Gerdau SA (GGB) 2016 Q2 法說會逐字稿

(interpreted) Good afternoon, and welcome to Gerdau's conference call to discuss the results of the second quarter of 2016. At this time, all participants are will be in listen-only mode during the Company's presentation. And after that, we will proceed with a Q&A 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 the management's expectations related to the future of the Company. Even though Gerdau believes that its comments are based on reasonable assumptions, there are no guarantees that future events will not affect this evaluation.

Here today are Mr. Andre Gerdau Johannpeter, Director, President, and CEO of the Company; and Harley Scardoelli, Executive VP of Finance. Now, I would like to give the floor to Mr. Gerdau Johannpeter. Sir, you may proceed.

(interpreted) Thank you. Good afternoon, everyone, and welcome to the conference call of Gerdau to discuss the results of the quarter. We will begin our analysis by looking at the world environment for the steel industry. After that we will comment on Gerdau's performance in the second quarter. And then I will detail the investments for the period.

It's important to mention that we will analyze the performance of our consolidated results in the second quarter of 2016 vis-a-vis the same period of the year before, and the first quarter of 2016. After that, Harley Scardoelli will elaborate on the financial performance of Gerdau, and next we'll be available to take your questions.

Now going to page 2 for those of you who are following us on the web, I will refer to the world's landscape. In the first quarter of 2016, the world steel production was down 2% when compared to the same period of the previous year, reaching 795 million tonnes.

By year end, the world steel anticipates a drop in the global demand for steel of 0.8%, and there should be then a rebound as of 2017 with an outlook for slight growth of 0.4%, reaching 1.5 billion tonnes.

With that backdrop, I must say that we continue to face structural challenges in the industry, mainly the world's excess installed capacity, especially in China, currently being investigated for unfair trade in more than 20 countries. In this regard, it is crucial that the Brazilian government accelerates the process of the trade defend mechanisms, acting in a more expedited and efficient way.

Attention should be given to the fact that several countries are already taking measures against the flow of Chinese products into their markets. And we run the risk of seeing all of these volumes coming our way. In addition, imports continue to be a concerning fact in the market of North and South America.

In Brazil, we are beginning to see recent signs of recovery in the industry, even though it's still recent and also subject to future advances in the political and economic landscape. In terms of capital goods, for instance, market figures point to a slight growth since January 2016 in the market for intermediary goods is now beginning to show signs of stabilization.

Behind all that, it is much needed increase in confidence level is necessary, which will then boost new investments, and as a consequence it will increase steel consumption. In the case of the Brazilian steel market, Gerdau is already sensing a recent improvement in domestic demand. If we consider, for instance that shipments of the Company in the second quarter versus the first quarter of this year was up by 12%. However, according to data from Instituto Aco Brasil, apparent consumption was 9 million tonnes in the first half of 2016, down 24% in relation to the same period of the year before. For 2016 we anticipate a 14% drop in apparent consumption.

With this backdrop, exports become crucial to steel-producing companies in Brazil, allowing them therefore to offset the lower demand in the domestic market, and then at the same time keep their units running. However, in order for companies to be more profitable with their exports, it's also important that we solve some of these existing competitive asymmetries, mainly due to the high cost of money, and also non-recoverable charges and taxes levied on the steel chain.

The only way to boost the downstream industry is to make it more competitive by eliminating the international market tax shelter and also removing residual taxes from exports. It is therefore crucial that we reinstate Reintegra, which was removed by the government. The companies of the industry are asking a tax rate of 5% to offset those residual taxes. Currently the tax rate of Reintegra is 0.1%.

Now let's move to North America where non-residential construction and the infrastructure segment are still growing. In the US, it is predicted that steel consumption should grow 3% in 2016. However, imports are still a matter of concern for North America.

Now speaking about South America, the highlight goes to margin improvement, [plus the fact] that there has to be drops in the economies of South America, we see some growth and positive GDP. We are also concerned with imports in this region.

Now in terms of special steel, the automotive industry in Brazil continues to experience lower demand, and in India and in the US, the automobile market continues to boom. However, the oil and gas market in the US is still presenting low demand.

