Gerdau SA (GGB) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to Gerdau's conference call to discuss the results related to the fourth 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. Gustavo Werneck, Director, President and CEO of the company; and Harley Scardoelli, Vice President and CFO.

With no further ado, I would like to give the floor to Mr. Gustavo Werneck. You may proceed, sir.

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Good morning, and thank you all very much, market analysts and investors, for accepting the invitation to participate in our conference call on the results for 2017. Initially, I would like to apologize because there was a problem in our building PABX and we are connecting via cell phone, so I hope you are listening well.

I just want to start by saying that it's a pleasure to me to be here with you in my first call as Gerdau's CEO. We will start by commenting on some main highlights of Gerdau's transformation trajectory and also the outlook for the market for where we operate. And right after that, we will talk a little bit about our investment forecast for 2018.

Next, Scardoelli, who is right next to me, will elaborate on Gerdau's financial highlights. And at the end, we will be totally available to answer your questions.

So to begin with, I would like to talk about the current momentum of Gerdau. We are going through a moment of profound transformation, and this has been very good for the company. Our business culture changed and it continues to change for the better. And that means that we are empowering people, reducing hierarchies and working in a more agile and simple manner. And I do particularly believe in that very much. Also, we are encouraging people to present innovations in all fields and areas of the company, which oftentimes represent unprecedented initiatives in our markets.

As many of you know, and I had the opportunity to talk to some of you when I was leading the Gerdau operation in Brazil in the last few years, we put a lot of efforts into digitalizing all of them. And now our next step aims at accelerating Gerdau's digital transformation to better serve those customers and also to help them grow.

Throughout our history of 117 years, recently celebrated this last January, the relationship with our customers has always been the backbone of our growth and longevity and we have several initiatives in place to give our customers the most unique experience whenever they buy a Gerdau product. And of course, we do that through the use of artificial intelligence, IoT, state-of-the-art digital relationship portal and more. Therefore, we are working hard to consolidate our position as one of the most innovative companies in the global steel industry. Innovation, for instance, has also helped us to be globally competitive in cost and productivity amongst other initiatives. And the results from all of these efforts are already starting to show very clearly in the company's financial figures. A clear example that certainly illustrates this point is the reduction of almost BRL 600 million in SG&A in 2017.

Also, we conducted a very broad revaluation of our assets that resulted in divestments of BRL 6.3 billion throughout the last 4 years. At the moment, this initiative is in its final phase, and it has allowed the company to steer its efforts towards accessing greater return potential in the steel industry. To that end, I would like to take this opportunity to explain the rationale behind our divestment strategy in the United States as we announced the sale of units in early 2018. First of all, I would like to tell you that we will continue to have very strong presence in the region and the U.S. will remain a priority market for Gerdau, and so is Brazil. The sale of rebar and [wire rod] producing [mills will allow us to focus on markets with better profitable margins, such as [structural bars], structural profile and also special steel. Moreover, we announced the sale of 2 of our hydroelectric plants in Brazil, in line with the strategy that I just mentioned to you.

Now looking at our performance in 2017, we can say that our management efforts coupled with the improvement of the market allowed for the evolution of our results in the year. I would like to reinstate that in the nonrecurring items, noncash effect Gerdau has a net income and adjusted EBITDA. Net sales of BRL 37 billion in the year was down by just 2% due to lower shipments. Adjusted EBITDA. And that is net of nonrecurring items was up 7%, reaching BRL 4.3 billion. And adjusted net income went from BRL 91 million in 2016 to BRL 522 million last year.

I would also like to highlight the improvement in the company's indebtedness indicators. In 2017, our net debt over EBITDA ratio was 2.98x. At the end of 2016, I recall that this ratio was 3.5x.

Now let's move to the following slide where I will elaborate on the market outlook. We are seeing a moment of positive outlook in the markets where we operate. So World Steel Association, for instance, foreseeing 1.6% growth in steel demand worldwide in 2018, mainly coming from developing countries, except for China, whose levels should still remain stable.

