Gerdau SA (GGB) 2015 Q3 法說會逐字稿

(interpreted) Good afternoon. And welcome to Gerdau's conference call about the results for the third quarter of 2015. (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 the 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, Executive Finance Vice President.

Without further ado, I would like to give the floor to Mr. Johannpeter. You may proceed, sir.

(interpreted) Thank you. Good morning. Good afternoon, everyone. And welcome to our conference call on the results of Gerdau's.

We will now like to begin our analysis by giving an overview of the world steel industry. Right after that, we will comment on Gerdau's performance on the third quarter of the year; and next, we will elaborate on all of the investments in the period and the capital increase done by Gerdau, as Gerdau S.A.

It's also important to note that we will analyze the performance of the consolidated results of the third-quarter 2015 vis a vis the same period of the year before.

After that, Harley Scardoelli will elaborate on Gerdau's financial performance. And finally, we'll be available to take your questions.

For those of you who are following us right now, we are on page 2. I will talk about the steel world industry, which is still facing a very challenging moment, as we mentioned in previous quarters.

According to Worldsteel Association, the estimate is that this year the apparent world consumption worldwide should be down by 1.7%. This is due by the global excess and installed capacity of approximately 700 million tonnes; the economic slowdown in China; low level of world investments; turbulences in the financial market; a lower demand from emerging countries, Russia and Brazil particularly; and some geopolitical conflicts. All of these factors can influence the behavior of consumption in the next few years.

For 2016, the growth outlook for the sector is 0.7%, still according to the Worldsteel Association.

Other factors that are still impacting the market in where Gerdau operates is the entry of imported steel in North and Latin America.

Alliances of steel associations, both in North America and Latin America, are making governments more sensitive to the need of setting up measures to fight unfair trade, particularly from China.

Some anti-dumping measures have been recently taken. For instance, in China, Colombia, and Mexico, and India they set up minimum prices in tariffs levied for imports of some steel long products, trying to reduce the -- trying to avoid a reduction of the industrial activity and job cuts.

In Brazil, the economic slowdown is still impacting the demand from the main segments that consume steel, like the industries civil construction, automotive industry, as we have been following, and also posting, weak performance.

In North America, there, civil construction, especially non-residential construction, has been posting a consistent growth in 2015. However, the prices of long are still feeling the pressure coming from the entry of imported goods in the region.

As for specialty steels, the segments of specialty steels in the North American market is facing a different reality. In the automobile industry, we've seen some growth, whereas there is a significant reduction in the segment of oil and gas.

In Europe, we see a gradual recovery of the automotive market, whereas in India, the sales of light and heavy vehicles is still strong. In Brazil, production and sales of vehicles are continuing to drop.

On page 3 now, we will talk about this current environment. In this quarter, our scenario was impacted by non-recurring items, especially because of some asset write-offs and goodwill amounting to BRL2.2 billion with no cash impact.

With that, we will present EBITDA and the adjusted net income so as to reflect the performance of the Company, and the internal work that we are doing to manage all of our operations.

Starting with consolidated shipments, we shipped 4.7 million tonnes, which represents a 2% increase when compared to the third quarter of the year before, mainly due to a growth in exports that surpassed 180%, exports from Brazil.

Now, our net sales. Net sales was BRL11.9 billion in the quarter, which was an evolution of 11% vis a vis the same period of last year. This expansion was due to the positive effect coming from exchange rate variation and the conversion into reais of our revenues in dollars, and also growing exports from Brazil.

Now, SG&A. Our efforts can be clearly seen through the reduction of 6% in SG&A in the first nine months of 2015 when compared to the same period of the year before.

In the third quarter, the reduction was 4.5% vis a vis the same period of the year before. However, if we exclude the effect of exchange variation, the reduction was even stronger, 17%.

EBITDA -- the adjusted EBITDA was BRL1.3 billion, meaning 4% higher when compared to the third quarter of 2014, mainly due to lower expenses with SG&A.

Speaking about the adjusted consolidated net income, it amounted to BRL193 million. And also, considering non-recurring items, the negative accounting income was BRL1.9 billion.

On page 4 now, we talk about our investments. In the third quarter, CapEx amounted to BRL509 million. The main highlights are the continuity of the installation of the heavy plate rolling mill at the Ouro Branco Mill in Minas Gerais, and the construction of the melt shop in Argentina. Both investments are predicted to start up in the second half of 2016.