Now I would like to talk about the main figures of Gerdau, starting on slide 3. We start with consolidated shipments. We sold 4.2 million tonnes. Shipments were stable when compared to the previous quarter, but vis-a-vis the first quarter, shipments grew 10%. And in Brazil's case, the comparison was with the previous quarter of the year before.

Now net sales, we reached BRL10.2 billion in the second quarter of 2016, meaning a reduction of 5% vis-a-vis the same period of the year before. This reduction was mainly due to lower sales volumes of longs and special steels in the domestic market, and also due to the sale of the operation in Spain, which was consolidated in the balance sheet until the month of May.

However, when we compare to the first quarter of 2016, Gerdau's consolidated net sales was up by 2%, stemming from larger volumes sold in all of its operations.

Now speaking about EBITDA or adjusted EBITDA that reached BRL1.2 billion, net of the non-cash effect from the sale in Spain. It was stable vis-a-vis the same period of the year before, supported by a 9% reduction with SG&A in the period, and also a higher contribution coming from affiliated companies that have a shared control in the balance sheet. Once we compare with the first quarter of 2016, EBITDA grew 29%. And there was an improvement in the EBITDA margin in all of our operations. So we were able to grow EBITDA from 62% of the Brazil operations to 53% in specialty steels.

Now consolidated net income excluding the non-cash effect of the Spain operation sale from the balance sheet, the adjusted consolidated net income totaled BRL184 million, down by 31% when compared to the second quarter of 2015. However, when compared to the first quarter of 2016, adjusted net income was significantly higher due to improved operating results.

Now, accounting profit was BRL159 million, due to better operating income and financial expenses in the quarter. I would also like to highlight our free cash flow position, which is one of our priorities. And that reached BRL807 million in the second quarter, stemming from higher EBITDA, lower CapEx, and also a reduction in working capital when compared to the first quarter of 2016.

Going on to slide 4, I would like to talk about our investments. In the second quarter of 2016, we invested BRL326 million in CapEx, which was the lowest disbursement level of the Company since 2010. One of the main investments is the new heavy plate rolling mill with an annual installed capacity of 1.1 million tonnes, which is already in operation in Ouro Branco, Minas Gerais, as previously forecasted. That way Gerdau is expanding its product line in the segment of flat steel, catering to new market niches. Heavy plates are utilized in the civil construction industry, oil and gas, naval, wind power, highways, missionary and equipment, amongst others.

In Argentina, the works for the new melt shop are well underway, and the operating (inaudible) of the plant will be initiated in December. The installed capacity of the new unit will be 650,000 tonnes a year. And the main focus will be to serve the domestic market.

For 2016, the forecast for CapEx disbursement continues to be BRL1.5 billion, which is 35% below the realized in 2015. And that concludes this part of the presentation. And now I'd like to give the floor to Harley, who will highlight the main aspects of our financial results in the quarter. Thank you.

(interpreted) Thank you, Andre. And good afternoon, everyone. Now starting on slide 6, we will talk about the result and performance of each of our business operations in the second quarter of this year. And then I will elaborate more on our consolidated results.

Firstly, I would like to say that both EBITDA and the EBITDA margin in the second quarter of 2016 were higher when compared to the first quarter of 2016 in all of our business operations, which demonstrates an improvement in all of our operations.

Starting with Brazil, in terms of the first quarter of this year, sales to the domestic market increased due to seasonality during the period. Exports also increased in the second quarter of this year when compared to the first quarter, mainly in terms of finished products stemming from improvements in the international steel prices in early 2016.

Now looking at EBITDA of the second quarter of this year, the absolute value was up by 62% when compared to the first quarter of 2016, due to higher volumes, so with further dilution of fixed costs. With that, the EBITDA margin went from 9.2% in the first quarter to 13.2% in the second quarter of this year. The Brazilian economy is already showing signs of improvement, which can be noticed in the level of confidence which is growing, and adjustments in inventories which indicates a rebound in economic activity in the second half of 2016.