In terms of Brazil, we believe that the economy will continue to revolve positively in 2018, particularly in the industry segment and at a more gradual pace with the construction industry. According to [Aco Brasil], domestic demand for steel is expected to grow 4% in 2018. And also I would like to emphasize, and as I said in previous occasions, that we are absolutely ready to cater to the potential expansion of Brazilian [demand], but until then, we will continue to export part of our production. However, there is a caveat that we have also mentioned in the previous quarters because in order to be competitive in the international market, it is crucial that (inaudible) tax rate is raised from the current 2% to 5%. (inaudible) is the demand from the entire downstream industry, and has been debated on a continuous basis right into the (inaudible) I recall, is the tax mechanism that allows for divestitution of nonrecoverable taxes already paid in previous phases of the productive change.

As for North America, market steadied to a 3.7% growth in long steel consumption in the United States in 2018, considering all the main consumer segments. In the case of the U.S., I'm referring to nonresidential construction, the industry and the oil and gas segments. At the same time, we are still waiting for the outcome of Section 232 and the government plan to boost infrastructure. In January, the U.S. Department of Commerce submitted its recommendation about Section 232 to President Trump, who has 90 days to present his decision on the matter. Infrastructure funding is another topic that merits our close attention as the government recently showed signs that it plans to address this topic. Our estimate is that the steel market in North America throughout 2018 will continue to use less than 70% of the installed capacity. And as a consequence, the margins will be [pressured]. The imports, on the other hand, should be lower than those from 2017 due to higher steel prices in the international markets, and therefore, that remains a point of concern. In relation to special steel, the Brazilian automotive industry should post a significant growth in sales to the domestic and also foreign markets.

If market expectations materialize, the sector will go back to the level of 3 million units in Brazil, and it is worth reminding you that this hasn't happened since 2014. Demand in India continues to grow. In relation to the automotive market in the U.S., the forecast points to a strong demand as well.

Now looking at the other countries in South America, the outlook points to economic growth in the region. Notably in Peru, Colombia and Argentina -- and in Argentina, we inaugurated a melt shop in the second half of 2017.

Now moving to Slide 4, next slide. I would like to comment on the investments we did in 2017 and for plans for 2018. In 2017, our CapEx investment in PP&E totaled BRL 873 million. From that total, 40% was invested in Brazil; 33% went to North America; 13% went to special steels, and special steel (inaudible) includes (inaudible) in Brazil, in the U.S. and India; and 14%, the remaining 14% went to the other countries in South America. For 2018, we anticipate a CapEx spending of BRL 1.2 billion, focusing on performance improvements and maintenance of our operations. This increase in CapEx is due to a shift of part of the investment of 2017 to 2018 that was added to the amount foreseen for the year.

I now conclude this part of the presentation and give the floor to Scardoelli, and I will be back later on to talk about our challenges for 2018.

Thank you, Gustavo, and good afternoon. So let's talk now about the results and the performance of Gerdau in the fourth quarter of 2017.

In consolidated terms, adjusted EBITDA of Gerdau was BRL 1.2 billion in the fourth quarter of 2017. If you look at the chart on the upper part of the slide, you will see the [good evolution] of the adjusted EBITDA during the year 2017, when the margin went from 8.3% in Q4 2016, to 12% in Q4 '17. This [evolution] is mainly due to the improved performance of Brazil, [BD], which posted higher net sales [systems] surpassing cost increases during the period.

These results demonstrate our efforts to improve the margin and significant reductions in SG&A expenses both in the quarter vis-à-vis Q4 '16, as well as in the year of 2017. Also I would like to say that in all of our operations posted a positive evolution year-on-year on the fourth quarter, both in EBITDA absolute terms and also in terms of EBITDA margin.

Now moving to our next slide. And as a continuation of the previous slide, the bridge chart shows the performance of EBITDA in the fourth quarter 2016 vis-à-vis Q4 '17, and the increase in net sales [per tonne] which was higher than the growth of cost per tonne. In addition, the reduction of BRL 137 million in expenses with SG&A also contributed to EBITDA growth, a reflection of our rationalization efforts in all business operations throughout 2017. As for net sales, these expenses represented 6.2% in Q4 2016 and went down to 4.1% in Q4 2017. Now looking at the bridge chart in the lower part of this slide, and also, checking again that we are looking at adjusted numbers with no cash effect -- net of cash effect and nonrecurring effect. We see that we went from a negative adjusted result of BRL 203 million in Q4 2016 to an adjusted net income of BRL 262 million, which was positive in Q4 of 2017 due to an EBITDA improvement and the reduction of financial expenses. And this means an increase of more than BRL 400 million when we run a quarter-on-quarter comparison.

