Gerdau SA (GGB) 2016 Q4 法說會逐字稿

(interpreted) Good afternoon, and welcome to Gerdau's conference call to discuss the results of the fourth quarter and the year of 2016. (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. Andre Gerdau Johannpeter. You may proceed, sir.

(interpreted) Thank you. Good afternoon everyone, and welcome to this earnings conference call to discuss Gerdau's results. We will begin our analysis with an overview of the world steel industry, followed by comments on Gerdau's performance in 2016. Further on, we will elaborate on the investments during the period.

It is important to mention that we will analyze the performance of the consolidated results for 2016 and the fourth quarter of 2016. After those comments, Harley Scardoelli will elaborate on Gerdau's financial performance. And at the end, we will be available to take your questions.

For those of who will follow us on the web, I'm on slide 2, that refers to the world steel landscape. According to the World Steel Association, the world steel production totaled 1.6 billion tons in 2016, up by 0.8% vis-a-vis 2015.

This growth was mainly driven by an increase in steel production coming from the Middle East and Asia. The highest growth came from India, which posted an increase of [2%] in the period. And China had an evolution of [1.2%] in the period, and the country accounted for 49.6% of the entire production: 808 million tons.

However, there was a downturn in steel production in Europe, the Americas, and Africa. The most significant decrease was in Brazil, that posted 9.2% reduction in steel production in 2016.

Now, if we look at world installed capacity utilization, it stood at 69.3%, very similar to the figures of last year, which was 69.7%. World installed overcapacity is around 800 million tonnes, and it still remains a matter of concern for the industry.

Now, looking at 2017, it is expected that the world steel consumption should grow 0.5%, mainly in emerging and developing economies, where consumption should grow 4%, excluding China. In China, consumption of steel should drop 2% in 2017.

In Brazil, we expect a 3.5% increase in steel consumption in 2017, according to Instituto Aco Brasil. The outlook indicates that a recovery in steel demand should start in the second half of the year. The first six months of 2017 should perform at the same levels of 2016.

In North America, steel consumption should grow 3% in 2017. The industry should benefit from the growth in demand coming from non-residential construction and the recovery of demand from the industrial sector. There is high expectation around the development of infrastructure projects announced by the Trump administration during his presidential campaign.

Other factors that could impact Gerdau's performance in the US is the current analysis being conducted by the US Department of Commerce on the application of anti-dumping tariffs levied on rebar imports coming from Turkey, Japan, and Taiwan; and also, countervailing measures on rebar imports from Turkey. The anti-dumping investigation should be concluded during 2017.

In South America, the highlights are GDP growth in countries like Peru, Colombia, and Argentina, which should grow between 3% and 4% in 2017.

Now, referring to specialty steel, there should be improvements in the automotive industry in Brazil and in India, and the US should experience more stability. The oil and gas market that posted a strong decline in 2016 and in previous years should experience more stability in 2017.

Going to page 3 now, I will talk about the main performance figures for Gerdau in 2016. Consolidated shipments reached 16 million tons, but shipments were down by 8% during 2015 mainly due to lower volumes sold in all business operations and also the sale of the specialty steel unit in Spain.

Now, net sales totaled BRL37.7 billion, down by 14% vis-a-vis the year before.

Gerdau's net income in 2016 was negatively impacted by non-recurring items related to accounting write-offs, mainly property, plant, and equipment and good will, amounting to BRL2.9 billion, non-cash. Thus, the Company's EBITDA and adjusted net income are presented in a way that best reflects Gerdau's performance and the internal effort of the management in all the operations.

Adjusted profit before interest, taxes, depreciation, and amortization -- known as EBITDA -- adjusted EBITDA totaled BRL4 billion, a 10% reduction vis-a-vis 2015 due to lower gross profit, partially offset by a reduction of BRL343 million in SG&A.

Now, adjusted net income was BRL91 million, down 87% over 2015 due to lower generation of adjusted EBITDA in the period. Including the non-recurring items, accounting income in the period was negative by BRL2.9 billion.

I would also like to mention free cash flow, one of the priorities of Gerdau's financial efforts, totaled BRL2.3 billion in 2016, mainly due to the generation of BRL1.2 billion in the fourth quarter of the year.

Now, I will talk about our divestments, on page 4. We continue to pursue our strategy to focus in our most profitable assets, and in 2016 divestments totaled BRL1.3 billion, considering its economic value. That refers to the sale of the specialty steel units in Spain; the sale of the long steel mill in Colombia; the Cleary Holdings Company, a coke producer and holder of a coking coal reserve in Colombia; also, a 30% stake in the company Corporacion Centroamericana del Acero; and also, the sale of downstream units and land in the US.

