Gerdau S.A. Q1 FY2022 Earnings Call

Good afternoon, everyone. I'm Rodrigo Maia, Gerdau's IR. Welcome to Gerdau's conference call to discuss the results of the first quarter 2022. Here with us today are Gerdau's CEO, Gustavo Werneck; and Gerdau's CFO, Rafael Japur, who will be presenting to you today. We would like to stress that any forward-looking statement that might be made during this conference call related to Gerdau's business outlook, projections and financial and operating goals are mere assumptions based on management's expectations related to the future of the company. Even though Gerdau believes that its comments are based on reasonable assumptions, there is no guarantee that future events will not affect this evaluation. Now I would like to give the floor to Gustavo Werneck. Gustavo, please, you may start the presentation.

Thank you, Rodrigo, and good afternoon, everyone. I'm glad to welcome you to this video conference call to discuss Gerdau's results for the first quarter of 2022. I hope you are all well. Joining me today is our CFO, Rafael Japur, and we’re both eager to discuss our performance and address any questions you might have. I will begin by discussing the international landscape and highlighting our overall results before detailing our business operations for this quarter. Japur will then share insights on our financial performance, after which I will return to emphasize key points of our ESG agenda. We will be available at the end to address any topics you'd like us to explore further. Let's begin with Gerdau's macro environment. The impact of the conflict between Russia and Ukraine began to intensify in mid-March. We saw a notable increase in the spot prices of raw materials, such as coal and alloys, as well as natural gas, leading to increased production costs. The shifting international markets, affected by supply constraints and rising material costs, also influenced global steel prices. However, I want to reassure you that our operations have remained stable without disruptions in raw material supply due to our safety stocks and diverse supply bases. Additionally, uncertainties from the emergence of new COVID-19 variants impacted consumer behavior in the Americas, with Brazil's retail performance declining initially this year. Thankfully, by early February and March, concerns subsided as consumer activity returned to normal levels. We are also closely observing potential impacts from recent lockdowns in China, which may affect the global economy in the short to medium term. Now let’s look at the highlights from our first-quarter results. We'll dive deeper into financial performance in a moment, but I can share that we recorded an adjusted EBITDA of BRL 5.8 billion, with an adjusted EBITDA margin of 28.7%, both of which are record highs for the first quarter. Gerdau's net income was BRL 2.9 billion, a 19% increase year-on-year, while net sales rose to BRL 2.30 billion, marking a 24% increase over the same period last year, with steel shipments totaling 3.1 million tonnes. These achievements highlight Gerdau’s strong market presence and reflect our strategic focus on the Americas, as well as the cultural and business transformations we've been undergoing. Moving on to our North America operations, our adjusted EBITDA tripled to a record BRL 2.7 billion, with an adjusted EBITDA margin of 33%. Strong demand from the nonresidential construction and manufacturing sectors drove our performance. We are optimistic about the second quarter, with our U.S. order backlog remaining above historical levels. Capacity utilization is also over 90%. Demand for steel in North America, particularly from construction, looks promising. Indicators like the Architectural Billing Index and the Institute for Supply Management Index remain strong, reinforcing this positive trend. However, we remain cautious about labor shortages, inflation, and logistical challenges affecting many North American companies. We also view positively the U.S. government's requirement for locally sourced materials for infrastructure projects. Investments in our North American capabilities will continue, including a BRL 30 million modernization project in Whitby, Canada, aimed at increasing annual capacity by 200,000 tonnes for structural profiles. As we discuss results, it's worth noting the cultural transformation journey in our North American operations that has enhanced productivity and operational excellence. We've been expanding our product portfolio to better serve our customers, leveraging digital channels to improve their experience. Turning to our special steel operations, I can confirm that our first-quarter EBITDA surpassed the fourth quarter of last year and the first quarter of 2021. The light vehicle market in the U.S. continues to face challenges due to the chip shortage, with recovery expected in 2023. Nevertheless, we anticipate a 14.7% rise in light vehicle production for 2022. The heavy vehicle sector shows a positive outlook as well, with expected production increases. The agricultural machinery segment looks promising too, driven by anticipated record harvests. In Brazil, the special steel market is feeling the effects of semiconductor shortages, leading to a 17% decrease in light vehicle production. However, there's a 9% growth projected for the year ahead. Heavy vehicle production also maintains strength, supported by government initiatives for fleet renewal. Regarding flat and long steel scenarios in Brazil, the demand for steel remains healthy. We expect actual demand to grow by up to 4% year-on-year in 2022, particularly from the construction sector. Retail sales have normalized, and we have seen a spike in digital channel orders from our customers. There is a positive trend in infrastructure investments, with substantial public projects underway. We also see a high demand for steel from the industrial sector, particularly from agriculture and energy-related investments. Lastly, in South America, strong demand from the construction and agriculture sectors continues to boost steel sales, particularly in Argentina and Peru, despite ongoing logistical and political challenges. This overview represents just a snapshot of our operations, and I look forward to delving into more specifics during the Q&A session. Now, I will pass the floor to Japur for the financial details.