Now as for dividends in the fourth quarter 2017, we paid out dividend of BRL 51 million to shareholders of Gerdau [S. A.] the equivalent to $0.23 per share. These proceeds will be paid on March 21 based on the closing positions of March 9. During the year 2017 as a whole, Gerdau S.A. allocated BRL 136.5 million, $0.08 per share to pay out dividends from the retained earnings results. Likewise, in 2017, Metallurgica Gerdau S.A. allocated BRL 19.5 million, the equivalent of $0.02 per share to pay out dividends also from the recent earnings results, but also reflecting an improvement in the [entire value of the holding] throughout the year of 2017.

Moving on to Slide 9, next slide, we talk about our debt and liquidity position. Gross debt on December 31, 2017, was BRL 15.5 billion, down by 11.6% in relation to September 2017, mainly due to the amortization of 2017 bond that matured in October. I also highlight that on a year-on-year comparison, the reduction of gross debt was 20% going from BRL 20.6 billion in December 2016, to BRL 16.5 billion at the end of 2017, BRL 4.1 billion in reduction of our gross debt. The average credit cost of the debt was 6.4% a year. On December 31, 2017, 12% of growth debt were short term. The reduction in the net debt over EBITDA ratio was at 2.98x in December 2017, and that, when compared to 3.5x at the end of the previous year, is mainly a consequence of the amortization of the 2017 bond, as well as higher cash conversion in the fourth quarter. The effect of this debt reduction was very important, and this is clearly seen, noticed in the reduction of the net financial debt of the company from BRL 1,758 billion in 2016 to BRL 1,449 billion during 2017, a BRL 166 million reduction or 15% of reduction of bad debt. The average time of the debt is 5.3 years in September of 2017, went to 6.7 on December 31, 2017, due to the liability-managed transaction carried out by the company in October. We bought back USD 552 million of 2021 bonds and USD 35 million of 2020 bonds. These are a notion of amount of its issuance. And to do that, we issued USD 650 million in new debt securities taking advantage of a very attractive market window. And with maturity in 2027 and a coupon of BRL 4,875. It's worth mentioning that in year-to-date, the credit rating agency Moody's in -- on January, issued a report upgrading Gerdau's rating from (inaudible) with a stable outlook. On the same day, the credit rating agency Standard & Poor's issued a report reaffirming Gerdau's investment grade of cyclical downgrading of Brazil's (inaudible) rating to (inaudible) previous year. This reflects our sound commitment to maintain a financial policy focusing on improving our capital structure, reducing debt and leverage.

Now moving to Slide 10, the last slide on my presentation. We will now talk about the free cash flow of the company. As we can see on the chart in the upper part of the slide, in the last 12 months, the company generated positive free cash flow of BRL 1.5 billion. Greater CapEx discipline or lower index in our efforts to manage working capital were important aspects that allowed us to reach these results. In 2013, the company had always posted positive free cash flow year-on-year. And the fourth quarter of 2017, now looking at the bridge chart in the lower part of the slide, EBITDA was more than enough to pay our CapEx, [commissions,] income tax and interest rate in addition to the freeing up of working capital amounting to BRL 430 million. As a result, free cash flow for this quarter was positive by BRL 1 billion, twice the amount posted in the third quarter of the same year.

Thank you very much, and I'll give the floor to Gustavo for his final remarks.

Thank you, Scardoelli. And to conclude, I would like to comment -- and before we get into the Q&A session, I would like to talk about our main challenges for 2018. We continue to carry out Gerdau's digital transformation focusing on our customers. We firmly believe in our capacity to innovate and also to position Gerdau as one of the most innovative companies in the industry in the world. At the same time, we will continue to pursue the reduction of our [debt] position. Moreover, free cash flow generation remains as one of our top priorities as demonstrated in previous years. And as I said before, we will try to improve the profitability of our operations, which has regardless of the external factors. I see that we still have room for further improvement, mainly because at Gerdau, we have a phenomenal team willing to overcome any challenge. Therefore, we are building a more profitable Gerdau with greater potential to generate returns to our shareholders.

And with that, I conclude my presentation. But before we open the floor for questions, I would like to reinstate my thanks to our customers, employees, shareholders and where the communities where we operate. Thank you very much for the support you gave me throughout 2017.

