Gerdau S.A. Q2 FY2021 Earnings Call

Good afternoon. Good afternoon, everyone. Here is Rodrigo Mala, Investor Relations at Gerdau. Welcome to our conference call to discuss Gerdau's results for the second quarter 2021. Here with us today are Mr. Gustavo Werneck, CEO of Gerdau; and Harley Scardoelli, CFO of Gerdau. They will both do the presentation for you today. We would like to say that any information related to Gerdau's business outlook, projections and operating and financial targets are mere predictions and forecasts based on the management's beliefs that even though we believe that the company's comments are based on reasonable assumptions, there is no guarantee that future events may affect this evaluation. Now I would like to give the floor to Mr. Gustavo Werneck. You may proceed, sir.

Good afternoon, everyone. I would like to start by welcoming all of you to our meeting to discuss Gerdau's results related to the second quarter of 2021. I hope you are all well and in good health and also going through these hard times the best possible way. As Rodrigo said before, also joining us today is our CFO, Harley Scardoelli. And for both of us, it's always a pleasure to talk to you about our quarterly performance and also clarify possible issues that may come up during this presentation. Scardoelli will start with the highlights of the results for the quarter. And next, he will talk about the performance of our operations. After that, I will share with you some information about our ESG agenda and comment about the markets where we operate. At the end, we will both be available to answer your questions and give you more details about our results. Well, Scardoelli, now the floor is yours and please continue with our presentation.

Thank you, Gustavo, and good afternoon to everyone. It's a pleasure to be here again to discuss our quarterly results. I hope you are all safe and doing well. We will start the presentation by reviewing our financial results and the key factors that influenced the company's consolidated EBITDA, which increased from BRL 4.3 billion in the first quarter to BRL 5.9 billion in the second quarter of 2021, setting a record EBITDA for Gerdau in a single quarter. All of our operations performed exceptionally well in the second quarter, achieving a production capacity utilization of around 80%, the highest level since 2018. This success is due not only to favorable market conditions but also to our strategic capital investments over the past few years across all operations. These investments enhanced our agility and efficiency, allowing us to capitalize on the profitability opportunities presented by the current market environment. In this quarter, we reached a record performance in our North America operation with an EBITDA of BRL 1.4 billion, more than three times last year’s figure, with a margin of 20%, a level not seen since 2008. This performance reflects the recovery of our industry in the non-residential construction sectors and the gradual resumption of activities driven by the ongoing vaccination efforts in the country. In the second quarter, the utilization of steel capacity in North America surpassed 90%, compared to less than 75% in the same quarter last year. Brazil's business segment also performed strongly, posting an EBITDA of BRL 3.6 billion in Q2, with an EBITDA margin of 40.7%, another record for Brazil's quarterly EBITDA. Brazil has remained robust in its main consumer sectors, prompting us to allocate a significant portion of shipments to the domestic market, with only 10% going to international markets. In past years, 30% to 40% of our shipments from Brazil were exported, but our current focus is on domestic demands. In the second quarter, the steel capacity utilization in Brazil exceeded 80%, compared to about 60% in the same quarter of 2020. The South America business segment had a performance comparable to Brazil, achieving an EBITDA of BRL 494 million with a margin of 38%. This segment has benefited from the strong civil construction market, especially in countries like Peru. In Argentina, we encountered production limitations due to COVID-19 challenges during the quarter, but production has since returned to normal levels. In the second quarter, steel capacity utilization in South America approached 80%, compared to approximately 40% in the same quarter last year. Lastly, our Special Steel division experienced robust growth due to the resurgence of the automotive industry in both Brazil and the U.S., reporting an EBITDA of BRL 495 million in Q2 with an EBITDA margin of 18.7%. We are monitoring the semiconductor supply situation in the automotive sector closely to adjust our production accordingly. Moving to our cash flow and working capital, our positive free cash flow for the quarter stood at BRL 1.2 billion, supported by a historical EBITDA of BRL 5.9 billion and effective management of our assets in recent months, which minimized our gross debt exposure to foreign currency fluctuations. Over the last 12 months, our cash flow was positive at BRL 7 billion, reflecting our commitment to appropriate capital remuneration and maintaining a strong liquidity position. The cash conversion cycle increased from 57 days in March to 60 days in June, primarily due to accounts receivable and inventory levels amid high global steel demand. The first half of the year primarily saw an increase in working capital. We now have a more balanced cash conversion cycle, allowing us to leverage the favorable market conditions we are currently experiencing, which we expect to continue into the latter half of the year. Regarding our debt position, at the end of June, our net debt was BRL 10.2 billion, a decrease of BRL 600 million since March. This reduction was influenced by the exchange rate impact on our foreign-denominated debt, as the Brazilian real depreciated by about 12% against the U.S. dollar in this period. Approximately 74% of our total debt, around BRL 12 billion, is denominated in U.S. dollars. Recently, we have implemented strategies to decrease our foreign exchange exposure, taking advantage of market conditions to increase our debt in Brazilian reals to 26% of the total. This adjustment provides a natural hedge since a significant portion of our EBITDA is generated in U.S. dollars and many of our assets are located in North America. Furthermore, 99% of our debt is long-term, averaging 7.7 years with a nominal average cost of 5.4%. Our debt amortization is well distributed over the upcoming years, with a concentration of repayments only after 2027. We have also seen an improvement in our financial leverage, measured by the EBITDA over net debt ratio, which declined from 0.96x in Q1 to 0.65x in Q2, due to the strong EBITDA generated. This leverage level remains within our financial policy targets, which stipulate that this ratio should stay between 1 and 1.5x, positioning us at a favorable level considering the cyclical nature of our business. Finally, the company’s return on capital employed, observed over the past 12 months ending in June 2021, has significantly exceeded our cost of capital, recording a return of 22.5% against a cost of approximately 9.5%. This has resulted in value creation for our shareholders and appreciation in our stock market performance. In conclusion, the evolution of our net income and dividend payout over recent years reflects better results and a considerable reduction in our net debt, positively impacting our dividend yield. This yield rose from 0.7% in 2017 to over 8% in the last 12 months. The annual dividends prepayment this quarter was based on adjusted results and does not include nonrecurring gains associated with the Supreme Court’s recent ruling on tax exclusions. Thank you all for your attention, and now I will hand the floor back to Gustavo for his thoughts on the market outlook.

