Gerdau S.A. Q1 FY2021 Earnings Call

Good afternoon, everyone. I'm Rodrigo Mala, Investor Relations of Gerdau. Welcome to Gerdau's First Quarter Earnings Results in the first time using video conference platform. Here today is Gustavo Werneck, CEO of Gerdau; Harley Scardoelli, CFO who will present to you today. All analysts and investors can send their questions to the chat. And then the questions will be answered by both Gustavo and Scardoelli after the presentation. I would like to clarify that any information, 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. I would now like to turn the floor over to Mr. Gustavo Werneck. You may proceed, sir.

Thank you, Rodrigo, for this brief introduction, and good afternoon, everyone. I would like to start by welcoming each one of you to our conference call to discuss Gerdau's results related to the first quarter of 2021. This is the first time we present with audio and video. And this is an attempt to be more aligned to the reality of our society today. I hope you are still well and healthy and also going through this period in the best possible way. On our side, and speaking on behalf of our 30,000 employees, we've managed to remain healthy and safe and keep our well-being while also pursuing an adequate routine in all of our operations by rigidly complying with all of the health and sanitary protocols established by the local authorities. In this last quarter, we did not have any interruption in the production of our industrial plants attributed to COVID-19. As mentioned by Rodrigo, also joining us today is Scardoelli. For both of us, it's always a pleasure to talk to you about our performance and clarify possible issues that may arise during this presentation. Scardoelli will start by talking about the highlights of our results for the quarter, and he will also discuss the performance of our operations. After that, I will return to talk about the markets where we operate and share with you some thoughts about what we see in the landscape going forward. At the end, we will both be available to discuss any issues you'd like us to elaborate on further. So Scardoelli, the floor is yours. We can then start talking about our results.

Thank you, Gustavo, very much, and good afternoon to you all. It's a pleasure to be with you using this new format, which I think will be very good, both for us and those joining us today. We will start the presentation with the first slide, looking at our financial results. We will also discuss the main factors that impacted our consolidated EBITDA. We went from BRL 3.1 billion in Q4 of '20 to BRL 4.3 billion in Q1 of '21, and this was a record EBITDA for Gerdau in a single quarter. All of our operations had excellent performance in the first three months of the year. This was not only due to a favorable moment for the steel industry, but also resulting from our diligent capital allocation over the last few years. These investments helped us to be more agile and efficient in capturing all the profitability gains brought about by the current scenario. This quarter, we also had excellent performance from our North American Business Division that reached BRL 843 million, or 50% above the EBITDA of the last quarter of 2020, with an EBITDA margin of 14.3%, approximately 4 percentage points above the margin of the fourth quarter of 2020. This result reflects the rebound of the non-residential construction sector, in addition to the gradual return of activities favoring our industry as the vaccination campaign advances in the country. Brazil's Business Division posted strong performance once again with an EBITDA of BRL 2.5 billion in Q1 and an EBITDA margin of 36.9%, which is another record figure for Gerdau in terms of single quarter EBITDA. Brazil remained strong in the key steel consumer sectors, and therefore, we allocated a large portion of shipments to the domestic market. In this quarter, we focused almost 100% on Brazil, leaving only 4% of shipments for the foreign market. The South America Business Division posted a performance similar to that of Brazil with an EBITDA of BRL 550 million and a margin of 38%. This operation benefited from the good performance of the special construction industry, particularly in Argentina and Peru. Last but not least, our special steel operation due to the rebound of the automotive industry both in Brazil and the gradual recovery of the United States showed very good performance in the first quarter of 2021, posting an EBITDA of BRL 409 million and an EBITDA margin of 16.8%. In the first three months of the year, the steel utilization capacity of the special steels operation was 83% compared to 78% utilization in the fourth quarter of last year. Now moving to the next slide, Slide number 3. We will discuss free cash flow and working capital. As we can see on the left-hand side of the chart, our positive free cash flow was BRL 1.1 billion in Q1. I would like to emphasize that this is an unusual cash flow for the first quarter at Gerdau, but this result was possible due to a substantial improvement in the indicators that contributed to this calculation. Starting with the historical EBITDA, as explained in the previous slide, it reached BRL 4.3 billion. Additionally, this performance was also attributed to how we managed our assets in the past few months, which reduced the exposure to lower growth of our gross debt in foreign currency, thereby minimizing the impacts from the exchange variation effects over interest on the debt. In the last 12 months, cash flow was positive by BRL 6 billion, reflecting our efforts and commitments to the adequate remuneration of invested capital, coupled with the company's strong liquidity position. On the right side of the chart, the cash commercial cycle went from 49 days in December of 2020 to 57 days in March of 2021, mostly attributed to accounts receivable and inventories, due to the fact that global demand for steel remains at all-time high levels. This cash conversion cycle is more balanced for our industry and Gerdau. Moving on to our next slide, we will discuss our debt position. I would like to underline that at the end of March, our net debt was BRL 10.8 billion, slightly higher than the net debt reported at the end of 2020 due to the impact from the exchange rate on the debt denominated in foreign currency. The Brazilian real depreciated approximately 10% against the U.S. dollar between December 2020 and March 2021. Currently, 77%, or approximately BRL 14 billion of our total debt amount is denominated in U.S. dollars. It's worth noting that in the last few quarters, we implemented a strategy to reduce the foreign exchange exposure of the debt and capitalize on opportunities brought about by the current interest rate scenario in Brazil. Therefore, we increased our exposure in Brazilian reals to about 23% of the total debt to protect ourselves from the high volatility of the dollar as seen lately. This level allows us to be closer to a natural hedge given that a substantial part of our EBITDA is generated in U.S. dollars and many of our assets and operations are located in North America. I would also highlight that 99% of this debt is long-term. As we can see on the right side of the slide, with an average life of 8 years and a nominal average cost of 4.8% per year. The debt amortization schedule is distributed along the coming years, concentrated only after 2027 or 2028. On Slide 4, it's important to mention the result of our financial leverage, measured by the EBITDA over the net debt ratio over the last 12 months, which fell from 1.25x in the fourth quarter of last year to 0.96x in the first quarter of 2021 due to strong EBITDA generated in this quarter. With this kind of leverage, we would like to point out that for the second consecutive quarter, we reached the goal set forth by our financial policy approved by the Board of the company, aiming to keep this ratio between 1x and 1.5x net debt over EBITDA ratio.

