Gerdau S.A. Q3 FY2021 Earnings Call

We will now open the audio and video channel for your questions. The presentations will be available in Portuguese and English through our chat icon, allowing you to follow along on your own computers, and we will play the slides in the Portuguese version. I want to point out that any forward-looking statements made during this conference call regarding Gerdau's business outlook, projections, and financial and operational goals are based on management's expectations for the future of the company. While Gerdau believes these comments are made with reasonable assumptions, there is no assurance that future events won’t impact this evaluation. Now I would like to turn the floor over to Gustavo Werneck. Please, Gustavo, you may begin the presentation.

Good morning, everyone. I would like to start by welcoming every one of you to our earnings release call related to the third quarter of 2021. I hope you are all healthy and well. Also participating in this presentation is our CFO, Harley Scardoelli. And as usual, for both of us, it's always a pleasure to talk to you about our performance and clarify possible questions that may arise during our presentation. I'll turn the floor over to Scardoelli, who will start by talking about the highlights of the overall results for the quarter. And also, he will talk about the performance of our operations. Next, I'll share some information about our ESG agenda and comment on the markets in which we are present. And close to the end, both of us will be available to talk to you about any points that you would like to explore in more detail. So Scardoelli, you have the floor now, and I'll come back to you later.

Thank you, Gustavo, and good afternoon, everyone. It's a pleasure to be with you in another earnings release call, and I hope everybody is doing fine. Let's start the presentation of the financial results with the main factors that influenced the consolidated results of EBITDA. Our EBITDA went from BRL 5.9 billion in the second quarter of this year to BRL 7 billion in the third quarter of the year, a level close to that achieved in the entire year of 2020. All of our operations had a great performance in the third quarter, which reflects the scenario of high demand in the steel sector in all countries where the company operates. Added to this is our team's ability to anticipate market opportunities. This quarter, we had another record performance in the North America operation, which reached BRL 1.9 billion, a level higher than the EBITDA of the whole year of 2020 with an EBITDA margin of 25%, which is a record for this operation. This result reflects the heating up of the construction and industry sectors and the continuous recovery of the metal spread. Because, as you know, that's the difference between scrap prices, the price that we pay for this input and the average price of our products. The Brazil BD also posted a strong performance, reaching an EBITDA of BRL 4 billion in the third quarter and a margin of 40%. The main steel-consuming sectors remain with resilient demand. And for this reason, we continue to allocate most of our sales to the domestic market, ensuring supply to the Brazilian market. In terms of our South America BD, we posted an EBITDA of BRL 602 million with a margin of 32%. This operation has also benefited from the good performance of civil construction, especially in Peru and Argentina. Last but not least, our Special Steel operations, which, due to the recovery of the automotive sector in Brazil and in the U.S., generated an EBITDA of BRL 539 million in the quarter with an 18.8% margin. We continue to closely monitor the semiconductor supply situation in the automotive industry in order to adjust production. However, we would like to highlight the good performance of the heavy vehicle segment, which is about 10 times more special steel per unit than light vehicles, and they are less affected by the supply of semiconductors. Moving now to Slide 3. Here, we talk about our free cash flow and working capital. As we can see in the chart to the left, we achieved a positive free cash flow of BRL 3.8 billion in Q3. This is the best quarterly result in terms of free cash flow since our historical series, meaning our entire way since we started monitoring that KPI. In the last 12 months, the cash flow was positive by BRL 8.6 billion. Now in terms of working capital, the cash conversion cycle went from 60 days in June of 2021 to 63 days in September of this year, due to the increase in accounts receivable and inventories, allowing for an adjustment of the company's working capital and maintenance of the service level to our customers at the moment of increased demand for steel in all of our operations. And also, service to our customers has always been one of the top priorities of Gerdau, and keeping great levels of working capital shows that we have a diligent focus on our customers. Moving to Slide 4 now. Now I would like to highlight that by the end of September, our net debt was BRL 8.7 billion, BRL 1.5 billion less than the net debt reported in June of the same year. And that was due to our strong cash generation performance in the period, even considering a 9% appreciation of the U.S. dollar in the quarter, which really impacts the conversion to BRLs. I would like to also highlight that 99% of our gross debt is long-term, with an average tenure of 7.5 years and an average nominal cost of 6.1%. The amortization schedule is well distributed over the next few years. And finally, on Slide 4, we pointed the results of the financial leverage measured by the net debt over EBITDA ratio over the last 12 months, which went from 0.65x in Q2 of this year to 0.41x in Q3 of this year, due to the strong EBITDA generated in the period and the reduction of our net debt and strong cash generation in the quarter, which have been already mentioned. A combination of these factors allowed us to reach this leverage level with these numbers. Now moving to the next slide, Slide 5. I would like to highlight the strong evolution of return on employed capital in the last 12 months ending September 2020 when the company posted a return well above its cost of capital, 36.1%, which, over time, translates into value creation for our shareholders and investors and also in the potential appreciation of the price of our shares traded on the stock exchange. And to conclude, moving to Slide 6. Here, I present the evolution of net income and the dividends paid out over the last few years, showing that the combination of better results and the significant reduction of net debt had a very positive effect on the dividend yield, meaning that the percentage of dividends and interest on equity paid on the closing price of the share at the beginning of each period, thus increasing from 0.7% in 2017 to 12% in the nine months of 2021. In this third quarter, the company will anticipate the payment of dividends equivalent to BRL 1.91 per share already net of taxes. I would like to thank you for your attention. And now I'll give the floor back to Gustavo, who will comment on the market outlook.