During that period, there was a reduction of 21% in CapEx expenditure vis a vis the second quarter of 2015. Year to date, investments total BRL1.8 billion.

Now, we will refer to the offering from Metalurgica Gerdau. Metalurgica Gerdau, one of the listed companies in Brazil, will hold a public offering of common and preferred shares. The transaction will involve 500 million shares to amortize the indebtedness of the company, so as to improve the company's liquidity position.

There are different stages of this transaction, like you can see in the chart. Pricing will be on November 17, and it should be concluded by November 24.

With that, I conclude this part of my presentation, and I give the floor to Scardoelli. I will come back after his presentation.

(interpreted) Thank you, Andre. Good afternoon, everyone. Now, I will talk about the results and the performance of each one of our business operations in the third quarter of 2015. We are on slide number 7 of the presentation. And after that, I will give you more details about our consolidated figures. And, in conclusion, I will talk about some of the extraordinary events in the quarter.

I would like to emphasize that the comments that will follow already contemplate the new business segmentation for Brazil, North America, South America in specialty steels where they are in our operation now reporting together with the Brazil BO and the Mexico BOs, as part of the North America business operation.

In terms of Brazil, the uncertainties in the economic environment have caused a lower level of demand, which has affected our business. Sales of steel in the domestic market in the third quarter of 2015 were down when compared to the same period of 2014.

On the other hand, exports increased in this quarter vis a vis the same quarter of 2014, especially due to opportunities in the international market, coupled with a favorable exchange rate.

Looking at the EBITDA for this third quarter, the absolute value was down by 21% vis a vis the third quarter of 2014, due to a worse mix in the market, and a lower net sales per tonne.

These effects also affected our EBITDA margin, which went from 16.3% in the third quarter 2014 to 12.6% in third quarter of 2015.

In North America, the economic environment continues to be positive. Therefore, however, the growing pressure from imported products resulted in reductions in shipments of 3.5% when compared to the third quarter of 2014.

EBITDA in the third quarter of 2015 was the highest ever since 2008, and it was BRL519 million when compared to BRL355 million in the third quarter of 2014, which is an increase of 46%.

This improvement is mainly due to the effects of the exchange rate variation in the period, coupled with better EBITDA margin, which went from 9.3% in the third quarter of 2014 to 10.7% in the third quarter of 2015, due to lower costs per tonne, sold in dollar terms, and lower operating expenses.

Speaking about South America, the South America BO and shipments in the third quarter presented an increase vis a vis the third quarter of 2014 with different behaviors in the countries where Gerdau operates.

The high levels of imports in the region starts to be dealt with, with measures of anti-dumping, such as what has been done in Colombia and in Chile.

The increase in shipments and the reduction of operating expenses brought about an increase in EBITDA margin, which went from 8.1% in the third quarter of 2014 to 9.1% in the third quarter of 2015. So, there was an increase in the EBITDA margin going from, as I said, 8.1% in the third quarter of 2014 to 9.1% in this quarter of 2015.

Specialty steels. Specialty steels shipments in the third quarter posted a reduction of 13% vis a vis the third quarter of 2014, due to a strong drop in demand in the automotive industry in Brazil; and, at a lower degree, changes in the oil and gas performance of the market in the US.

The reduction in EBITDA for specialty steels in the third quarter of 2015, vis a vis the same period of 2014, occur due to a lower dilution of fixed costs, and a worse geographic mix.

With that, the EBITDA margin went from 11% on Q3 2014 to 10.2% in Q3 2015.

Now, I'll talk about the consolidated numbers, on the next slide. In consolidated terms, the adjusted EBITDA was BRL1.3 billion in Q3 of 2015; an increase of 4% vis a vis Q3 of 2014.

If we look at the bridge chart on the upper part of the slide, we can see that this adjusted EBITDA increase occur due to increases in the volume sold, and higher net sales per tonne, which offset at the higher cost of sales, in addition to lower expenses with SG&A.

And the bridge chart in the lower part of the slide, we can see that the consolidated net income in the Q3 of 2015 was down in relation to Q2 2014, basically, due to lower depreciation and higher financial expenses, impacted by the exchange rate effect.