Thank you, Scardoelli. Thank you for the first part of the presentation. Please let's go to our next slide, Slide number 7. Here, we will discuss Gerdau's performance in the first quarter of 2021 and the global landscape for the steel industry. As we heard from Scardoelli's comments about Gerdau's performance in the first quarter, I would like to split this slide into sections. Of course, we will talk about the market, but we also understand that a portion of the results achieved in the first quarter stems from the benefits we are reaping through the intense transformation we've undergone in the past few years. This led us to be lighter, simpler, and more agile. I would say that we are ready to deliver greater value to our customers. As a result of this simplification of the company, SG&A expenses this quarter accounted for less than 3% of net revenue compared to 6% five years ago, which equals savings of approximately $300 million annually. By the same token, our digital approach, which aims to integrate and optimize all our operations while ensuring total customer focus, generated financial gains of nearly BRL 700 million since 2018. A good example of this initiative is the number of new customers captured through digital channels, with more than 3,500 customers purchasing steel online in the first quarter of the year. Another BRL 35 million came from new sources of digital revenue, adding to our long and flat steels operations in Brazil. Similarly, we also benefited from strong steel consumption in the countries where we operate, particularly in Brazil and the United States. Global production of crude steel grew 10% in the first half of 2021 compared to the same period last year, according to World Steel data. Still, according to the association, demand for steel is expected to grow 5.8% this year and another 2.7% in 2022 compared to 2021. These numbers highlight the importance of steel as an essential input and the strong recovery moment of global economies. In the last 12 months, we continue to emphasize the health, safety, and well-being of our people as the pandemic continues to develop. Now let's move to the next slide, Slide number 8. Here, I'll talk about the markets and how Gerdau is operating in these markets and also the outlook going forward. I'll start by discussing our North America business operation. Our volumes in North America remain very high in the first quarter, with a strong order inflow from the construction industry. We are also posting better economic indicators coinciding with the progress of the vaccination plan in the U.S. The metallic spread experienced a significant increase in the period despite the higher prices of scrap in the local market in the U.S. Additionally, our internal efforts to reduce costs and expand our portfolio focused on fully serving our customers have allowed us to capture new business opportunities, resulting in even stronger outcomes. As part of our strategic roadmap for North America, we recently completed the modernization and technological upgrades of our structural steels and profiles rolling mills in Petersburg and Cartersville units located in the states of Virginia and Georgia, respectively. This allowed us to expand our product mix in the market. Looking ahead, our order backlog in the U.S. is equivalent to approximately three months of purchases, mainly due to robust activity in the construction sector, with construction projects from December to February accounting for approximately $300 billion, representing a 6% year-on-year increase according to the Statistics Agency of the Federal Government of that country. We remain optimistic about the possible effects of the infrastructure investment package recently announced by the Biden administration, which includes over $2 trillion in investments over the next eight years, including $115 billion for highways and bridges. These are two significant consumers of steel. The North American steel association, known as AISI, estimates that every $1 billion spent on infrastructure generates approximately 50,000 tons of steel consumption. If we combine these factors, steel demand is expected to add another 3 to 4 million tons annually according to analysis from KeyBanc Capital Markets. Furthermore, we believe that the executive order focusing on increasing federal purchases of locally made content, together with commercial measures imposed on imports, will further sustain the high utilization capacity of North American mills, leading to above 90% in our case. Now I will touch on our special steels operations in both the U.S. and Brazil. The demand follows the higher-than-expected performance of the automotive sector, heavy vehicles, distribution, and oil and gas. In the first quarter of the year, 3.6 million units were produced, representing an 11.3% increase from the same period in 2020, with 78,000 units of heavy vehicles produced from January to March compared to 60,000 the year before. The forecast for 2021 points to significant growth, going from 214,000 units to 298,000 units, indicating increased investments in logistics due to the economic rebound in North America. Another significant point to note is the 41% increase in tractor sales, with February sales reaching 16,200 units. Additionally, the oil and gas segment saw growth in rig counts, with 527 units opened in the first quarter. Activity is expected to increase in the coming months, coinciding with the recovery of oil prices. In terms of shipments, we have successfully transferred capacity from the Jackson New facility in Michigan to our other special steel plants in the United States, enabling us to deliver more innovative products with higher added value to our North American customers. In Brazil, demand for special steels in the first quarter was robust, aligned with the trend to replenish inventories in the automotive industry, which registered a 2% increase in production compared to the same quarter last year. This growth is largely driven