Gerdau S.A. Q4 FY2020 Earnings Call

Good afternoon, and welcome to Gerdau's conference call to discuss the results related to the fourth quarter of 2020. We would like to emphasize that any forward-looking statements that might be made during this conference call related to Gerdau's business outlook, projections and financial and operating goals are mere assumptions based on the management's expectations related to the future of the company. Even though Gerdau believes that its comments are based on reasonable assumptions, there is no guarantee that future events will not affect this evaluation. Here today are Mr. Gustavo Werneck, Director, President and CEO; and Harley Scardoelli, Executive Vice President and CFO. Now I would like to turn the floor over to Mr. Gustavo Werneck. You may proceed, sir.

Good afternoon, everyone. I would like to start by welcoming every one of you to Gerdau's conference call to discuss the results of the fourth quarter of 2020. I hope that you're all well, in good health, and going through the spirit in the best possible way. On our side and speaking on behalf of our 30,000 employees, we've managed to be healthy, safe, and also care for our well-being. And as a result, we were able to maintain an adequate routine in our operations by following a very stringent discipline in complying with the sanitary and health protocols of all the local authorities. Here with us today is our CFO, Harley Scardoelli. For both of us, it is always a pleasure to talk to you about our performance, clarify issues, and also ask questions that may come up during our presentation. Scardoelli will then begin by talking about the highlights of the overall results in the quarter and the performance of our operations. After that, I will comment on the markets where we operate and share some information about what we see on the radar in the coming months. At the end, we will be available to talk to you about any issues or questions that you would like us to explore further. So, with no further ado, I'll give the floor to Scardoelli.

Thank you, Gustavo, and good afternoon to you all. It's a pleasure to be with you for yet another earnings release call. I hope that you are all well and healthy. We will begin the presentation on Slide 2, the presentation on the financial results, and we will start with the free cash flow and working capital available on this slide. As we can see in the chart on the left, our positive free cash flow was positive by BRL2.4 billion in 4Q '20. This improvement in relation to Q3 of 2020 is the combination of a few factors, like a 43% increase in EBITDA quarter-on-quarter. The second aspect will be lower working capital, driven by a cash conversion cycle of less than 50 days. And the third point refers to all of our efforts, agility and commitment when dealing with Gerdau's management, particularly in such a challenging year as 2020. Year-to-date, free cash flow was positive by BRL4.5 billion for the second consecutive year, which reinstates our commitment towards maintaining a liquidity position. The cash conversion cycle went from 63 days in September of 2020 to 49 days in December of the same year. Working capital optimization was attributed to the release from the accounts receivable line, coupled with improvements to the payment cycle, which could be translated into a recovery of activities and more favorable payment terms with suppliers. On the other hand, there was an increase in inventories between September and December due to high levels of production to cope with the strong demand in our markets. Now moving to Slide 3. Here, I would like to highlight that by the end of 2020, our net debt was down to BRL9.9 billion, almost flat when compared to the same period of 2019. Despite the fact that there was a depreciation of the BRL vis-à-vis the U.S. dollar of approximately 29% in 2020. Considering that the bulk of our debt is denominated in U.S. dollars, when we look at the company's net debt in this currency, we arrive at a total of $1.9 billion in December 2020, the lowest level since 2007. Currently, 77% or approximately BRL13 billion of the total debt is denominated in U.S. dollars. It is worth mentioning that at the end of last September, this percentage was around 85%, and we were able to reduce that percentage by 8 percentage points. We should also recall that in the last few quarters, we've been adopting the strategy to reduce the foreign exchange exposure of the debt, while also taking advantage of the opportunities brought about by the current interest rate scenario in Brazil. Therefore, we increased our exposure in Brazilian BRLs to approximately 23% of the total debt in order to protect ourselves from the high volatility of the U.S. currency at the moment. This level brings us closer to a natural hedge, given that a significant part of our cash generation measured by EBITDA is denominated in U.S. dollars and a substantial part of our assets and operations are located in North America. I