In terms of dividends, based on the adjusted net income from Q3 of 2015, we will pay out dividends of BRL67.5 million to Gerdau S.A. shareholders, equivalent to BRL0.04 per share.

Despite all of the extraordinary events that impacted our results, this dividend will be paid out due to pre-existing income reserves, and based on our liquidity position that contemplates the generation of a positive cash in the quarter. These proceeds will be paid out on November 19, based on the position of that date.

Now, on page 9, we look at the indebtedness of the Company, which is under control, even despite the impact of the exchange rate variation. The gross debt on September 30, 2015, was BRL27.6 billion; higher when compared to June of 2015, due to the effect of the exchange variation.

The weighted average cost of the debt was 6.8% a year, with an average amortization term of 6.6 years. The net debt-over-EBITDA ratio was 3.8 times in September 2015, due to exchange rate variation.

In September 2015, the Company concluded the process of eliminating the financial covenants augmenting the net debt-over-EBITDA in all contracts with commercial banks. With that, the Company can maintain the focus towards reducing its leverage without running the risk of breaking these covenants in moments of volatility and cyclicality that are inherent to the business.

Another important item that must be mentioned, the Company has already signed a new line for $1 billion higher than the amount we had before to ensure working capital have access to liquidity, and go on with its operations.

We would also like to highlight that the Company still maintains its investment grade with the three major rating agencies. Even with the lowering of Brazil's investment grade, we are still maintaining our investment grade, allowing the Company to access capital markets with more competitive costs.

Now, going to slide 10, I would like to refer to working capital. In September 2015, the cash conversion cycle of the Company was down by six days, had a reduction of six days when compared to June, six days in one quarter. That was due to the fact the nominal increase of 3.9% of our working capital accounts was offset by an increase of 10.8% in our net sales.

I would like also to highlight that this increase in working capital of BRL426 million from June to September also contemplates an exchange variation in the companies abroad. Excluding this variation, there was a reduction of BRL1.3 billion from June to September, which clearly demonstrates all of the Company's efforts to optimize its working capital, and, as a consequence, to generate cash.

Now, moving on to slide 11, this slide shows something very important that speaks about Gerdau's operating performance this year, and, more particularly, in this quarter.

The first nine months of 2015, the Company generated BRL1.8 billion of free cash flow. This is due to an EBITDA of BRL3.6 billion, which was up by BRL595 million vis a vis in relation to all the commitments of the Company in terms of CapEx, income tax, and interest; and in addition to the release of BRL1.2 billion of working capital.

This positive free cash flow is in keeping with the Company's strategy to pursue a capital discipline, as it has been the case in 2013 and 2014, despite a very challenging environment faced by the steel industry.

Now, concluding my part of the presentation, we go on to slide 12, where we refer to extraordinary events during the period.

Gerdau presents its financial statements in compliance with the international standard of IFRS. And this standard determines that we run, on an annual basis, tests for goodwill recoverability and other long-term assets of the Company. These calculations for the recoverable amount involve calculations per business segment, based on the methodology of discounted cash flow.

Due to changes in the business segments of the Company, and also the deterioration of some markets where the Company operates, the Company decided to anticipate the goodwill recoverability test for the third quarter of 2015. In these tests, we recover impairments of BRL1.9 billion.

In addition, there was also the write-off of some tax credits from deferred income tax that presented no hope of ever being utilized amounting to [BL1.9 billion], as you can see on the chart and this slide.

I would like also to highlight that these extraordinary events affected the results of Gerdau. However, they did not produce any cash effect.

Now I'll give the floor back to Andre for his final comments.

(interpreted) Thank you, Scardoelli, for your presentation.

Once again, I would like to emphasize that Gerdau's results in this quarter was strongly influenced by non-recurring items with no cash impact. Once we exclude these items, the net income and the growth of EBITDA already reflects all of the work that our teams have been doing to increase competitiveness, and efficiency, and other operations. And all of that is part of our initiative called Gerdau Project 2022.

The Project also involves some simplification of operations and internal structures; the modernization of the business culture; and the reassessment of the profitability potential of our assets, following a long-term strategy view.

Our managerial efforts are also reflecting, for example, the reduction of SG&A; the optimization of working capital; and also, a significant free cash generation amounting to BRL1.6 billion in the third quarter 2015.

