that level of 58 or 59 of an annual average, do you see any possibility of that volume being exported? Is there any possibility? Thank you.

(interpreted) This is Andre. You referred to changes in FGTS or severance pay. I do not like to speculate. We have to see in practical terms what happens so then we will be able to evaluate whether this will impact the civil construction market.

About the ore, if it reaches the level of $58 per tonne and whether we did exports, our strategy is to focus in the domestic market, the supply to our mills, first of all. Secondly, in the domestic market when there are opportunities, and then they appear, we tackle them. If the price is $58, $60, $65 -- it certainly depends on the exchange rate and freight prices both domestically and abroad and there are several variables that come into play and also cost vis-a-vis profitability.

But we are constantly monitoring. But as I said before, the focus now is to supply our mills and to be very competitive, particularly in Ouro Branco because our mining cost is very good and this is certainly happening in the overall cost of the steel chain.

(interpreted) Thank you very much.

(interpreted) Alan Glezer, Bradesco BBI.

(interpreted) I have two questions. The first is about the specialty steel division. There was a drop of about -- almost about 100 basis points in the second quarter of 2015 and I understand that part of that margin shrinkage has to do with changes in the regional mix with a greater participation of Europe and India in the mix.

I just want to understand how recurrent this mix change is and whether it will be repeated throughout the second half of the year? Also, I would like to understand your expectation for your Brazil and North America division. I mean the US was going through a positive moment and I just want to know whether there has been any changes in the specialty steel operation in the US?

The second question refers to mining. We've noted the 20% increase quarter on quarter of shipments of iron ore by Gerdau and steel production in Brazil only increased by 9% quarter on quarter. What is the strategy behind the difference between increases of ore and steel exports in Brazil and whether we could expect anything about rebalancing of mini mills and the production of mini mills being transferred to Acominas? So these will be my two questions. Thank you very much.

(interpreted) This is Harley. About your first question, the change in mix affecting our specialty steel unit, as you said it yourself, this is related to a drop in volumes in our Brazil unit. In relative terms Europe and India, Brazil and the US, they were more relevant and they also experienced a drop. That's why the results were a bit down. But it's difficult to forecast because it will depend on the recovery capacity and when that will take place in Brazil, because visibility is low today.

In North America, the automotive industry has a good outlook and it has experienced a good performance. On the other hand, the oil and gas industry has been impacted and even though that represents -- that has a lower representation in our mix, we also sell to that industry.

So once again, I do not have any visibility that would allow me to tell you whether this will be maintained or not. But anyway, in order to have a more significant change, we would have to see improvements in these two major markets, meaning Brazil and North America.

Now, referring to ores, I mean the main element of these changes in terms of production has to do with the large competition that we see in our integrated operation. We have a very good structure in our mining structure and this also reflects in the large competitiveness of the integrated route and this had an effect on the production capacity of mini mills and Ouro Branco. And this is basically what we monitor and then we allocate production according to differences between the two routes.

(interpreted) Thank you very much.

(interpreted) Humberto Meireles, Goldman Sachs.

(interpreted) Well, Andre, I have two questions. First I would like to go back to the US and focus on volumes from January to June versus the same period of last year. You remained flat and demand gradually grew. How do you see that behavior for the second half of the year, whether the -- if the volumes will remain flat versus the year before or you can anticipate some improvements coming from the non-residential construction industry? And what about the capacity, how do you see the capacity performance in the US in the second half of the year?

And my second question refers to imports Brazil. We talked a lot about numbers. Could you give me a breakdown of imports in Brazil? Rebar, I think is not very significant. What can you tell me in terms of future risks and what is the possibility of having increase of imports from China?

(interpreted) This is Harley. To answer your question about shipments and growth coming from North America in terms of growing demand and stable shipments from last year to this year, this is very much linked to imports. They have probably a strong part of the US demand that has been strong and sustained by the several industries that we serve. Civil construction is one that has posted good growth. But a part of that has been absorbed by imports. And this is the point that was made. Anyway, the profitability, as we mentioned before, had a positive evolution due to an improved metal spread.

Referring to capacity and looking towards the future, we see a certain stability at least in the short run and a capacity utilization that should remain in the same levels of today, meaning about 70% of our operation in North America.

I would just like to mention one point regarding the balance between demand and the absorption of demand by local producers. What we've seen is that investments in infrastructure, when they pick up in the US, the trend is that part of the projects will tend to use products locally produced and this should certainly benefit the local producers. Once the infrastructure sector recovers, the trend is that local producers will absorb a major part of this growth. In the mid-range, this is a positive outlook for North America.

(interpreted) About imports -- in Brazil, imports are continuing. There has been some decreases in some areas and increases in some quarters, but we see some reduction because of the exchange rate. The depreciation of real affects that market.

While referring to Chinese rebars, we are not the traditional suppliers. Mostly it's Turkey, something comes from Asia. And it's very difficult to make any prediction whether there will be any export of rebars.

(interpreted) Thank you.

(interpreted) We will now conclude the question-and-answer session. I would like to then give the floor to Mr. Gerdau -- Andre Gerdau Johannpeter for his final remarks.

(interpreted) Thank you all very much for participating in this earnings conference call, and if you still have any questions, our Investor Relations department will be available to answer your questions. Harley and myself are also available to help you and we will see you back again on November 4th when we will announce the results of the third quarter. Thank you very much.

(interpreted) Gerdau's conference call is now concluded. I would like to thank you all very much for participating. Have a very 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.