would also like to underscore that 92% of this debt is long-term, with an average tenure of 7.7 years and an average nominal cost of 4.7% a year. The debt amortization schedule is well allocated throughout the next coming years. And finally, on Slide 3, we show the results of our financial leverage, measured by the net debt over EBITDA ratio of the last 12 months, which went from 2.07x in Q3 of '20 to 1.25x in Q4 of 2020 due to higher EBITDA and the debt amortizations during the quarter. With this level of leverage, we would also like to emphasize that we achieved the goal defined in our financial policy and approved by the Board of the company, which was to keep this ratio between 1 and 1.5x. Now let's move to Slide 4, where I will highlight the main factors impacting the consolidated EBITDA, which went from BRL2.1 billion in Q3 to BRL3.1 billion in Q4 of '20. All of our operations posted sequential margin improvements from the third to the fourth quarter of 2020. But before we start, I have to say that this is the best EBITDA in the history of Gerdau in the fourth quarter. This result stems from a quarter with strong performance in almost all of our operations, more so in Brazil and in South America. The Brazilian domestic market remained solid in the fourth quarter of 2020, with a strong demand and replenishment of inventories. South America posted a similar performance when compared to Brazil, whereas North America continued to follow the path of the strong performance posted in the previous quarter. Even though our special steel operation was mostly impacted by the effects of the pandemic, we can already see a significant improvement coming from that operation in the beginning of the third quarter and more so in the fourth quarter. The consolidated EBITDA margin was also positively impacted this quarter, reaching 22.4%, with a margin of 30.9% in the Brazil BD. Besides the robust performance of the BDs attributed to a favorable environment, I would like to stress that our financial and operating discipline played a crucial role. We reduced the amount of SG&A expenses vis-à-vis revenue when compared to what was posted in the fourth quarter of '19. In Brazil, EBITDA was approximately BRL1.8 billion due to the higher demand coming from civil construction and industry in the domestic market. 86% of sales were earmarked to the domestic market, focusing on capturing all the opportunities, while at the same time, maintaining the Brazilian market fully supplied. It is worth mentioning that since the rebound of the demand at the end of the second quarter of 2020, we have dedicated a great part of our sales to the local demand. The landscape in Brazil remains extremely favorable to the civil construction industry. We posted a record number of construction licenses, the civil construction confidence level last April was 65 points, and by December, it had already reached 93 points. In addition to that, we anticipate a positive outlook for civil construction, GDP, and retail growth. This scenario should remain the same next year. Now in North America, in the fourth quarter of 2020, EBITDA increased in absolute figures when compared to Q3 '20 due to higher shipments, demonstrating the continued resilience of the nonresidential construction market and the industry. Furthermore, our efforts to optimize costs allowed us to maintain the EBITDA margin of this operation above 10%. Well, this is certainly the best EBITDA margin in a fourth quarter since 2007 in our North American operation, which is constantly affected by year-end seasonalities. In South America, we had another quarter with good results, with strong demand in civil construction, mainly in Peru and Argentina. We posted excellent operating results, particularly after the resumption of some operations that had been shut down in the second quarter of the year due to the impact of the COVID-19 pandemic. Last but not least, our Special Steel operation. As I said earlier, this was one of the operations more heavily impacted by the pandemic because several OEMs produced very little for a period of 3 to 4 months. However, as of the third quarter, we started to see signs of rebound coming from the automotive sector, both in the U.S. and Brazil. In Q4, the good performance came from the Brazilian market, where inventories were quickly replenished and vehicle production increased according to data from ANFAVEA. This rebound led to a recovery of the capacity utilization rate of this operation that went from 50% in Q3 '20 to 70% in the fourth quarter of 2020. It is also important to mention the impact of oil prices in the oil and gas industry in the U.S., and there was also a reduction in automobile exports from Brazil to Argentina. However, the rebound of the automotive industry should continue throughout 2021, contributing, therefore, to improve results in this BD. I would like to thank you for your attention. Now I turn the floor back to Gustavo, who will comment on the market outlook.