Thank you, Scardoelli. Now let's move to the next slide, Slide #7. I would like to provide an update on the key topics related to Gerdau's ESG journey and share the highlights and progress of our agenda. Sustainability is a core part of Gerdau's strategy, and we aim to discuss it more frequently in our conference calls. I want to emphasize our commitment to sustainable management of natural resources and our efforts to produce renewable energy. Recently, we announced our plans to develop a photovoltaic power station in Brasilândia de Minas, Minas Gerais, in partnership with Shell Brasil. Named Aquarii, this solar park will start supplying part of the clean energy to our production units in Minas Gerais in 2024. This initiative is part of our goal for energy self-efficiency and finding cleaner energy sources to expedite the decarbonization of our mills. This also aligns with our new business strategy under Gerdau Next. Furthermore, last year our gas emissions were half the global average for the steel industry, highlighting our commitment to addressing global challenges like climate change and reinforcing our recycling efforts as our main raw material comes from recycled steel scrap and charcoal from planted forests. We publish various KPIs, including the carbon intensity indicator, in our annual report, tracking our social, environmental, and financial progress. Our advances in diversity and inclusion are notable; we increased the percentage of women in leadership roles from 17% in 2018 to 23% in 2021, with the aim to reach 30% by 2025. There's also been a significant rise in the number of black leaders, moving from 16% in 2019 to 26% currently, totaling 570 black leaders, thanks to our internal leadership and internship programs. While we recognize we still have work to do, especially in top leadership, we view inclusion as a journey, and we are committed to creating a more diverse and inclusive environment. Recently, we signed a pact to promote racial equality, serving as a guide for companies aiming to implement affirmative actions and invest in public education for black professionals. Encouraged by our cultural transformation, we continue to integrate our ESG agenda into business decisions, striving for sustainability in our 120-year history. Now, let's move to the next slide to discuss the markets where Gerdau operates and the outlook for the steel industry in the coming months. I want to begin with our North America operations, where shipments are expected to remain elevated in the third quarter due to a strong order backlog, driven by economic recovery and robust activity across steel-consuming sectors, particularly construction. Consumer confidence is also rising, reinforcing our optimistic outlook. The Institute for Supply Management reported the activity index for the nonresidential construction sector reached 57.1 in June, the highest in nearly a decade. The $1.2 trillion infrastructure investment package from the Biden administration is another reason for our optimism about the North American market, with anticipated additional steel demand ranging from 2 to 5 million tonnes annually, depending on the package's specifics and implementation timeline. We are well-positioned to meet the growing demand for steel these new infrastructure projects will create. In that context, we are advancing our strategic plan for long steel operations in the U.S., focusing on strong performance, value generation for our customers, and expanding our product portfolio, which allowed that operation to achieve margins above 20% for the first time since 2008. Our mills in North America are currently operating at over 90% capacity utilization. We have recently modernized and technologically upgraded the profiles and structural steel rolling mill at our Petersburg unit in Virginia, enabling us to boost production levels to meet customer needs in the coming months. Now, moving to our Special Steel operations in the U.S., vehicle production is currently misaligned with sales due to a chip shortage, with an estimated 1.5 million units underproduced in the country. OEMs globally anticipate more than 4 million units will not be produced for the same reason. However, the U.S. market outlook remains positive, with projections for a 45% increase in heavy vehicle production this year, driven by economic recovery and growth in the oil and gas sector as the rig count surged by 75% in June compared to last year. Additionally, our Monroe Mill in Michigan has completed its modernization, positioning us to enhance cost efficiency and offer higher-value products. In Brazil, despite the chip shortage affecting the automotive sector's production of approximately 230,000 vehicles from January to August, demand for special steels remains robust for both light and heavy vehicles, driven by opportunities in the domestic market and reallocated shipments to international markets. Data from ANFAVEA suggests that vehicle production is projected to grow by 22% year-on-year to 2,463 units in 2021, with a notable 42% increase for trucks and buses. The market conditions are favorable, especially due to low vehicle inventory, which remains around 15 days, along with expectations from agribusiness and construction sectors positively impacting heavy and semi-heavy vehicle segments like trucks. It's important to note that the heavy vehicle market is less affected by the chip shortage compared to light vehicles. With this long-term positive outlook, I'm pleased to say that we have resumed operations in the melt shop in Mogi das Cruzes, São Paulo, expanding our product offerings. Moving to the long and flat steel market in Brazil, the second quarter has seen a resurgence in all steel-consuming sectors, indicating a positive performance in the second half of the year. Our shipments of longs and flats to the domestic market rose by 46% year-on-year between April and June and 10% quarter-on-quarter. The construction industry continues to be active, with active project sites increasing by 43% from the previous quarter. Projections indicate that real estate launches and sales will rise by 14.2% and 7.5% respectively in 2021, according to studies. Retail sales are expected to grow by about 6%, boosted by emergency aid measures from the government. Moreover, infrastructure investments are anticipated to total BRL 127 billion this year, influenced by both public and private projects. The industrial sector showed strong recovery, particularly in agribusiness, highways, energy, durable goods, and machinery and equipment, with growth resulting from internal demand and realignment of global supply chains. According to IBGE, the industrial GDP is projected to grow by 4.2% in 2021, especially in agriculture, energy, and highway equipment sectors. In South America, starting with Argentina, we resumed operations at our melt shop in early July following restrictions on oxygen supply due to pandemic measures. The rolling operation continued uninterrupted through our Brazilian plants. Local civil construction activity in Argentina remains strong, growing 6.5% month-on-month and 31% year-on-year. Lastly, in Peru, steel consumption is stable, driven by public investments in civil construction, which grew by 20.5% year-on-year in May. We continue to monitor the local presidential elections in Peru, but currently do not foresee any significant changes impacting our sector. Now, turning to Slide 9, I want to emphasize that in the second quarter, we invested BRL 566 million in PP&E globally, contributing to a total investment of BRL 1 billion in the first half of the year, with an estimated CapEx for 2021 at BRL 3.5 billion. I invite you to Slide 10, which connects to that CapEx investment. This amount includes early investments in modernization and expansion of long and flat steel capacity at the Ouro Branco Mill in Minas Gerais. This investment aims to increase our annual production capacity for coiled hot rolled strips by 250,000 tonnes and for structural profiles by 500,000 tonnes to meet the growing demand in Brazil. In structural profiles, we continue to pioneer in developing the metallic construction market in Brazil, which began in the 2000s. Our commitment remains focused on fully supplying the domestic market. Additionally, I want to mention the growth of production in our SILAT plant in Ceará, now renamed Gerdau Caucaia, which will serve the northern and northeastern markets. At the end of July, we resumed operations in one of our rolling lines for rebars, bars, and profiles at the Cosigua unit in Rio de Janeiro after a seven-year hiatus, aimed at meeting high demand from construction and industrial sectors. The plan to restart activities at the Araucária mill in Paraná is on track, with a restart expected in the second half of the year, which will help optimize our product supply across the country. Thank you all for joining us today and listening to our updates. As always, Scardoelli and I are available to address any questions you may have and provide further details on the points of interest. Rodrigo, I turn the floor back to you to organize our Q&A session. Thank you for your time.