We were also able to maintain our investment grade in the main rating agencies.

Also, we were able to negotiate the removal of some covenants, which allows us to have a better management of the debt, focusing on long term.

I would also, in addition, like to reinstate our offering of shares, which is an important initiative to amortize the debt level of the Company, and, in turn, to improve our liquidity position.

This is a very challenging moment for the steel industry in the world, and also in Brazil, due to the economic slowdown. Our teams are working very diligently to operate in different fronts to make the Company even more profitable and more competitive.

With that, I conclude our presentation. And Harley and I are now available to take your questions. Thank you very much.

(interpreted) (Operator Instructions). Ivano Westin, Credit Suisse.

(interpreted) Thank you for the presentation. I would like you to elaborate a bit on the Brazil BO, and what can be expected in terms of pricing for the end of the year and early next year? How do you see prices going to? And what would be the shipment expectation for next year? And what would be the quality of that exported product?

And the second part is whether you could comment on North America. The operating result was quite robust. Do you believe that the margin reported can be sustainable? Or whether you think that -- with the evolution of the metal spread, what could be expected for 2015 -- 2016, sorry?

(interpreted) I will answer the first part of your question about Brazil. Your question was about market, volume mix, etc. It's very difficult to anticipate anything about Brazil, of course, given the current environment.

And what we see the first quarter was better in comparison. And in the second quarter there was about an 18% reduction in the domestic market, and part of that volume was offset with exports. This is a landscape that will probably be maintained from now on. The export level in the third quarter was a bit higher, maybe it will not be as high in the fourth quarter. But we will continue to maintain a robust export policy, given the slowdown in the domestic market.

The margins of export, despite the fact that there was a depreciation of the real, there are still low margins. But the margins are low because since there was -- in addition to the depreciation of the real we also experienced lower prices in the international market.

About prices in Brazil, I have no comment, because we do not make any comments about that. And, once again, apparently, I think that the markets will continue to perform at the same levels of this third quarter. This is my view.

(interpreted) Ivano, now, speaking about North America, which is the second part of your question, in North America, in the market in general, we see a recovery in consumption levels. This is something very clear. This recovery has been very apparent in various segments.

But one thing that has happened, and we see a clear trend, is stores' imports. The levels went back to pre-crisis level. So there has been an increase in imports. And this is a trend that we may anticipate for the short term. Even yesterday, we heard that possibly interest rates in South America may go up, even before what the market expected. So I don't think that we will see a major change when it comes to imports.

But now, speaking about exports, the metals spread has been stable, has been at very good levels, I would say. At the same time, maybe one positive aspects for the future, having a mid- and long-term view, is that we may be able to see some recovery in the infrastructure area.

The infrastructure industry is very important to us. And when -- once the situation becomes stronger, a great part of this consumption will then go back to local producers, because infrastructure projects, backed up by the government, of course, the steel consumption will be resumed. This is an important aspect.

And something to be mentioned about North America, there is also a traditional seasonality factor. Traditionally, the market faces seasonality in terms of volume, because we are approaching winter in North America.

(interpreted) Thank you, Harley and Andre. I would just like to link the outlook, Brazil and North America, your two main businesses. Harley, could you say something about your indebtedness level? Your net debt-over-EBITDA ratio was 3.8 times, and you negotiated the covenant. What is your comfort level concerning this debt level, and how far you want to go?

(interpreted) In terms of our indebtedness, one important thing about the negotiation of the covenants is that we wanted to eliminate any short-term pressure regarding the net debt-over-EBITDA ratio.

But the trend is that this leverage goes up once the real has appreciated. But, with time, the trend is for that to go down, because we see negotiations at $1 million. So we see pressures coming from the US, and that part of specialty steel set is also in the North America. And some economies that have prices linked to the dollar will lead us to a decrease in that trend. So, in mid and long term, those leverage will be resumed.

This short-term trend we saw of a higher net debt-over-EBITDA ratio may be seen in the near future. But we know, for sure, that we will not have any problems with our debt.

(interpreted) Thank you very much.

(interpreted) Carlos De Alba, Morgan Stanley.

I would like to talk, very quickly, about the view for cash flow generation in the fourth quarter, and in next year. Clearly, third quarter had a very positive performance, so you can comment as to what the CapEx level that you expect for the remainder of this year, and next year, as well as working capital efforts (inaudible) finally to achieve in the year.