Thank you, Scardoelli. Please let's move to our next slide. Now we will talk about how Gerdau operated in the fourth quarter of 2020 and also throughout last year. As we heard from Scardoelli's comments on Gerdau's performance in Q4, our results had a significant improvement attributed not only to the recovery in the different markets where we operate but also due to the transformation that we promoted and that is already part of the day-to-day of our teams. We became a more agile, simpler and more digital company, which allowed us to be ready to capture the many opportunities that came up during the challenging year of 2020. We now find ourselves much better prepared to deal with other moments of difficulty that may occur in the future. Not only in the fourth quarter, but during the entire last year, we prioritized health, safety, and the well-being of our people. We benefited from more resilient business models, centered on customers. This allowed us to fully serve the demands in the markets where we operate. Now moving to the next slide. I will talk about the markets where Gerdau operates, and I will give you some more details about the outlook for the coming months. I will start with Brazil. In Brazil, shipments of longs and flats in the domestic market were up 22% between October and December on an annual comparison, as a result of the industry recovery and the consolidation of the good moment experienced by civil construction, including retail. Not only civil construction remains on a growing path that started a few quarters ago, it also benefited from the inventory replenish movement in the distribution network and the excellent performance of retail that grew 10.5% in 2020 according to Anamaco. For 2021, Anamaco predicts that the retail industry, driven by purchases of construction materials from self-builders, should grow between 3% and 4%, following a growth trajectory that has been in place since 2016. I would like to underscore Gerdau Comercial, our own steel distribution network that celebrated its 50th anniversary earlier this month, continues to digitalize its services to our customers to provide them with a better purchasing experience. In 2020, our chatbot performed over 112,000 interactions, increasing shipments by 87% through digital channels. In addition to the chatbot, that also includes our website, and 100% of our base of construction material stores use our digital channels, including the virtual store of Juntos Somos Mais, a company we own in joint partnership. In the fourth quarter of 2020, Gerdau posted record sales via Juntos Somos Mais, accounting for 24% of the total number of products sold to the Construction Retail segment. Moreover, the marketplace of Juntos Somos Mais posted year-end sales in 2020 of BRL7.4 billion, growing almost BRL1 billion year-on-year. The company, which today represents the largest ecosystem for construction retail in Brazil, remains focused on its plan to expand with the acquisition in January of Conecta Reforma, a construction and remodeling start-up company. So as I've been saying to you for a while now, steel can also be sold through digital platforms, and this is already a reality at Gerdau. Furthermore, the machinery and equipment sector, particularly the yellow line, implements in heavy-duty highway vehicles, also posted good performance due to agribusiness activities, exports, civil construction, and mining activities. It's important to highlight that in the fourth quarter, there was an important effort to maintain margins and profitability in the industry worldwide due to increased costs of commodities in the international market. In the last few months, our focus has been geared towards ensuring full supply to the domestic market. Our exports, originating from Brazil, were down by 11% vis-à-vis the previous quarter as part of this strategy. In 2020, there was a 50% reduction in exports when compared to the previous year, with shipments accounting for 16% of our sales compared to almost 30% back in 2019. So at the moment, the Brazilian domestic market is our absolute focus. For the months ahead, we remain very optimistic regarding the Brazilian market, as we expect to see further recovery of the economy and the rebound of the growth cycle for all sectors where we operate. In addition to retail, as I said earlier, the construction sector should also maintain its positive performance, justified by some factors like the return of consumer confidence, maintenance of historically low interest rates that are also shown by important indicators like cement consumption and the projections from the National Union of Cement Industry that consumption should surpass 61 million tons in 2021 and the civil construction confidence index from Fundação Getulio Vargas said that at the end of 2020, it reached 94 points. We also see opportunities in infrastructure, with the growth of public and private investments in infrastructure, logistics, and sanitation. I can mention just a few infrastructure investments like the VLT Consortium in Salvador, 4 terminals in Bahia and Rio de Janeiro, and the new Tamoios highway in São Paulo. In 2021, investments in infrastructure in Brazil should amount to more than BRL126 billion according to recent estimates from the Brazilian Association of Infrastructure and Basic Industries. Now I will talk to you about our Special Steel operations. Starting with Brazil, where the fourth quarter experienced higher production levels at the OEMs attributed to a rebound in repressed consumption in the domestic market and also a strong movement of inventory replenishment, as the automotive industry recorded the lowest inventory levels in its history in 2020. In early 2021, the industry only had enough units to cover 12 days of sales according to ANFAVEA. The association forecasts a 25% increase in vehicle production this year, 2021. This has been positively reflected in a very robust portfolio of orders in the initial months of the year. Furthermore, we anticipate the continuation of the good performance of the wind energy and machinery sectors, along with our continuous efforts towards increased efficiency and operating flexibility that allowed us to improve our customer service in the last periods. Still talking about Special Steels in the United States. The demand for this segment in the fourth quarter followed the performance of the local automotive market and went back to pre-pandemic levels, with sales of 1.6 million units in December. This figure points to a promising year for the automotive industry in the country, and in particular, regarding heavy vehicles, which is positively impacting our order portfolio that is currently at its highest level since mid-2019. The agriculture sector remains resilient, whereas the North American oil and gas industry continues to present a slower recovery. Also, our digital initiatives and the technological adjustment at the Monroe unit in Michigan allowed us to maintain the market supplied at adequate levels and to respond to the demands from the consumer markets. Further on, I will talk in more detail about this investment when we refer to our updated CapEx. Now I would like to refer to our North American BD, now talking about longs. In the fourth quarter, we remained at higher levels with increasing orders on the part of the construction industry. For instance, the architectural billings industry that anticipates the performance of non-residential construction in the U.S. in up to 12 months ended 2020 with the best performance in 10 years. On the other hand, the metallic spread was relatively stable between October and December, despite the increase in scrap prices in the local market. I also would like to mention our internal efforts to improve efficiency and reduce costs in order to offer a portfolio focused on the needs of our customers as well as the transformation