Thank you, Gustavo. Thank you, Scardoelli. And now we will initiate the Q&A session for questions coming over the phone. Our first question comes from Rodolfo Angele from JPMorgan.

My two questions are: first, I would like to ask Scardoelli to elaborate a little bit more on the working capital of the period. This is something that probably consumed a bit of the potential cash flow of the company. But we also know that when prices are escalating, it's just natural that this would impact your working capital. But I would just like to hear something more on the strategic side. Is there anything in the numbers that is part of a preparation for a better second half? Gustavo just mentioned that we have a new melt shop at Cosigua and also in the plant in Paraná? I would just like to learn more about your working capital strategy. And my second question is to Gustavo. I would like you to comment on the business environment in Brazil in regards to prices because we've been hearing that the price increases have stopped. I just want to know whether this is true or whether we should expect a carryover towards the next half year. And also if you have any concerns related to imported goods.

Thank you, Rodolfo. Before I hand over to Scardoelli, who will discuss working capital, I'll return to talk about the market. Regarding working capital, this is a strategic topic for Gerdau that we have been examining for a while. As we go through this period, it is essential for us to prepare adequately for a strong market in the second half of the year. Our focus during the last quarter has been on ensuring we can fully support market demands in the fourth quarter, making it crucial to manage our cash flow now. We expect that the opportunity to generate more free cash flow will arise later in the second half of the year. The preparations we've made are strategic. In July, we saw significant growth in construction activity, which is continuing. The decision to resume operations at the Cosigua rebar rolling mill, where we aim to increase tonnage, is designed to yield a strong EBITDA in the third and fourth quarters. Scardoelli will provide more details on this, but we have had important discussions recently to prepare for this market. Now, I'll turn it over to Scardoelli to elaborate on the topic, and then I'll address the market, pricing, and overall business environment.