Looking at the North America operation, sales had a seasonal increase when we compare the second quarter of this year with the first quarter of 8%. Now in terms of the second quarter of 2015, sales were stable. EBITDA in the second quarter of 2016 was BRL408 million, up by 15% when compared to the first quarter of 2016. This improvement is mainly due to higher volumes sold. With that, EBITDA margin went from 8.3% in the first quarter, to 9.5% in the second quarter of this year. Speaking about the second quarter of 2015, the drop in EBITDA margin was due to a lower metal spread effect in the second quarter of 2016.

Now looking at South America, shipments in the second quarter of 2016 were down by 3.1% when compared to the second quarter of 2015, with different behaviors in countries where Gerdau operates. At the same time, the optimization of operating costs, particularly in Argentina, Colombia, and Peru units, in addition to lower scrap costs, led to an increase in EBITDA margin which went from 7.6% in the second quarter of 2015, to 15.5% in the second quarter of this year, therefore showing a new level of profitability of this operation.

Our special steels operation, and I would like to remind you that on June 23, 2016, we concluded the sale of the units in Spain. The economic value of the transaction was EUR155 million, or BRL621 million. And the sales contract also foresees the possibility of receiving up to EUR45 million additional or an additional BRL180 million at the end of five years, depending on the future performance of the business.

As a result of this sale, the Company recognized an accounting expense of BRL105 million in the result line in operations of subsidiaries in its P&L. I would like to highlight that this is not a cash effect. As a consequence of this sale, the figures related to the second quarter of 2016 contemplate the results of Spain until the month of May of 2016.

Now speaking about special steel in the consolidated fashion, sales in the second quarter of this year accounted for a reduction of 15% vis-a-vis the second quarter of 2015, mainly due to the sales of the units in Spain, in addition to the realignment in inventory levels in Brazil. In terms of the first quarter of 2016, the seasonal improvement in sales in Brazil was offset by the reductions in Spain.

Increase in EBITDA and an increase in the EBITDA margin in the second quarter of 2016 when compared to the second quarter of 2015, came from higher profitability in all the units of special steels. Now speaking about the first quarter of this year, I would like to highlight the best geographic sales mix with that of the EBITDA margin went from 8% in the first quarter of 2016 to 13.6% in the second quarter of 2016.

Now going to slide 7, we will refer to consolidated figures. In consolidated terms, adjusted EBITDA was BRL1.201 [billion] in the second quarter of 2016, which was stable vis-a-vis the second quarter of 2016, with a slight increase when compared to the same period of the year before.

If we look at the bridge charge on the upper part of the slide, we can verify that the adjusted EBITDA occurred due to lower expenses of SG&A of BRL59 million and other revenues amounting to BRL57 million. It's important to highlight the positive evolution of EBITDA in the second quarter of 2016 vis-a-vis the first quarter this year in absolute terms, BRL1.5 billion when compared to BRL930 million in the first quarter. This is 29% increase, and also there was an increase in the margin of 17% when compared to 1.9% in the first quarter.

In the bridge chart in the lower part of the slide, we can see that our net income went from BRL265 million in the second quarter of last year to an adjusted net income of BRL184 million in the second quarter of 2016, due to higher financial expenses also impacted by exchange rate variations. This result also includes the non-cash effect of the sale in Spain. And based on these results, in the second quarter we will pay out dividends of BRL51.5 million to Gerdau's SA shareholders, which is the equivalent to BRL0.03 per share. These proceeds will be paid on September 2nd, based on the positions of August 22.

Now moving to slide 8, I will talk about indebtedness and liquidity levels of the Company. Gross debt in [June] 30, 2016 was BRL20.7 billion, 20.7% lower vis-a-vis March of 2016, and 25% lower than the peak reached in September of 2015. That was due to exchange rate variation in the period and amortizations conducted throughout the period, in addition to the exit of the debt from Spain from the sale of the operation. The weighted average cost of the debt was 7.4% a year, with an average amortization term of 6.1 years.

On June 30, 2016, only 9.5% of the gross debt was short-term, mostly represented by working capital line. I would like to highlight that in terms of the maturity of BRL3.1 billion for 2017, the cash and cash equivalents and the Company's credit line are more than enough to pay for that, considering that most of the debt only matures in October of that year. Moreover, the Company also has the option to refinance part of this debt.

The reduction of net debt combined with the stability in EBITDA resulted in a drop in the net-debt-over-EBITDA ratio to 3.6 times.