And now with no further ado, we will go to the Q&A session. Scardoelli and myself, we will be pleased to answer any of your questions.

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

Gustavo, in your initial remarks, you talked about the outlook of the industry and 4% growth that is forecasted by Aco Brasil for 2018. Could you please comment on the utilization level you have today in Brazil? And what kind of growth is expected for Gerdau? Whether it is beyond the guidance presented by Aco Brasil? And what will be normalized parity we see today? And looking at the results in the fourth quarter, I think that indeed Brazil had a very significant margin, it's a high margin, and we still have the increases prices in volume. We still believe that we will have a normalized EBITDA margin for Brazil about 20%. So the second point is about North America. I would like you to comment on the outlook for price and volume for 2018 with or without Section 232 and after the conclusion of the sale of your assets. What kind of margin expansion you think you would have? And still speaking about Brazil could you also tell us something about the model (inaudible) for Brazil?

Thank you for your question. I will give you a more conceptual answer and then I'll give the floor to Scardoelli, who will give you the figures. So at the end of 2017, our utilization capacity for steel in Brazil was around 67%. We therefore believe that the capacity that will grow throughout 2018 because we noted a growth in demand coming from the industry and the automotive industry. So we are resuming the operation of one of our special melt shops, one in (inaudible) and we are now concluding the preparation of that melt shop in the next few days, where we should see producing steel again. And that now in relation to specifical construction, we also noticed a recovery even though it's a more gradual recovery once we compare with a few of the segments that I mentioned. Now in relation to our clarity, in the last few months, we tried to recover some of those cost pressures that we had here in terms of But more particularly in rebar, we still have a negative parity.

Now in terms of the EBITDA margin in Brazil, it is important to recall that between 35% to 40% of our production in Brazil is exported. So therefore, this general margin for Brazil that you mentioned, part of it comes from the domestic market and the other significant part comes from the export margins. International prices you should recall, continue to stay at the mid-level, export and regular or at current price levels help us to have an overall higher EBITDA margin in Brazil. Also I would like to highlight some important aspects to that, not only related to the Brazil BD, but also the other but it was more significant in Brazil and that is profound reduction in our SG&A expenses. Gerdau as a whole, at Gerdau, we were able to close the reduction of BRL 600 billion in these expenses and when we compare to the year 2017. Also all of these expense reduction are based on a very stringent methodology that allows us to continue posting further reduction. So Gerdau's operation [sticking] more particularly about Brazil with 0 or 0-based budget with methodology does not use as a base the expenses from the year before because it usually discusses in detail all of the expenses considering market reality. And we also deploy digital transformation in Brazil with expenses, we use digital robots and other state-of-the-art technologies. This reduction in SG&A expenses had a significant impact on our margin. Now going to North America, regardless of any speculation regarding the final decision of credit in terms regarding Section 232, we are not comfortable with the margin. But throughout the last few months, we've been taking measure to increase margins regardless of 232. Our decision to value that in the U.S., aimed at reduction in company to leverage, but also we aimed at increasing margin. We understand that with this change in management and more recently, I recall, that we announced the disengagement of our Manager in the U.S., but trying to look for more advantages margins. Now I'll give the floor to Scardoelli, who can probably give some more color

Good afternoon. In fact, Gustavo already talked about all of the main concept. I just have 2 comments. One, regarding results for Brazil. When we look at the numbers from our recent, we see an evolution from the third to the fourth quarter 2017. So despite the seasonal effect, when it comes to shipments to the domestic market, there were also other increases. And there 2 things. When we look at the international expenses, a positive impact played an important contribution for our business. There is obviously it comes in keeping with what Gustavo said because we still see some further discount in our domestic prices when compared to international prices in (inaudible) And to give some color to our very strong effort to reduce SG&A expenses, I will take some numbers. In [2008] in the peak of the market, our shipments back then were about BRL 42 billion. And today, it is BRL 37 billion. But our SG&A expenses, which at year-end was at BRL 1.7 billion, it was BRL 2.7 billion. So there was a BRL 1 billion reduction during the period. This is a very significant. So all-in-all, these expenses at kind of 4.5%, but in the quarter, were 4.1% of our net sales. So for this year an effort should not be disregarded.

