Gerdau SA (GGB) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to Gerdau's Conference Call about the Results of the First Quarter of 2017. (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. André Gerdau Johannpeter, Director, President and CEO; and Mr. Harley Scardoelli, Vice President and CFO.

Without further ado, I'd like to give the floor to Mr. André Gerdau Johannpeter. You may proceed, sir.

Thank you. Good afternoon, everyone, and welcome to Gerdau's conference call to discuss the results of the first quarter of 2017 where we will initiate by looking at the world's scenario of the steel industry followed by Gerdau's performance in the quarter. And after that, Scardoelli will refer to Gerdau's financial performance. Right after that, we'll be available to take your questions.

For those of you who are following us on the web, on Page 2, I talk about the general steel landscape, starting with the Worldsteel Association that in April, reviewed the outlook for steel consumption for 2017 and the forecast of growth that went from 0.5% to 1.3% in 2017. Therefore, it's anticipated that by year-end, steel consumption worldwide should reach 1.5 billion for the year, more particularly the highlight to the recovery of South America and Asia. And with that, we should see a 4% increase in consumption in 2017 coming from these regions. Now if we exclude China, the estimate in China is that steel consumption should be in keeping with the growth of last year of 1.3%.

Therefore, we're still concerned that with the industry not only due to unfair trade in many countries but also due to the excess of installed capacity which is a cause of concern for many in the sector.

In terms of Brazil, we believe in a gradual evolution, mainly starting in the second half of 2017 and mainly in a more consistent way, after 2018. We hope that interest reduction and reductions in inflation with the new structural reforms in Brazil, social security, labor and tax reforms should boost the economy in the country and as consequence, increase in steel consumption. The expectation from Instituto Aço Brasil is that the consumption of apparent steel should grow 2.9% this year. And this, just to give you an idea, corresponds to the certain levels we had a decade ago, which really reflects the current political and economic scenario in North America. The forecast for 2017 is that we should see the growth in demand for nonconstruction -- nonresidential construction and the recovery of the industrial sector. The announced measures of the deployment by the Trump administration to find unfair trade reductions of taxes, deregulation, investment in infrastructure should boost the demand for steel in the U.S. in 2017. The forecast of growth in steel consumption in the U.S. is 3%.

Moreover, there is an expectation that U.S. Department of Commerce will finally approve the charter on the antidumping tariff related to investigation of rebar steel coming from Turkey, Japan and Taiwan and also countervailing measures should be advised for rebars coming from Turkey.

There is another new entry in this case for iron ore in large scales and this will also merit another verification involving some countries that imports into the U.S. We believe that once these measures are approved, we should see positive results in the region.

Still speaking about North America, we are concerned with all of imports of long steel because they are coming in large volumes and that represents an important part of consumption in the U.S. because it's an important material and that generates competition, especially in wire rod and rebars.

In South America, the economy of market served by Gerdau should present different levels of growth, especially related to GDP growth of 3.5% positive in Peru; in Colombia, 2.3%; Argentina, 2.2%; and Chile, 1.7%. These positive growth numbers should also be reflected in increases in steel consumption. In the quarter, we see an improvement of specialty steels in the automotive sector in Brazil, especially due to export in India, the market remains bullish. And in the U.S., we should see stability in the automotive industry and in that term, the segment of oil and gas.

Now I would like to talk about the large figures of Gerdau on Page 3, starting with consolidated shipments. We shipped 3.6 million tons, a reduction of 7% vis-à-vis the first quarter of 2016 influenced by Brazil due to seasonality and lower demand in the initial months of the year, which was accentuated with the effect of the economic crisis. In addition, there was a reduction in export volume coming from Brazil due to lower opportunities in the international market. Now net sales came up to BRL 8.5 billion in the first quarter of 2017, down by 16% vis-à-vis the same period of the previous year due to the foreign exchange effects in the period as well as the sale of the units from same state. Gerdau's results in the first quarter of 2017 was influenced by a nonrecurring event related to the reversal of a contingency provision related to the exclusion of ICMS tax from the tax base for contributions to PIS and COFINS accrued from 2009 to 2016. This reversal was based on a ruling by the Federal Supreme Court stating that the inclusion of the ICMS under calculation was unconstitutional and this decision is supported by the provision of the companies with the counsel that the probability of loss in the pending lawsuits became remote in light of the court's decision. Therefore, the net effect from this reversal and other provisions to the Gerdau's result in the quarter amounted to BRL 858 million.