Since 2014, total divestments add up to BRL2.4 billion. Along these three years, just to give you an idea, we've sold 13 assets in the United States, Europe, and Latin America.

Now, let's talk about investments in 2016. They total BRL1.3 billion. That was a reduction of 43% vis-a-vis the year before, and this reflects how selective we were in choosing new investments. The main highlights were the conclusion of investments centered in the heavy plate rolling mill at the Ouro Branco mill in Minas Gerais and also the conclusion of the plant in Argentina, which should start up next March.

In 2017, Gerdau will continue to be very selective in terms of CapEx, with a disbursement of BRL1.3 billion focusing on productivity improvement and the maintenance of its plants.

Now, I will give the floor to Harley, and then I will come back to you after his presentation. Thank you.

(interpreted) Thank you, Andre, and good afternoon.

Now, let's take a look at slide 7, and I'll talk about the results and performance of each business operation in the fourth quarter of 2016. Further on, I will give you more details about our consolidated results.

Starting with Brazil, shipments in the fourth quarter of 2016 in relation to the same period of the year before were higher, due to increase in exports and a slight recovery in the domestic market.

Looking at EBITDA and the margin in the fourth quarter of last year, there was an increase due to lower SG&A even though the gross profit remained stable. Specifically related to the third quarter of 2016, reductions in EBITDA and EBITDA margin were caused by the market mix, a drop in the domestic market, and an increase in exports with lower profitability coming from exports, and scheduled maintenance costs amounting to BRL100 million.

Now, referring to North America, sales were stable when we compare the fourth quarter of 2016 with the fourth quarter of 2015.

EBITDA in the fourth quarter of 2016 was down vis-a-vis the fourth quarter of the year before, due to lower net sales per tonne denominated in dollars and also by competition from imported goods. This reduction was partially offset by lower SG&A. Thus, the EBITDA margin went from 8.7% in the fourth quarter of 2015 to 3.8% in the fourth quarter of 2016.

Now, referring to South America, shipments in the fourth quarter of 2016 were slightly down when compared to the fourth quarter of the year before, in keeping with the economic performance of each country where Gerdau operates.

EBITDA and EBITDA margin in the fourth quarter of 2016 posted a reduction when compared to the fourth quarter of 2015, due to lower net sales that were higher than the reduction in cost of sales.

In terms of specialty steel, shipments in the fourth quarter of 2016 were down by 27.8% when compared to the fourth quarter of 2015, mainly due to the sale of the units in Spain.

Improvements in EBITDA and EBITDA margins in the fourth quarter of 2016 vis-a-vis the same period of the year before occurred due to the sale of the units in Spain that had lower margins when compared to the other units of specialty steel, in addition to higher earnings from the United States units.

Now, going to slide 8, we talk about consolidated figures. In consolidated terms, adjusted EBITDA totaled BRL716 million in the fourth quarter of 2016, down 21.4% in relation to the same period of the year before. Now, if we look at the bridge chart in the upper part of the slide, we see that the decrease in the adjusted EBITDA is a result of lower shipments and lower net sales per tonne, partially offset by the optimization of operating costs and expenses, mainly SG&A expenses.

It is important to highlight that the consolidated result for the quarter was impacted by the fact that the two largest operations, Brazil and North America, posted results simultaneously lower than those posted in the third quarter of 2016, as mentioned in previous slides.

On the bridge chart in the lower part of the slide, we can see that we went from an adjusted net loss of BRL41 million in the fourth quarter of 2015 to an adjusted net loss of BRL205 million in the fourth quarter of 2016 as a result of lower EBITDA in the period.

Now, speaking about dividends, in 2016 Gerdau paid out BRL85.4 million, the equivalent to BRL0.05 per share, to pay out dividends as a result of earnings obtained in the first nine months of 2016 and also due to preexisting earning reserves.

Looking now at slide 9, I will talk about our indebtedness and liquidity of the Company. These are positive figures related to the closing of the year. Gross debt as of December 31, 2016, was BRL20.6 billion, down by 2.4% when compared to September of 2016 and 22.3% vis-a-vis December of 2015, basically due to working capital financing amortization.

The weighted-average cost of the debt was 7.2% a year, with the average amortization tenure of 5.7 years. On December 31, 2016, almost 22% of the gross debt was short term, mostly represented by working capital lines.