And then, there were some comments about eventually selling the European assets in specialty steel division. If you could elaborate on that.

Finally, specialty steel remains clearly quite difficult, but could you comment as to have you seen any stabilization at all in your order book? And what are your expectations for next year? Thank you.

(interpreted) Okay, summarizing Carlos De Alba's question, the first point referred to CapEx and working capital trends. And the second question was about our specialty steel operations in Spain, and what will be the general outlook for the Brazil operation.

Now, concerning CapEx and working capital, one important point to highlight is that the Company is focusing heavily on the optimization of our working capital, and the efforts will materialize in this quarter, in particularly.

So now we have adequate working capital, adequate to our operations level, and this is lower this year. So the trend is that we will have a consistent working capital. I mean consistent with the level of operations.

In moments where the market is down, we were able to optimize our working capital, so there was a significant reduction, and we want to continue with that trend.

Likewise, with CapEx, we've been very disciplined in terms of our CapEx expenditures. There's BRL1.8 billion which is year-to-date amount, also reflects an exchange aspect that occurred throughout the year, which led to that amount.

At the same time, it is important to highlight that our CapEx trend in this quarter, and the quarter before, had a drop of 21%. We spent BRL448 million in the second quarter, and we spent a bit over BRL500 billion, BRL509 billion, in this quarter, which stems from the consistent efforts by the Company to pursue a very strong discipline in terms of CapEx.

(interpreted) Mr. De Alba, I will talk about the other part of the question about specialty steels, and the order book. Speaking about specialty steels, we do not have any previous sale decision, I mean any decision to sell assets. But what we have reported is that for all of our operations around the world we are constantly evaluating opportunities to generate value in our portfolio as part of our long-term strategy. And this is part of our run-of-the-mill operation.

Now, concerning the order book, and I think that you are referring to the order book, right, I will go back to what I said before. In the first quarter, we had a drop of 7% to 8%; and then, in the second and third quarters in Brazil we experienced an average of 18% decline vis a vis the previous year. So, we see a certain stability at this low level.

The fourth quarter usually comes with more seasonality in Brazil, so it's difficult to make a comparison. But, for next year, it's very difficult to anticipate what will happen due to the overall economic environment in Brazil. It's very difficult to give any guidance, but what we've seen is a certain stability; stability at a much lower level when compared to previous quarters.

Thank you very much, Harley and Andre.

(interpreted) Thiago Lofiego, Merrill Lynch.

(interpreted) This is [Karel]. My first question is about demand in Brazil. Today, we saw Usiminas announcing a readjustment in their output. But after you announced the closing in Sorocaba, demand continues to deteriorate. Do you have any initiative or any plan towards adjusting your production again considering the current demand levels? This is my first question.

My second question is whether you can give me the -- what is the current level of the metal spreads today?

And about SG&A, we saw very good performance of SG&A, which was very stable in the quarter, and with a drop of 5% year on year. My question is whether you still see some room to make improvements along this line, or whether a great part of the benefit has been already contemplated.

(interpreted) We've been making adjustments to assets as of November, December of last year when we revisited some operations. We took operations to the mining route, focusing on a more integrated route and giving more flexibility to our scrap operation. And throughout the year, we also made other necessary adjustments to cope with the current demand.

But currently, we do not know what the next step will be. But it will certainly depend again on the demand, because if demand goes down further we will have to reassess it. But we are operating at about 70% in Brazil. We are also ready to reassess, any time.

(interpreted) Karel, about the metal spread in North America, I cannot give you exact figures, but it has been stable. It has been very resilient, and it is currently at good levels or adequate levels to our operation.

In terms of our SG&A effort, I must say that this is a continuous effort. We have been focusing on that in the past years, and so the trend is for us to maintain all of the reductions that have been captured thus far.

I would like to remind you, and this is something Andre already mentioned, that the 6% drop that we have year to date is in real. Especially, in our North America operation there is a very strong exchange rate variation. Once you exclude that exchange effect, it would be -- the number would be 17% in terms of SG&A year on year.

(interpreted) Okay. Thank you very much.

(interpreted) [Kyle Hibader], BTG Pactual.