However, I would like to clarify that there is still the possibility that the Supreme Court finds it necessary to apply the modulation mechanism to this decision, which is used to determine the effect in time other ruling of unconstitutionality. In case the Supreme Court applies this modulation mechanism, limiting the effects of the decision in time, it may be necessary to reassess the risk of loss associated with the above-mentioned lawsuit, which consequently may require the accrual of new provisions related to this matter in the future.

Due to the nonrecurring event, we are presenting the adjusted net income and EBITDA. Adjusted EBITDA was BRL 853 million, down by 8% vis-à-vis the first quarter of the year before, stemming from lower gross profits partially offset by the reduction of BRL 205 million with SG&A expenses. I would also like to mention that EBITDA from North America operation in the period was certainly impacted by the inflow of significant volume of imported steel into the region. However, when we compare that to the fourth quarter of 2016, consolidated adjusted EBITDA grew 19%, especially due to a growth of 47% coming from the Brazil operation, which is a reflect of a better product mix offered to market amongst other factors.

While consolidated net income amounted to BRL 824 million, however, not considering the nonrecurring event already mentioned, Gerdau has an adjusted consolidated net loss of BRL 34 million due to a lower EBITDA in the period, as announced.

Moving on with the presentation on Page 4, we will talk about our asset optimization and what we did so far in 2017. We continued pursuing our strategy to focus on the most profitable assets and clearly, divestment in the joint venture amounted to BRL 421 million. In March, Gerdau signed a contract for a joint venture, selling 50% of Gerdau's stake in Colombia with a public capital management, which is already a partner in the Dominican Republic.

The economic value of this transaction was BRL 523 million and the part that refers to the 50% stake of Gerdau amounted to BRL 262 million. The transaction has not yet concluded that's why Gerdau Diaco is still reported as a controlled entity in the balance sheet of the first quarter. Moreover, we saw 4 downstream units of specialty steels and 5 mills producing goods for the construction in the U.S., with an economic value of BRL 179 million.

Now I'd like to talk about investments on Page 5. Our investment in PP&E totaled BRL 237 million from January to March 30. Now for the rest of 2017, we intend to outlay CapEx amounting to BRL 1.3 billion in keeping with 2016. The focus of the investment is to improve maintenance and productivity of the operation.

With that, I conclude this part of my presentation. I now give the floor to Harley to continue the presentation.

Thank you, André, and good afternoon to you all.

Now I would like to talk about the results and performance of each of our operations for the first quarter of 2017, starting with Brazil. In 2017, in the first quarter of 2017 vis-à-vis the first quarter in 2016, shipments were down mainly due to lower exports. Looking at the EBITDA and the margins in the first quarter of 2017, we were up due to higher net sales per tonne and also a better market mix, higher proportion sales in the mix, in addition to SG&A expected.

In North America, sales were up when we compare the first quarter of this year to the first quarter of 2016 due to improvement in the nonresidential construction market and in the industry. Vis-à-vis the fourth quarter of 2016, there was improvement due to seasonality in these areas and a comparison and also due to the commercial strategy of the company to recover market share of imported products.

EBITDA in the first quarter of this year was down when compared to the first quarter of 2016 due to higher costs of raw materials that were not following, followed by higher prices of steel.

Now in terms of the fourth quarter of 2016, the improvement in EBITDA and EBITDA margin happened due to higher volume sold or better net sales per tonne, and as a consequence, higher dilution of fixed costs. In South America, shipments in the first quarter of 2017 were down when compared to the first quarter of the previous year, mainly due to heavy rains in Peru, which damaged the distribution of products.

EBITDA and EBITDA margin in the first quarter of 2017 were down when compared to the first period the year before due to high levels of reduction of net sales vis-à-vis cost of goods sold, particularly in Peru and Argentina. On the other hand, the reduction in SG&A expenses offset the drop in EBITDA and EBITDA margin.

And lastly, related to specialty steel, sales in the first quarter of this year were down by 30.2% vis-à-vis the first quarter of 2016, due to the sale of the units in Spain, which occurred during last year.