From the BRL4.5 billion of short-term debt, as illustrated on the right part of the slide, BRL2.6 billion refer to a 2017 bond that matures in October of this year, and the rest refers to working capital lines that are constantly renewed. Cash and cash equivalents and the credit lines of the Company are more than enough to cover this bond in October 2017. In addition, the Company could also refinance this debt in total or partially.

The significant reduction of net-debt-over-EBITDA ratio of 4.2-times in December 2015 to 3.5 in December 2016, even despite the lower EBITDA in the periods mentioned, is a consequence of debt amortization that was made possible to cash generation in the period, in addition to the positive effect of the foreign exchange variation.

One of the positive aspects that I would like to highlight is the Company's strategy related to the capital structure of Metalurgica Gerdau S.A. holding. In November 2015, the company placed a public offering amounting to BRL900 million, aiming at reducing its debt position at the time. In addition, in August 2016, the company issued convertible, exchangeable, and redeemable debentures in the amount of BRL450 million, and as a second step also to optimize its capital structure.

To that end, in the fourth quarter of 2016, we sold 50 million of preferred shares of Gerdau S.A. that were owned by Metalurgica Gerdau, amounting to BRL641.3 million. With this strategy, Metalurgica Gerdau was able to reduce its net debt from BRL2.1 billion in September 2015 to BRL574 million in December 2016, which will significantly improve its balance sheet in the coming years and also its capital structure.

Now, moving to the next slide, slide 10, we will refer to working capital. In December 2016, the cash conversion cycle of the Company was lower when compared to September 2016, due to a 15.1% reduction in working capital when compared to a reduction of 0.9% in net sales. The working capital reduction was a result of inventory adjustments and lower trade accounts receivable in almost all business operations.

It is worth mentioning that in 2016 there was a BRL2.6 billion reduction in working capital, and the Company remains focused on the management of this indication.

The cash financial cycle currently finds itself at a much higher level, which shows that we promoted a very significant structural change in the way the Company operates.

Now, moving to slide 11, we talk about cash generation, and this is a very relevant and very significant event this quarter. As we can see in the chart, the generation of BRL1.2 billion of free cash flow in the fourth quarter of 2016 -- of BRL2.3 billion in the year of 2016 -- was a consequence of the release of working capital, in addition to EBITDA that was more than enough to honor the Company's commitments.

CapEx discipline and the efforts to manage working capital will continue to play an important role in the generation of free cash flow in 2017, which will allow the Company to continue deleveraging the Company.

I would also like to highlight some important aspects that must be taken into consideration when we look at the performance of the year. The drop in gross profit due to lower shipments during the year was offset by 48% due to all pricing efforts promoted by our management that resulted in about 13%, or BRL340 million, in reductions in SG&A.

Thus, the EBITDA margin in the year went from 10.3% in 2015 to 10.8% in 2016, and this was made possible and caused the reduction in the gross margin.

In addition to this reduction in working capital, a 40% reduction in CapEx allowed us to maintain strong cash generation in 2016 and also the consequent reduction of the other indicators.

Now, going to slide 12, well, I would also like to talk about accounting losses, non-cash, in the fourth quarter of 2016. Gerdau presents its financial statements in compliance with IFRS that determines that we should conduct impairment tests for goodwill and other long-lived assets of the Company.

To determine the impairment value of each business segment, the Company uses a discounted cash flow method based on the economic and financial projections for each segment. These projections are updated taking into account changes to the economic landscape in the markets where the Company operates, as well as assumptions related to the results expected for each segment.

In 2016, particularly in the fourth quarter, the total impairment of the assets reached BRL2.9 billion: being BRL2.7 billion posted as goodwill and BRL100 million as property, plant, and equipment in the North America BD; and BRL139 million as PP&E in the South America BD. I would like to mention once again that these extraordinary events affected Gerdau's accounting results, but it was a non-cash impact.

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

(interpreted) Thank you, Harley. To conclude, I would just like to say a few things about this current moment of structural challenges that we still face in the global steel market; the economic downturn that has been faced by Brazil, which is almost coming to an end; and the drop in shipments in our main markets. We were able to close 2016 despite all that with a positive performance.

And I would like to start by mentioning the BRL2.3 billion of cash flow generation. A reduction of 43% in CapEx vis-a-vis the year before. We also improved our leverage ratio, with a 26% reduction of our net debt. And promoted a 13% reduction in SG&A when compared to the previous year.