I just have a few more questions. You said today that you have a negative parity, I just want to know whether you could quantify where do you think -- when do you think this parity would be more normalized at about 10%? And when you talk about margins sold in the domestic market and exported from Brazil BD, what kind you will expect an allocation from ME to MI? And I know that you cannot anticipate what will happen with the final decision regarding the 232, but regardless of that what will be the -- with the completion of the sale of your asset, what kind of margin expansion should we expect to see?

When we start drawing projections about how far this parity can go, we have to look at the commercial policy of the company, because usually there aren't many too details about that, clarity will probably continue to evolve to make up for possible cost increases. But when we look at the company's commercial policies, I would like to just comment on how this parity could evolve in the assortment. About MI and ME, when there was a drop in demand a few years back a great part of our production was steered to exports. Therefore, we are ready to transform the production due to the external market, the foreign market and to the domestic market. We can do that very quickly, and I mentioned the example of our Melt shop in (inaudible) During the most typical months experienced in the past year, we interrupted the production of that melt shop. And now we see a significant recovery of the automotive industry. And therefore, we are starting up another melt shop in the next few days. We will communicate the starting of the melt shop. So therefore, I can say that we are ready to cater to any changes in the demand coming from the domestic market. Now regarding 232 in the U.S., I will turn it to Scardoelli.

It's still too soon to tell (inaudible) about the FX. But what we can say is that the effect with be positive for Gerdau, our production is there. And that should bring about positive effect. So currently it's very difficult to quantify. And the same thing goes when it comes to margin changes. I mean pro forma after the sale of our asset, it's still too soon to give you any figure. But certainly these products were sold and together with wire (inaudible) which was sold in Vermont, these products have lower margins and this should bring about a positive effect. So it's too soon to give you any figures about that.

Next question is from Thiago Lofiego from Bradesco

I have 2 questions. If you could elaborate a bit more on the cost pressure, particularly the cost of [scrap] And what should be expected in the next quarter both in the U.S. and Brazil? We've seen an increase in scrap prices in Brazil and U.S. And so I just want to know whether this should be a matter of concern? Or whether you are just transferring that through prices? Now going back to the debate on the domestic market, when I looked at your figures, in the fourth quarter, you had a drop in (inaudible) which was a bit higher than what it was shown in 15% against 10%. I just want to understand the reason for this performance? And I think it's probably due to different mix between the companies. So maybe you could shed some additional light to that subject. And what can you see today considering a rebound coming from infrastructure industry, missionary, civil construction? And where do you see some green shoots in what areas are not yet recovering?

This is Gustavo. In terms of [scrap] in the world and in Brazil, we know that there is no direct correlation because there are several factors that do not allow us to draw a direct comparison between the behavior in scrap prices and market and scrap prices in Brazil. All we know is that scrap in Brazil follows a very peculiar market dynamics. (inaudible) we have to factor in the uniqueness of our industrial plant. We can quickly operate a mix between scrap and pig iron in the very specific case of Gerdau, we have an access of that allows us to produce long steel through our integrated mills. And another factor that we noticed is growth in scrap generation in Brazil, as a result of the economic rebound that began last year. So therefore, I would say that the cost behavior that could be expected in the next few months is a model of that cannot be fully followed. And considering Gerdau's characteristics, we can have a very good cost equation regardless of the recent moment involving scrap in Brazil. Now in terms of domestic market, and you talked about the fourth quarter of last year, there is no structural reason that led us to reduce our stake in (inaudible). There is nothing in our radar that tells us that this participation in the few months, we will change somehow, quite the contrary. In terms of civil construction, we are already seeing some signs of recovery even though there is a gradual -- with the gradual recovery that it continuously moving forward. In Sao Paulo, for instance, when we look at indicators such as new launches and new projects we see that this recovery is actually happening. But larger constructure projects, about this topic, I think it will take a few more months until we can see a more accentuated recovery in the infrastructure market in Brazil.

Can you say a few words about [electrodes?] And where do you see impact that we would anticipate for Gerdau's in Brazil? We know the [price] contract was up and your product exposure is about 30%. I mean, we chose to have that exposure. Could you please elaborate a little bit more on that?