that our North American operation is going through in order to make it more agile and provide a better response to the market. Now looking forward, we believe in the rebound of the economy of the U.S., in line with the decision of the new administration to strengthen the Buy American program and to implement other programs for economic stimuli that should favor the consumption of locally produced steel. A good example was the executive order signed by President Biden to strengthen and improve federal domestic procurement programs. The executive order will require that government agencies give preference to local content. Another example is the broad package for investments in infrastructure that should be put in motion very soon and should also be responsible for accelerating job generation in the country. Besides that, the Biden Administration indicated the continuity of the trade measures imposed by the previous administration that should contribute to maintain margins and the utilization capacity of the North American mills to positive levels above 80%. Now speaking about South America, I'll highlight the positive level of demand for long steels in Argentina as a result of the industry rebound, mainly boosted by the agriculture and livestock industry, white line, and automotive sectors, combined with the continuity of good levels of activity in civil construction, driven by private investments and public infrastructure projects. The last figures from the Institute of Statistics from Argentina indicate that civil construction in the country grew over 6% year-on-year. Volumes delivered in the domestic market in Uruguay also moved in this positive direction. In Peru, steel consumption is experiencing a strong recovery, which led us in the fourth quarter to post the best shipment for the period in the last 12 years, with record sales in November, mainly attributed to the resumption of the activities of the construction sector. The construction industry in the country grew 17% in November, the highest growth rate since July of 2013, before advancing another 7% in December of 2020, being the fourth consecutive increase according to data from the Peruvian Chamber of Construction. Now let's move to Slide 7, where I would like to highlight that in the fourth quarter, we invested BRL549 million in PP&E, contributing to a total investment of BRL1.7 billion in 2020. Now for 2021, our investments are estimated at BRL3.5 billion. You might recall that early last year, we reduced our CapEx for the year from BRL2.6 billion to BRL1.6 billion due to uncertainties and the volatility brought about by the pandemic and global markets. Now we make a new adjustment for 2021 as our investment capacity is directly related to our free cash flow generation that had a very favorable performance, as previously mentioned by Scardoelli. Now on the next two slides, I would like to elaborate on two of our main investments in progress, such as the continuous casting of the Pindamonhangaba special steel mill in the state of São Paulo in Brazil and the conclusion of the investment cycle in the special steel unit in Monroe, Michigan, U.S., both focused on serving the future needs of our customers. The $120 million investment in the new continuous casting in Pindamonhangaba, as shown on Slide 8, is on schedule, with the start-up predicted for the second half of 2022. The new equipment will offer a more automated process with better yields, resulting in a better quality product to the demanding market with cleaner and more resistant materials. This is aligned to the future prospects of electric and hybrid vehicles in Brazil. In 2030, the light vehicle market is expected to comprise 9% of hybrid units and 3% of electric units according to HIS. As shown – as we'll show on Slide 9, by the middle of 2021, we will conclude the current investment cycle in our Monroe mill with a final CapEx allocation estimated at $70 million. The technological updating of the plants included refurbishing of several pieces of equipment like the electric furnace. We will now be able to increase volumes and offer a larger range of products with higher added value to our customers in the North American market. In the United States, the movement towards further weight and size reduction of parts for hybrid vehicles is still in progress. The engines, for instance, are increasingly smaller on average. In 2009, we had engines of 3.4 liters, and today, the average is 3.2 liters. But by 2025, it should reach 3 liters. Also, transmissions are gaining new speeds, and in some cases, some vehicles have between 8 to 10 years. These changes have a direct impact on the demand for smaller-sized components and for clean steels. And in our special steels operation in the country, we already supply these steels to several applications for electric and hybrid vehicles. Well, now let's move to Slide 10, where I would like to underscore the conclusion in December of the acquisition of Silat in the state of Ceará. This is part of our long-term strategy to strengthen Gerdau's position in the steel value chain through investments and acquisitions. The addition of this new unit helps us to fully supply the Brazilian market as a whole, together with our other capabilities in the Northeast and Southeast regions. With that, we will be able to improve our supply capabilities to our customers all over the country. In addition, in the last quarter, we announced the acquisition of a stake in construtech Brasil ao Cubo, responsible for the applied offside modular construction applied to 2 hospitals for the treatment of COVID-19, one in São Paulo and one in Porto Alegre, which had our support. The transaction represents another advance of Gerdau next into new businesses and is in line with our strategy to develop a diversified portfolio of new products and businesses, in addition to allowing us to move forward with our innovation thesis on the future of construction. We want to contribute to closing a relevant productivity gap in the construction industry by adopting new methods and technologies. Furthermore, Gerdau next continues to foster initiatives to develop the Logistics segment through G2L, our logistics arm. At the same time, we want to capture opportunities in the renewable energy sector by engaging possible partnerships to enhance our relevance in the clean energy matrix. Also, in early January, we became the only steel producer to be part of the Carbon Efficient Index, ICO2 from B3 that gathers companies from IBrX 100 committed to the efficiency and transparency of GHG management. Furthermore, we recently reached a B- rating in the annual survey of the Carbon Disclosure Project, CDP, climate change module. This rating is higher than the regional average rating for South America in the metal and metallurgical sectors. This reaffirms our commitment to climate issues and a low-carbon economy. Once again, I would like to thank our employees for their efforts throughout 2020, a very unusual and challenging year for all of us because we had to enhance our actions and attention to health care and safety. But it was your dedication that allowed us to reach solid results and strengthen the relationship with our customers. To conclude, I would like to mention an important milestone in our company's history, which was the celebration of our 120th anniversary on January 16. As we celebrate our century-old trajectory and the entire legacy built by past generations, we continue to accelerate our initiatives to generate even greater value and benefits to our customers. Thus, becoming an increasingly more people-centric and sustainable company in all dimensions, while at the same time, we prepare ourselves for a new cycle of growth. With that, I conclude my part of the presentation, and now Scardoelli and I will be available to take your questions and clarify possible issues.