Moreover, we continue pursuing our strategy to focus our efforts in assets of higher profitable margin, and in 2016 divestments totaled BRL1.3 billion; and in the last three years, BRL2.4 billion.

In view of all of these initiatives, the management's efforts were acknowledged by the capital market, which resulted in a very strong stock price appreciation of Gerdau S.A. and also Metalurgica Gerdau S.A. in 2016.

Now, the outlook for 2017 will remain challenging in the steel industry, but we hope to see a gradual recovery of steel demand throughout the year. On a positive note, I would like to say why we believe that that will be the case, and that's because international steel prices are higher this year than the year before, much due to increases in raw material, especially coal. The price of coal has escalated. And more recently, we've seen a strong price recovery of iron ore, which helped to keep international prices at a higher level.

Also, in 2017, we can mention the accelerated growth in the US probably boosted by the new administration and what has been announced during Trump's campaign, like infrastructure investments, mainly in energy and the environment; a possible tax reduction, which is currently being analyzed; and also, they want to fight unfair trade in the US. [With all of these] initiatives, we should expect to see a recovery in the landscape.

And as for Brazil, we expect to see recovery of growth in the second half of the year. And comparing today with the year before, now we see inflation approaching the target. And today we may expect another announcement, and experts are pointing out to interest rates at around 10%.

The government is working on several reforms, like pension funds, welfare, and labor laws. And if we look at GDP a year ago, we expected a drop [to 3.5% and 4%], but we should expect a growth of 0.5%, or even 1%.

Looking at all of the sectors combined, we believe that in the second half of the year Brazil's economy should recover, and this will be very positive in terms of steel demand.

We have made many adjustments at Gerdau as part of our management efforts, and today we operate in a simple way. And we are ready to operate in our most important markets, like Brazil and the US.

Now, for 2017, we will continue to work diligently to increase the value of the Company, focusing on several initiatives. We will start to carefully manage our financial indicators and reduce leverage, and we will work towards our cultural modernization at Gerdau through initiatives such as digital innovation, which has brought about important productivity gains and cost reductions. We will also continue, as I said before, to focus on our most profitable assets.

And this concludes our presentation, and now we are available to take your questions.

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

(interpreted) I have two questions. And first, I would like you to comment a bit on the competitive landscape in Brazil, talking a little bit about demand but also supply. The market seems to be more fragmented, with new small players in the market that may be bothering or stirring up this competitive landscape. Do you believe that we should expect to see some consolidation in the industry? And how aggressive are these smaller players?

My second question refers to the US, whether you see any evolution of the metal spread in the first quarter, maybe? I don't know whether you can give me any expectation about the first quarter and whether you can comment on steel demand, still referring again to the first quarter, if you can?

(interpreted) This is Andre. I'll start by answering your first question, and then Harley will take the second question.

About new entrants, these entrants are mainly focused on rebars. Well, we should also recall that we have other product lines that do not experience a market with so many players, like bars or iron ore, wire. They do not experience the same dynamics.

But when it comes to rebars and we experience the entry of new players, that happened when the market was down, and this is what we've been experiencing in the last two, three years. However, we've also noticed that these new players were gradually finding their niche markets, and the market adjusted itself to the new demand.

And with a rebound in the second half of the year, that effect will be minimized because we face a 16% drop and last year a 14% drop in consumption. So, with a drop in consumption of 3% this year, the trend for the new players that have been in the market for quite some time, they are already revisiting their clients, and the market will adjust itself in terms of supply and demand.

So, I think the worst is already behind us. But again, the market is very competitive. That's why it's very difficult to make any predictions about how the market will behave from now on.

(interpreted) This is Harley. To answer your second question about the metal spread in the US, at year-end -- and this was one of the factors that negatively impacted our margins -- is that these metal spreads were under pressure. And the numbers were -- [the lows ran in $50]. So, this was one of the lowest levels in metal spreads, and the fourth quarter was even lower than that. And certainly, this affected our figures.

We expect from now on to see some improvement in some areas when the market begins to recover, and we already saw some stability in spread prices. And that's why the trend is for metal spreads to improve.

Of course, it takes some time until that is materialized, and I don't know how long it will take, whether it will be all entirely in the first half of the year or the second half. But we expect to see some improvements. And certainly, this walks hand in hand with our plans -- with the overall landscape and investments in infrastructure in the US, as mentioned by the current administration.

But the market, in a way, is already showing signs of recovery. Not only I'm referring to our operation, but the market as a whole. These are aspects that involve potential improvements throughout the year.