Thank you, Scardoelli. I would like to ask you to move to the next slide. Here, I will provide an update on the key points of Gerdau's ESG agenda, highlighting our progress on this journey. Sustainability is central to Gerdau's strategy, and we are increasingly addressing this topic in our conference calls. First, I want to emphasize our commitment to addressing societal issues, particularly the housing situation in Brazil. We recently announced the launch of the Reforma Que Transforma Program, which aims to enhance the low-income housing landscape in the country. With an investment of BRL 40 million, the project will improve more than 13,000 vulnerable homes over a decade starting in 2022. Families will have two options: access credit at below-market interest rates or receive a full donation for the renovations based on social vulnerability criteria. This initiative aligns perfectly with our social strategy, where housing is a strategic pillar. Moreover, we remain committed to enabling renewable energy production and advancing the sustainable management of natural resources. This quarter, we began constructing a solar farm next to our Midlothian Texas facility in partnership with 174 Power Global and TotalEnergies. Scheduled to open in 2022, the farm will feature 230,000 solar panels, allowing the plant to be powered by solar energy. Lastly, I want to express our pride in being recognized twice as Company of the Year and Best Company in the Mining and Steelmaking Sector by the Época NEGÓCIOS 360 degree yearbook published by Editora Globo and by Exame Magazine's Melhores e Maiores ranking during our 120th anniversary. We excelled in innovation, people, sustainability, and financial performance in these awards, reinforcing the positive results of the company's recent transformation towards a more agile, digital, innovative, diverse organizational culture focused on people and maximizing value for our customers. Now let's move to the next slide. Here, I will talk to you about the markets in which Gerdau operates and also the steel industry outlook for the coming months. Initially, I would like to point out numbers related to our North America business operation, where volumes should remain at high levels in the fourth quarter, not forgetting the seasonality, which is common to this period due to the year-end vacation. Today, our backlog of orders in the United States is equivalent to about 90 days, in line with the positive moment for the North American economy, which has resulted in very strong demand for steel from various production sectors, especially the construction industry. An example, which really reinforces the optimism with the local economy in the medium and long term, is the level of local consumer confidence, which continues to rise. The architectural billing industry, which measures the activity of the nonresidential construction sector in the country, reached 56 points, maintaining a solid and strong trajectory above the 50-point levels throughout 2021. Now the Institute for Supply Management Index that monitors the performance of the manufacturing sector reached, in September, 61 points, representing an upward trend for the 16th consecutive month. We also remain optimistic about projections that the infrastructure investment package valued at USD 1 trillion will generate an additional scale demand of up to 5 million tonnes of steel per year in the domestic market over a period of 5 to 8 years. In this context, we continue to invest in improving the productivity and profitability of our production capacities in the U.S. and also expanding the mix of products offered to our U.S. customers, especially new solutions in commercial and structural profiles in order to meet the growing demand for steel. This allowed us to achieve, as mentioned prior by Scardoelli, a historic EBITDA and EBITDA margin in the North America business operation in the third quarter. A point of attention, however, is the labor shortage in the United States, which has impacted many companies in the region, ours included. Well, now I will talk about our special steels operation, starting with the United States. The U.S. vehicle production continues at lower levels than expected due to the shortage of semiconductors in the market. It is estimated that about 3 million units will no longer be produced in the country due to the lack of components in general, including semiconductors, leading to production of light vehicles to total 13.2 million units in 2021 against an initial projection of 16 million units. Although also feeling the effect of this disruption in the supply of semiconductors, the outlook for the heavy vehicle market is more positive, with heavy truck production supposed to reach 267,000 units this year against 214,000 in 2020. In turn, the oil and gas sector continues in gradual recovery with the so-called rig counts reaching an average of 559 this year when compared to 535 in 2020. I would also like to mention that with the completion of the modernization and technological upgrade of our mill in Monroe, Michigan, we will deliver increasing volumes of special steels with higher added value to our customers in North America from a more profitable and more productive operation. Now speaking about Brazil and still speaking about Special Steels, the market has been affected by the lack of semiconductors, which led to the National Association of Vehicle Manufacturers, ANFAVEA, to reduce its estimate of vehicle production growth to somewhere between 6% to 10% in 2021 against the previous forecast of a high of 22% when compared to 2020. It is also estimated that