Fine. In fact, all of the points that Gustavo mentioned are very important points to help us run a more strategic evaluation of our working capital. And it's also important to mention that this first half in terms of free cash flow, I mean, this was the best free cash flow in a half year in years, unlike other previous years where traditionally, if you look back eight years ago, Gerdau in the first quarter always had a negative free cash flow, meaning that this reconstruction of working capital, which is something that usually happens earlier in the year, was so impacting that free cash flow became negative in the beginning of the year to then become positive. But this is not the case this year because we started in the first quarter already posting a positive free cash flow, and it remains positive in the second quarter. So for the year, we are not concerned about our capital position because it remains strong. And the trend towards the end of the half year is that we will have an optimized working capital, and we will no longer have the need to build working capital. But now referring to the strategic side, we see a very highly demanding market, and we are ready to serve the third and fourth quarter, which are expected to be very strong. We expect to see significant growth in demand. And we see many good opportunities. The other point is that we are market leaders in many segments. Therefore, we are constantly pursuing our commitment to fully serve these markets, providing excellent service levels. And to do that, we need an adequate working capital level. We must have all the necessary inventories to ensure full service to our customers. We gained market share during the pandemic period. And to maintain that market share, we have to maintain good service levels and an adequate ROE. We reinforce also our inventories of some inputs, and I'm talking about coal, alloys, and refractories, and to do an offset of costs and risk mitigation. I mean in the second half of the year, we faced issues related to energy that are not yet sold. Therefore, having a good inventory level puts us in a more comfortable position to serve our markets and our customers. And finally, to the points that Gustavo mentioned, and it's important that I mention it, we are also adjusting our production to face this stronger demand. So we are bringing back the rolling mill. We are resuming operations of the rolling mill at Cosigua. We are resuming operations at the melt shop in Araucária, as we did with the one in Mogi das Cruzes. We have a new rolling new in the Northeast that used to be the old SILAT. It's now Gerdau Caucaia. Therefore, we need working capital to operate these new operations. So that's what I wanted to say about working capital and the free cash flow because, once again, this first half of the year was very strong. And so now talking about dividends, I mean, it remains positive even though we paid BRL 1.6 billion in dividend payout.

Thank you, Scardoelli. I would like to emphasize that we are leaders in many market segments, so we are fully committed to supplying the market. We see numerous export opportunities and are preparing to meet the increasing demand, particularly in construction, a robust segment that is expanding rapidly in Brazil. We've seen significant growth in new construction projects, making it essential for us to prepare accordingly. This includes growing our inventories and effectively managing our working capital to align with the anticipated market demand. The retail, industrial, and civil construction segments, as well as various infrastructure projects, all remain strong. We expect strong demand in the coming years and months. While we cannot disclose many details due to competitive reasons, we recognize that pricing in Brazil is stabilizing, though we continue to pursue additional margins. Our working capital strategy for the second half focuses on strict cost management, particularly regarding input costs. We've noted challenges in electric energy and metallurgical coal prices. Regarding thermal power plants, while some regions are facing heat waves, the South is grappling with colder weather. Additionally, while scrap prices have slightly decreased by about $20, we anticipate a further drop in scrap prices in Brazil in the second half. Therefore, we believe we are well-prepared to manage our costs, which will enable us to deliver consistent results in the upcoming quarters. Lastly, we have a unique ability to anticipate market trends, as demonstrated by our market share gains in Brazil, particularly during the pandemic, which allowed us to achieve even greater success. I hope this provides further insight into our expectations for the company's performance in the near future.

Our next question comes from Daniel Sasson from Banco Itaú.

My first question relates to the potential prepayment of extraordinary dividend payout, whether you anticipate the taxation of this dividend payout due to the tax reform. Or what would be your target? How do you see that potential tax reform in terms of capital allocation? My second question is about your cash cost. And you just talked about, Gustavo, about a possible expected drop in scrap prices in the second half. In the second quarter, your cost performance was slightly better vis-a-vis your peers even though the scrap prices were not as high as iron ore prices. What should we expect in the second half? Is it possible to imagine that scrap prices will drop? I mean, could we still see some margin increase?

Scardoelli, can you please start with the dividend, and then I will continue talking about scrap prices?

In terms of dividends, we believe our policy is adequate, so we will maintain a 30% dividend payout. While there is a tax reform being discussed, it is still in the early stages, making it difficult to predict when it will conclude. We typically prepay our dividend payout, and we have three dividend payout moments. This means we are largely protected in terms of our overall dividend payout. For now, we will maintain our policy and wait to see the outcome of the tax reform. We feel confident that we have time on our side. I also want to highlight that this year, due to our current results, I may sound repetitive, but when our EBITDA increases significantly, as it is now, both EBITDA and net income are affected by fixed expenses. Since interest rates are stable and lower than anticipated, an increase in EBITDA leads to a rise in net income. That's why we have maintained our current dividend level. In the first half, we have already paid out nearly double what we distributed last year. Therefore, we remain confident that our policy is appropriate, and any issues related to tax reform will need to be assessed as we learn more.