Improvements in EBITDA and EBITDA margins in the first quarter 2017 when compared to the first -- same period of the year before, happened due to the sale of the units in Spain that have lower margins in addition to higher profitability coming from the specialty steel units in the United States.

Now moving onto Slide 8. I will talk about consolidated EBITDA. This adjusted EBITDA and consolidated reached BRL 853 million for the first quarter of 2017, 8% lower when compared to the first quarter of 2016. If we look at the first chart on the higher part of the slide, we can see that 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 expenses.

Now in relation to the fourth quarter of 2016, EBITDA and the EBITDA-adjusted margin presented an increase mainly due to the fast performance of the BD Brazil. In the chart -- the first chart in the lower part of the slide, you can see that we went from an adjusted net income of BRL 14 million in the first quarter of 2016 to an adjusted net loss of BRL 34 million in the first quarter of 2017 due to lower EBITDA in the period.

Just as André mentioned during his presentation, I would like to highlight that in the first quarter of this year, we also had the reversal of contingency provisions related to the exclusion of ICMS tax from the tax base of contribution of PIS and COFINS. This reversal is also detailed in all of the reports issued by the company that I would like to emphasize that in terms of net result stemming from this reversal and the recognition of other accounting provision for the period ending March 31, the company posted BRL 530 million underlying of reversal of contingency liabilities net and BRL 370 million in the line of reversal of updated contingent liabilities also net in the part related to financial results of its consolidated income statement.

Income tax and social contributions of this reversal amounted to BRL 442 million, with a net effect, excluding this amount, totaling BRL 858 million being considered nonrecurring event in the company's consolidated result.

Also there, we would like to emphasize that there is yet the possibility that the Supreme Court may understand again the obligation of the modulation mechanism may be necessary to be applied, which is to determine the effect in time of a decision to declare unconstitutional. If the court applies, the modulation mechanism is limiting the effect of the decision in time, it may be necessary to reassess the risk of loss associated with the said lawsuit, which as a consequence may require the accrual of new provisions related to the matter in question in the future.

In terms of dividend, consolidated net income in the first quarter of 2017 was BRL 824 million, and it was impacted by the nonrecurring event already mentioned related to the reversal of the provision for contingencies amounting to BRL 858 million. Considering the possibilities that the Federal Supreme Court may prospectively apply the modulation mechanism to its decision to declare unconstitutionality and thus limiting its effect on taxpayers, the company is not considering at this time to pay out as dividend in advance of minimum mandatory dividends, and will continue to monitor the matter until the court's final decision is made.

Moving to the next slide, Page 9, I will talk about debt and liquidity positions of the company. Gross debt as of March 31 of this year amounted to BRL 19.7 billion, down by 4.3% percentage vis-à-vis December 2016 and 17% vis-à-vis March 2016 basically due to amortization of working capital alone and the effects from exchange variation.

The weighted average cost of the debt was 7.1% a year with an average tenor of amortization of 5.6 years. On March 31, 2017, approximately 21% of gross debt was short term. Bear in mind that from the BRL 4.2 billion of debt with short-term maturity, BRL 2.5 billion refer to the 2017 bond due in October and the remaining refers to the working capital lines that are renewed on a frequent basis.

Cash equivalents and credit facilities of the company are more than enough to honor this commitment. Furthermore, the company has the option to refinance the debt in full or in part.

A reduction of the net debt over EBITDA indicator of 4.1x in March 2016 to 3.5x in March of this year and despite a lower EBITDA in the periods compare was a the result of that amortization brought about by cash generation in the period in addition to the positive effects from the extreme variation.

Finally, still talking about the debt, I would like to mention the company's strategy referring to the capital restructure of the Metalurgica Gerdau Holding Company. On March 7, 2017, Metalurgica signed a contract for the exchange of shares with Banco BTG Pactual whereby BRL 34,209,552 common shares held by BTG will be exchanged by 33 million -- 33.3 million preferred shares held by Metalurgica anticipated and in association of an obligation maturing in December of 2017, in addition -- in view of the increased interest of Metalurgica Gerdau in the common stock of the company resulting from the exchange and in compliance of CVM Instruction 361, Metalurgica Gerdau filed with CVM an application for registry of public tender offer due to the increase in the interest in compliance of the formal procedures necessary to put that into effect.