the global automotive industry will lose between 7 million to 9 million vehicles produced in 2021, returning back to levels of 2020. Now when we look at heavy vehicles in the country, it remains quite promising on the one hand, driven by the strong performance of the construction, agribusiness, and machinery and equipment sectors. According to ANFAVEA itself, the production of heavy vehicles should rise 60% in 2021 in a year-on-year comparison. It's also important to note that a heavy vehicle consumes 10 times more special steel than a light vehicle, for example. The market in the fourth quarter will remain challenging for the automotive industry, also due to seasonality. But we see good opportunities linked to the resumption of activities in some automakers, which will be capitalized by the additional volumes produced at our plant in Mogi das Cruzes in the State of São Paulo, which resumed operations in August. Now I will talk about the scenario for the long and flat steel markets in Brazil, whose performance in the third quarter reflects a continued scenario of high demand for steel from basically all consuming sectors, and that also has a very good outlook towards the fourth quarter. Our shipments of long and flat steels in the local market grew 5% between July and September on a year-on-year basis. The construction industry continues to be strong. The number of active construction sites rose by approximately 40% in the third quarter when compared to the same quarter of the year before, and the performance for the coming months remains favorable. By 2021, the launch and sale of real estate should grow, respectively, 17% and 9%, according to studies from Tendência's consultancy. Retail sales were boosted by the emergency aid measures implemented by the federal government last year, and they got stabilized at high levels. According to data from IBGE's monthly trade survey, retail sales should advance approximately 6.4% in 2021 on a year-on-year comparison. In this regard, we continue to benefit from our business model, which puts the customer more and more at the core of our strategy. Online sales, for instance, through our digital channels in Juntos Somos Mais, which is our construction marketplace in which we are partners, were six times higher in the third quarter year-on-year. In the period, more than 30% of our steel sales occurred through these channels. And for us, this is a very significant number because it really consolidates our growth strategy to sell steel over digital channels. In turn, investments in infrastructure continue to be unlocked, in addition to projects like the VLT in Salvador, Line-2 of the São Paulo subway, and the privatization of several highways. And I would like to highlight the auctions for the construction of renewable energy infrastructure. In 2016, we started the production of heavy plates in our Ouro Branco plant in Minas Gerais. And since then, we have been working very closely with our customers to develop new products and solutions. In 2021, for instance, 20 photovoltaic parks are being built in Brazil and 600 new wind power towers, which use thick plate in their composition from Gerdau. I would also like to highlight the continued recovery of the Brazilian industrial sector in the third quarter, driven by the good performance of the agribusiness; capital goods; machinery and equipment; road equipment; energy; and particularly, agribusiness. The scenario not only reflects domestic demand but also the ability of these sectors to build an export platform. According to the National Confederation of Industry, CNI, the industrial GDP is expected to grow 6.1% in 2021 year-on-year. All of these sectors have driven the demand for heavy plates, raising by 34% our shipments of heavy plates in this last quarter when compared to the same period of 2020. These numbers should remain high in the coming months, generating good opportunities in our flat steel segment. In Argentina, operations returned to normal in the third quarter after a second quarter in which local production volumes were affected by restrictions in the supply of oxygen to the plant due to measures to fight the pandemic in the country. Construction and agribusiness activities remained strong, which have been driving sales up in the local market. The local civil construction activity continues on the rise, with a growth of approximately 23% in August in the yearly comparison according to the latest monthly data from the country's Chamber of Construction. The same scenario is repeated in Uruguay in the steel market as well. Finally, in Peru, steel consumption continues at good levels, stimulated by the civil construction sector as a reflection of public investment, the good retail performance, and a very good performance coming from the real estate segment. The construction industry advanced 25.5% in August year-on-year, according to the latest survey by the country's Statistic Institute. Now let's move to our next slide, where we show that we invested BRL 810 million in fixed assets globally during the third quarter, contributing to a total disbursement of about BRL 1.8 billion over the first nine months of the year. I would like to reinforce that the CapEx disbursed and forecast for the year 2021 continues to be estimated at BRL 3.5 billion, and we continue to adopt an austerity approach in the approval of our investment plan. I would like to thank you all once again for joining us today and for listening to us. And as of now, Scardoelli and myself are available to answer your questions and to probably elaborate on some points of interest. Thank you.