The first question is from Leonardo Correa from BTG Pactual.

Congratulations on these excellent results. My first question refers to the landscape in Brazil. When we look at the figures for January and we see an increase of over 10% in demand, and this really surpassed all of the market estimates. But how do you see the portfolio of orders going for the second quarter? And who is boosting this demand? We saw a few years ago that there was an increase of over 30% year-on-year. So if we could elaborate a bit more on the short-term landscape in Brazil, this would be very helpful. And my second question is about capital allocation. Obviously, inventory levels are very, very low, even lower than expected. And in terms of debt, you were able to lower your debt. But by the end of the year, the debt level will decline further. Well, you increased CapEx maybe due to some delays caused by the pandemic. So we don't know yet what will happen after 2022. But my question is about dividends. Dividends. And this is relevant to the sector and to investors. What are the milestones? What are the next steps that you need to reach in order to announce a better policy in terms of dividend payout?

It's great to speak with you today, Leo. I'll address the first part of your question regarding growth drivers and the short-term outlook, and then Scardoelli will discuss dividends and capital. Reflecting on 2019 and 2020, I mentioned last year that we could expect a rebound. We quickly resumed operations at our mills, leading to increased shipments of longs and flats that exceeded market expectations. I want to commend our teams for achieving these results, as our deliveries in 2020 were above market levels. Looking ahead, we anticipate delivery growth for longs and flats of about 8% to 10%. The year has started strong, with both January and February showing strength across all segments and regions. Therefore, we expect a positive outlook. Specifically in Brazil, the civil construction sector shows great resilience. We've been monitoring key indicators that support our forecasts, and our orders from the construction industry are robust. For instance, the number of active projects in the cut and band segment has grown by 36% year-on-year from February 2019 to February 2020, with 1,818 projects currently active. This is a significant figure. We are also observing a number of new projects and licenses in cities like São Paulo, indicating that the civil construction industry will play a crucial role in our deliveries throughout 2021. The retail segment has also been very strong since 2016. It's particularly vital for our Juntos Somos Mais project and our deliveries to construction stores, which started the year on a solid footing. After a recovery in 2019, this momentum continued into 2020. We're now seeing new orders, particularly within the infrastructure sector, where we've already secured some important deals. In regards to the industry, it is very strong right now. The portfolio is highly demanded. In view of the exchange rate conditions and macroeconomic conditions, the level of exports in areas like the yellow line is very strong. Therefore, equipment and machinery manufacturers are operating at full force, and this demands a lot of steel. Therefore, all in all, all the drivers are very strong. We are very optimistic looking forward. And before I turn the floor back to Scardoelli, it hasn't been possible to see a total replenishment of inventories because demand is so strong that I think that inventories will only be fully recovered, maybe throughout the second half of the year. In the entire change, the inventory level of longs is about 75% and flat steels, 50%. In our view, inventories will take some time to recover completely. I'm sure we will be able to talk more about it as we answer other questions. Now I'll give the floor to Scardoelli to talk about capital and dividend payout.

Leo, here is Scardoelli. It's a pleasure to talk to you and to talk to all of you. In terms of capital allocation, this is always a very important and interesting question, especially right now when we see better results. But I do have a few points to mention. First of all, our focus will be on maintaining a flow of positive cash flow. We announced the review of our CapEx plan. Even then, we will be able to maintain a positive cash flow. With that, the trend towards leverage, as you put it yourself, is that leverage should remain at very good levels in keeping with our policy and well behaved, I would say. Our CapEx also indicates that we do see a good avenue of growth. We are predicting investments in our operations and other one-off and strategic announcements that we made. As Gustavo said, we acquired Silat, and through our new business unit, we found new avenues of growth. If we look and we usually say that in our meetings, our return on equity means that investments into our own operations bring adequate returns. So all in all, this is a very good business to shareholders. I would like to remind you that when it comes to return to shareholders, we have to look at a total return to shareholders. If we look at last year, or the calendar year of 2020, the return was 18%. By the end of December, but if we look at it today, we will be talking of something around 30%. We believe, therefore, that the company itself will grant good returns in terms of total return to shareholders. In regards to dividends per se, the deleveraging dividends are naturally increasing. In 2019, Gerdau approved and paid out BRL0.25 per share, in 2020, that was BRL0.42 per share. Now we're getting close to a moment where maybe we will pay more dividends than what we pay in interest. Dividends are naturally increasing. And why is that? This would demand a very long question in terms of capital allocation. But I think this is approaching a more adequate return. Our dividend policy remains at 30%. We believe that with that, we are paying out adequate dividends to our shareholders at the moment.

Our next question comes from Caio Ribeiro from Credit Suisse.

My first question is about the price transfer that you expect in the first quarter. Could you talk about revenue per ton? And how much of that you think will increase in this first quarter? And also, if you could talk about the parity premium that you anticipate today and whether you see further room for new price increases that you probably planned down the road? Secondly, my question is about the sustainability of the EBITDA margin in Brazil, which today is close to 30% or 31% in this quarter. Considering the increase in scrap prices, in particular, do you believe that you will be able to keep that same margin in the quarters looking forward?

Well, Caio, I will answer your question, but Scardoelli, please feel free to interrupt me at any moment. Let me try to put all your questions together. As you saw in the fourth quarter of 2020, our EBITDA margin reached 31%. The last time our EBITDA margin was above 30% was in 2009, meaning that in the past 11 years, we have been pursuing that because we wanted to give an adequate payout to our investors. But let me be a bit careful in regard to pricing. If I could put together demand and pricing in a single headline that you would put in a newspaper or presentation, I would say, Gerdau sees strong demand and balanced prices in the international market. Maybe this will be a summary of all. Caio, we saw an evolution of premium. In February, I would say, in January and February, rebar premiums reached 5% to 15% positive with no pressure at the moment from the entry of imported products. But I don't want to talk about pricing because, as I said before, I'm a bit careful in that regard. Let me now refer to margins. We still see some room to increase margins that we reached at the end of last year and in early 2021. I would like you to take into account some other factors in addition to pricing alone. I would like to remind you that we worked very hard in the past 5 years to better prepare our company to compete in this market. We lapped some businesses that had lower margins. We promoted a deep cultural and digital transformation. We eliminated BRL1 billion in SG&A. All of that was to prepare Gerdau to post, let's say, decent results in more demanding markets, as we have now. And certainly, in these markets, we will deliver much better results when compared to what we delivered 10 years ago. As a reminder in terms of margin evolution, if you look at this quarter, you have to consider exports. Back in 2019, 30% of our production in Brazil was exported, and that number was down to 15% in 2020. We know that export margins are worse when compared to domestic margins, and this low export level will continue to be around 2021. You also have to consider the dilution of fixed costs and the relentless job to seek performance improvements. Behind all that, in regards to performance, last year, the entire team put a lot of effort into making further improvements. I wouldn't like you to attribute the evolution of our results to a single action that moves that leverage called price. All of the results stem from the relentless work from thousands of our employees that work towards seeking better results. In terms of costs, in fact, there was a very strong increase in costs. Iron ore, coal, and scrap, all these prices went up. But we can still, despite these prices, mitigate these costs. This is what we are indeed doing. For the next coming months, we anticipate some stability in general in terms of costs. To give you a general overview, Caio, that's what I had to say. But now Scardoelli, if you have any other comments, please feel free to speak up. I hope I have clarified your questions.