Now next slide, I will talk about working capital. On March 2017, the cash conversion cycle was up vis-à-vis December 27 -- 2016 due to increases of 5.3% in the working capital when compared to a reduction of 1.9% in net revenue. Increases in working capital stemmed from the readjustment in our inventories in the BD North America reflecting the seasonality of this indicator. From March 2016 to March 2017, we were able to reduce by BRL 1.8 billion of our working capital. And the company has remained very much focus on managing this indicator.

And finally, in concluding my part of the presentation on Slide 11, we talk about the free cash flow of the company. In the last 12 months, the company generated positive free cash flow and due to the selectivity in our spending in CapEx and we did all of the necessary efforts to manage working capital. Looking at the rich chart in the lower part of slide, EBITDA was announced to honor all of its CapEx commitment and income tax and interest, however, with the consumption of BRL 457 million in working capital stemming from inventory adjustment, free cash flow was negative by BRL 256 million, reflecting, as we mentioned before, the seasonality in the field.

Now we'll give the floor back to André for his final remarks.

Thank you, Scardoelli. To conclude, I would like to highlight that our performance in the first quarter, excluding the nonrecurring event, reflects a very challenging moment faced by the world steel industry and also I would like to highlight the excess installed capacity and over-trade practice that's coming from some companies in the global market. In Brazil, we believe that we will see a gradual evolution mainly in the second half of 2017 and 2018.

With -- as the domestic market in steel gradually moving, it's very important to be competitive in exports. Our export range about 35% or even 40% in terms of our production in Brazil. But in order to do that, we have to increase the tax rate of (inaudible) which is now 3% and should go to 5% (inaudible) is approving some the downstream industry and (inaudible) who were not familiar with it is the tax mechanisms to get tax restitution to get restitution from nonrecoverable tax is already paid in the consumption by the different lengths of the productive change.

With that increase, we will be able to inject more than BRL 45 billion in the Brazilian economy and generate more than 400,000 new jobs, considering the entire downstream industry. In North America, the market continued to grow and the expectation for the year is very positive considering the deployment of new measures by the current Trump administration, as I said before, and this will increase in consumption. I would also like to emphasize our joint venture in Colombia due -- and also the divestment adding up to BRL 421 million this year and to BRL 441 million.

To conclude, I would like to say that for 2017, we will focus on generating improving productivity and improving our operating performance and financial performance and also we will continue to focus on the most profitable operation.

I would now be available to take your questions. Thank you very much.

(Operator Instructions) Our first question comes from Mr. Ivano from Crédit Suisse.

I would like to start with BD Brazil and the outlook for the year. You have a significant margin in the first quarter and I just want to understand whether you can make further improvements and what is your outlook in terms of volumes and prices? And whether we should be able to see some price increases coming into the results for the second quarter? And also, if you can talk a little bit about parity. Now referring to North America, I think that U.S. is in a different momentum when compared to Brazil. Could you please comment on the challenges and what should we expect throughout the year? You said that in this current Trump administration, you anticipate a positive outlook, but even you have antitrust coming in, whether that would impact their consumption? And what is your expectation vis-à-vis volumes throughout the year? What do you -- how you see the increases in pricing and metal spreads? And one more thing, when I look at production in sales in the first quarter, you had significant increase of [35%] in your sales volume. So -- and then minus 3%, so I want you to comment on that, please, if you can.

Ivano, this is Harley. Let me refer to Brazil. In terms of pricing, we do not make any comments on that because it also -- it depends on parity, volatility and the appreciation or depreciation of the dollar. Very recently, the premium was very low, close to 0. That's why we have to keep a close look at that. In terms of volumes and higher production vis-à-vis delivery, first is, in a way, had to do with our inventory adjustments. And therefore, production had a mismatch. And then we have to work harder on readjusting our inventory, which is also due to seasonality effects throughout the year. This should be mitigated.