Thank you, Gustavo. Ladies and gentlemen, we will now initiate our Q&A session. Our first question comes from Rodolfo Angele from JPMorgan. Rodolfo, you may proceed.

I don't know if I'm still on that list. May I proceed?

Yes, of course, you can. Rodolfo, yes, we can all hear you well.

Thank you. I am glad to be a commodities analyst instead of a technology analyst because it took me some time to get this right. My main question is about your capital discipline and growth outlook. In your release, you mentioned that we have reached full capacity in the U.S., and Brazil's utilization rate is quite high. We also noticed that you paid a strong dividend this quarter. However, considering everything you've shared about the outlook for the next quarter and year, we still seem to be operating with solid cash generation, especially when reflecting on the company's cash generation over the past few years. I can see some concern from investors regarding this discipline because there may come a time when production teams might push for increased capacity as new opportunities arise. I would like to hear your thoughts on your future plans and what you envision moving forward, especially since you painted a positive picture for the upcoming quarters. I've heard some concerns primarily related to labor in the U.S., but could you share what really worries you now? The demand and price ratio appears to remain strong, so what key points should we be aware of? Those are my two questions.

Thank you, Rodolfo. I'll turn the floor to Scardoelli, because I think he will be better suited to talk about capital discipline, and then I'll go back and answer your part about the growth outlook.

Rodolfo, it's always a pleasure to talk to you. Well, this, in fact, is a very recurring point. That this has been a going concern on the part of shareholders. I've been maintaining the Z-Scores in the last few quarters. Our capital allocation has been very disciplined. This year, we were able to execute the CapEx that Gustavo just confirmed. Our expectation is to spend BRL 3.5 billion in CapEx this year when compared to 2017, we would just spend BRL 800 million. So for this year, we will invest heavily on CapEx. And you also mentioned that our plants sometimes have to operate with bottlenecks. So we are taking good care of that with a lot of discipline. We're being very cautious. So we are applying a very robust methodology in terms of CapEx investment, focusing on return on equity, etc. So in this regard, our allocation is very careful, but we are investing heavily in CapEx and dividend payout. We are now paying out good dividends, and this was a recurring question that we got from the market. So we consider the extraordinary results we had this year with all of our operations. So we thought that was the right moment, and it has been approved by the Board to give return on equity. Or at least for the past years, we had very good returns. And at the same time, we are also working to reduce our debt. We've been very diligent, both in terms of our net and gross debt as well. Our objective remains the same: to lower our gross debt. And we will continue to do that. So I think the allocation of capital is well in place, and we are able to meet the desires and meet the needs of all the parties involved.

I would like to add something to that first part. I've been with the company for quite a while and have witnessed many transformations. I remember years ago when we had numerous inquiries about when we would deploy new capacity. For us, culture is something that takes time to change. Today, we face different questions: how can we better serve our customers? How can we improve our performance? How can we enhance our productivity? The idea of growth for the sake of growth is not our focus. I see our culture present throughout the organization, and we believe that what truly matters is much more related to people and ESG rather than growth itself. I don't worry about variables under my control because we have risk managed. For example, we could discuss the market later. A segment that has stabilized is retail. Retail experienced significant growth, particularly after government incentives, but it has leveled off since June of this year. What we can control is how we operate in this segment. We will emphasize our Juntos Somos Mais program to achieve quicker penetration in retail. This is a controllable variable. We've increased our customer base from 2,000 through construction material stores to almost 50,000, making this a highly relevant market for us. However, there are aspects beyond our control that concern me. One is the issue of staffing. In the U.S., we've struggled to fill all our open positions, which has been challenging given our utilization rate above 94%. Although we haven't halted production shifts, maintaining capacity has been difficult due to the lack of suitable candidates. The same situation exists in Brazil, where there are 300,000 job openings in technology. While we are not a technology company, having good tech professionals is crucial for our performance. This makes finding qualified individuals to expedite our transformation strategy challenging. Regarding business costs, I'm particularly concerned about coal prices, which have surged from USD 200 to USD 400. While we anticipate a decline, coal is a critical input for our raw materials, especially at the Ouro Branco plant. We cannot predict how this will evolve. However, we manage scrap, ore, and other inputs very effectively, which is one of our strengths. Additionally, we prepare for chip shortages that affect our automotive clients, but these issues impact everyone. If we need an electronic part to maintain equipment and don't have it, we would face difficulties. We have formed a strong strategy to secure all the spare parts necessary, resulting in high stock levels. We don’t foresee any major disruption risks in the next two years. Overall, that summarizes my response.