by excellent results from trucks and light commercial vehicles, according to data from ANFAVEA. We anticipate a positive outlook for the sector regarding special steels, with ongoing replenishment of light vehicle inventories and increased production of heavy vehicles due to a favorable agribusiness momentum, characterized by a record crop season and fleet renewals already underway this year. We also noted heightened demand abroad for Brazilian products from the automotive sector, prompting many customers to redirect shipments to the international market in a highly competitive manner. Given these robust market prospects, we continue to invest in our special steels operation. Recently, we announced a BRL 1 billion investment in the modernization and expansion of our special steels operations in Brazil. This investment includes the installation of a new continuous casting system scheduled to start in mid-2022 at the Pindamonhangaba unit in São Paulo, and the inauguration of a new annealing furnace and spheroidization of steel bars at the Charqueadas plant in Rio Grande do Sul, also scheduled for next year. We also announced the restart of the melting shop at our Mogi das Cruzes mill, also set to begin in the latter half of 2021. We continue to closely monitor our customers' needs, making timely decisions aligned with current market trends. Now, I will shift gears to discuss our operations in long and flat steels in Brazil. We see a very positive landscape, and our performance in the first quarter of the year reaffirms the rebound of the sectors that heavily consume steel. We have a positive outlook for the remainder of the year, not only in the second half but for the entirety of 2021. According to data from Instituto Aço Brasil, apparent steel consumption in the country increased by 32.8% in Q1 year-on-year, with domestic sales rising 29%. Our internal figures reflect a continued increase in construction sites, which grew by 4% in the first quarter compared to Q4 2020, indicating a strong real estate market trend. Mortgage loan levels also saw a substantial increase, reaching almost BRL 124 billion at the end of 2020, marking a 57.5% year-on-year growth. We project mortgage loans to further increase by 27% this year, reaching BRL 160 billion according to the Brazilian Association of Mortgage Loans and Savings. Our deliveries to the construction sector rose 8% from January to March this year compared to the previous quarter, and 45% compared to the same period last year. We believe that real estate launches will also continue to rise, and follow Abramat's estimates projecting a growth of 38% this year. On the retail front, there was some instability in the last quarter, but retail sales remained at high levels, with growth expected at 3.5% for 2021 according to estimates from Abramat and Anamaco. We are positive about the recent announcements regarding privatizations and infrastructure projects made by the government, projecting investments around BRL 127 billion this year per data from the Brazilian Association of Infrastructure and Basic Industries. In the industrial segment, which is another key market for our Brazilian Business Division, this quarter saw continued strong recovery across consumer segments driven by the growth of the domestic market. We witnessed the reorganization of global supply chains offering valuable opportunities to our customers to expand their exports of capital goods, agricultural machinery, yellow line equipment, and road implements. Our shipments of longs and flats rose 3% in Q1 compared to Q4 2020, and 25% year-on-year. Additionally, there was a notable shift in consumption from imported materials to domestically produced steel during this period. Thus, the outlook remains positive, with industrial GDP expected to grow by 3.5% in 2021, as per the National Confederation of Industries. This includes segments such as agribusiness, yellow line equipment, and road implements. I want to re-emphasize that our focus remains on fully supplying the domestic market, leading us to reduce exports in this first quarter. We are pleased with the investment in the Silat mill in Ceara that allowed us to meet the specific needs of the market in the North and Northeast regions, which typically consume expanded and ready-made products. To further bolster our presence in these regions, we expedited product deliveries to support ongoing construction projects. We aim to heighten our footprint in the Southeast as well by localizing production in these regions. I would also like to restate that we decided to restart steel production at our Araçariguama mill in the state of Paraná in the second half of this year, which will add an annual capacity of 420,000 tons of crude steel, thereby boosting our capabilities to serve the domestic market's demand in key sectors such as civil construction and infrastructure. Concluding our discussion of the long business operation in South America, demand for longs in Argentina is quite promising, primarily driven by the industry's recovery, especially in the agriculture and livestock sectors, along with the performance of civil construction backed by private investments and public infrastructure projects. Recent figures from the Institute of Statistics of Argentina, INDEC, show that construction activity in the country surged by over 23% in the first two months of the year, suggesting a very positive trend into March. Shipments in the mass market in Uruguay also reached all-time records in Q1 2021. Peru is worth mentioning as well, where steel consumption remains high, largely due to the civil construction sector, which has performed positively over the past six months thanks to public investments and a robust retail sector. Peru's GDP grew for the first time in five quarters, registering a 5% increase from January to March year-on-year, according to the Central Bank's data. This concludes my remarks for this slide, and now we will move to Slide 9 to discuss CapEx.

