Gerdau SA (GGB) 2016 Q3 法說會逐字稿

Good afternoon, and welcome to Gerdau's conference call to discuss the results of the third quarter of 2016. At this time, all participants will be on listen-only mode during the Company's presentation. And after the Company's remarks we will initiate the 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 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. With no further ado, I would like to give the floor to Mr. Johannpeter. You may proceed, sir.

Thank you. Good afternoon everyone and welcome to this conference call to discuss Gerdau's results. We will start our analysis with an overview of the world steel industry and next we'll comment on Gerdau's performance in the third quarter of the year, followed by more details on our investments in the period. It is important to mention that we will analyze the performance of the consolidated figures in the third quarter of 2016 in relation to the same period of the year before. After my remarks, Harley Scardoelli will elaborate on Gerdau's financial performance, and finally, we'll both be available to take your questions.

For those of you following us online, we are on page 2 and then I'll talk about the general overview of steel. Last October, the World Steel Association published an update of the forecast for apparent steel consumption for 2016 and the following years. It is anticipated that 2016 will end with a 0.2% increase of global demand for steel after going through a drop of 3% in 2015. Excluding China, the outlook points to a 1.1% growth in demand, reaching 1.5 billion tonnes. For 2017 we should expect a 0.5% increase in global demand for steel driven by emerging and developing economies that excluding China, should experience a 4% increase in demand, however, China should experience a 2% drop in demand for 2017 and that is due to the lower pace of their economy. Despite our modest predictions for the consumption of global steel, the industry still faces the same difficulties and challenges that we encounter this year maybe move to next year due to unfair competition coming from some countries in the international side. In addition to that the economic recession in Brazil led to lower steel demand.

In 2016, steel consumption should be down by 14% in Brazil, probably the lowest level ever recorded in the last decade. The Brazilian economy shows signs that maybe the worst moment is already over. But it's worth mentioning that recovery will be slow and gradual. We've taken some important measures in order to arrive at a better tax balance such as the current debate around the proposal for constitutional amendment, PAC that limits actual increases in public spending in addition to the proposal reform of the welfare system, which is gradually moving forward and with our Banco Central bank, we will be able to reduce interest rates in the country in order to boost the investments.

For 2017, we anticipate an increase of 3.8% in steel demand in Brazil according to Instituto Aco Brasil. Now, if you look at North America, the steel industry, as most downstream industries, has been posting a decrease in demand since 2015. Moreover, we follow with some concern at the recent increase in imports of rebars. That's why the local rebar producers submitted an investigation request to find out why there has been an increase in imports coming from Turkey, Japan and Taiwan. In addition, there is low demand in the industry and also it's a moment of caution due to the presidential election which we just heard this morning that the President-elect is now Mr. Donald Trump.

On the other hand, we see that the overall construction industry is recovering and this has been felt into the financials crisis particularly in the non-residential segment, which now shows signs of a gradual and steady evolution. There is also a significant infrastructure deficit in the US, which represents a good opportunity for the industry in the region in the next coming years. Now for 2017, we anticipate an increase of 3% in steel consumption in the United States according to the World Steel Association.

Now if you look at South America, we must highlight the good outlook for 2017 in countries like Peru which should experience a GDP growth of 4.1% and Colombia 2.7% growth as well as in Argentina with a 2.7% growth. As far as specialty steels, the Brazilian automotive industry has posted significant reduction in the last three years. And as of 2017, we expect to see some recovery in demand even though it will be slow and gradual. In the US, the market for light vehicles should still remain at this good level, a record level, however, in other relevant markets such as heavy vehicles that should continue to post a weak demand. In India, the automotive industry is still performing well and is supposed to grow further.

Now on slide 3, I will talk about the current landscape of Gerdau, starting with consolidated shipments. We consolidated 3.7 million tonnes of shipments were down by 21% vis-a-vis the third quarter of 2015 and that was due to lower volumes sold in all of our business operations.

Now referring to net sales, it was BRL8.7 billion, down by 27% vis-a-vis the same period of the year before. Now, profit before interest, taxes, depreciation and amortization, known by adjusted EBITDA totaled BRL1.2 billion, down by 7% vis-a-vis the same period of the year before, reflecting the lower performance of the North America operation, partially offset by the improved performance of the other operations.