Daniel, we will look for higher profitability. But we are in a very unique position in Brazil because we have a flexible production operation that will allow us to seek for additional flexibility in costs. There will still be volatility in scrap prices not only abroad but also in Brazil. And we have this very unique capacity to navigate through this universe and seek for additional opportunities. We do not believe in a consistent reduction in demand globally, but export offerings are being reduced both in China and Russia. And another relevant aspect when it comes to scrap is that people are constantly seeking further reduction in GHG emissions. And a fast way to reduce GHG emissions in steel production is by replacing or by scrap. Therefore, scrap will continue to experience high demand globally. So with higher scrap demand, prices will be sustained. I would say that the name of the game to look for further profitability in the second half is in good cost management. And we find ourselves in a very unique position because of our business models and the way we collect scrap and our flexible quotas. And this will certainly allow us to lead in terms of profitability and opportunities to reduce costs even further.

Our next question is from Daniel Leonardo Correa from BTG Pactual.

My first question relates to Gerdau Metalúrgica. Sometimes we are asked about your cash position, which has been stagnant for a few months. I’m not sure if you have any updates to provide. What is your priority? What is the current figure? This question has been coming up more frequently in recent weeks. My second point is also about a question we've been receiving regarding a potential energy crisis or the risk of power rationing. I'm curious about what Gerdau is doing to prepare for potential energy shortages and whether that includes any preparations for possible energy rationing.

Okay. I will begin, and then you can take over before I discuss energy.

In terms of our cash position, the cash is secure and invested in daily liquidity instruments with no risk. We plan to maintain this investment and currently do not have any specific plans for that cash. Additionally, we do not foresee any investments that would diverge from the company's strategy, which focuses on holding and the interests of Gerdau's controller. For now, we will keep the cash in its current liquid form.

Leo, regarding energy and demand, we are not overly exposed. Our self-generation accounts for 80% of our energy production, primarily from our hydroelectric power plant in Dona Francisca in the South. This power plant will supply energy to our recently reopened units. We have also taken steps to increase our inventory to fully meet market demand. Consequently, we are well prepared for any potential energy risks. On the cost side, we are well protected by long-term contracts, and with our self-generation, the remaining challenge is new capacities like Cosigua, which currently depend on the spot market. Overall, we are equipped to handle various scenarios during this upcoming water crisis.

Our next question is from Rafael Barcellos from Santander.

Congratulations on your results. My first question is a follow-up regarding demand. What is the share of civil construction in your Brazil operation's portfolio? It was previously one-third and then two-thirds. What is the current position? Additionally, I would like to know more about your inventory status. My second question pertains to capital allocation. Considering the company's financial policy, I believe the first metric to look at is net debt over EBITDA, which should be between 1 and 1.5 times. From what I understand, the company is quite comfortable in this regard. However, the gross debt is currently at 15. Is this the level the company aims for, even prior to discussing capital allocation? Or do you believe there is a need to revise that figure? I would also like to learn about your capital allocation strategies within the company.

Let me start with demand and inventory. Retail accounts for about 60% of our business. We are adopting a more discreet strategy and have previously discussed this, as we increasingly aim to serve the end consumers, specifically the construction material stores. We have been focusing on this for the last five years, with heightened emphasis over the past two years. Consequently, our ability to serve these end consumers has grown. In Brazil, there are 150,000 construction material stores. Previously, we reached 5,000, but soon we will be able to serve 30,000 of these stores. Regarding profitability in Brazil, we need to consider both demand and our strategy to seek additional margins through our Juntos Somos Mais initiative. This is a key strategic move, reflecting one of our most decisive actions in recent years. Retail plays a significant role in our overall strategy, and the self-construction market remains robust, continuing to require many products we developed, such as meshes and materials for self-construction, which has become crucial for us. Regarding inventories, they are recovering and are nearing historic levels. However, we notice an upward trend in the reinforced concrete segment recently. We experienced a temporary reduction in inventories across the chain, which is why we are adding 360,000 tonnes from Cosigua to this product line to meet the increased demand and fully serve the market. Scardoelli, you can now address the second part of Rafael's question.

Regarding our leverage, it is a key indicator of our financial strategy alongside our growth. Currently, our leverage is significantly lower than the initial level established by our Board. It's important to provide some context here. The target range we set was when our leverage was around 3. It peaked at 4 and then dropped to 3, at which point we developed our financial policy. We have now reached a level below that, which is quite satisfactory. We are comfortable with this because we understand the cyclical nature of our business. Over the last six months, we generated BRL 10 million in EBITDA. Even if it were BRL 5 million, this leverage level would still be appropriate. Thus, we aim to keep this leverage around 1 to 1.5. As for our goal regarding maximum gross debt, we remain committed to that. In the last quarter, we reduced our gross debt from BRL 17.8 billion to BRL 15.8 billion, cutting BRL 2 billion thanks to foreign exchange effects and debt amortization, and we will keep working towards this objective. This approach is prudent and well-suited to our industry. It's crucial that we maintain a healthy balance that will enable us to keep growing, meet market demands, and seize organic growth opportunities. This strong balance is facilitated by our financial policy.