(interpreted) My first question refers to the current scrap pricing landscape in Brazil. How do you see the price evolution in Brazil, and the short-term trend, considering the prices we have seen in the international scrap prices?

Secondly, can you comment on the anti-dumping investigations that are being conducted in the US?

(interpreted) To answer the first part of your question about scrap, yes, the numbers are quite volatile in the market. But we have been also monitoring what has been happening to iron ore in different markets. They counterbalance each other.

The consumption varies according to the price of ore. Large world producers are replacing the scrap consumption by other products, based on ore, when the price of iron ore is lower. We haven't seen any significant drops recently. But you have to monitor the market, due to its volatility, and also look at what is happening with iron ore.

Now, referring to anti-dumping, this is also another thing that is closely monitored by the Company. We've seen a trend in countries like Chile and Colombia, and, more recently, we didn't think that there would be any reaction. This is something that shows that countries are more concerned with their excess capacity, and, as a consequence, a higher volume of imports that entering several countries.

The United States has been closely monitored, for obvious reasons, but, thus far, we do not know of any new thing concerning cases in that country.

(interpreted) Thank you very much.

(interpreted) Leonardo Shinohara, HSBC.

(interpreted) My question refers to projects, and also the installation of your heavy plate rolling mill. We see some companies with some difficulties in the flat market. How do you see that as a new entrant?

And entrance of the melt shop in Argentina, in your view, this will be good to supply that local market in Argentina, or you have other things in mind?

(interpreted) About the heavy plate project in Ouro Branco, Minas Gerais, it's still according to plan. It should start up in the second half of 2016. Our expectation is that as it will start up in the second half of the year, in the first year it's still in the initial phase of the learning curve, we will then be better prepared to supply the market after, maybe, 2018. And then, we will probably see some rebound of the market in Brazil by then.

This is a very differentiated project, because we will introduce a very modern state-of-the-art rolling mill that will cater to all different demand segments in Brazil. And so, we know for sure that even though this is a very difficult economic environment we will be able to provide rolling products of high quality.

Now, about the melt shop in Argentina, it should start up in the second half of 2016. The focus is to supply the local market with the levels that we will be able to assist with all the billets that we send to Argentina. So the focus is very domestic.

(interpreted) Thank you very much.

(interpreted) Roy Yackulic, Merrill Lynch.

Could you give more detail about the covenants removal, and just remind me, I think, what the covenant was? And is it temporarily waived, or what exactly are the circumstances? Thank you.

(interpreted) The question is about the covenants, and whether the waive was only temporary. The covenants we had was of 4 times net debt-over-EBITDA.

But the removal of the covenants is of a permanent nature. From now on, all of our contracts with commercial banks related to the debt will no longer contemplate any leverage covenants, as we had in the past.

Can I ask a follow up? If, and I don't think it's likely, or going to happen, if Gerdau is to lose investment grade then the covenants would not kick (technical difficulty).

(interpreted) [Cristiane].

It went quiet for a while there. I just want to ask some questions, if you don't mind, on the working capital cash benefit you realized in the third quarter.

I notice, for the third quarter, you had an inventory working capital benefit in cash flow of BRL1 billion; and, to add to that, the net purchasing and proceeds from trading securities was a working capital benefit of [BRL580 million] in the quarter. I'm just trying to better understand that.

And to go back to the inventory question, even though you had BRL1 billion benefit in working capital inflow, your actual inventory balance sheet increased. I wasn't sure how you can increase your inventory in your balance yet have a cash flow benefit on working capital; if you could help me understand that better, as well as how to think about the purchase and proceeds of trading securities? Thank you.

And we may have a bad connection.

(interpreted) I would like to ask you please to repeat the first part of your question. Our line is a bit noisy, and I couldn't really understand it. Can you please repeat the first part of your question, slower, please?

Sure. The third quarter saw cash benefit from inventory of BRL1 billion, but the balance sheet of inventory increased in the third quarter compared to the second quarter. I want to better understand how could inventory increase, yet you have a cash flow benefit of BRL1 billion? Thank you.

(interpreted) The question is about working capital. We have a cash generation through working capital issuance. In reais, it seems like there was an increase in working capital. But to answer your very pertinent question, indeed, in fact, the cash effect occurs when we look at the working capital per operation, and according to the currency of its denomination.