In the first quarter, we globally invested BRL 435 million in fixed assets. The estimated CapEx for 2021 remains at BRL 3.5 billion, which includes amounts that were postponed from the beginning of the pandemic last year. This amount encompasses investments in flat steels in Brazil, as mentioned earlier. We continue to exercise rigorous decision-making regarding capital allocations and new investments, based on all the lessons learned from previous CapEx disbursements. I will now move to Slide 10. This slide reflects important investments. As I mentioned earlier, regarding our strategic roadmap in North America, I'd like to highlight the completion of investment in the long steel mill in Petersburg, Virginia, which is a significant milestone in better serving our customers in North America. With a $33 million investment, we modernized the plant, including technological upgrades to our structural steel rolling mill, ensuring improved efficiency and higher productivity at that unit. We can now expand our product mix to include higher added value products, like beams and sheet piles, which align with the future requirements of the construction sector in North America.

Now, let's proceed to Slide 11. Here, I'd like to highlight the development of construtech Brasil ao Cubo, in which we hold an equity interest. In addition to building a new center for COVID-19 treatment with 14 new beds in São Paulo, Brasil ao Cubo finalized last month the construction of the first eight-story commercial building in Tubarao, Santa Catarina, utilizing a construction technique known as modular construction, which predominantly employs steel as a raw material. This marks the first modular multi-story off-site building in Latin America. We are committed to reducing the productivity gap in construction within the country through initiatives like this. We also remain dedicated to promoting the industrialization of the sector. Last month, we announced the launch of Gerdau Graphene, a new company focused on developing and commercializing products by applying graphene. This aligns with Gerdau Next, our new business division. This division is aimed at exploring new segments beyond steel, offering greater technology to the civil construction industry, as well as industrial and automotive lubricants, rubbers, thermoplastics, paints, and sensors, both in Brazil and across Latin America and North America. Recently, we announced a capital injection of BRL 100 million proportional to the stake of each partner in Juntos Somos Mais, the largest civil construction marketplace in Brazil. This investment signals our optimism towards the steel market in Brazil and reflects our strategic focus on innovation and distribution. Today, approximately 30% of all retail business derived from our distribution arm, Comercial Gerdau, now comes through this platform. This expenditure is part of a growth plan set to accelerate in the coming years, aimed at expanding the ecosystem and enhancing functions like the technological upgrade of the virtual store and the development of new business opportunities. Furthermore, Juntos Somos Mais experienced a growth of over 16 times in steel sales during the first quarter of 2021 compared to the same quarter of the previous year. Additionally, we have concluded our greenhouse gas emissions inventory, audited by the Totum Institute, which indicated a carbon intensity of 0.93 tons of greenhouse gases emitted per tonne of steel produced. This is almost half the average for the global steel industry, which stands at 1.83 tons. Gerdau also adopted the MACC methodology, the Marginal Abatement Cost Curve, to restructure its emissions reduction targets for short, medium, and long-term goals. The objective of this study is to assess available and developing technologies applicable to our steelmaking process, enabling us to prioritize initiatives and investments for future disclosure. We aim to set clear greenhouse gas emissions reduction targets based on this approach. Lastly, I would like to extend heartfelt thanks to all our employees for their dedication in the early months of 2021. Your combined efforts have enabled us to achieve solid results and maintain closer connections with our customers. This gratitude extends from myself and all my colleagues present today. Scardoelli and I will now be available to answer your questions and clarify any issues. I will now turn the floor back to Rodrigo to help us organize the Q&A session. Thank you.