Now when comparing to the second quarter of this year, EBITDA was stable especially due to the improved performance of the Brazil operation in reduction with SG&A in the period. Now referring to net income, it was BRL95 million, down by 51% when compared to the third quarter of 2015, due to lower EBITDA generation in the period. Now in the first [nine years of the year to-date], net income was BRL293 million. I would also like to refer to free cash flow one of the priorities of our financial management at Gerdau which totaled BRL1 billion in the first nine months of this year.

Slide 4, we will talk about investments. And in the third quarter, investments totaled BRL286 million (inaudible) in our core CapEx. The highest disbursement occurred in the Brazil BD, almost 50% of CapEx and that was mainly to fund the investment at the heavy plate rolling mill installed at the Ouro Branco plant in Minas Gerais and the startup of this operation was in July, as announced before. At year-end, Gerdau should have a CapEx disbursement of around BRL1.5 billion, 35% below that of 2015. For 2017, the forecast for use of CapEx should amount to BRL1.4 billion focusing on the improvement of productivity and maintenance.

Now I'd like to give the floor to Harley Scardoelli, who will elaborate more on our results for the third quarter of 2016.

Thank you, Andre, and good afternoon, everyone. On slide 6, I will talk about the results and the performance of each of our business operations in the third quarter of this year, and then I'll give you some more details about our consolidated results. Starting with the Brazil operation, in relation to the second quarter of 2016, sales to the domestic market were down due to lower pace of the activity in the construction industry and industry in general, in addition to accumulated inventory from clients in the second quarter of 2016 anticipating price increases. Exports were down especially in September, however, in the third quarter of 2016, they showed better margins.

Now looking at the EBITDA for the third quarter of this year, the absolute value increased vis-a-vis the second quarter of the same year due to higher net sales per tonne in the domestic market and abroad in addition to benefits from lower SG&A expenses. These factors combined allowed the EBITDA margins to go from 13.2% in the second quarter of 2016 to 19.7% in this third quarter.

Despite the good performance in the third quarter, the level of the economic activity in Brazil remains low and we know there is a reduction in the performance of exports giving us a more challenging landscape for the next month in addition to the seasonality in the period. In North America, shipments were down by 17.5% when we compare the third quarter of this year with the second quarter of the same year due to some competition from imported goods in the region and the lower pace of the industrial activity in addition to a certain caution because of the political landscape.

EBITDA in the third quarter of 2016 was lower vis-a-vis the second quarter due to lower volume. So as a consequence of the lower dilution of fixed costs. With that, EBITDA margin went from 9.5% in the second quarter to 7.9% in the third quarter of the same. Now in terms of the third quarter of 2015, in addition to lower volumes sold, the lower net revenue and net sales per tonne also impacted the reduction of EBITDA margin in the third quarter of 2016. The continuity of the strong competition of imported goods in the region associated to lower economic activity must result -- should result in the continuity of this landscape, which is very challenging for the operation in the months to come.

In South America, we experienced a slight reduction in shipments in the third quarter of 2016 when compared to the second quarter in almost all countries in the region where Gerdau operates. The EBITDA and the EBITDA margin in the third quarter of 2016 posted a reduction when compared to the second quarter of 2016 due to lower prices in the international market, but still remains at good levels. It's important to mention that profitability should remain good due to cost reduction efforts in all units of this operation.

Now referring to specialty steel, shipments in the third quarter of 2016 were down by 26.6% vis-a-vis the second quarter of the same year, mainly due to the sale of the units in Spain. The improved EBITDA margin in the third quarter of 2016 when compared to the second quarter occurred due to the sale of the unit in addition to higher profitability coming from the units in United States.

Now moving to slide 7, I refer to the consolidated figures of Gerdau. Adjusted EBITDA was BRL1.2 billion in the third quarter of 2016, 7% lower when compared to the same period of the year before. If we look at the bridge chart at the upper part of the slide, we will notice that EBITDA -- the reduction in adjusted EBITDA occurred due to lower shipments and lower net sales per tonne partially offset by the optimization of costs and operating expenses, mainly SG&A.

In the other bridge chart in the lower part of the slide, you can notice that we went from an adjusted net income of BRL193 million in the third quarter of 2015 to an adjusted net income of BRL95 million in the third quarter of 2016 due to lower EBITDA in the period. It's important to mention that EBITDA stability in the third quarter of 2016 vis-a-vis the second quarter in absolute terms and improvement in the margin, 13.8% against 11.7% was due to the best performance of the Brazil operation compensating for the poor performance of the other business operation.

Now speaking about dividends, based on results obtained in the third quarter of 2016, the Company will pay out dividends of BRL34.2 million to shareholders of Gerdau S.A. which is the equivalent to BRL0.02 per share, these proceeds will be paid on December 1, based on the positions of November 21.