Now speaking more specifically about the debt levels of Metalurgica Gerdau SA, the holding company, according to our general assembly conducted on July 7th of this year, we approved the seventh issue of debentures, amounting to BRL450 million [max]. The objective of this issue is to roll up the short-term debt from Metalurgica Gerdau at competitive costs, 85% of CDI.

At the end of today, we will announce the conclusion of the subscription rights of shareholders. We expect a high level of adhesion on the part of Gerdau shareholders. Due to the success of this underwriting, we decided not to issue the promissory notes that have been approved during the last board meeting.

Now moving to slide number 9, we will talk about working capital. In June of 2016, the cash conversion cycle experienced an important reduction of 12 days when compared to March of 2016, due to a 13.5% reduction in working capital and an increase of 1.6% in net sales. The reduction in working capital occurred due to the effect of exchange rate variation over our operations abroad, say all the units in Spain, and also due to the management of our working capital in all business operations.

I would like to highlight that the 71 day cash conversion cycle reached an all-time record of the Company. This reduction of 21 days vis-a-vis June of 2015, stems from a continuous management and optimization of the Company's working capital.

Now going to slide 10 of the presentation, I would like to conclude my presentation talking about the strong cash generation of the Company during the quarter. As we can notice through the chart, a good level of EBITDA associated to reductions in CapEx and the release of working capital resulted in a free cash flow of BRL807 million in this quarter. This is the fifth consecutive quarter when we demonstrate positive free cash flow generation.

The CapEx generation throughout the year, especially in the second half of the year, and efforts to optimize working capital will continue to be important pillars in our generation of free cash flow in 2016.

And now I give the floor to Andre.

(interpreted) Thank you, Harley. And to conclude we will go to our final remarks on page 11. I would like to say that all of our management efforts and all of our operations are generating immediate gains that are already reflected in our balance sheets and our P&L.

This quarter's performance demonstrates that Gerdau is reinventing itself while at the same time complying with the priorities set forth for 2016, such as increasing its market value while at the same time expanding competitiveness of the operations.

In the quarter, we were able to achieve a significant free cash flow of BRL807 [million], in addition to reducing our net debt level by BRL2.4 billion, and also we restricted new investments. With all of that, we managed to generate more results. We will continue to reassess the profitability potential of our assets, as we did in Spain.

And in terms of current management initiatives in place, I would like to highlight that digital innovation that we are promoting in all of our operations, the use of new technologies, is bringing about quick efficiency and productivity gains.

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

(interpreted) (Operator Instructions) Thiago Lofiego, Bradesco BBI

(interpreted) Good afternoon. And congratulations for your results. Andre, I have two questions. Could you please comment on the signs of improvement in this very spread-around consumption, or whether you see signs of a more significant recovery? And also if you could comment on the competitive environment considering your peers or whether you see some pressures in terms of delinquency and discounts.

The second question is if we think about a potential improvement in cash generation that you may have in the next two years at least, what could be expected in terms of dividend payout or capital allocation, and still in the same question, whether in terms of CapEx should we expect that you will continue to decrease CapEx or you will resume some other projects that you had in the pipeline. So what is your capital expenditure forecast?

(interpreted) Thiago, thank you very much. I will start by answering the first part of your question, and then [Raul] will answer the second part. What I've noticed is that in general there are some signs of regained confidence. And this is a sign that the economy may begin to rebound. We have experienced our ninth quarter of drop in GDP. But we already start to see some predictions from economists that maybe next year we will experience a slight increase in GDP, maybe in 2018 an increase of about 3%. So probably we are reaching the end of a cycle that even in a bad scenario we see some stabilization.

We experience some improvement in sales. But if we look at industrial production in the past 2-3 months, we've seen growth, growth of 0.5% or 1%. It's a low base. But it's still a good sign all in all.

And also in our conversations with customers, we will begin to see some rebound. While it is like a very slow and spread-around market, we are constantly monitoring the sales of construction materials, and still those [two] sales tag along. And we are not experiencing any more severe drops. And things are becoming flat and more stable, leading towards a rebound. That's why we can say that we're beginning to see a slow rebound, but the landscape is beginning to change.