Looking at North America, and it was denominated in dollar terms, so there was a reduction in inventories and a reduction in working capital. This was reverted into a generation of cash, which entered our banking accounts in North America.

But now, when we look at the balance sheet, translated into reais, and considering the depreciation of the currency, shows a nominal growth. But once we eliminate the exchange factor, we see a reduction in working capital, and a positive entry in our cash flow. So there was, indeed, in reais, a reduction in our working capital.

Thank you. Can you discuss about the trading securities benefit? What does that consist of?

(interpreted) I think your question relates to accounts receivable in our working capital. These numbers also reflect a major effort on the part of the Company to maximize, in this particular case to shorten, the receivable term from our clients. This has a very strong impact on the working capital of the quarter.

(interpreted) Marcos Assumpcao, Itau BBA.

(interpreted) My first question refers to the Latin America operation. Despite this drop in international prices and an increase in import, the EBITDA margin is at a very reasonable level in the quarter. Do you believe that these levels could represent a new level for the operation?

We see that the margins in South America are around 8% to 9%, and it's been more consistent in the last quarters. Can we consider this new level as a new normalized level for the business?

The second question is on specialty steel. I saw, with a good surprise, the fact that the margin was up in the quarter, even though this was a lower quarterly, particularly in Europe. Once again, is it possible to maintain the margin for specialty steels? Or you think that the margin will go up in view of the newer volumes, or the recovery of volumes in Europe, in particular?

(interpreted) Ladies and gentlemen, please wait. We will resume this conference call in a few moments. (technical difficulty). Thank you. You may proceed.

(interpreted) Marcos, we would like to apologize; there was a technical problem here in our office. But we heard you very well, and your question was about the margin for the specialty steel operations, and also Latin America.

Starting with Latin America, the margin levels were different, especially if you compare to the margins we posted about a year ago, because now they are almost half of what they were before. And I think that the current levels of 8% or 9%, they are still sustainable; they are sustainable levels. This is the way we see the operation today.

But we must also look at the countries where we operate in Latin America, because they were also benefited from the exchange rate. Some countries have prices more packed to the dollar. And so, of course, the imports also impacted volumes. But I believe that we can say that there is a certain stability in Latin America.

Now, referring to specialty steel, a positive aspect when you refer to the margins, this has certainly something to do with diversification. We mentioned before that India went from a cash generation that was negative to a more stable cash generation, close to breakeven. And this is very good.

When we saw a slowdown in the automotive industry in Brazil, and in North America, this industry is performing well. But the oil and gas industry is still struggling. Therefore, it's difficult for us now to have a good visibility.

But these are markets that are still struggling with seasonality in the last quarter, especially when it comes to reinstating their inventories in the network. So we may see some readjustments by the end of the year, due to seasonality.

(interpreted) Now, I have a follow up, if possible, referring to working capital. Working capital improved in the quarter. You had a target that was posted at the end of last year, and you said that you wanted to get close to 75 days of cash conversion cycle. Do you think that this target is still feasible?

(interpreted) Marcos, thank you for your question. In fact, we are pursuing more optimized working capital levels, due to the current environment, and also in an attempt to preserve liquidity. Therefore, we will continue to pursue lower cash conversion cycles.

It's difficult to say when we will reach these levels, but this is a continuous effort on our part, but it will depend on the predictability of deliveries.

Most part of our working capital is inventory. And the optimization of inventory depends on the accuracy of our sales prediction. If the prediction is good, we can reduce it so as to adjust the inventory levels to more adequate levels. This involves a continuous work. And our focus has been very strong in that area. We will certainly pursue lower cash conversion cycles. I cannot just tell you now when this will happen.

(interpreted) Thank you very much.

(interpreted) Leonardo Correa, BTG.

(interpreted) I know that we are approaching the end of this call, so, if it's necessary, you can shorten your answer. But my question is addressed to Andre, first of all, because I want to know about your demand [chains].

We've seen and we've been looking at the numbers and seen some resilience in the market -- well, in the past Brazil was facing a different environment. But I'm referring to that small spread around market. How are you feeling the pulse of this new market? Are you already seeing a worsening of that demand, worse than when compared to other industries, or you already see a differentiation in the demand? This is my first question.