Thank you, Gustavo. We will now start the Q&A session. We received many questions through the chat box. The first question comes from Carlos De Alba from Morgan Stanley. Do you see any possibility of further improvement in the landscape in 2021? Do you see any potential for the company to deliver special dividends?

Well, thank you. Let me answer Carlos’ first question about the landscape and what we see going forward. And then I'll give the floor to Scardoelli, who will help us with the second part of the question about dividend payout. Certainly, we see the possibility to expand our results in the second half, and in the second quarter as well. As I mentioned in my speech, in various geographies and businesses, we observe many positive signs not only in terms of maintaining, but growing the demand for steel. I'm referencing Brazil, where steel demand in the construction industry remains incredibly strong. Without detailing more numbers, all of that information is public. However, looking at our own performance, we can see growth in construction sites, which increases monthly and signifies how robust this sector is. Recently, we noted some infrastructure opportunities, anticipating an increase in steel demand. Moreover, the industrial sector, as I mentioned, is strong in the domestic market while our customers are also identifying numerous opportunities to export locally made products. This encourages steel demand and consumption. In the U.S., we have a very positive outlook going forward. The bill recently announced by President Biden further reinforces our positive outlook, not only short-term, but also looking ahead to next year. This encourages us to believe we can expand our results down the road, so I will now leave the floor to Scardoelli to elaborate on the dividend payout issue.