Our Next question, from Caio Ribeiro from Crédit Suisse.

My first question is about the balance between the external and domestic markets. I understand you're increasing shipments to the domestic market, but can you share if this trend is expected to continue? Is there still potential for further increases in domestic shipments? Additionally, how do you view export opportunities compared to the domestic market? Lastly, do you think you could introduce a buyback policy to support your dividend strategy?

I'll answer the first part of your question, and then Scardoelli can address the second part. Caio, we will continue to prioritize the domestic market because the profitability levels are higher. This approach also helps sustain the development of the country and contributes to the growth of the Brazilian GDP. Exports have been declining, from 30% in 2019 to 15% in 2020, and only 4% in the first quarter of 2021, with a slight increase to 8% in the second quarter of 2021 as we catered to the Argentinian market. However, this will not be the case in the third quarter since our melt shop has resumed operations. Therefore, we are completely focused on the domestic market. If we identify other export opportunities in the coming months with high margins through strategic partners, we will consider those. However, our current focus is on fully serving our Brazilian customers. Now Scardoelli, you can address the other topic regarding the buyback.

The buyback serves to hedge our options program. Previously, it was based on options, but now it relates to shares, which are part of the long-term incentives for our executives. This strategy was solely for hedging purposes, and our hedge position remains strong. As for a more aggressive buyback program, that's also on the table for future consideration. However, our current priority is to reduce gross debt. Our growth program requires some capital expenditures this year, so that is our immediate focus. There are no plans for a buyback at this time, but it remains an option for us. If we start contemplating when it might happen, we are currently evaluating our market capitalization and net debt, which continues to decrease. Based on market expectations and analyst reports, our valuation multiple falls between 3 to 4 times, which historically is considered low for this industry.

Our next question is from Thiago Lofiego from Bradesco.

Gustavo about your new coil hot-roll strip rolling mill, I think these are new projects. I think you already talked about the coil hot-rolled strip rolling mill, and I think it's the same project of Ouro Branco M profiles. Where is it? And what is the CapEx for the profiles? And if you could give me a CapEx range for next year, this could be very helpful? And my second question Gustavo, what sector worries you the most on the demand side? Where do you see a lower degree of comfort? Because demand in Brazil remains very good. So where do you see more risk going forward? And in the U.S. metal spreads in the third quarter, do you think we should expect an expansion of metal spreads as spread prices are coming down, whereas steel prices are not coming down?

We will maintain a conservative approach to capital expenditures as we focus on investments in key areas for Gerdau that can provide adequate returns. We often discuss the significance of these two investment decisions which relate closely to our current and future profitability goals. The hot-rolled coil strips rolling mill in Ouro Branco and the heavy plates rolling mill have been performing well. The hot-rolled coil strips mill has been operating at full capacity for some time, and it may be time to consider expanding production. Our Commercial Gerdau division is positioned to distribute this extra production, which will enhance our profitability. This will be the second phase of an existing investment, increasing the capacity of the hot-rolled coil stripes mill from 1 million to 2 million tons per year. Additionally, we will increase our production capacity for structural profiles to 1.1 million tons annually, with the new rolling mill located next to the existing structural profiles mill in Ouro Branco. These expenditures are included in our overall capital expenditure plans. We will release a detailed CapEx disbursement flow at an appropriate time without altering our total CapEx plans. The investment in the hot-rolled strips mill is approximately $200 million, while the structural profile mill investment is about $300 million. On the demand side, I am less optimistic about the automotive sector due to a shortage of components. The global shortage of electronic components won’t be resolved in the short term. However, the market for heavy vehicles, such as trucks and buses, requires fewer electronic components. We will closely monitor this sector, as the market for long and flat products is performing well. In the U.S., we are committed to achieving double-digit EBITDA margins. We have reached a 10% EBITDA margin and, for the first time since 2008, our EBITDA margins exceeded 20%. We expect metallic spreads to increase over the next half year. In recent years, we have been able to purchase scrap in the U.S. competitively, and our operations in cost, customer service, and product portfolio have improved significantly. We believe we are well-positioned to respond to the market’s needs and achieve higher EBITDA margins for metallic spreads. We remain optimistic about our ability to fulfill market demand, enhanced by the upcoming U.S. infrastructure package, which should be approved soon by Congress. This package will support not only short-term demands but also enhance competitiveness in the long run. As a result, we view the U.S. market positively moving forward.

Thank you, Gustavo. If you could give me a very quick follow-up on the U.S. Do you see any potential pressure on the price of scrap in the U.S., even if you're talking about the capacity of price increases for flats. What about metal spread in the next 12 months? How do you see that evolving?

The scrap pressure in the U.S. will continue to exist for prime scrap. Prime scrap is mostly used in our special steel operation. We concluded a very important investment in our Monroe Mill so that somehow we'll be able to mitigate that price pressure on prime scrap. Now we have more competitive costs. But we don't see such a pressure on our obsolescence scrap, which is the scrap we use in our longs operation. We have all the elements necessary to make our operation even more competitive. During this call, we talked about a possible scrap reduction in the U.S., but we are talking about obsolescence scrap, and this does not happen in prime scrap because the demand for prime scrap is way above supply in the U.S.