Now on slide 8, we will talk about indebtedness and liquidity of the Company. Gross debt on September 30, 2016 was BRL21.1 billion, up by 2.1% vis-a-vis June of the same year due to cash contributions to fund working capital in addition to exchange variation in the period. So weighted average costs of the debt was 7.4% a year with an average amortization tenure of 5.5 years.

On September 30, 2016, only 10.4% of growth that were short term, mostly in the form of working capital. From the total of this debt, BRL14.1 billion referred to the issuance of bonds in the capital markets. It's also important to mention that in terms of the maturity of BRL2.7 billion scheduled for 2017, BRL2.6 billion out of that amount referred to bonds maturing in October of next year. The available cash and credit line of the Company is more than enough to honor these commitments. Moreover, the Company has the alternative to refinance the total debt or part of that debt. Cash generation allowed for relative stability of net debt compensating for the lower EBITDA of the last 12 months, resulting in a stable net EBITDA or net debt over EBITDA ratio of 3.6 times.

Now I would like to refer to the capital structure of the holding Metalurgica Gerdau SA. In November 2015, the Company entered a public offering of BRL900 million with the purpose of reducing its debt position. Additionally, in August of this year in 2016, the Company issued exchangeable and convertible debentures amounting to [BRL4,500 million] as a second step to optimize this capital structure. To that end, yesterday, at the end of the day, the Board of Metalurgica Gerdau approved the sale of preferred shares of the Gerdau SA up to 14 million shares with the purpose of paying short and mid-term debt, debt on Metalurgica Gerdau. With this strategy the Company understands that the capital of the holdings will be in keeping with the expected cash flow for the next coming years.

Now, I'll go to slide 9, and we will talk about working capital. In September 2016, the cash conversion cycle was higher vis-a-vis June of 2016 due to a reduction of 15.1% of our net sales, and increase of 4.9% of working capital.

Working capital increase occurred due to -- inventory increases due to a strong reduction in sales at the end of the third quarter, mainly in the [Brazil BD]. For the fourth quarter of 2016, we expect to see a reduction in working capital. I would like to emphasize that in the first nine months of the year, we were able to reduce working capital by BRL1.3 billion and the Company still remains with a very firm focus on the management of this KPI.

And finally, going to slide number 10, I conclude my presentation talking about our free cash flow. As can be noted in the chart, a good level of EBITDA associated to a firm discipline of CapEx resulted in free cash flow of BRL230 million in the third quarter of 2016 and BRL1 billion was cumulated results in the first nine months of 2016. With CapEx discipline and efforts towards the best management of working capital, we will continue to be an important element of our free cash flow generation in 2016.

And now, I'll give the floor to Andre for his final remarks.

Thank you, Harley. Now we are on slide 11 for those of you who are following us, and to conclude the presentation, I would like to say that we were able, this quarter, to reduce the impact of this difficult moment of the steel industry in the world and in Brazil and this reflects all of our efforts in management along with many other activities. Despite the challenging landscape in the industry, we were able to reduce expenses, improve the margins, limit CapEx and maintain stable debt position. I also said that we were able to have a significant free cash flow position.

So, in terms of Brazil, despite the improvement in the margins, we anticipate the same challenging landscape for the following months, but still considering a gradual recovery but lower levels of export. This challenging scenario also applies to the other operations in the Americas in places that we will continue working diligently in all of the different initiatives to generate further value to Gerdau. Some of those efforts are the modernization of our culture, reviewing the potential of the profitability of our assets, reduction of costs and expenses which has resulted in a good generation of free cash flow, restrictions to CapEx and also the deployment of several projects in the area of digital innovation, which has been translated into efficiency gains and productivity gains in our operations.

With that we conclude our presentation and we are open to answer your questions.

Ladies and gentlemen, we are now initiating our Q&A session. (Operator Instructions) Thiago Lofiego, Bradesco BBI.

Thank you. Good afternoon. Congratulation for your results. I have two questions, the first is, whether you can comment on the impact of coal and if you could talk a little bit about the magnitude of the impact and how much of that impacted you. And along the same question, and now speaking about costs, do you still see more room to cut to further -- cut costs -- further cut in costs?

Now, the second question about the steel demand in Brazil. My question is whether you noticed some positive signs of improved demand in the last few months and whether you could also speak about the construction industry dynamics and whether you could refer to some of the most important factors that affect your industry? Thank you.