Perfect. Thank you, Carlos, for your question. This is a common question, especially considering the substantial improvement in our results. I would note that our dividend payout policy is set as a percentage of net income, unlike the common practice in the U.S., where companies often focus on cents per share. This allows for automatic adjustments based on results. Therefore, with the improvement of our EBITDA, the related net income experiences comparably fixed expenses, thus representing an improvement in terms of dividend payouts. We are not contemplating changes to our dividend payout policy at this time, reminding you that the Board approved BRL 0.4 cents per share for Gerdau and BRL 0.2 for Metalurgica, which is close to the total of the dividends distributed last year. Thus, the dividend payout is being adjusted, and moving forward, we may revisit this topic, but the policy currently remains at 30%. Again, we generate strong dividends, with the dividend yield currently at 8% when considering the last 12 months and an annualized estimate of 5% if we consider the dividend being paid this quarter.

Our next question comes from Caio from Crédit Suisse. The question is related to your last comment. Capital allocation, with leverage going below 1x net debt over EBITDA ratio, do you think there is a likelihood of dropping even further? What would be Gerdau's capital allocation going forward?

In a way, part of that question is linked to the dividend part, which I already addressed. Regarding capital allocation, we must remember that we will still maintain a strong cash generation, but there is also a more robust CapEx program this year. Even though we spent BRL 400 million in the first quarter, our plan is to spend BRL 3.5 billion throughout the entire year. I believe our CapEx investments, reflected in the slide we discussed on return on employed capital, shows our level of ROCE at 14%. Lower leverage indicates a direct return to shareholders. This means strong dividends and a CapEx approach based on ROCE. Currently, our return is high, so we trust that returns in terms of results to shareholders are well-aligned considering the good returns of our employed capital and relevant CapEx expenditures.

Our next question comes from Daniel Sasson from Itaú Bank.

Now looking beyond the second quarter, regarding contracted volume, better prices at the international market in Brazil, do you believe that margins could be sustainable going forward, particularly above 35%? Could you elaborate a bit on the global dynamic related to steel exports to China? I think this would be helpful. Thank you.

Let me answer that question. Scardoelli, please feel free to add. As I mentioned, Daniel, it is a pleasure to talk to you. Today, we see structural conditions in the coming quarters where we believe these margins should be maintained. To address the second part of your question, which is very interesting, my view currently considers many variables indicating a potential structural change in the global steel scenario. If you evaluate the longer-term landscape compared to the past ten years, it could differ significantly. Much of this is linked to the moves originating from China, which has a profound impact on the global steel market. Changes such as the adjustments in discount rates for several steel milling products effective from May 1, similar to rebar, wire rod, etc., indicate significant shifts. On the same day, there were also policy announcements regarding import taxes and ferrous raw materials aimed at decreasing import costs, which I perceive as both short and long-term adjustments. Another aspect reflecting long-term changes in the Chinese market is the significant increase in their production through electric furnaces driven by scrap material, escalating from 15 million tons per year to nearly 200 million tons per year. This situation applies pressure on the global cost of scrap, something we haven't observed in recent years, indicating important structural change that warrants recognition. Additionally, the Chinese government is actively working on reducing GHG emissions, which is evidently a sustainable endeavor. According to my evaluation, they are signaling that profound changes will emerge in the coming years. So, while the upcoming quarters showcase sound fundamentals, examining the extended outlook, I believe we are entering a period of several years with more robust outcomes than we have witnessed in the previous ten years. Scardoelli, if you'd like to add anything, please feel free.

No, thank you, Gustavo. I think you covered everything.

Our next question comes from Thiago Lofiego from Bradesco.

The margins of your North American BD are still growing in the second quarter as volumes improve, and the spread is higher. In your special steel business, are you seeing any impact on demand because of the lower production of automobiles?