Our next question is from Leonardo Correa with BTG Pactual. While we wait for Leonardo to be connected, we move to the next question. Carlos De Alba with Morgan Stanley. Carlos, over to you. Hello? Oh, here is Leonardo again. Hi Leonardo, how are you doing? Hi, Leo.

Can you hear me? Can you hear me well?

Yes, we can hear you clearly.

Okay. What I think is going on is that when you call us out, there is a slight delay to be online. Anyway, it works fine now. So congratulations. Gustavo, I know the price topic is a very sensitive one. And it changes really fast. However, when we check prices in the domestic market in Brazil, I think everybody expects to see a correction, a restatement for months or discounts. Instead of construction, there are some discounts being granted. At the same time, foreign exchange is being depreciated and differences abroad are being appreciated. When you think about the premium in the domestic market, it's minus 10 already, a 10% discount vis-a-vis the domestic market. So do you think this price level is sustainable? Or should we expect to see a new upward trend, which comes from FX and international moves? The second question is more timely. And I apologize; there will be a third question as well. Anyway, Harley, in the second quarter, we talked a lot about working capital. It was a heavy debate in the conference call. To some extent, it shallowed the international scenario because of a big consumption of working capital. And it also happened this quarter. So I'd like to hear from you if, for the fourth quarter, we should expect to see a relief going forward. I'm understanding in the third quarter, there was a big change in the scenario. The risk of rationing increased a lot. Many companies were getting ready for a slightly worse scenario in the future or disruption in production. So it made sense to work on inventory levels, but that's not so likely nowadays. And last but not least, what about GOAU, G-O-A-U? I think everybody was a little bit anxious about the use of cash, BRL 1.5 billion, which was in GOAU's cash for a while? You announced a big annual dividend, but GOAU was higher, greater than 12%. So once again, please, I'd like to hear a statement if we should expect to see diversification or not because everybody is concerned about a possible entry into new business. So I imagine what the answer will be, but I'd like to listen from you, the final answer about G-O-A-U, Metalurgica GOAU.

Thank you for asking three questions in one.

I apologize.

No, these are very important topics. Let me start by thanking you for your congratulations on our results. We pay attention to the insights shared by industry leaders and experts. As managers, it’s essential to take these insights and apply them in practice. At Gerdau, we've been actively implementing this approach over recent years. Our company culture has become increasingly important, and I attribute much of our third-quarter success to the transformations we’ve been undergoing. While there are favorable market conditions, our agility, connection with consumers, and the engagement and dedication of our employees have been key to our progress and preparations for 2021. Without these efforts, we wouldn't be achieving these results. It’s a combination of market conditions and our ability to cultivate a strong culture that positions us for future success. Regarding profitability, we are confident in our ability to maintain our current profit levels in the upcoming quarters. The steel supply in Brazil has balanced with demand, and typically, this brings heightened competition, which can be a double-edged sword. We've seen this increase in competition over the past couple of months as supply met demand. However, we are also experiencing considerable volatility with foreign exchange rates and sudden spikes in international prices, which leads us to believe that we can sustain our current profitability in the coming years. That’s our expectation. As we approach the fourth quarter, our daily operations show that we are building strength over time, as I previously discussed with Rodolfo. We remain optimistic about our profitability levels. But Leo, it's important to say that demand remains very strong. Even though there is progress in supply, demand did not go down, maybe got flat in retail. But if you think about civil construction, the number of work sites, the number of orders, new launches, and particularly, in the industry, the manufacturing industry that is growing more and more. And we will continue to grow in the future, owing to our clients' opportunity to export. At the end of the day, we believe that when it comes to demand, it's not going to go down, maybe seasonality in late December, but it will suddenly or quickly come up in January. And now I'll ask Scardoelli to answer the last two questions. But I'd like just to say that diversification in Metalurgica does not exist. Metalurgica will remain and continue as it has in recent years. There is no internal discussion about diversification. I'll turn it over to Scardoelli to give you more details on this, and then he can also answer the question about working capital.