And I have two other questions to Harley. Could you please briefly talk about CapEx? Some competitors are already talking about a different CapEx level, assuming a more complicated landscape, in the near future. They are even referring to a lower CapEx, lower than when compared to a sustainable level. Do you think that even if we have recession next year you will have a higher CapEx?

In considering all of the assets and the competitiveness, having a dollar-denominated CapEx, including the inflation and everything, what would be your opinion about a good CapEx level that is workable, despite the difficulty we find in the economy?

About leverage, maybe if -- net debt-to-EBITDA is 3.8 times. I know that you negotiated [all] the covenant. But, Harley, we also know that, historically, you've always been very conservative in terms of the net debt-over-EBITDA ratio. What ratio would be ideal at this moment of the cycle, before you start thinking about paying out dividends in a more aggressive way? To what level that leverage should fall to allow you to pay more dividends to your shareholders?

(interpreted) Leonardo, I will answer your first question about the business segments and the decrease. And you also talked about the very [pulverized] market.

That small market, the pulverized market, did not experience such significant drop or decrease as was experienced by the construction industry. It wasn't even close to that 18% experienced by the larger segments, it was only one digit.

Now, it's difficult to say whether things will remain the same next year, because you have to look at the level of employment. But this is a good market. And we've been monitoring that market closely. If you look at construction material, finishing market, these areas have experienced some slowdown, but not as significant. And this is also an important market to our industry.

(interpreted) Leonardo, to answer your question about CapEx, today, we have a very strong discipline concerning CapEx. We are only focusing on the investments that are geared towards maintenance.

We only have two large projects still underway, as Andre mentioned before: one is our heavy plate project in Ouro Branco, and also the new melt shop in Argentina. So, we saw a downwards trend in our CapEx lately.

And we used to make a more encompassing review of our CapEx close to the end of the year. In a year like this, maybe, we will wait until the year end approaches to give you a better guidance. There are only two projects now as part of our CapEx, and all of the remaining expenditure approved is for maintenance.

Now, in regards to the net debt-over-EBITDA ratio, we will continue to work towards reducing that leverage, as we saw with the covenant. Now we have a leverage more consistent to -- with our conservative profile. And so we want to keep our investment great and have a lower net debt-over-EBITDA ratio.

With the current results, naturally, with the passing of time, that net debt-over-EBITDA ratio tends to go down, because we have cash generation coming from our business that are denominated in dollars. So this leverage is improving.

I don't want to give you any guidance. We have to look at our [local] levels that are in keeping with our investment grade. And if we lower this leverage and maintain the Company as a generator of a positive cash flow, this is what we want. And this is important for a company such as ours.

(interpreted) Thank you very much.

(interpreted) I just have one thing to add about our dividend policy. Our dividend policy is proportional to our results, therefore, we want to keep our dividend policy on 30%. So the dividends will be adjusted to the profitability levels of the Company.

(interpreted) Alan Glezer, Bradesco BBI.

(interpreted) I have two questions. The first is about the Brazil BO. It saw a significant increase of exports in the first quarter, 60% quarter on quarter. Where are the main destinations of your exports, and whether you can say something about products that were exported this quarter? The net sales per tonne was about flat quarter on quarter. This is my first question.

My second question is about the North America BO. Do you have any information about scrap? We have seen a drop in scrap exports in the US. Have you seen an increase in the scrap availability, and whether the pressure on prices have increased, because of the availability of scrap in North America? Thank you.

(interpreted) In terms of the destination of our exports, we always look at the opportunities. When prices are convenient, we look at the convenience of prices; and we also look at the aspects related to the depreciation of the Brazilian currency.

The export shipments have been directed to Latin America, Asia, Europe, and something also to North America. And in terms of the mix, the bulk of the exports are semi-finished goods.

Our mill of Ouro Branco is very competitive in terms of cost, we have our own iron supply, and the costs are very competitive; therefore, we can make very good use of the opportunities.

Now, referring to scrap in North America, the trend is of a recent drop in prices. But, for us, what is important is the monitoring of the metal spread. Metal spread has been flat or stable in the last quarters.

(interpreted) Okay. Thank you very much for your answers.

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

(interpreted) Thank you very much, on my behalf, and on behalf of Harley, for your questions, and your interest. If you still have any further questions, our IR people are available to assist you there.

I would like to invite you to join us again on March 1, of 2016 for the results of the fourth quarter.

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