Let me address that. Thiago, thank you for your questions. In our long steel operation, we see an even more positive landscape. Demand remains robust, and we anticipate expansion in the upcoming quarters alongside the recently announced infrastructure package. Currently, our spreads are growing, even with the heightened scrap prices. In North America, the horizon looks promising. Speaking about special steels, we are not significantly impacted by difficulties in vehicle production, neither in the U.S. nor in Brazil, due to a robust inventory recovery in steel. In the U.S., approximately 400,000 vehicles are still parked by OEMs awaiting electronic components. This situation undoubtedly complicates fleet expansion. However, we haven't felt a prevalent dip in demand, as the inventory replenishment is ongoing both in Brazil and the U.S. Our anticipation for upcoming quarters is a gradual stabilization, with full stabilization expected in the fourth quarter. In our case regarding special steels, we firmly believe the impact will be quite mild, significantly less than in the broader chain.

Our next question is from Leonardo Correa from BTG Pactual.

How is your order portfolio and inventory levels in Brazil? How long do you think it will take for the inventories to be replenished? Are we looking at a new level of EBITDA margins in Brazil? There's considerable debate about recurrency; some see 30% margins as the new normal. This is a similar question to the one asked earlier regarding the margins in Brazil.

I can respond to that as well. Our order inflow across all segments remains robust, which has allowed us to more quickly replenish inventories. I want to emphasize our commitment to customer service, ensuring our clients are not experiencing any steel shortages. As of now, inventories are similar to the levels we had in February and March. We project these inventories to resume normal levels by June or July. Regarding the EBITDA margins, Scardoelli, you might want to elaborate on what I mentioned earlier. I feel confident that the fundamentals of steel demand remain quite robust in Brazil, particularly across all sectors, suggesting continued strength in margins for the quarters ahead.

Indeed, our business model in Brazil has proven resilient in the lower part of the cycle. During challenging times, we have been able to perform above-average compared to the global industry. We have a strong model that becomes even more effective when markets are positive, which is indeed the case presently. You previously mentioned developments in China, which are a structural element influencing our setup. We're seeing trends that suggest a forward motion over the coming quarters and possibly years. Therefore, our business model responds well to this momentum. Whether these circumstances will define the 'new normal' for margins remains contingent on other variables or assumptions. However, we anticipate an extended cycle in commodities with attractive pricing. Hence, our margins should remain at favorable levels. Furthermore, as Gustavo mentioned, our operations have continually adapted to work more efficiently and also incorporated the zero-based budgeting methodology as well as the annual reduction of $300 million in SG&A expenses, which positions us to capitalize effectively during positive market scenarios.

Our next question comes from a retail investor. I'd like to take this moment to mention that Gerdau has 200,000 individual shareholders. The next question is from Jim Wilson Carnado: In terms of company governance, does Gerdau intend to migrate to Novo Mercado? Also, what about the payout? Do you plan to increase the dividend payout?

Scardoelli, could you address that?

Regarding dividend payout, I believe I addressed that previously. Dividends are increasing significantly as per our payout of 30% net income. In terms of governance, Gerdau is currently at Level 1 on Bovespa, which is a strong governance level. Many key aspects required by Novo Mercado are already being complied with, ensuring we maintain a 100% tag along process. Our governance practices are advanced, and considering our defined control structure, pursuing Novo Mercado is not in our immediate focus.

Thank you. Our next question is from Rafael Barcellos from Santander.

Could you comment on the utilization capacity in Brazil? Additionally, what is the strategy behind the restart of the Araucaria unit in Paraná?

Let me answer that question. Rafael, thank you for the inquiry. Our utilization capacity in Brazil is not at the limit. We have available capacity, and the restart of Araucaria is a good example. Our utilization is around 75% in Brazil, while the highest utilization is in the U.S., which is close to 91%. The aim of restarting Araucaria is to augment the availability of crude steel for our operations in Brazil. Our operational characteristics enable great flexibility between our plants, not only concerning steel production and rolling mills but also regarding raw materials. We can mix use of scrap through our bio reducer while having access to pig iron as an alternative in Minas Gerais. Therefore, the goal with Araucaria is to boost steel production that will supply various rolling mills across the country, enhancing our production planning and logistics to better serve our customers and reduce costs.

Our next question comes from Marcio Farid from JPMorgan.

Could you comment on the premium levels in Brazil versus parity abroad? What is the balance level considering supply and demand in the steel industry?