Our next question is from Eduardo from Morgan Stanley.

Can you please comment on your CapEx for structural profile? I think the connection was not so good and I couldn't capture what you said. Can you give me an idea about your additional EBITDA for these 2 new lines, both coiled hot-roll strips rolling mill and structural profiles? This will be very helpful. And finally, if you don't see any risk of this new capacity entering the market, and whether this could put any additional pressure on prices.

Let me provide an update on our capital expenditures and some figures. We discussed how additional EBITDA can be achieved through increased capacities over the long run. I will mention CapEx and these capacities again, and then Scardoelli will discuss the potential additional EBITDA from these investments. For context, the investment in structural profiles is around $200 million, which is already factored into our budget for this year, meaning no extra expenses will be necessary. We have been cautious about the regions in which we operate, so this won't lead to increased volatility. This investment comes at an opportune time as we have had great success with our current investments. The heavy plate rolling mill has been performing well, initially producing around 500,000 tons and expected to reach 1.1 million tons this year, indicating a strong recovery. We are in a favorable position regarding market share to meet demand, which is why we think it's the right moment to expand our flat product offerings in the region. If we had that capacity available now, it would be fully utilized in the market through Commercial Gerdau. We view this as a low-risk investment that will not impact our existing capacity in Brazil since the materialization of the investment in 2023 or 2024 will coincide with increased demand. The previous investment in structural profiles is significant, and we believe the growth of metallic construction in other regions will also occur in Brazil as investments like Gerdau Next and G2Base develop. We are currently the only producers in Latin America, and increasing our output to 1.1 million tons will enhance our position while enabling us to provide environmentally cleaner solutions. I will now hand it over to Scardoelli to discuss the additional EBITDA for these new investments.

We should consider different assumptions regarding the new equipment and the market entry curve for coiled hot-rolled strips. As Gustavo mentioned, Gerdau has the capability to absorb this demand quickly, which could lead to an increase in our shipments of coiled hot-rolled strips. We are currently operating our rolling mill at full capacity, and if we can add 200,000 tons, we could likely meet the demand. However, making accurate projections is challenging. If we analyze the average EBITDA from our Brazil operation this quarter, considering total shipments without separating domestic and foreign markets, it would exceed $400 per ton. In comparison, the same operation last year had an EBITDA slightly above BRL 100 per ton. It’s difficult to determine when this will enter the market and at what point. This contribution is significant for our business. Additionally, we need to take strategic aspects into account. Our product line is well-diversified in Brazil, covering almost every type of product, which bolsters our status as a strong market player. While I return the question to you for consideration, it’s important to understand the market conditions surrounding the startup of the coiled hot-rolled strips rolling mill, which can be quicker than for structural profiles, which will ramp up more gradually.

Our next question is from Andreas Bokkenheuser from UBS.

I hope you're all well and safe. Just a quick question on scrap. Just wanted to follow up with one question. And obviously, there's been a lot of talk about scrap tightness. You obviously mentioned prime scrap getting tied in the U.S. Some people believe that obsolete scrap will get tight as well. Obviously, we're seeing anybody anywhere in the world, adding capacity, which is EAF capacity, consuming more scrap. So it does definitely look like a tighter scrap market going forward. Do you have any plans on how to kind of alleviate that tightness? Are you thinking about vertically integrating down the supply chain to secure more scrap through buying scrap yards? Are you able to reduce your prime scrap usage via DRI or HBI or another metallic? So that's basically the question, what is your overall metallic outlook on raw materials?

Thank you, Andreas. Andreas is asking what is Gerdau's strategy for the current scrap market? As we may expect some reduction in this market in the U.S. or even globally. And how does the company intend to operate in this market? And whether you intend to acquire part of scrap or use some similar strategy to face this more restricted scrap market that we anticipate for the next few years?

Thank you, Andreas, and thank you, Rodrigo. This is an important question because we are observing structural changes in the steel industry. Regarding the performance of companies over the next 10 years, we need to take into account the significant changes occurring compared to the past decade, particularly for Gerdau due to our strategic position. We anticipate that profitability will likely be higher in the next 10 years compared to the previous decade. In China, for example, there have been reductions in productive capacity as the focus shifts to the domestic market along with reduced exports and efforts to minimize greenhouse gas emissions. Public data show that GHG emissions from electric furnaces can be up to ten times lower than those from integrated plants. Therefore, we expect an increased search for alternatives to lower GHG emissions, with a growing emphasis on electric arc furnaces. We also foresee continued pressure on scrap prices globally, which could lead to higher product prices. This trend is something we've noticed over the past couple of years, particularly during our visits to China, and it's been a focus for us. Over the last two years, we've been implementing strategies to secure scrap more effectively. In Brazil, we've optimized our scrap purchases, and we're applying similar strategies in the U.S. Part of our recent results can be attributed to competitive scrap purchases influenced by the movements in scrap yards and the dismantling of vehicles and wagons. Currently, we do not plan to make any significant investments in direct reduced iron or similar projects, as we believe our scrap procurement strategy is already well underway and we will continue to enhance this approach.