(interpreted) Thank you, Harley, and thank you, Andre, very much.

(interpreted) Felipe Hirai, Bank of America Merrill Lynch.

(interpreted) In fact, this is Caio. I have two questions. The first refers to cash generation, whether you could give me more details about working capital, whether there's still room for further reductions? I know that in 2016 you [promoted] great reductions. But whether you can give me also some outlook for CapEx, not only in 2017, but also 2018?

(interpreted) This is Harley. In terms of working capital, there are a few things that should be considered. We worked diligently in the last three years, and if you look at our history since 2010 we went from more than $5 million to numbers around $2.1 million. And of course, this affects our earnings generation.

But when you look at the cash conversion cycle, we moved today to numbers close to 70 to 80 days. We already demonstrated our efforts in terms of working capital in the last two years.

From now on, we are better adjusted, meaning that we shouldn't promote any further major working capital reductions, unless the market deteriorates. But that's not in the horizon, because we foresee some recoveries and we already showed you the decrease in our shipments and we already experienced some increases that should probably impact working capital, but not significantly.

In terms of cash generation, I may mention EBITDA that, in a way, should repeat or should mirror this landscape of slight recovery, both in Brazil and North America.

And we are just diligently pursuing a very strong discipline in terms of CapEx. When you look at what we spent in 2016, is BRL1.3 billion. This could be maintained in the following years if we continue to experience a recovery. And this is more than enough to keep our operations going with good maintenance levels and also good enough to maintain our equipment fully operational and in good shape.

So, we will continue to generation a positive free cash flow in the next few years. And this, combined with a more stable exchange rate, we will be able to improve our leverage.

(interpreted) Thank you.

(interpreted) Ivano Westin, Credit Suisse.

(interpreted) Well, the first point refers to the South America BD. You had a significant margin in the second quarter, and now in this quarter a decline. Could you elaborate on the outlook for that unit and whether it will be reasonable to consider that this was a one-off situation and that we should expect a 15% figure again, that we should resume the 15% figure that we had in the past?

You have a ramp-up of flat steel coming soon, and even considering this current scenario with a recovery in the second half of the year due to that positive scenario and your plans coming for next year, what will be the volume delta, consolidated, for the domestic market you can anticipate?

(interpreted) This is Harley. As for the first part of your question related to margins in South America, we do believe that the fourth quarter was heavily impacted by the seasonal aspect, which is normal. But the South America operation should have margins -- had good margins, and we expect to maintain the same margins posted in 2016.

We see a positive growth of GDP in some countries, like in Peru. Argentina also will post positive figures. And we were impacted by seasonality in the fourth quarter, but we should resume our regular levels in the next coming months.

About our plans, we have the hot coil rolling mill that has been in operation for about three years, and the performance has been very good, also in terms of sales. We are very pleased because it's been well accepted by our customers. But it's (inaudible) for them a true process and at high utilization levels in terms of its utilization capacity is over 80%.

Now, the heavy plate rolling mill started up more recently, and we still have to go through a learning curve, which takes about six months to one year, until we can see improvement. And the utilization volume is lower.

We cannot disclose the volumes for the future, but I can just give you an idea about the coil hot roll rolling mills. But we hope to see some market recovery in terms of the heavy plate rolling mill.

But we are introducing very modern products of high quality and very differentiated. We have had positive feedback from our customers. Customers are pleased and, therefore, we are very excited with the performance that we will certainly achieve once the heavy plate rolling mill reaches full maturity.

(interpreted) Thiago Ojea, Citibank.

(interpreted) My first question is about scrap prices in Brazil. We have seen a drop on the average long steel prices, but we've seen an increase in the price of scrap in Brazil. How do you see that movement? And what could be the short- and mid-term outlook?

And the second question refers to demand in the United States. Andre mentioned the new Trump administration and the measures that should be implemented. But in view of all of these measures, can you anticipate any rebound of the economic activity? Or, you think that the US will depend on these new measures to be able to grow more?

(interpreted) This is Harley. Referring to scrap, I think what you mentioned is more a one-off. Structurally, our spread in Brazil reflects our advantage, because we have a very diversified and spread around collection of scrap throughout Brazil.

Even though there is some one-off effects here and there, structurally speaking we haven't seen any changes in this landscape. The structure is very strong, especially considering the way we collect scrap.

Now, about the United States, I commented on Trump's administration initiatives, things that were announced during his campaign, and we are just waiting to see whether these things will be implemented. Infrastructure is not something that will happen overnight. We do not have a lead time yet. So, we are just waiting to see what will happen.