Leo, when it comes to working capital, that's an important point. And just as a reminder, when we work on the release of our conference call for Q2, we made comment that the second half of the year, working capital will already be more balanced. Why the second half? Because we knew already that we would still have a little bit of capital use for working capital in Q3. That's what we're showing now. The trend now is to have a more adequate working capital level despite higher demand levels that we continue to see. So I would say that further down the road, possibly working capital is going to be more stable. So in Q4, possibly, working capital is going to be neutral or slightly upwards or downwards, but levels pretty close to what we believe it should be. And please bear in mind that there's working capital composition. And the third quarter is always focused on having an adequate level of customer service. We have significant market share in Brazil and also in North America in our segment. So in order to make these results and margins possible, we need to have a balanced working capital.

And what about the cycle, 60 or 62 days?

That's a very good level, historically speaking. And if we check the curve of 8 years, you'll see we drop from 90 days, first quarter, almost 100 days, down to 60 days. And today, the service level is very satisfactory, considering the current demand. So working capital will be neutral. As for Metalurgica G-O-A-U, just confirming what Gustavo already said, we don't have any plans to have diversification. Our cash position, which was very much charged by the market, if you do the math about dividends in Gerdau for Metalurgica, it's what comes in, comes out. And nearly half of the cash balance that Metalurgica had is BRL 1.5 billion or BRL 1.6 billion it was in Metalurgica's cash, BRL 800 million to BRL 900 million or half of it was already returned via dividends paid to shareholders. And what is there, we'll continue as we did today. No further allocation yields, but no intention and no plan to diversify Metalurgica by using cash. We're not considering this.

Carlos, Carlos De Alba, right? Carlos, please go ahead.

So I just wanted to go back to the very strong demand in Brazil. Can you talk about the risks because we're seeing interest rates increasing? The fiscal situation is complicated. You have an election year that typically would incur potentially result in more projects. But given the fiscal situation, they might not be able to do it. They might not be able to execute. So how do you see the risks that demand for steel might actually decrease next year given the higher interest rates and the significant slowdown that people are expecting in the GDP for the country? And then my second question, if I could. How are you seeing the increase in imports from Turkey that we saw recently in prior months? Is this something that maybe was triggered by a specific period in time in the recent past where you saw a premium that is obviously much greater than the discount that you're seeing today, depending on the BRL? How are you understanding that increase in Turkish imports into the country?

Thank you, Carlos. Thank you for the question. Can I ask Scardoelli? And maybe Scardoelli, you can add any further detail.

Brazil is a country of risks and opportunities for many years now. When it comes to elections, volatility goes up. What we consider as risk today is more a long-term risk when it comes to interest rates. If over time, they keep on going up and coming back to past levels, we believe this might be another hindrance for the civil construction segment. We believe the interest rate level that is evolving right now. Certainly, it's been offset by a very significant growth in real estate credit lines in Brazil. High interest rates, the GDP level, which was transformed into real estate credit for civil construction was not higher than 15%. But in the U.S., it's 85%, Carlos. So we believe there are possibilities today to buy property. And certainly, this is mitigating, at least for next year, this hike in interest rates. We've been watching very closely, more specifically, not a number of active construction sites but new ventures for next year. And we believe that despite all this volatility in the construction sector, this factor will continue to support demand. Another aspect that I would like to highlight to you, Carlos, has to do with the industry. Manufacturing industry vigorously increased demand for steel in the latest months, and particularly owing to the opportunity or windows of export that our clients found via FX or disruption of logistics, local chains. So we have traditional clients in machinery and equipment, our agribusiness, and they have a portfolio sold for 5 years. So there were moves by many clients in exhibitions and fares where we sell products. And participation was lower this year because they understood it wouldn't make sense to be at a fair to supply products and to talk about new launches. They have a 5-year portfolio. So that's what we also see in heavy vehicles and trucks. The very long delivery terms to deliver trucks in Brazil are unprecedented. So now we can navigate next year with this volatility at a calmer pace.

What about exports?

Our exports at Gerdau, Brazil, they will start to increase again. That's a window of opportunity for us. If we find a window of volatility or difficulty in a quarter next year, we can quickly reverse the picture and reverse the domestic production for exports. Back in 2019, our exports were about 30% of production in Brazil; in 2020, around 15%. And we went down strongly to meet the domestic market, close to 2% in the first quarter this year. And if you check the number of the third quarter, it went up to 12%. So we still have opportunities to resume exports, if necessary. So we believe, for the next 5 quarters horizon, this thing about steel demand in Brazil will mitigate political and economic risks down the road. As for imports, we also consider imports to be growing marginally in Brazil, owing to difficulties in supply. Once supply gets stable in Brazil in all segments, our projection is that imports will go down slightly. At current levels, around 13%; historically, around 10%. So a marginal difference. And we believe that now that we have a balance in the latest months between supply and demand, they should go back to historic levels. So overall speaking, that's what I have to say. Scardoelli, anything that you would like to add to Carlos?