While certainly we still have to reduce unemployment, deal with credit lines to balance economy and consumption, but there are some good signs that lead us to believe that we are probably beginning to enter a rebound cycle with a slight growth in the next 2-3 years.

(interpreted) Good afternoon, Thiago. This is Harley. Now I will answer the second part of your question about free cash flow. Our focus is still very strong, especially in terms of CapEx. We are maintaining our approach. The level of CapEx reached in the second quarter was ideal. And it could be maintained for the next quarter. But we still have many other quarters to come. But we are being very diligently in terms of CapEx, and that's why it should be maintained at this level, which is enough to keep our operations running at a good pace, and also in view of the current momentum.

Another issue related to free cash flow and dividends, I think you noticed that we announced the payout of dividends for this half year, which means that we are confident in terms of the results. We also announced a buyback program of our shares, which demonstrates that we are comfortable in terms of our capacity to generate cash for the year.

We still maintain our strong focus on working capital. About our cash conversion cycle, 71 days, and we are very much focused on maintaining that level. While our free cash flow varies according to the activity, but this is an all-time lower level for us. But we intend to keep it and sustain it for a bit longer.

(interpreted) Harley, could you confirm your CapEx number so that we can run a model for 2017?

(interpreted) In terms of CapEx for this year, we still maintain our expectation of something around BRL4.5 billion, which is something we announced early this year. We started with a number slightly higher. But we will continue with the pace that we just spoke about for this quarter.

Thiago, we always show investments at the end of the year. But currently we do not feel the need to make any substantial changes to our CapEx levels.

(interpreted) Thank you very much.

(interpreted) Ivano Westin, Credit Suisse

(interpreted) Good afternoon, Andre. Good afternoon, Harley. And thank you for the questions, and congratulations for your results. The first topic relates to the (inaudible) South America. In this quarter our EBITDA margin was very significant, growing 7.6% from last year to 15.5% this quarter. Now could you give me an outlook for this division? What are the margins expected? And also you had talked about concerning exports in this region, whether we should expect any anti-dumping measures to protect the market. He was referring to imports.

Also you reported good improvements in a margin of 13.3% and with a better outlook for Brazil that you talked about in your initial remarks, whether we should also expect that this margin should remain the same in this next quarter.

(interpreted) Good afternoon, Ivano. This is Harley. I think including both South America and special steels operations, we can say that we believe we will be able to maintain the margins. If there are changes in the costs of South America. Well, this happened in a few quarters. We did an enormous effort to reduce costs. And that's why the margins should be maintained at the same levels.

And specialty steels operations, well, you have to include the Brazil (inaudible) and the operation in Spain, and the sale. In Spain the margin was sacrificed because it is in the European market, and the situation is different. So certainly in terms of special steels operations, we expect to see better margins when compared to the margins we had last year.

(interpreted) Thank you, Harley. If you allow me, I have another question. Can you please talk a little bit about the volume outlook and margins for North America this year and next year, and also if you could comment on the metal spread. Thank you.

(interpreted) Speaking about the North America operation and the metal spread, metal spread when you look at last year and we talked about that during our presentation. It was down slightly because of market conditions. So volumes are lower but-- are better but, that does not represent a very significant improvement.

But if we look at this historically and look back in the last two or three years, the margins in North America are greatly improved. But we must also take into account imports. And that's why we are not being able to improve metal spreads substantially.

We've been monitoring the growth of the economy, which is a growth currently sustainable, but also marginal at this point.

(interpreted) Thank you. It's clear.

(interpreted) Leonardo Correa, BTG Pactual

(interpreted) Good afternoon, everyone. And thank you. My first question refers to price increases in Brazil. If we look at Brazil, I mean it's improving. Andre and Harley, as you've said it yourselves, we see a landscape that brings a bit of hope. And much was said in some articles about difficulties, especially regarding this first increase that was announced a week ago. Could you please tell us a little bit about that, how is the acceptance of that?

And also at current exchange-- foreign exchange levels below 3.15, we get close to a level of 15% that is probably slightly above what can be considered sustainable by the market. Can you tell me whether you see any changes in paradigm or whether you see some other signs that allow us to work with higher levels than those that we have been experiencing? We've been looking on the import side, and it's low. It's only 4% on the import side. And I would just like to run by you some of the forward trends, and what kind of premiums we could expect in this new market.