Before Gustavo answer on electrodes, I would like to still say something about scrap. We have a strategy of Gerdau. We buy scrap in many areas. We have our own inventory and we buy all over the country. So scrap is under more pressure in the central part of the [Dubai.] If we buy from the South and North, and we buy pig iron as well in this helps us to use pig iron as an alternative to. So we have a lot of our alternatives in this part of our business in Brazil, and that continues to be solid. So even though you'll see short-term pressure, we can factor that in. I always like to remind people that all-in-all, increase for scrap demand is only a reason to exist because we will have a better margins when we see that the market is up. We have more scrap that's why we have to look at the whole picture. You asked about electrodes in this case our supply has been ensured by a strategy of different vendors. We have many contracts with them. So in terms of the supply of electrodes with Gerdau plant, that's not a concern.

Our next question is from Leonardo Correa from BTG Pactual.

My first question is addressed to Werneck. You clearly allocated great part of your time in your introductory remarks talking about the digital transformation that Gerdau is deploying. I would just like to get a better understanding about value generation? So if we think that this digital transformation would bring about premium, regarding pricing or whether this should bring about market share gains. If that also a possibility of having cost reductions, I just want to bit more details? Because you focused a lot on that subject, and we know from our past discussion that this has been a recurring search, I mean you have been focusing in the area for quite some time. So I would just like to get some more detail on that subject? Well, now moving on to some other questions. I just want some help related to export margins, all of the analysts that follow Gerdau in Brazil in the last 2 years, we know that exports hasn't been very profitable. And at times, it was even negative. So what about this gap into the last 6 months. Can you give us some order of magnitude, whether it's half or third? I mean we know that the export market has been a bit rougher, and it had an important contribution in the last quarter because the international landscape helped? And in terms of long steel, there is now a merger between (inaudible) So how do you see competition? And what about the price formation in this more total scenario? And I also heard some arguments when you talked to the press, when you referred to Gerdau's tax rate in the U.S. Could you elaborate a bit more on that? What is the reduction angle? Or whether you could share with us anything related to tax benefit considering trends in new tax reform?

Let me talk a little bit about the digital transformation and right after that, I will give the floor to Mr. Scardoelli, because he talked about the margin of the domestic export market in Brazil and then he also talked about consolidation and the tax reform in the U.S. In terms of the digital transformation, as you recall, we started this journey a few years back. At first, we were naïve. We just wanted to verify whether indeed digital transformation could bring about good financial results for the company. So following state-of-the-art methodologies for digital transformation, we talked about a few things the market called MDC. So we started by testing the technology, new mindset and new ways of developing projects in the company. And we were able to clearly see important gains that could be obtained through a digital transformation. In the first 2 years, we focused the digital transformation in-house. We put in place several initiatives in different areas of the company in order to capture a good potential because through the traditional tools, these improvements were not being captured. So when we see a reduction of BRL 600 million in SG&A, it would be very difficult to capture this amount in a short period of time if we were not (inaudible) that digital transformation. And whenever we talk about digital transformation, we are talking not only about technology, but we are talking about a mindset, cultural transformation, and we are talking about even new approached with traditional issues. So during my remarks, if you consider a conference company as ours, and when we look at all of the number of documented invoices are traded every day in our company, we can do a process like that with a lot more efficiency in terms of speed and agility, and we already incorporated this technology mindset in our plans. We applied the technology and digital concepts in our maintenance. There is a very robust contract with GE, GE together with Gerdau sold more than 40,000 sensors in the plants in Brazil. So today, online we can connect all of the data and then we have a digital map of what happens. We can bring some forecast of possible failure in one of the equipment and we can advance. So we avoid failure a 6 month failure. In several quarters, we were able to notice important improvement. Year-on-year, Gerdau has tried to deploy state-of-the-art technology and management tools, but there is a point when that's not enough to capture all of the results. Therefore, I can say that in 2016 and 2017, we were able to capture important gains. So as of this year, we want to promote a digital transformation in other areas with our customers so that our customers can have a unique experience and can also grow. So therefore, we want to promote the digital transformation with our customers. And it's important that we can share these gains with our customers. Therefore, in general, this has been our digital journey. And then I'll give the floor to Scardoelli, who will then give you figures about margins, consolidation and also tell you a little bit more about cost in the U.S.