Our next question comes from Thiago Lofiego from Bradesco BBI.

Werneck and Harley, congratulations for these outstanding results. I have two questions. One, heavy plate, if you could mention the utilization level today? And how do you see demand evolving throughout the year? My second question is about the metallic spread in the U.S. and more particularly in this first quarter, how do you see the evolution of spreads, and whether you had or are experiencing any impact in the U.S. due to a more rigorous winter season?

I believe I can address that, Scardoelli. Thiago, I would say that our investments in heavy plates have been successful. Our rolling mill is among the most modern in the world and has delivered exceptional quality products, which makes us very pleased. The market is recovering, and our shipments are outperforming market levels, with current utilization at around 60%. However, the market continues to change. I expect that as the coming months progress, the utilization rate will rise, and we will keep experiencing success. The metal spread in the U.S. has been stable. Looking back at the last three months of last year, there were no significant market variations. So far in this first quarter, things appear similar, with perhaps slight improvements in January and February. The winter season in the U.S. had some impact, but it was minimal when considering the entire year of 2021. The effects were more pronounced in our Texas operations, as well as in Virginia and Tennessee, affecting both operations and the entire supply chain in those states. Our operation in Mexico was also impacted because of gas supplies from Texas. We had to halt operations for about five days, but these volumes can be readily recovered in March. Currently, all operations are running at full capacity, and we are not facing any gas supply shortages. We anticipate a swift recovery from the shutdown.

And regarding this last point, do you see any impact in the U.S. margins because of these issues? Or do you think that this is not significant?

Well, it is not significant, Thiago. The volume was very small. We only stopped for a few days. When you look at the entire quarter, I think that this effect will be mitigated. We are already seeing after the resumption of the activities that we will be able to recover our volumes, increasing our daily shipments.

Our next question is from Rodolfo De Angele from JPMorgan.

My first question is about imports and whether, with prices close to parity, you foresee any potential for volume increases. My second question pertains to capital and capital expenditures. I understand that you have had to adjust your budgets to accommodate the new reality, but I would like to know if you have any plans to enter a new growth phase or explore any initiatives related to increased volumes that differ from your recent past.

Rodolfo, it's a pleasure to talk to you. Well, imports of steel in Brazil, we do not see any signs and I also believe that we will not see any signs in the next few months because the international and Brazilian markets are very volatile in terms of different indicators. Therefore, at the moment, we do not see anything on the radar. But I will now allow Scardoelli to say a few words about capital allocation, maybe in a more qualitative way. Our CapEx, looking towards the next few years is more focused on improving efficiency, lowering costs, and also marginally expanding production areas where margins are higher. Our capital allocation is duly debated, and we have a very robust governance to discuss capital allocation. We have in place a Committee for Strategy and Sustainability that advises the Board. When we look at the rigor of the decisions, they are very rigorous. Therefore, we will remain with our feet on the ground. As Scardoelli said during his presentation, we do not want to exceed 1.5x EBITDA. All to say that we'll be very rigorous in our decisions of CapEx allocation. In terms of the geographies, the bulk of our investments in the next few years will be in Brazil, in our mini mills. We want to modernize the local mills to seek further efficiencies and more competitiveness. Our Ouro Branco Mills and mining and also our mills in the U.S. You might recall, Rodolfo, that 2 years ago, we talked about a gap that we identified in relation to our U.S. costs when compared to our competitors of about $30 per ton, and $15 by operating efficiency and the remaining through CapEx. We were able to recover those $15 of efficiency, and we will continue to invest in our main mills in the U.S. to eliminate this cost gap for good vis-à-vis our competitors. And therefore, we will be able to level the playing field.