No, I guess these are the highlights. Carlos, great to see you.

If I may ask an additional question, with the strong cash flow generation you have, would the company consider or propose to the Board the possibility of doing some share buybacks as a way to return money to shareholders?

On this topic, Carlos, was addressed this, Carlos, via dividends. So there are two ways to return capital to shareholders. And the management's decision or the Board decided to have this return consistent with our extraordinary results, dividends. So that's a format, to some extent, more to the point. And we believe, as a result, we don't have to decide what is the right moment to work on buybacks. Historically, we use buybacks to maintain our treasury and to have our long-term plan. So this can be as effective as all the rest.

The next question is from Rafael Barcellos with Santander.

Hi, Rafael. What's up?

Hi, Scardoelli.

We can hear you well.

Thank you. My first question was just answered. It was about exports. Exports in Brazil have been gaining traction. And if you think about the third quarter, you reported an 85% mix in domestic markets. So I would just like to have some color about how you see exports for the coming months or next quarter, especially, like you said, exports could be a relief mechanism. And you said that supply recovered in recent months. And as for demand, clearly, it remains strong. But maybe I would like to have some color about your current order book. What is your sentiment? But clearly, demand is strong and supply recovered. In this scenario, the burning question is about the competitive environment. So I wonder if you could make some comments on competition. It could be interesting to hear from you.

Okay, Rafael. Exports went down dramatically. We exported 30% of our production in 2019. It went down to 15% in 2020 and went down in the third quarter of this year to 4%. Everything in the domestic market in the second quarter went down to 8% and in the third quarter to 12%. So from 12%, going back to 15% or 20%, we can do this very fast. Because the bulk of our exports eventually are for subsidiaries or partners in Latin America. So the need, if we need to ship completely to the domestic market, well, we let this opportunity for the future to go back and meet these partners and subsidiaries. So it's very easy for us should we need it. And if there is volatility in demand for the current quarters, we can do that. So exports are ready for us. That's an opportunity, a very short-term opportunity. All we have to do is to press the play button if we have a current or actual need, which is not happening right now. Well, our order book is very strong. There is a concern by our clients, particularly in the manufacturing industry, they want to have steel supply guaranteed so they can honor their export agreements. So we have a very robust confirmed portfolio, not only for Q4 but also taking into account the transition into next year. The automotive market, we also have expectations to see whether 2022 will be better than this year. We don't believe there's going to be a full recovery of the sector owing to the chips or semiconductors. We've been watching this topic with experts involved in the market, and it's only expected to be fully stable in 2023. But we have an additional opportunity in Brazil. More than 50% of our special steel production is oriented to the heavy vehicle market trucks. And it doesn't rely so much on chips compared to light vehicles. Certainly, we can have 200 chips in these vehicles. So the heavy segment for us also has high prospects or booming next year and also agribusiness with machinery and equipment. So overall speaking, things are stable. And the competitive environment goes back to what we had before the crisis. So these are the players we already had. They are competing in the arena. And I would say that maybe we moved away from the pandemic even stronger in the civil construction segment by acquiring Silat, known as Gerdau Caucaia. But in the short term, it turned out to be a very powerful relief valve to meet demand peaks that we will have in the coming quarters. So let's say Gerdau is getting out of this pandemic period even stronger with the progress in our strategy and also some positions in retail and also Caucaia. So overall speaking, that's my answer to you.

Our next question is from Isabella Vasconcelos with Bradesco.

Hello? Can you hear me well?

We can see and hear you clearly.

Okay. Great to talk to you again. It's been a while, great to see you. I have two questions. I guess most of the topics were already answered. But the first question is about the short term, and the second long term. Short term, if you think about the U.S., Gustavo, you said that you expect the level of profitability to remain the same. Seasonally speaking, scrap usually goes up during the winter season. And I think you have other cost and imports that are going up. Do you see opportunities to maintain the EBITDA margin at 25%? Or should we expect to see some variation next quarter or in the first quarter of next year? And my second question, more long term. If you think about renewable energy, I think if we're doing some moves already and it makes all the sense. If we think about Gerdau Next and potential revenue streams that might arise from this new business, is energy something that you really focus on in terms of growing the long-term strategy at Gerdau? So these are my questions.