Tax reduction is something that will produce a more immediate effect, and this would help people on the industrial side. We also have an anti-dumping case on rebars, and I think this week we will hear something about that from US Department of Commerce.

But in the shorter term, we can say that non-residential construction continues to develop and at good levels. The industry itself also [posts] some recovery, and that starts with the increase in commodity prices. This affects some industries in the US: oil and gas and energy. We start to see some reactions.

And we see some signs in the industry, but our market focus is more on the non-residential market and continues to develop well. Infrastructure will produce a leap in consumption; not for now, but probably for 2018 it should be a bit stronger.

(interpreted) Thank you. Do you think that this non-residential improvement is something that could be seen in the first quarter, because then we also have to take into account the seasonality effect?

(interpreted) Hard to say. Probably it could more noticeable in the second half of the year, because the winter will be over and spring, summer, and autumn are better months, mainly because of the climate conditions.

(interpreted) Thank you.

(interpreted) Marcos Assumpcao, Itau BBA.

(interpreted) You just talked about countervailing duties and anti-dumping cases in the US. Could you please give me an idea of what should be expected in the short term and what could possibly be the margin in the US if these cases are proven and enforced, of rebar from Turkey would go down?

And you also talk about productions and leverage at Metalurgica Gerdau since 2015. And how do you see leverage ratios at Metalurgica Gerdau? Do you believe that the ideal situation would be still to have some debt, or no debt at all? So, how do you see the situation, going forward?

(interpreted) I will talk about trading, and Harley will talk about Metalurgica.

Our expectation is that there should -- the results should be positive for the industry. Three years ago, between 2013 and 2014, there was a previous study, and the evaluation showed a very small percentage of anti-dumping.

But the period that is under analysis now is 2015-2016, and there was a big leap in volume. But we also believe that it will be possible to prove that anti-dumping, in fact, occurred and some countervailing measures will be adopted. That's what we expect to see, but you never know. You have to wait for the results.

It's very difficult for us to express any opinion, but we are hopeful, because looking at the industry data there is a possibility that the anti-dumping case will be successful. There might be any effect in the market, depending on the percentage. And then, we will have to see what the market dynamics will be.

Mostly here, we are talking about imports of rebars into the US. That's why this case is so important. And so, we have to wait and see what the final outcome will be.

(interpreted) This is Harley. Now, about Metalurgica, as a holding company our objective is reach zero debt. We only want to hold stake in operating assets. So, this is our objective.

So, all of the efforts that started back in 2015 produced good results. And we have to find a solution to the debt without putting pressure on Gerdau, and this is something that we did successfully.

Part of the debt has to do with the debentures that we issued that are in high demand. And once that is converted into equity -- and there is a great possibility of that happening -- that will brought our debt down. And so, we will be in a more comfortable position. And we believe that once we [work] in the net-debt-over-EBITDA ratio of Gerdau, results will emerge and that will produce more dividends to Metallurgical, and this equation with cash generation will be well resolved.

(interpreted) Thank you very much.

(interpreted) Leonardo Correa, BTG Pactual.

(interpreted) My first question is addressed to Andre. About the US, my question has to do with some possible listing of the operation in the US, whether this is being contemplated or whether this could be studied in the future?

I know that [GNA, or Mera Steel] has been listed and you engaged in a delisting. Now, the scenario changes, and we see some Gerdau peers in the US like Commercial Metals and [Umberg] trading at nine or 11 times EBITDA. That is a relevant multiple differential which generates great value potential.

I would just like to hear your views about this movement and what you see coming forward in terms of listings abroad, especially considering a more promising scenario in this Trump administration.

My second question is about operating adjustments. The quarter had some stoppages, and this harms some of the analysis. Do you think that we still see some more streamlining of assets? Or, this is a project that will continue further, or not? And what should be expected?

Also, given this benign scenario of metal spreads, I want to know whether you expect to export in that market?

(interpreted) This is Harley. Let me first answer the first part of your question about listings in the US. When you look at the comments on the market, you see that the US market today is using very good multiples in this industry, and this also impacts us indirectly. Therefore, indirectly we benefit from those moves.

And end even though we are not considering anything at the current moment, this is always an option that is brought over to us. I would say, therefore, that this is an option that always merits our attention and further analysis.

I think you also asked about operating adjustments. In fact, the last quarter of 2016 was heavily impacted by scheduled maintenances and adjustments that at the end kind of pollutes the entire result, and it's difficult to outline all of the impacts.