Rodolfo, I want to make a brief comment about CapEx. Although this may not directly address your question, I feel it’s important to share some insights. During this call, it is evident that we reviewed our CapEx and reduced it in 2020 from BRL2.6 billion to BRL1.7 billion, which reflects our actual spending. The plan for 2021 was set at BRL2.1 billion and has now increased to BRL3.5 billion, indicating we have simply postponed some of our planned expenditures. Overall, it's business as usual. When we examine the last three years from 2019 to 2021 and compare that to the previous three years from 2013 to 2015, we see that Gerdau invested an average of BRL2.5 billion annually during the earlier period, which coincided with significant investments in Brazil due to the World Soccer Cup. Following that, we faced a global crisis in the steel market, requiring us to decrease our CapEx to BRL1.1 billion annually from 2016 to 2018. However, in the recent three-year period from 2019 to 2021, we returned to a spending level of BRL2.3 billion. My main point is that Gerdau, while exercising a disciplined approach to our CapEx decisions, particularly focuses on return on equity and capital. We possess the flexibility to adjust our CapEx based on current market conditions. With the current bullish market, we are increasing our investments to support future growth and improve EBITDA. Simultaneously, should market conditions shift, we can also adapt our CapEx strategy accordingly. Therefore, providing a long-term CapEx projection is not feasible if it isn’t tied to an EBITDA outlook. For 2021, our CapEx has been increased to make up for last year’s under-expenditure. As we begin to deliver consistent returns aligned with our cost of capital, we are poised to generate even higher returns, and the investments made by Gerdau are creating value for our shareholders.

Our next question comes from Rafael Barcellos from Santander.

Congratulations for your results. I think most of my questions have been answered. I just have a follow-up question. It's about retail and civil construction, which was very important in 2020. How do you see the performance of this market now in the first quarter in terms of their representation in your portfolio and the growth looking forward? My second question is your big picture view of your strategy. Now that you've moved along, if you could talk about competition, market share and your view about the Brazilian market looking ahead?

Thank you, Rafael. It's a pleasure to talk to you. Retail remains very strong. If you look back at 2016 and if you looked at every single month, retail has been growing. Maybe there was one outlier, which was December of last year when there was a slight decline. But other than that, it grew every single month. So retail started with a very strong year. So retail and distribution are very representative in our deliveries. 58% of our shipments occurred through retail and distribution. So that's a very representative segment to us. The year started on a strong beat with the outlook for new short-term incentives in the Brazilian economy. If that occurs, this segment will grow even more. We are very well prepared to fully serve the Brazilian market, even considering a more robust growth scenario. We still have idle capacity that we are not running at the moment. It's amazing to see our capacity to run equipment that has been nonoperational for a while. Therefore, I say that we are certainly not concerned about not being able to serve the market because we have enough installed capacity to serve the demand, whatever that is. In terms of Silat, we are very pleased with this acquisition. We are still in the integration phase. Our plan is to increase the capacity of that operation by 50% this year, going from an average of 100,000 tons a year to 150,000 tons. So we will grow production by 50% this year and certainly improve customer service, not only for customers in the Northeast, but all over Brazil in general. This is an investment that occurred at the right time and was done the right way, and this will certainly make us happy looking forward.

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

Great. My question, continuing with Silat, is about the EBITDA contribution you expect from this acquisition. If you can't comment on the EBITDA in absolute terms, could you at least provide insights on EBITDA per ton? Specifically, how does it compare to your current Brazilian operations or the overall EBITDA per ton for Gerdau, so we can better understand the potential upside from this purchase? Additionally, can you highlight any significant differences between the flat steel market in Brazil and the long steel sector? Which one do you believe has better prospects, improved conditions, or better pricing opportunities in the coming months? Lastly, since this is the final year of your three-year CapEx cycle, what can we expect regarding CapEx beyond 2021? For 2022 and beyond, can you give us a clearer idea of the investment levels you plan to pursue?

Thank you, Carlos. I will begin by addressing your three questions, and Scardoelli can chime in afterward. Carlos asked about Silat's performance, numbers, and results. As I mentioned, we are still in the early stages; we took full control of the operation in December. January was our first month fully operating Silat alongside our other mills in Brazil. We see significant opportunities with this plant because we can enhance its performance and align it with Gerdau's performance levels. Currently, the plant produces 100,000 tons a year, and we aim to increase that figure, anticipating considerable growth this year. We believe Silat can quickly achieve EBITDA levels comparable to our other plants in Brazil, adding extra value in logistics and shipments. By our next earnings report in May, which will cover four months of operation, we expect to provide more figures and details. Carlos also inquired about the differences between longs and flats in Brazil. Generally, our participation is more significant in the longs market, where we have a strong history and leadership. This segment outperformed the flats market last year. We increased our market share in both areas, but I note that inventories are lower in the flat segment compared to longs. I believe both sectors will achieve a balance between supply and demand in the short term. Overall, our plants are functioning well in both sectors. We started with hot coils before moving to flat plates, and in both instances, we've had success in Brazil, not only in terms of equipment and production but also due to our ability to distribute these products through Comercial Gerdau, which recently celebrated its 50th anniversary. For your last question about our 3-year CapEx, our forecasts for this year and the following two years reflect what we've done previously. Given the volatile global environment, including COVID impacts and potential future developments, we decided to provide information on our CapEx for 2021. Moving forward, our approach to capital allocation remains consistent with our previous statements and practices. We will maintain a very disciplined financial policy. I will now turn it over to Scardoelli for his comments.

Thank you, Gustavo. Yes, this is the point about CapEx. I think the most important aspect of that forecast is volatility. In 2020, we just demonstrated that we knew how to navigate in more adverse scenarios, being more stringent with our expenditures. When the situation permits, we will resume our investment. I believe that the takeaway message to the market and shareholders is that we will always have CapEx adjusted to market conditions, maintaining financial discipline and focusing on the correct execution of that CapEx with good planning, always ensuring the return of equity in the long run.

Our next question, in English, is from Timna Tanners from Bank of America.