It's André. Speaking about the U.S., the U.S. market -- I mean, demand remains strong in the nonresidential construction area, there has been a recovery in the automotive area. We see good figures and we have record numbers and we will continue to remain as such. So our challenge refers to significant volumes of imported goods and also competition coming from domestic producers are the major challenge in the western Canada and also Mexico has to do with reviewing margins. We have a slight recovery from the fourth quarter to the first quarter and we expect to continue that trend throughout the year with some rebound coming from metal spread. We don't know precisely when that will happen but we anticipate some marginal recovery throughout the year. And once again, there's a volume but there is a very serious competition coming from domestic producers. There is an incident and things that happened, but we never know what the final decision will be. But once again, the outlook on the demand side is very good.

I would just like to go back to the previous point. Can you quantify what kind of volume increases you can anticipate year-on-year? And whether you can say anything about the drop in steel demand?

We would rather not give you this market guidance. We've been closely monitoring all of the KPIs. It's a moment of recovery like André said about North America. The outlook is quite positive in Brazil. In terms of margin recovery, we have to work hard to try to improve the performance. But in terms of volume, it's difficult to tell you anything about that.

Our next question comes from Thiago Lofiego of Bradesco BBI.

André, can you comment on your divestments? You talked about a target of BRL 1.5 billion between this year and next. So you still have the same target? Could we probably expect further divestments or beyond that figure and in what region could we take (inaudible)? And about ICMS, in case you win that case and the court favors you, that amount that is in an escrow account, would that be totally reverted to your cash and will that reduce your net debt automatically? Or is there any other accounting measure which is associated to that?

This is André. Our strategy to optimize assets. Here today, we had a lot of results. We had a joint venture. We don't have any specific figure, Thiago. We are working in several business and in several different alternatives as we've been mentioning in the past 2 years. And whenever something happens, we make the announcement. So we would rather not announce anything very specific. I can still tell you that we are -- we have some negotiations underway which could become a joint venture, a partial sale or a total sale as we have been telling you throughout the quarter. So what is important to know is that we are constantly seeking for further asset optimization in any better process.

This is Harley. To answer the second part of your question related to the ICMS pay, we are very cautious in terms of any part of any possible outcome of the pay. But considering where hypothesis and if indeed the court favors us and the modulation allows us to have access to that cash, the cash will return to the company and we will have it in our messaging. Therefore, it's not considered in the calculations yet.

Our next question comes from Leonardo Correa from BTG Pactual.

My first question refers to imports. We've seen some pressure in the return of import. So when we look at the monthly evolution in the past month, I would just like to want your expectation for months. I know that the pressure is not as high as it is flat. But what are you seeing amongst other distributors and competition from imported steel in Brazil? The second question refers to CapEx. And Harley, maybe you can help me with that. When we look at the 1.3 billion current level, I think, the market is currently expecting especially when you look at the depreciation level of the dollar, which is about BRL 2.5 billion, we are -- I mean, the market is questioning the sustainability of such low CapEx. I know that your operating level is very reduced. Other players in the industry held a different level of CapEx, more distant from depreciation than you. So maybe you can help us understand, for how long you can run with such suppressed levels of CapEx? And about metal spreads, we see some movements of price increases in the U.S. and what about your metal spread in the U.S. in that part of the world?

This is André. Speaking about import, long more specifically, we have to be careful because there are also rails in that figure. But if you remove that, the number changes. In our product line, we have an experienced growth, it's been stable in the past month. And the reason is very simple, that's because the Brazilian market looking at prices domestically, compared to prices abroad, the cost of import and selling here is not very attractive. Our run-of-the-mill is based on the growth of internal demand so that we can optimize the operation. So import is not our major concern because, here, it's low and also due to domestic prices, there is not much possibility to those credit that exports to Brazil.

This is Harley. Now to answer your question about CapEx and depreciation, we have been very careful to maintain our growth at a level where we run no risk in our operation. We are always working to maintain our CapEx and we're being very careful and very attentive. A good level, on average, in our operations and also considering that part of that CapEx today relates to investment in equipment that also -- I mean, maintenance is not proportional to the level of investment, therefore, we are very comfortable that in the few years' time, we will maintain investments at these levels, 1.3 -- like BRL 1.3 billion. So this is what we expect now for the year 2017.

Our next question is from Thiago Ojea from Citibank.