But in fact, we have to consider the drop in Brazil and also the drop in shipments in the US. But the main adjustment stoppages occurred in Brazil. But now, we resumed operations in our units in January. So, things should be back to normal.

We don't have anything in the pipeline for the year or we do not anticipate any adjustments or shutting downs or stoppages that will cause great impact. We closed with 60% utilization. And in the second half of the year, we were much lower than that due to the normal seasonality, but I think that the impact was stronger this year.

But as of iron ore, our priority is to serve the Ouro Branco mill. But our production is higher than Ouro Branco's consumption, not only in terms of volume but we also buy from other local producers in order to do the necessary blend. And so, from what we produce we end up not consuming everything.

So, we try to sell it both domestically and abroad, and we are constantly monitoring that. We had some sales last year, but now iron ore hits [$95] almost.

But we have to look at the reality of the moment. And so, at a given moment we may export, and then we should resume to regular moments. It's just a one-off situation, because our focus at the moment is to supply to our Ouro Branco mill.

(interpreted) Thank you, Andre. If you allow me to add something to my question, do you have any significant inventory that you could sell probably faster? I don't know whether you can tell us anything about your iron ore inventory levels?

(interpreted) Honestly, I can't tell you, because we would have to analyze the operation. Usually, all of the output is already sold. We don't carry much inventory. We produce in the same pace of our deliveries. But maybe we can answer you in more details later on.

(interpreted) Thank you.

(interpreted) Bruno Giardino, Santander.

(interpreted) My first question is about price increases. You tried to increase prices in February, and I just want to know how that's moving forward? And the second question has to do with the impact of this price vis-a-vis coal prices and volatility?

(interpreted) This is Andre. On pricing, I'm not going to be specific for a market. But as I said, there is an environment that is strongly sustaining prices, influenced by the spike in coal prices. It's still very high, even though it has dropped a bit. And also, iron ore prices were up.

And this impacts international prices and causes prices to rise. We have heard of global prices in China and also prices from other exporters like Turkey, and we've noticed that prices are going up. And this has an impact on domestic markets which is a cause of further adjustments. But this should be looked on a market-by-market approach. If this continues, this should lead to further adjustments due to higher international prices and raw material prices.

And I think your other question was on coal. It's difficult to say, because there was a spike in coal prices and then prices came down a bit. Therefore, it's difficult for me to give you any figures at the moment.

(interpreted) Thank you.

(interpreted) Gabriela Cortez, Banco do Brasil.

(interpreted) I would like you to elaborate more on what happened to that non-recurring depreciation at the Brazil unit?

And also, a question regarding divestments. I don't know whether you can comment on the assets that you have in mind to sell and where they are located, in what units? And how much you would expect to gain from the sales?

(interpreted) Could you please repeat the first part of your question? Because it was very low. The second part of the question was okay.

(interpreted) The first question refers to depreciation at the Brazil BD, looking at the amount reported for the fourth quarter.

(interpreted) Okay. While they look at the depreciation, let me say that we continue pursuing our strategy of focusing on the most profitable assets. And last year, we already referred to important divestments, and this is in keeping with what we've been saying on the past two, two and a half years. And now, we are just showing you some of the results.

And we will continue pursuing that strategy. We don't have anything to announce at the moment because we do not disclose anything specific for a region. But we continue looking at possibilities of full sales or partial sales or even joint ventures. So, we would continue to focus on this program, and as things happen we will let you know.

(interpreted) Thank you.

(interpreted) Now, about depreciation in Brazil, in fact, in the last quarter we may experience some adjustments, possibly most representative figure when compared to -- an average between the third and fourth quarter. The startup of our heavy plate rolling mill in Ouro Branco impacted depreciation in the fourth quarter.

(interpreted) Do you think we could see some tail still remaining in this coming quarter?

(interpreted) What happened in the third and fourth quarter is more significant than anything else.

I would also like to say something about divestments, just to give you an idea of how this is important to us. All the divestment that we already did and what we presented to you during this presentation -- amounting to BRL1.3 billion in 2016, for instance -- the multiple in relation to EBITDA it was around eight to 10 times.

That's why this is so important, and it really emphasizes the fact that we are focusing on the most profitable assets. This brings about higher economic value to the Company, reducing SG&A and reducing other lines of our balance sheet.

And EBITDA could be much -- is much lower. When we sold Sidenor, you remember what the multiple was. The average is very close to what we had in Spain, between 8% to 10%.