And the second question relates to the sale of assets. We've been talking about that for quite some time as a strategy of the Company. And that's also illustrated by all of the results that you are delivering. What about the priorities in your strategy? In the past you talked about selling assets at suboptimal returns. But would you also consider selling core assets, like in Brazil and in the US? Has there been any changes in your asset sale strategy, and what is your level of confidence towards the future? Thank you.

(interpreted) Hi. This is Andre. I will start by referring to the assets, and then Harley will refer to your first question. Let me say what is behind our strategy. In the last two years we decided to reassess the profitability of our assets in our entire portfolio. And for every region and every country we listed some alternatives or some solutions.

We already mentioned an alternative being a joint venture, a merger, or the partial shutdown of certain lines of products or a partial sale. I mean all of that is still being analyzed. We do not have any clear target. But we are still pursuing that strategy. And this applies to all of our operations.

We had a joint venture with a Japanese for wind power. There is also the sale in Spain. These are the two cases that have been previously announced. We are reassessing every day. This is very dynamic, and it depends on the opportunities that may come up, some opportunities that are evaluated. And as things happen, we will announce them.

What I can say is that we are still pursuing the strategy to reassess profitability. And we have some criteria that will allow us then to stick to a portfolio that will give us more profitability, generating more value, and better results to everyone.

(interpreted) Good afternoon, Leonardo. This is Harley. Now speaking about the first part of your question, in terms of pricing we are always very careful in terms of making comments about it. This is a very dynamic environment, because it depends on niches, regions and inventory levels. That's why it's very complicated to make specific comments on pricing.

What I can say in terms of quality of exports, well they have been maintained at low levels. The premium is being maintained. But it is within a bracket that we can consider to be normal. We know that all foreign exchange variations, when they are very specific for a certain country, that lead us to expect better productivity or better profitability, such as in Turkey. But sometimes this is not structural. There are some movements whereby in some countries there was a depreciation of the exchange rate, and then things changed.

But we have noticed that exports have been capped at lower levels, especially when compared to the last 18, 19, or 20 months. So this is effect number one in terms of pricing, and the premium environment in parity as well.

(interpreted) That's clear. Thank you very much.

(interpreted) Marcos Assumpcao, Itau BBA

(interpreted) Good afternoon, everyone. And congratulations for your results. Now speaking about volumes or shipments, particularly in Brazil, shipments to the internal market in the second quarter were down 8% year on year, when compared to sales in the first quarter that were down more significantly. Do you think that this can be attributed to procurement anticipation or announced prices? Or this is just a sign that the demand is becoming more stable? And also I would like you to comment on your sales in July.

The second question is on working capital. Looking back, I remember you said that the internal target of the Company was to reach 65 days of cash conversion cycle. I mean you reached that and went even below that number. So I just want to understand whether this is a normalized level or whether in due time you may change your target, looking for a more aggressive working capital target. Thank you.

(interpreted) Good afternoon, Marcos. This is Harley. Speaking about drop in volumes in the domestic market, what you said is true. The drop was worse at the end of last year and early this year. And this decrease is at a lower level. And what contributes to all of the remarks made by Andre is that we see some positive signs in the market.

The market is still repressed. But we already see signs of recovery. That's why the drop was not so significant. Now in relation to the second part of your question, about the new levels of the cash conversion cycle of working capital, our target is more aggressive. I would like to highlight that we have to consider the foreign exchange variation, and the growth in the past. But our target today or the level of 71 days which is an all-time record for the Company, is now the new target of the Company. And we see that it's something that we already achieved. We will try to be in that range of 70-75, between 70 and 75 is a good range for the Company.

(interpreted) Great. Thank you very much.

(interpreted) Felipe Hirai, Bank of America

(interpreted) Good afternoon. Thank you very much. I have two questions. Going back to anti-dumping, there is a study being suggested by companies and the government to probably initiate some anti-dumping measures.

And the second question relates to the objectives. Andre, I know that you talked about many options and alternatives. But do you have any specific target in terms of the amount you're looking for, for investments, and what will be the optimum timing? Thank you.