First of all, I would like to ask Harley something about working capital. We just saw an increase in working capital in inventory adjustments and replenishment. What is your idea about working capital in the next quarters of the year? And the second question refers to import. André just said that import in the line of products are still okay. But has -- from your customers, any increase in imports out where final products that have compromised, I mean, do you feel that your customer is preferring more that's why there should be -- it should impact demand in Brazil?

Thiago, this is Harley. Referring to working capital, this effect on the first quarter for us is very normal and seasonal. We have made readjustment in our inventory and throughout the year, the numbers or the situation should be normalized. But the trend in the last few years, in the last quarters has always been that of readjusting our levels of working capital to be more in line with our activities that's why we've been able to maintain our cash conversion cycle between 70 and 85 days and the inventory and the trend is to work with working capital below 80 days. This is our intent. This is not our guidance. So our intent is to migrate towards these levels. Throughout the year, once again, we should reverse this trend from the first quarter. But that should occur probably in the second half of the year. I know there was a reversion on the working capital in the second half of the year.

Thiago, I will talk again about import and you asked about what our customers saw. But there may be something in infrastructure and probably machinery that we haven't noticed anything unusual when compared to the last few months. It's a major challenge and the entire industry has to do with the rebound in demand, the long's market which has seen better years, I mean, around 9.5 million and 10 million tonnes is now around 6 million and 6.5 million. So this is the major problem and we did see good opportunities for recovery for most particular this will occur in the second half of the year and in 2018.

Next question, from Bruno Giardino from Santander.

The first question relates to costs, particularly in the Brazil BD, so what do you expect in terms of cost pressure, particularly from coal? And SG&A now, I saw significant reduction in the first quarter when compared to the first quarter of the year before. Do you see that you still have further gains in that line further on? Or whether -- what should we expect from the company from now on?

Bruno, this is Harley. Talking about coal, our coal purchases have been scaled amongst different contracts that's why we see that volatility is in a short term for coal. Coal represents about 80%, but the impact of this recent increase in coal was very much offset because of our long-term contracts that can mitigate that effect. There is an impact but, I would say that the most relevant impact comes from our costs -- Brazil costs as a whole. So second aspect of your question related to SG&A, this is an area where we've been focusing for quite some time and we are reaching levels that can be maintained throughout time, the trends that we see now should lead us to maintain further stability as we saw some numbers on a year-on-year comparison.

Next question from Marcos Assumpção from Itaú BBA.

My first question is about the rebar business. Could you elaborate on how do you see the possibility of new entrants to this business today? And also the recent attempts to increase prices while where others haven't been successful enough. The second question is whether you could talk about the performance of iron ore in the quarter and how much that impacted the Brazil business?

Marcos, this is André. About rebars, we do not have access to the costs or how things work because the new entrants are still closely held companies and they don't publish their results. What we've seen is that in terms of volume and market trend and production, is that many of them are increasing their volumes currently. And while the new entrants are already here to stay, so the market is still trying to find ways to work out its demand. But they already occupied an important phase in this universe, and I think the trend going forward is that this will be sustained in terms of the rebound margin. Once again, we'll just wait for a rebound in demand. And once that happens, it will change the dynamic not only for rebars but for other products as well but mainly rebars. But this is one of the areas that is struggling the most because it had to do with specific construction industry where rebar is important.

Marcos, this is Harley. About iron ore, we do not separate or follow the results of iron ore because we have separate costs line. The volume of our sales go to our own units and then it's about 70% to 75% that goes to our own units. This is important that we have to acquire material at an adequate cost. We are not separating the results because the result is already incorporated in the Brazil BD. A great part of that iron ore is the inventory in our domestic operation.

Our next question, in English, comes from Carlos De Alba from Morgan Stanley.

My first question has to do with the recovery in Brazil. Have you seen any tangible evidence of demand is picking up or will improve in the second half of the year? We're already in early May. And also, what end market did you say will recover first in Brazil, in the local market? And then the second question is similarly with North America, what is your outlook for volumes? Could you give us some numbers guidance, at least qualitative guidance in terms of volumes and EBITDA in North America, which continues to be the lowest in terms of EBITDA generation or EBITDA margin rather, in -- across the portfolio?