Good afternoon, Thiago. This is Harley. For the first part of your question, I think there are two important aspects to talk about when we speak about coal. Our production activity that is affected by coal refers to 5% of consolidated shipment. But in consolidated terms, our position -- I mean, we have a percentage with scrap and 25% integrated with coal. We also have many contracts with fixed prices and they are short-term contracts. So this impact may occur maybe next year, but this will be mitigated by our mix between mini mill and the integrated mill.

The second part of your question referring to costs, we continue to be very diligent in our efforts, we are able to capture good cost reductions, especially in SG&A, but I would say that we still have some room to achieve further improvement and we will still see some positive impact to that end throughout the next coming months.

Thiago, this is Andre. Now referring to demand in Brazil, we haven't seen yet, in practical terms, any increases in demands or increase in orders, but what we see is a change in the general mood. And in first level, we have seen some improvements like lower interest rates, it [wasn't] very significant but it's in the right direction. We also see the possibility of further investments in infrastructure. Therefore, the landscape changed, but in practical terms we aren't experiencing it yet. But we believe that we will still have to go through difficult six or eight months and things will begin to improve in the second half of next year.

I would also like to mention two other things. If we compare the domestic market in Brazil, comparing it year-on-year, there was an 18% drop. But if you compare the previous half of the year to this one, the drop was 8%. Those are both significant reductions but they are getting -- things are getting better. So we gradually see signs of improvement and therefore, I believe that the rebound will occur soon. The recovery will come, it will come it's just hard to tell when and in what magnitude.

In your last call, you said that you were beginning to see some signs of improvement in -- on the consumer side -- consumer -- on the consumer side, are you talking about that's small and spread around market?

This market, a small market, doesn't suffer that much, but it being now impacted by unemployment, by the drop in household income. So there are some aspects that leads to reductions in consumption, but we don't see any recovery, any particular recovery. And the outlook is good, but things are not materialized yet.

Marcos Assumpcao, Itau BBA.

Good afternoon, everyone. My first question is about your partnership with GE Digital. This is still an infant project, but do you believe that this will be able to reduce your maintenance CapEx in the long run? And the second question is whether you could tell us about Brazil's EBITDA in September, particularly?

Hi, Marcos. This is Andre. About GE, just to elaborate a bit more on that project, this is a pioneer project and it involves the partnership between Gerdau and GE. This includes an important investment in sensors. We will -- but more than a thousand machines still have a much better preventive maintenance operation. The sensors can measure vibration, machine temperature, vibration, rotations et cetera. And once you monitor all that you prevent waste and outage and set up time. Therefore, we have important gains in maintenance and equipment use and equipment life. And this eventually can reduce CapEx because the machines will not require as much maintenance and the machines will probably have an extended lifespan and this, as a result, should lead to reductions in CapEx, I cannot precise you how much, but there will be some.

The second question was about Brazil's EBITDA in September. Harley?

We will not refer specifically to the month of September, we can only refer to the quarter.

Okay. So let me ask you something else. We think the flat steel industry starting negotiations with the automotive industry and they were also able to post some price increases on the distribution side and the prices were a bit far from the automotive prices. Do you see an expectation for higher price increases during the negotiations with automotive industry because maybe in addition to that mismatch of prices, demand is very much elastic. Do you also see the same trend in the area of specialty steel. Do you see any relevant changes in the short run?

Good afternoon, Marcos. This is Harley. Pricing dynamics in the specialty steels industry, it's not yet finalized. We haven't reached a final (inaudible). The outlook and how this will behave is something hard to predict now, but what we said is that we believe that there should be some gradual recovery throughout 2017 and this can certainly help because this coupled with some elasticity can be good, but it's too soon to make any comment about prices in that market.

Kyle Hibader, BTG Pactual.

Good morning. I have two questions. The first question is about working capital. There was some increase in the quarter very much related to accumulated inventory or increase in inventories, how do you see this line going forward? In the first half of the year, there was a significant reduction in working capital. So do you think that the current level as some saying that it's closer to a normal level or this would be -- in the third quarter this is closer to the normal level?

And secondly, in relation to the metal spread in the US, could you please tell us a bit about how do you see the evolution of metal spread vis-a-vis the previous quarter and what is your expectation looking forward into the next quarter? Thank you very much.

Good afternoon, Kyle. This is Harley. So about working capital, the drop in sales that occurred particularly at the end of the third quarter, especially if you look at it due to the days of the cycle and there were some factors that impacted that. But the drop in sales is that, we still need some time to react. We have to look at working capital in a more continued way. In our opinion is that in the fourth quarter we will be able to revert that trend.