Now speaking about the other points of your question, you talked about export margins. As you said, this is very volatile number. You said, it certainly depends on the pricing environment abroad and there are moments that, that is very close to 0. So obviously at the end of the year, we had more positive international prices until this margin paves a contribution, but without mentioning any specific figures because (inaudible) disclose these figures, there is an assumption that, that is around half of our gross margin in domestic market. So this is an assumption that is not very far from the current moment. Once again, this reflects current position only reflecting what we saw in the past few months. When it comes to consolidation, usually we would rather not say anything because things are still underway there are still some remedies that have been recommended. So we do not let comment on the project certainly the knowledge that the Brazilian market is very fragmented and has been more fragmented lately. So this is positive and obviously, this is still a very fragmented and competitive market.

And finally, speaking about the tax reform in the U.S., we --whatever we are seeing is being together with what we hear from others like the announcement that the Trump administration is pointing out the fact that they want to put together in new proposal to fund infrastructure in the near future together with the tax reform. So there in the immediate long range, it's very positive to our operations in the U.S. We still have a good footprint in the U.S. and its tax reform aims at increasing competitiveness of the businesses in the U.S., which is our case. And so this should attract potential investment, and this has a very good growth effect on steel consumption. But it's difficult now to give you numbers. So we also see positive particularly when we consider coming from the U.S.

Next question is from Thiago Ojea from Citi.

I will try to just ask 2 questions. First question is on flat (inaudible) whether you could comment on the utilization level that you had in 2017 and more particularly on the heavy plate? And how do you see the evolution of that in 2018? And the second question relates to the M&A process, more particularly in the U.S., whether you still see possible opportunities? Or whether now you already have an asset base that is comfortable enough for the company? And also that whether the (inaudible) deal had any clear, due to the implementation of Section 232?

Thiago, this is Gustavo. I will -- Scardoelli and I will now answer this question. I'll start speaking about flats and then I'll give the floor to Harley to talk about M&A and opportunities in the U.S. In terms of flat sales, as a reminder, we have 2 rolling mills, flat rolling mills in Ouro Branco. These 2 together they sold last year 1.3 million tonnes, we produced and sold 1.3 million tonnes. Our (inaudible) hot rolling mills in October 2013 has now has capacity of 800,000 tonnes and our heavy plate rolling mill started up in July 2016. Therefore, a 1.5 years ago with an capacity of 1 million and 100,000 tonnes a year. More specifically, concerning rolling mill, I think, but we are very pleased with the performance of the rolling mill. We have a contract for technology transfer with JFE, which when they are a worldwide in the production of heavy plate. There is a learning curve of that rolling mill that is now been accelerated. Therefore, we were able to produce better sophistications of heavy plate and we have been successful in the approval of these products with our customers. I'm not going to break the production of rolling mill that together they produced hot rolled of 1.3 million tonnes last year. Now I'll give the floor to Scardoelli, he will tell you more about the U.S. and the opportunities in that we're seeing.

In terms of the U.S. and particularly regarding our assets in U.S. and Canada, we at a point in our portfolio that we consider to be very adequate. Adequate because from now on we will begin to see growth and performance improvements. In terms of our sale with SMC and Section 232, there is nothing there. 232 benefits the production of U.S. steel as a whole, not necessarily only rebar. Therefore, we have a very good exposure. So we will be well exposed to any benefit and any benefit is welcome. We produced rebars in the U.S. and Canada in mills, where we still have a good portfolio because these are mills that have a more [noble] exposure. So they may have some exposure in terms of rebar. Therefore, we didn't suffer any losses vis-à-vis potential benefit that could come from this decision.

Your next question from Caio Ribeiro from JPMorgan.

My first question is about the company's debt position. It should be an important reduction in 2018 with a possible several cash generation because all of the divestment that already announced may be to a level of 2x net debt over EBITDA ratio. I just want to understand what your priorities are looking forward? Whether you would increase the dividend payout? Or whether you have any other kind of capital benefit in mind to generate this potential. And secondly, one of the reason behind that BRL 1 billion reduction that you posted this quarter, you also posted an important reduction in working capital in the quarter. I just want to understand whether you see the working capital levels as comfortable enough looking forward?