Premiums remain low due to the ongoing increase in international product prices and FX factors. Currently, premiums for both longs and flats are around 10%. Historically speaking, these levels are low. As regards the supply-demand balance in Brazil, the introduction of new capacity and restarts in production are currently ongoing. As previously mentioned, while inventory recovery is proceeding slower than anticipated, I believe that by mid-June or July, the entire chain will achieve a full recovery to inventory levels. Nonetheless, demand and order inflow remain robust.

Gustavo, our next question comes from Geraldo Mellone Jr. from Bresser Asset Management.

What is the amount of recurring CapEx for Gerdau considering projected needs for 2022 and beyond?

Scardoelli, can you address that?

Regarding CapEx, this currently has a recurring component. We are focusing our investments, particularly on our Ouro Branco Mill, which is an integrated operation following a distinct investment cycle compared to scrap-based mills. They have more constant and regular CapEx cycles. Historically, we have kept a tighter operation during the low periods over previous years. In the long-term projection, I would say that it would slightly be below or equal to depreciation. It won't necessarily happen every year, but looking at a longer time frame, it should be kept just below what we aim for. We'll continue updating the market annually to convey our capital expenditure outlook as the market dynamic can change significantly.

Our next question comes from Marcelo Audi from Cardinal Partners.

Capital allocation has been a key point of discussion today. How can we ensure that capital allocation will yield returns on current investments? Given your cash flow generation, do you think the ROE should decline due to excess cash? What should be expected in the context of Gerdau's new cash generation scenario, especially considering your investment discipline?

Scardoelli, can you respond to this?

Absolutely, Marcelo. Pertaining to our discipline in capital allocation, it holds paramount importance within our company structure. We've experienced a strong growth period followed by a challenging horizon in the industry, particularly during China's steel export increases, which prompted us to revisit our portfolio strategy. Over these years, we executed divestments, restoring our return on employed capital, a level we aim to maintain moving forward. Gustavo, the executive team, and the Board are meticulous in evaluating CapEx and overall investment decisions, ensuring we deliver adequate returns on capital input. Regarding cash generation, with current interest levels, we can operate with lower cash levels than historically seen. We typically had around $2 million in cash within the company. Currently, we're closer to BRL 1 billion; we could manage less if needed since we have credit lines available for immediate access, reinforcing our confidence in operating with a lower cash threshold.

Our next and before last question comes from Ricardo Caballero from Rio Verde Investimentos. In terms of cash with Metalurgica Gerdau S.A., which is quite robust, do you already have specific plans for that cash?

Scardoelli, please.

This cash is currently allocated to safe investments with good liquidity, so there's no defined destination for it. It is invested and retains high liquidity, but our intent is to keep it available for the current operations of Metalurgica, primarily serving as a holding for Gerdau S.A.

Our next question comes from Markus from GTI. In relation to your financial cycle or cash conversion cycle, do you view this as something recurring moving forward? This is our last question from the chat, and I want to express our gratitude for your participation.

I'll let you address that one as well.

I believe we are discussing our working capital financial cycle. At the end of 2020, the cycle level was likely below normal. Presently, it stands at 57 days. Therefore, I would say that between 55 and 60 days constitutes an adequate cash conversion cycle in terms of working capital. We consumed cash to facilitate working capital adaptiveness during this first quarter in response to market fluctuations. This trend may persist into the second quarter as activity levels remain high, as noted by Gustavo during his presentation.

Thank you, Scardoelli. We now conclude the Q&A session. I want to reiterate that this was our first video call, so if any connection issues arose, please feel free to contact our IR department for clarification. I now turn the floor back to Gustavo and Scardoelli for their final remarks.

To conclude this conference call, I extend my gratitude to all of you for joining us today. It's always a pleasure to connect with you. Our team, Scardoelli and myself, remain available for any follow-up questions or insights you may require. I'd also like to take this opportunity to invite you to our next conference call regarding the second quarter of 2021, scheduled for August 4. Thank you all, and please take care of yourselves and stay healthy. I wish you a wonderful end to your week.

Thank you, Gustavo. Gerdau's conference call is now concluded. Thank you to everyone for joining us. We had over 200 participants today. Thank you, and have a great afternoon.