(interpreted) Good afternoon. This is Andre. Speaking about anti-dumping, we don't have anything specific. But we continue to monitor in all of our product lines. There was a drop in volume due to the foreign exchange variation and the low economy in Brazil. But we continue to follow up to see whether we should initiate an investigation of imported products that may bring about any damages to the Brazilian market. So we are still following up. We're monitoring. But there is nothing specific to that end.

And the second question referred to divestment, if I understood it correctly, whether there is any specific criteria or target. In fact, we utilized several criteria when we analyzed our presence in different operations in countries. One of them on seasonality, is whether the operation can give us return at the cost of capital, whether the invested capital is generating positive returns.

Also we analyze the growth potential. We analyze the competition, import levels and the competitiveness of assets. There are many things that come into play. And then we decide whether we want to get into that or not, or whether we will enter into a joint venture or what have you. So we do not have any divestment goal or any specific goal. We work according to opportunities. And that's how we've been working, pursuing this strategy. We do not have any specific timeline or anything like that. Thank you.

(interpreted) In English, Carlos de Alba, Morgan Stanley

(technical difficulty) the crisis. So there is some concern that perhaps the growth has peaked and may decelerate. So could you comment as to any potential signs that may be happening?

And the second question has to do if you can please provide us an update on CARF, what the next steps are, and also whether or not you think you really have any reasons to believe that the fiscal authorities will pursue other years (inaudible) amount that they will try to collect in taxes from the Company. Thank you.

(interpreted) Carlos, good afternoon. This is Andre. (technical difficulty)

(interpreted) Mr. Carlos de Alba, you may proceed.

Hello. Can you hear me? Hello? Hello? Hello?

(interpreted) Mr. de Alba, Mr. de Alba, could you please repeat both of your questions, please?

Sure. The first question has to do with the US, the auto sector in the US. We are basically back to prior record levels that we saw before the global financial crisis. And I wonder if there is any signs that the Company has seen in terms of a potential deceleration on the US market?

And the second question is on CARF. If there is any update about the case, and if the Company has any reasons to believe or has been notified of potential additional years that the fiscal authorities may be reviewing and that they may try to collect higher taxes from the Company.

(interpreted) Mr. de Alba asked two things. The first question was related to the automobile industry in the US which is booming and is at record levels, and whether we see some deceleration signs. I think that was his first question.

So the production of light vehicles has been very high. And consumption and production are in keeping. And until now, we haven't seen any drops. The levels are still high and sustainable.

Specialty steel is growing much less, and it's much slower, which is oil and gas. But for light vehicles, this is an industry with strong demand. Heavy vehicles, that's not growing as much. But the second part of your question, I will then give the floor to Harley to answer you on CARF.

(interpreted) In terms of CARF, as of July of 2016, the Company told the market that we appeal to the lower court, and the Ministry of Treasury said that all of the stages were now being studied. There hasn't been a final opinion yet. But after we are communicated by the court on the final results, we can still present some additional remedies. We can still (inaudible). But this will have a very low financial impact to the Company. Because we also posted some judicial guarantees. The Company maintains its position of not having provisions for contingencies. Because the probability of gaining this case is still good.

Thank you.

(interpreted) Tatiana Brikulskaya, HSBC

Hi, everyone. Thank you so much for hosting the call, and congratulations on the results. I have one quick question. I was wondering if you could update us on your availability under the credit facility.

(interpreted) Tatiana's question was about availability in our global working capital line, or credit line. The working capital line has a total of $1 billion on the total line. And today we are utilizing $450 million, meaning that we still have $550 million available.

And do you have any other availabilities under other facilities, or that's about it?

(interpreted) The question is whether we still have other availabilities in other facilities. The availability of the Company is about 1.5 billion of cash and cash equivalents, plus another billion dollars in terms of credit line.

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

(interpreted) Thank you all very much for participating and demonstrating interest in our conference call for the results of the second quarter of 2016. And if you need any further assistance, please talk to our IR department. Our next call we be on November 9th, when we will give you the results for the third quarter. Thank you very much, and have a good day.

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

Statements in English on 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.