Caio, this is Gustavo. First of all, in terms of indebtedness, there was a reduction mainly due to cash reduction, which continues to be positive and also comes from the proceeds from the divestment of our asset. From the end of the year until now, I think we announced something close to BRL 1 billion in asset sales. And these proceeds will enter our cash and this will starting to reduce our debt position. This also has an impact on dividend payout because when the money comes in and we don't know when that will happen, we will be paid and interest expenses will also benefit our free cash flow position, but our focus is certainly continue pursuing this reduction in net-debt-over-EBITDA ratio. Another aspect is that we are not thinking in terms of changing our dividend policy, because dividends should increase maybe in the 30% payout level. But with an improvement in our results, the dividend payout would also increase. Gustavo says that we are now beginning a new phase. Gustavo says that we are approaching the end of our divestment programs. And for now, it's just time to start thinking about new opportunities and the digital transformation will also require some additional capital that will generate profitability improvement and investment. Another point you mentioned, the second part of your question, I'm sorry, could you repeat it again?

Sure. In the working capital, there was a significant reduction in the quarter. I just want to know whether that is sustainable looking forward?

Yes. Working capital, in terms of (inaudible) I would say that we're very optimized. With SG&A, there is also always room to do more. Those 50-day time that if we just maintain the cycle these levels may be reducing just a little bit more, but our effort in working capital will be proportional to our business. We will always need cash as our business improves, if we increase our sales revenue. So 70 to 75 days that we have in the first 2 years, we will be able to maintain this and obviously, we will try to be always below that.

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

Just wanted to say again, is there any growth to further improve SG&A spend in the (inaudible) year with the changes in the management structure in that business unit and whereby the other business units? And second, how far or how close to concluding the investor program are you, given the recent announcement? (inaudible) So if you could comment on those 2 that will be useful. And then the guidance (inaudible) expectations in terms of consensus, the EBITDA for 2018. How do you see the evolution in the coming quarters of EBITDA and cash flow generation? Why aren't you be able to meet market expectations and to accelerate the reduction in net-debt-to-EBITDA, which has to (inaudible) come the like?

Let me repeat the other question. Firstly, about SG&A. We continue putting a lot of efforts into a further reduction. And the second question was about divestments, whether we are approaching the end of the divestment cycle. And this question is about [indiscernible] in terms of EBITDA. The first question on SG&A, well, let's assure that we will maintain a very strong focus. We also mentioned during our remarks that we reaching about 4% and net sales revenue. And the expenses and dropping expenses will go further once the shipment will continue to increase. So when shipments increase, we will be able to reduce that even further. So this is a constant focus of the company. All of the operations focusing on that reduction. In some instances, we are more aggressive than others. So certainly, we see a lot of room to promote further improvements in that regard. Now in terms of divestments, we already said that we are approaching the end of the divestment phase. I think what it still remains to be done is still something very marginal vis-à-vis what has already been announced. We talked about BRL 6.3 billion in proceeds in the last 4 years and almost BRL 2 billion were announced from the end of last year to now. And so we are approaching the end of this process. What remains is just a very marginal, because the bulk of it has been done. And the third prospect about the EBITDA consensus. We do not give our guidance, and we do not -- have a specific comments on market expectations. It's too soon in the year to say anything. And I think you noted from our remarks that at least last year and as we started the year with a more optimistic view. There are divestments the leverage position placed us in a very good position. The company is quicker more agile, and we all talked a little bit about that. So I would say that the market range in everything is within the possibilities. So we do not give any specific guidance about that.

(Operator Instructions) The next question is from Rodolfo De Angele with JPMorgan.

If you allow me 1 last question considering that you're giving us another chance. My question relates to the U.S. metal spreads, and I do apologize if you said something to that end. Could you please tell us how you see that today? And what was the evolution of metals spread vis-à-vis the fourth quarter?

This is Harley. We are not used to giving specific guidance but rest assured that this trend at this time of the year in the U.S. is that they are leaving winter and the climate will be a bit warmer, we'll find scrap more in the northern part of the continent. So there are more construction being done. So the tendency is for an improvement in metal spread. I cannot say anything else than that.

We now conclude the Q&A session. I would like to turn the floor back to Mr. Gustavo Werneck for any final remarks.

Well, I would like to thank all of you for participating in this call, and I would like to invite you to participate in our next conference call related to the first quarter of 2018, which will be on May 9. So on my behalf and on behalf of Harley Scardoelli, it was great pleasure to talk to you. I wish you a very good afternoon. See you later. Thank you.

Gerdau's conference call is now concluded. Thank you very much for participating and have a good afternoon. Thank you.