I wanted to just, if possible, make sure I understand the guidance. I think it's clear that there's more stability going forward at these high levels. But in particular, with the Special Steels in the southern region, is there a new run rate that we can expect? Or is there further growth in volume there? Is that an opportunity for further upside? So that was one question. And then other than that, I mean, I think everyone's asked a lot about the dividend and CapEx going forward. I was just wondering if there's some further announcements or timing for further decisions that we should watch?

Thank you, Timna. Scardoelli, would you like to answer that question? The first part of Timna's question was more in relation to Special Steels that we didn't have the opportunity to elaborate a lot. I would just give you a general overview. We see a more consistent recovery that started in the fourth quarter of last year, both in our Brazil, Special Steel operations, as well as in North America; the order incoming is quite strong. Timna, in Brazil, the level of vehicle inventory in the chain is very low, 12 days only. Historically, this is the lowest level ever reached. So in addition to increased sales in Brazil, it is necessary that we promote an inventory replenishment, and this is the focus right now for Brazil. In the U.S., in terms of light and heavy vehicles, we saw and we still see good recovery with a very consistent flow of orders, probably in the U.S. a segment where we see the most difficulty is oil and gas. I mean, oil and gas is a segment that is struggling for a few months already. We cannot see any short-term recovery. As I mentioned before, we are experiencing growth in our Special Steel operations, I don't know whether Scardoelli wants to add anything else or still answer Timna's question about dividends and CapEx.

Timna, in regards to Special Steels, I just want to add one more thing. I think that you may be asking whether the worst is behind us with the availability we have today. Well, certainly, this is not any specific guidance, but we believe, yes, the past is behind us. This involves a gradual and slow recovery. We do not think that 2021 is a year where we will see this operation at levels that we experienced some years ago. The outlook is very positive for 2021. This fits into the overview given by Gustavo. In terms of capital and dividends, Timna's question refers to some announcements in terms of changes going forward. We are in a moment of consolidating our results and enhancing our results. The return of capital to shareholders is being done in a very structured fashion. We are delivering reserves, posting consistent ROEs, our dividend policy at 30%, and dividends are increasing as results improve. There is nothing different in our policy. Nothing changes.

Our next question, in English, from Andreas Bokkenheuser from UBS.

Congratulations on the strong result. Just a quick follow-up on the capital allocation question. I may have missed this, sorry, if I did. But have you given any thought to a share buyback given the strength of your current free cash flow? That's the first question. And second question, your view on the North American construction market and long steel demand in North America. You obviously mentioned that the ABI, Architectural Billings Index, had improved in December, which is correct, but it's still in contraction territory, still negative, and it has been negative for 11 months. So seeing that the ABI kind of anticipates or is a pretty strong leading indicator of nonresidential construction in the U.S., does that mean that you think the U.S. or North American construction market is going to decline based on the weak ABI number? That's the second question. And maybe a quick follow-up on the import question. You obviously mentioned you don't expect imports to come in significantly in the coming months. We've been hearing out of China that more and more Brazilian buyers of steel are placing orders with Chinese steel mills. So do you think that's taking place in flat steel and not so much in long steel based on your comments?

I will answer the first part of Andreas' question. Once again, he asked about capital returns and whether we have anything to say about the share buyback. As I was saying before, we have an avenue of growth through CapEx, through Gerdau Next, and our dividend policy is for 30% payout, and this is higher than what is determined by Brazilian legislation. That's why we believe that our return to shareholders is adequate. In terms of the share buyback, I do not want to speculate about other companies. But usually, it becomes stronger when the company does not have large plans to grow. We do have great plans to grow our operations. That's why we believe that at least right now, this is not the way to go. In terms of the U.S. market, I don't know whether Scardoelli wants to say anything.

Yes. He asked us how we view the sustainability of current demand levels in the U.S. market based on various indicators. Generally, the outlook for the U.S. market is very positive. Our backlog of orders remains strong, so we do not currently see any indications of declining demand. With the vaccination progress in the U.S., certain sectors, especially the service sector, are recovering, which may help sustain overall demand in the short term. We believe inflation will not revert in the U.S., and in the midterm, demand should hold steady. We also anticipate a resumption of infrastructure investments. Recently, President Biden addressed a group of senators, mentioning that 'China will eat our lunch if the U.S. doesn't increase their infrastructure spending,' highlighting significant infrastructure developments. As we plan our deliveries for 2021, we do not expect any decrease in demand. Regarding imports in Brazil, we are closely monitoring recent news about the acquisition of Chinese products. We do not see signs of increasing imports in Brazil amid market volatility and exchange rate fluctuations, so we do not think this situation will favor importing long products or flat steels.

Ladies and gentlemen, the Q&A session is now concluded. I would like to turn the floor back to Mr. Gustavo Werneck for his final remarks. You may proceed, sir.

Thank you. Once again, I would like to thank you for joining us today. As usual, it is a great pleasure to talk to you. Rodrigo, our IR team, are always available to talk to you and to answer questions that were not answered today. I would like to take this opportunity to invite you to participate in our next earnings release call related to the first quarter of 2021 that will take place on May 5. Thank you all very much. Take care and watch your health; your health always comes first. Thank you, and all the best.

Gerdau's conference call is now concluded. Thank you all for participating, and have a very good afternoon. You may disconnect now.