Our next question is from the web, and I want to express my gratitude to all the over 400 participants. The first question is about the demand from the capital goods industry, particularly in renewable energy, oil, gas, and sanitation. The inquiry is regarding the market outlook in Brazil and the U.S., as well as the company's strategy for the energy and sanitation sectors.

Thank you for your question. We are very optimistic. In the U.S. market, in the short term and even before the approval of Biden's infrastructure package, the demand for steel is already very strong. The demand from the renewable energy sectors and Amazon warehouses has increased significantly. Therefore, in the short term, we are already seeing growth in demand from these segments, and this demand is expected to continue growing, especially after the final approval of the infrastructure package. The same applies to Brazil, where infrastructure investments have historically reached BRL 200 million a year at one point, but are now down to BRL 100 million. There remains a substantial gap in infrastructure investments in Brazil that will eventually be addressed. The sanitation sector indicates that Brazil needs to invest more in infrastructure, and we are well positioned to serve this market. Regarding renewable energy, we can approach it in three ways. First, we are well prepared to supply steel for solar and wind energy projects, including rebars for generators and components for turbine blades. We can supply steel throughout the entire industry. Second, the steel supply for renewable energy also relates to Gerdau's sustainability and self-generation of power. In the coming years, we will enhance our sales efficiency by producing and generating our own energy through our facilities, which is part of our sustainability commitment via renewable energy. Our partnership with Shell at the Aquarii solar park in Minas Gerais involves a 50-50 arrangement, and 80% of the energy used at our mill will come from this solar park. Additionally, we have Gerdau Next, our division focused on new businesses, with the goal of growing our share in renewable energy to the point where we can become a trader of renewable energy in Brazil. Overall, these are positive developments that will drive increased demand, and we have been preparing the company to be a leader not only in Brazil but also internationally, as we have for the past 20 years.

Next question from SFA Investments. First of all, congratulations on your results. Regarding retail sales in Brazil, how much does that represent of your total volume? What is the strategy of Juntos Somos Mais as part of that retail initiative?

Thank you, Rafael. I appreciate your question. The construction retail market in Brazil is highly significant, representing over 50% of our business. We aim to enhance our market penetration through two main strategies: Commercial Gerdau and Juntos Somos Mais. The latter has experienced considerable growth and has already become the largest marketplace for civil construction in Brazil. Initially, Juntos Somos Mais functioned as a loyalty platform serving 150,000 construction material stores in Brazil. However, our goal is not only to be the largest marketplace but also to evolve Juntos Somos Mais into the primary solution provider for consumers focused on civil construction. In the future, consumers looking to renovate their entire home will be fully supported by Juntos Somos Mais, not just in terms of products but also services. We have ambitious plans, and Juntos Somos Mais offers a unique channel that enables us to connect directly with the end consumer. Brazil has 150,000 construction material stores, and previously, we sold only to 5,000 of them due to the intermediary step. Now, with Juntos Somos Mais, we are getting closer to the end-users. We expect to expand our reach from 5,000 stores to 30,000 stores in the near future. This growth is closely tied to our strategies to strengthen our market presence and enhance our ability to serve the market. Moreover, we aspire to become a leading provider of solutions for end-users.

Our last question comes from an unidentified source. What steps are being taken in the structural profiles segment? Can you elaborate on how Gerdau is tackling this market in Brazil?

Other questions that arise will be addressed by our Investor Relations department after this conference call. Thank you for your question. In summary, I would say that our innovations come in two key areas. First, we are innovating in our product offerings. Our Ouro Branco Mill features advanced technology that produces profiles that are more resistant to corrosion and can handle greater loads, making them suitable for extreme conditions, such as operations at sea. This has resulted in improved product quality and significant innovations in both our structural profiles and flat products. Additionally, we have evolved our business model. A few years ago, we sold our structural profiles solely for construction foundations. Now, with the launch of a new company called G2Base, we can provide a complete solution for our customers. Instead of just selling profiles, we offer integrated solutions. Clients can source everything they need from Gerdau, creating a win-win dynamic that benefits both parties. We enhance our business profitability by adding services, while customers benefit from our 120 years of proven expertise in providing comprehensive solutions. This approach has led to cost reductions and shorter delivery times, demonstrating that innovation is an integral part of our daily operations across all areas, not just structural profiles. Gerdau is undergoing significant changes as we continue to modernize and strive to deliver ongoing innovations to our clients. Thank you for your question.

Thank you, Gustavo. And now we conclude the Q&A session. I would like to thank all of our investors who joined us today. And now I would like to turn the floor back to Gustavo for his final remarks.

Scardoelli, would you like to add anything else? Or do you think I can conclude.

Yes, I would just like to thank everyone for joining us today.

I would like to thank you all for joining us today. It’s always a pleasure to talk with you. We are available to answer any further questions you may have, and Rodrigo can assist with any additional inquiries. I also want to invite you to join us for our next earnings release call regarding the third quarter of 2021, scheduled for October 27. Thank you very much, and please take care.