(interpreted) Thank you very much.

(interpreted) Milton Sullyvan, XP Management.

(interpreted) I have two questions. The first question refers to scrap prices or scrap costs. So, given the operating leverage of the Company, when you take a look at the metallic costs of the Company in the Brazil BD, the metallic costs seems to be at a better quality. I think that improved significantly.

So, I would like to revisit the issue of scrap from earlier on. I just want to know whether we are looking at further stability or improvements in the cost of scrap once we look forward to the second half of 2017?

And the second question relates to the growth in shipment and the impact in working capital and CapEx. We saw that the Company had a good performance in working capital and CapEx, but I want to understand what are we looking at in terms of shipment growth [without] having to look at relevant impacts and investment working capital and maintenance CapEx?

(interpreted) This is Harley. On scrap, well, I would say again that this was a one-off situation. So, we shouldn't expect any more significant changes.

We anticipate a good spread in terms of our scrap, because we collect scrap all over Brazil and this benefits our average cost of scrap because we collect in bulk. Therefore, what you saw in the quarter is like a one-off situation. But in particular, we don't see any major changes, going forward.

Now, in terms of working capital and CapEx, we are well positioned in working capital, but more particularly referring to CapEx. Even with a quick recovery in the markets, both in Brazil and in the US, our largest markets, [with] figures around 60% we do not anticipate any substantial divestment or changes in CapEx to face this recovery. Once recovery comes, we will be at a great advantage and there will be no need for further investments.

Now, referring to working capital, we are better adjusted, and we also introduced practices to manage working capital that were very positive. So, once the market recovers, we will tend to recover, as well, and operate at a more optimized condition.

When you have a 60% capacity, we still have a lot of room to maneuver through our capacity. And then, for instance, we can change from one product to the other because we have capacity to do that.

So, if there is a rebound, we will not need as much working capital. For this year, we believe that even though there will be a recovery in volumes, the efforts in working capital will not be very significant.

We always see the seasonal effect at the end of the year and some working capital recovery in the beginning of the following year. So, I think we will find ourselves at very optimized levels this year.

(interpreted) Thank you.

(interpreted) Carlos de Alba, Morgan Stanley.

I just wanted to know if there are any specific initiatives to increase EBITDA and further improve cash flow generation? And the accomplishments on working capital have been great, and CapEx is already low. So, going forward, the cash flow generation has to come from better EBITDA.

And could you share any of the specific initiatives that the Company may still be pursuing to increase EBITDA? Either is it possible to further reduce costs and reduce SG&A expenses without seeing a recovery in volumes or without seeing a strong recovery in volumes?

And the second question has to do with the expectations for higher dividends in 2017. The Company paid very low dividends last year, understandably, given the difficult situation that it faced. But is it possible that the Company would try to increase the level of dividends that it pays in 2017?

(interpreted) Carlos de Alba's question referred to free cash flow generation for 2017, considering that an important part of our cash generation in 2016 had to do with working capital adjustments and whether we reached the limit and whether there is a possibility of EBITDA improvement or any interest rate reductions in order to maintain that situation. And also, whether this would have a positive impact in our dividend payout in 2017.

Well, in a way, we anticipate some [volume] increases in our operations. We also talked about better margins and SG&A that was significantly reduced in 2016, also taking into account that if we look at the end of the year, at year-end our SG&A level was much lower. Therefore, throughout 2017 we may capture additional reductions while we are comparing it with the beginning of 2016, where that number was higher. There is a possibility of EBITDA increase.

And if we continue to optimize CapEx, like we mentioned -- BRL1.3 billion -- this should also tend to improve and generate good cash.

Another point I would like to mention is that, as I said, we have a cash and cash equivalents and goodwill good enough to honor all of our commitments. This is the most expensive bond that we have.

Most part of our cash is denominated in US dollars. So, there is a difference between the interest that we pay and the interest that we receive in dollar terms, and that should also be captured throughout the year once we pay for that bond. And in a way, this should improve our interest rate position in 2017.

Having said all that, we could say that cash generation will continue to be very good in 2017.

(interpreted) We will now conclude the Q&A session, and I'll give the floor to Mr. Andre Gerdau Johannpeter for his final remarks.

(interpreted) Thank you all very much for joining us today. Thank you for your questions. And if you have any further questions, please contact our Investor Relations team.

And on my behalf and on behalf of Harley, I would like to thank you and invite you to also join us again on May 4 for the earnings conference call for the first quarter of 2017. Have a good day.

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