Our first question was about Brazil's recovery, whether we've seen any concrete signs of recovery or what is the outlook of a rebound in demand in Brazil. But signs over the few weeks, we've seen one-off signs here and there but once again, our idea is that there should be a stronger rebound in the second half of the year and mainly in 2018. So considering some important initiatives we've seen like the reforms and the labor outsourcing, there has been drop in interest rates. There is also the release of the (inaudible) pay of BRL 34 million. We see a private and public partnership. We recently saw that in 4 airports. So we hear some good and positive news here and there. But it takes some time until this has any impact in the steel consumption. That's why we anticipate improvement in the second half of the year and in 2018. And also, the agro business in Brazil is doing well. So that's not a major segment to our Gerdau results but once agro business is doing well, there is an increase in wealth and we're hoping that it's good for us. We already saw some improvement in the numbers. The forecast is about 25% of rebound in the industry in general, part export and part domestically. And the most difficult segment is that of civil construction, and that industry takes longer to recover. But I think that probably it will start recovering later this year and in early 2018. This is the outlook we anticipate, a gradual recovery occurring in the second half of the year and early next year.

To answer Mr. De Alba's other part of the question, he talks about the market in the U.S. In that regard, and I think that we go back to something that André talked is about that the forecast or expectation for 2017 has to do with the growth in demand, especially in nonresidential construction and industrial area. For some of the measures that have been implemented by the current administration like tax reductions, investment and infrastructure, which is something that we know it takes some time until we see any impact. But all of these measures can certainly impact the U.S. demand. Our own operation is going to a market share recovery and we saw improvement in volumes because of the market share that we work on. And the forecast for the U.S. in 2017, for the entire country, anticipates an average steel consumption of about 3% growth. There has been some recovery of market share in other parts that's why we may see some improvements in our own performance. But it should be close to the market growth as a whole.

The next question, also in English, is from Roy Yackulic from Bank of America Merrill Lynch.

I noted that this quarter's free cash was negative driven by higher working capital. And in last year, in the fourth quarter, we saw positive free cash flow in the fourth quarter particularly because of working capital gains or reduced working capital. But now that we see perhaps the market share in Brazil and having turned in the U.S. and higher working capital, how do you expect that the balance going forward in terms of the magnitude of increase in working capital, how this will impact free cash flow? And also I noted that in the first quarter, you didn't pay any dividend. I think, you have to balance increasing working capital. And can you pay dividends to maintain positive free cash flow and deleverage?

This question has to do with cash generation in the quarter and the forecast for the year, especially related to working capital. In terms of increase in working capital and the negative effect on cash generation in the quarter had more to do with inventory readjustments due to seasonal effects rather than increasing volume for demand recovery and this is also -- this also answers part of your question. We considered that this seasonality will be reverted throughout the year due to -- our history on that indicator and cash generation will be positive this year as well. On policy vis-à-vis dividends last year, certainly had a lot to do with our results and also in terms of cash adjustment. And that's why we did not pay dividend in this quarter. We're being very cautious. We have a positive result but we are deferring dividend payout for another later date once we have a final ruling from the Supreme Court with a reversal. Or at the end of that case, we should see changes in our working capital. But once again, due to seasonality, things we would view as they did in the past, looking at our history.

Can I just ask a further question on that? And that would be that in 2016, working capital was reduced about BRL 2.6 billion from 2015, are you saying that you can maintain this low level of working capital going forward? Or is it just that the market is going to recover so slow that it won't increase that fast?

The question is whether we can maintain this level of working capital with our market and recovery? In fact, the same things are proportional. If there is growing demand that will require a higher working capital, but as a consequence, we will also improve our cash generation coming from a better EBITDA. So I think this is the rationale. So as a consequence, if the situation is reversed, we will not generate income. The reduction in EBITDA we had in about 2 years were just to address working capital with a lower EBITDA generation. So we expect that once the recovery occurs, we will have the 2 indicators moving further. And we will work hard so that we will end up by having a positive free cash flow.

We now conclude the Q&A session on today's call. I would like to give the floor back to Mr. André Gerdau Johannpeter for his final remarks.

Thank you all very much for participating in this conference call. On my behalf, on behalf of Scardoelli, I would like to invite you to be with us again on August 9 for the result of the second quarter 2017. If you still have some questions remaining, please see our IR department to answer your question. Thank you, and have a good day.

The result conference call is now concluded, I would like to thank you very much for participating, and have a very good afternoon.