Thank you, Isabella. Speaking of our U.S. operation, this quarter, we reached historic levels in terms of EBITDA margin. And it comes from some factors. Firstly, we had a metal spread and unprecedented metal spread level. And our expectation is that these spreads will be sustainable for the coming months. I think it's too early to say that we expect to have the spread maintained by the end of next year. I think it would be just clairvoyance rather than fundamentals. But if we check our short-term fundamentals, our expectation is having spread and profitability levels to be maintained with slight variations. In addition to spread, this quarter, we managed to put into practice nearly fully a plan that I mentioned three years ago, which was to recover a $30 per tonne gap that we had vis-a-vis our competitors. And this was possible, owing to a very robust performance management but also coming from a CapEx program that we've been using for three years, it has proved to be very successful in terms of having a more noble mix of products and meeting our full customers' needs. So it all happens at the same time. Our expectation for next year is good and also for Q4. We don't believe there is going to be something going back, just usual volatility. But I couldn't say categorically if this EBITDA margin will be the same, but it will remain high. As for scrap, you're absolutely right, Isabella. We had a higher time for collection and transportation in the winter, like Michigan in the North, where we have an important special steel operation. And in the market, we have a hard time to buy prime scrap. That scrap that comes from the automotive market, owing to the stoppage of OEMs, and we use this scrap more often in special steel. For long steel, we fully depend on obsolete scrap, old vehicles, old refrigerators. So the supply of this scrap remains very strong. The economy is moving around, so it's normal to have this level of activity generating more scrap. And we've been in the U.S. for many years, and we are adapting now well to collection and seasonality and also searching for alternative logistics flow. So my level of certainty is very high, and we have a good operation in our business operation in the coming quarters in the U.S. As for renewable energies, that's a very important topic for us. I would say that as we speak, it's not an additional cash generation only, but we focus on having an adequate percentage of high production. When we moved away from Cacu and Barra hydropower plants, when we sold them, we lowered our potential of generations. And now with renewable energies, we expect to recover this potential and, at the same time, have an increasingly more renewable energy supportive matrix, wind power, photovoltaic, or other sources. So speaking of renewable energies, revenue generation, it's too early to say that even though it's a high topic for us. And as our efforts become more material, then we can also consider that because that's an interesting topic for us, Isabella.

We don't have any more questions coming from the Raise Hand icon. continuing with questions through the Q&A. We have a question from Daniel Sasson from Itaú BBA. Can you comment on the sustainability of margins in the North America BD? Would it be reasonable to say that the goal there should be higher throughout '22 and '23 versus the historical numbers? Thank you for your question.

Daniel, adding to what I already mentioned to Isabella, metallic spreads are historically very high. I believe they will continue to remain at these elevated levels in the short term. I don't see them returning to the lower levels we've seen in our recent history because of the fundamentals we observe, which leads us to this conclusion. Therefore, we expect that in 2022, our metallic spread levels will be among the highest in our history. It's up to us to work diligently to ensure this remains a reality moving forward.

Thank you, Gustavo. And I would like to thank the question from Leonardo from Bank of America, which is very similar to the question just posed by Daniel. I would also like to thank the question from Alejandro, who is a Gerdau investor, who asked us about working capital, and the question has already been answered. Therefore, I would like to thank you for asking all of your questions. And now we conclude the Q&A session. In case any question has not been answered, please forward your questions to our IR team. Please inform me at gerdau.com.br, and we will be happy to answer your questions. Now I'll turn the floor back to Gustavo for his final remarks.

Thank you, Rodrigo. Once again, I would like to thank you all for joining us today in our earnings release call. It's always a pleasure, and we're always very happy to talk to you. As Rodrigo said, we are always available. Also, I would like to invite you to join us again on February 23, when we will talk about the results for the fourth quarter of 2021. Thank you all very much. Take care, and please put your safety and your health in the first place. So Gerdau's conference call is now over. I would like to thank you very much for joining us, and I wish you a very good afternoon.

Statements in English on this transcript were spoken by an interpreter present on the live call. Our earnings release call. It's always a pleasure, and we're always very happy to talk to you. As Rodrigo said, we are always available. Also, I would like to invite you to join us again on February 23, when we will talk about the results for the fourth quarter of 2021. Thank you all very much. Take care, and please put your safety and your health in the first place. So Gerdau's conference call is now over. I would like to thank you very much for joining us, and I wish you a very good afternoon.