New levels of working capital is something that, it's difficult for us to say anything to you in the short run. Especially, if you look at the trend in the last two quarters, it was not so low, I mean, as in the second and not as high as in the third. But the focus is still very firm in that area especially in North America when it comes to the fourth quarter. This is about working capital.

Now speaking about metals, metal spreads, there are some particular elements. We were at, probably, the lowest level ever in the last few years due to a series of things we talked about that the US environment, a lot of imports, there was a lot of volatility in the political landscape because of the election that now has been defined. But what we see is pressure coming from raw material and this usually reflects an improvement in the metal spread. But it's too soon to make any prediction that we believe that historically speaking we are at very low levels, so this should grow.

Thiago Ojea, Citibank.

Good afternoon and thank you for allowing us to ask questions. My first -- my question has to do with your US business, I know that things are still very recent, but giving the new outlook coming from the Trump government with more infrastructure investments, do you -- can you anticipate any idea about demand for 2017? Do you have any idea of quantities? And also in terms of iron ore, the prices are going up in the international market, do you believe that you will be able to resume exports or whether it will be worthwhile to resume exports of iron ore or not?

Thiago, this is Andre. I will talk about the United States. As you said, Trump was just elected, but we have been monitoring and even both candidates had a very strong government plan when it comes to investments in infrastructure. So our expectation is with the new President-elect, in the next few years, we believe that there should be more investments in infrastructure. The United States really need investments in infrastructure and this has been the case for many years. And this has an impact in the economy, because this generates jobs, consumption and growth. Infrastructure brings about many benefits to their local economy. Therefore, we believe that they should resume investment in infrastructure once the new President takes over. In terms of numbers, it's hard to make any prediction, but we do believe that there will be investments in infrastructure.

Good afternoon, Thiago. This is Harley. Now about the second part of your question, even with losses in international prices, our focus remains in the supply of our own operations. So therefore, we are much more focused on supplying to our own operations at competitive costs rather than selling abroad or exporting, our focus remains in the local supply. There may be some opportunities in the spot market and if they come about we will look at it, but again, the main focus is on cost and we want to deliver at competitive costs.

Fair enough. How much non-residential represents today in your sales mix, just to complete? Thank you.

Approximately 40%, Thiago.

Renan Criscio, Credit Suisse.

Good afternoon, everyone. I would just like to get more information on the production swap from the blast furnace in the Brazil unit, what is the status of that today and when would they consider exchanging the operation and whether you are already doing something at Ouro Branco.

And the second question is on South America, the margins, even though there was a slight drop in the quarter, the margins are still quite high. What should we expect looking forward? Should we still expect the same margins in the future? Thank you.

Good afternoon, Renan. In terms of swapping production between the integrated operation and that one, we do not focus directly on that because these operations are dedicated to several segments in different markets and we understand that both operations have a very good cost structure. Therefore, we are not contemplating anything in terms of swapping production. And I imagine that this has something to do with metallurgical scrap. And in a consolidated way, in terms of mini mills and integrated mills, production is half and half. And especially due to the ore that we have access to our cost structure is very good and we are not contemplating that is something necessary for the moment. So there will be no swap between mini mills and integrated ones.

Now, South America, the margin levels that we attained --- if you look historically, we've reached level above 10%, this has been the case since the second half of 2015. We're doing a lot of efforts to reduce costs. And in South America, the operations have been opened to international prices for quite some time especially Peru and Chile. So we are making strong adjustments on the cost side and we see good outlook for Colombia and Peru and we see a good performance in volume growth and that's why for all of these reasons we were able to achieve very good margins in those regions. South America in the short-term is also affected by seasonal elements, usually this part of the year is weaker, but in the long run we believe that the margins, we will be above 10%.

Victor Penna, Banco do Brasil.

Good afternoon, everyone. My question has to do with the maturity of bonds in 2017. Given the landscape for next half of the year, if that is worse than expected and you generate less cash, are you looking at other alternatives in terms of maturities of debt or -- so in general, what I want to learn is, what are your funding alternative?

Good afternoon, Victor. Speaking about the bonds that mature in October of 2017. Well, first of all, that involves about $800 million or less. In terms of immediate liquidity, in addition to having more than BRL1.5 billion in cash and most of it in US dollars, we also have good working capital that is fully committed, it's available to the Company. And the amount is higher than $1 billion. So we have approximately $2 billion to pay for that disbursement if need be in October 2017, we can also have the alternative to engage in a total or partial financing of the debt. So there will be available credit lines in the market and because of our investment rating we have access to credit. And we will continue evaluating the possibilities in the long run. So everything has to do with our liquidity position. In our view that if we believe that we have to engage in additional financing they will be available.

Now about divestments, Andre already talked about it before and this is part of our portfolio reassessment that started last year, we are still looking at other possibilities like joint ventures and other investments or divestments. There is nothing yet decided, we just have to look into what the opportunities will be. Now in terms of 2017, we do not necessarily need anything of that to happen in order to fulfill our commitment. Thank you very much.

Humberto Meireles, Goldman Sachs.

Good afternoon, everyone, and thank you. I would like to focus on the Brazil business operation. And whether you could help us get a better modeling of the business and help us understand what would be the contribution coming from iron ore to that margin of 19.7% of EBITDA. And what would be the EBITDA level that the third party ore is running at because this would help us to get a better understanding of the steel business and run the model for the future.

Good afternoon. Humberto, this is Harley. Thinking about the margins of this quarter in Brazil, this is something more related to the alignment of some factors that we mentioned during this call, but notably prices in Brazil, the prices had a positive impact in our figures for the quarter. Exports materialized especially in the early part of the quarter with good profitability. And we also benefited from that large export towards cost reductions, including SG&A.

So a combination of all the factors is what led us to this good alignment of prices. And therefore, the result is that we had a good performance in Brazil. Now referring specifically to ore, it's important to say that our mining operation is consolidated and that has been the case for several quarters. So in terms of the price effect, I mean the price is not affecting these results because these have been already contemplated before. I think you should remove that from your analysis and I reinstate that, that is all due to a combination of factors, good prices in Brazil, good profitability coming from exports and also a great effort towards cost reductions, especially in SG&A that more than offset the situation.

Could you also say something about volumes from third parties, because they (inaudible) how did it run this quarter and in an annual basis?

This number varies from quarter to quarter. And this number is published in our quarterly report, but one-third goes to third parties and sometimes come to export, and I once again repeat that our focus is to supply to Ouro Branco rather than sales to the foreign markets. So, between 25% to 33% or 35% is what that represents.

Milton Sullyvan, XP.

Good afternoon. I have two questions and both questions are just follow ups of Humberto's question. I would like to get a better understanding of export prices in Brazil. This quarter we noticed that there was a significant price difference quarter-on-quarter, and Harley said that this operation occurred mostly in the early part of the quarter. So what is Gerdau's price of the product today given the volatility experienced in the last few months, whether profitability is better or worse and what could be expected in terms of prices in the foreign market from now on? And it still on the Brazil operation, my question refers to other revenues, let me see if I understood, this ore is the ore that you sell to yourself through Ouro Branco, but there is also ore of third parties, it's a volume from third parties. And in a footnote you've mentioned that the Brazil revenue also includes sales of coke and coal for iron ore. Could you please elaborate more on the impact coming from other revenues and whether they are allocated in the domestic market or core market?

Good afternoon, Milton, it's Harley. To elaborate on this subject, when we talk about export pricing, the dynamic of the business changed, a positive aspect in the third quarter refers to sales in the last of the quarter which were accounted for later on and that was due to the business environment of export that at the end of the second quarter reflected in the figures of the third quarter.

So at the end of the quarter, the landscape was much more complicated, but as we speak and looking towards the future, the export markets are giving signs of recovery with a better iron ore price, better price for rebars and these are opportunities that may come up. But it's too soon to tell whether this will impact us in the short run, but what's positive in the third quarter is a reflection of what happened at the end of the second quarter, that had implications that had results in the third quarter.

Now, speaking about sales of ore or coal that impact affects the sales to the domestic market, but they are not relevant enough when you analyze the entire period. It's not something that will impact your analysis that much, we do not get into a lot of details because as we said, sales volume is very volatile and it varies quarter-on-quarter. Therefore, our focus is mostly related to supplying to our own operations. If we look at our indicators you will see that sales per quarter varies, but on average, for the year, it will be between 25% to 35%.

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

Thank you all very much for participating in this conference call and your interest. And on behalf of Harley and myself, if you still have any questions, please refer to our Investor Relations department. I would like to take this opportunity to invite you all to participate in our next call on February 22 of 2017 to discuss the results of the fourth quarter of 2016. Thank you very much and have a good day.

Gerdau's conference call is now concluded. We would like to thank you all for participating, and have a good afternoon.

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