Thank you, Gustavo. Good afternoon, everyone. It's a pleasure to be here with you during our earnings release call, and I hope you're all doing well. Let's review our financial highlights for the first quarter. First, we want to draw attention to our EBITDA and our ability to convert it into free cash flow. This quarter, we achieved an EBITDA of BRL 5.8 billion, with investments of about BRL 2.4 billion in our business, divided between working capital and CapEx. After accounting for taxes and financial obligations, we converted 52% of our EBITDA into free cash flow, representing 15% of our revenue for the period. This marks the third consecutive quarter that Gerdau has converted over 50% of its EBITDA into free cash flow, equivalent to 15% of our revenues this quarter. To provide more detail, we generated BRL 3 billion in free cash flow this quarter, which led to a total of BRL 11.4 billion over the last 12 months. This is the eighth straight quarter of positive free cash flow, with the seventh quarter producing over BRL 1 billion. This success is a testament to the resilience of our business model, which allows us to generate cash through various economic cycles. It also reflects our ongoing effort to reduce our balance sheet leverage, a strategy we've pursued since 2016. Our working capital this quarter stood at BRL 15 billion, with a cash conversion cycle of 60 days. Notably, this is the second-lowest cash conversion cycle for the first quarter in the past decade. This result highlights our disciplined capital management and our improving efficiency in decision-making processes throughout our operations. Regarding our liquidity and debt position, we reduced our gross debt by BRL 1.3 billion this quarter, primarily due to exchange rate fluctuations affecting the dollar-denominated portion of our balance sheet. Our total gross debt is now BRL 12.8 billion, and with cash reserves of BRL 7.6 billion, our net debt stands at BRL 5.8 billion. As a result, we have lowered our financial leverage, with the net debt to EBITDA ratio reaching a historical low of 0.20x, the best we have seen in 121 years of operation. Looking at our long-term debt, we have an even amortization schedule with no significant payout clusters in the next five years. I want to remind you about our plan for early amortization of our 2024 bond, which will take place next week, potentially generating around BRL 800 million. This aligns with our goal to decrease both our gross debt and our dollar-denominated debt, further enhancing our ability to provide returns to our shareholders. Speaking of shareholder returns, the top of the slide illustrates the growth of our net income over the years, along with our distribution capacity. The improvement in our financial discipline has allowed us to deliver dividend yields that surpass historical levels. As shown on the lower part of the slide, our payout increased from 33.6% in 2018 to 11.2% in the past 12 months as of the end of the first quarter of 2022. In terms of dividends, based on our performance in the first quarter, Gerdau S.A. and Metalurgica Gerdau will issue dividends on May 26 and 27 respectively. Gerdau S.A. will distribute BRL 964 million or BRL 0.57 per share for shares held on March 26, 2022. Metalurgica Gerdau will pay BRL 314 million or BRL 0.29 per share for shares held on May 16, 2022. Additionally, Gerdau S.A. and Metalurgica Gerdau have approved a share buyback program to purchase up to BRL 55 million of preferred shares from Gerdau S.A. and up to 69 million preferred shares from Metalurgica Gerdau, comprising 5% and 10% of the free float for those classes of shares, respectively. These buyback programs will last for 18 months and reflect our prudent capital allocation strategy and our confidence in our ability to continue generating cash and creating shareholder value. Thank you for your attention, and now I will turn the floor back to Gustavo, who will discuss our ESG initiatives.

Thank you, Japur. Finally, in the last part on the next slide, I would like to give you an update on some important points of Gerdau's ESG agenda by sharing highlights and progress in our journey. I mentioned that we are making progress in the construction of our solar park in Midlothian in the U.S. State of Texas where our largest long steel plant in the country is located. This picture shows the conclusion of the works, and I recently took this photo, and the solar panels are arriving right now. In a short time frame, we want to have all the solar park concluded. The clean energy generated by the park will supply the local unit. And like I said, it is in line with our strategy of reducing greenhouse gas emissions also through investments in renewable energy projects. Our expectation is that once we have these panels, the plant will be up and running by the second half or early second half of this year. In addition, I highlight that Gerdau's audited average greenhouse gas emissions dropped from 0.93 to 0.90 tonnes, which is the number audited in 2021. We had a dramatic reduction. And this new value strengthens our commitment announced earlier this year to reduce our greenhouse gas emissions to 0.83 tonnes of CO2e per tonne of steel by 2031. Now on the next slide, I would like to share that for the first time, we have knowledge through the Inspire Gerdau program aiding partners in our supply chain. Suppliers that stood out by making headway in their demographics with the increase in the percentage of women, descendants, and people with disabilities in its workforce and with good practices related to the theme of diversity and inclusiveness. The program was created at the end of 2020, and it aims to mobilize and encourage our suppliers to consolidate best practices in diversity and inclusiveness. In the beginning of 2022, we reached the number of 203 micro companies and even large supplier companies that joined the contract. We continue to work to be an increasingly inclusive and diverse steel producer in addition to engaging the entire ecosystem in which we are present. In addition, I would like to mention that we recently completed the renovation of the first house selected by the Reforma Que Transforma program, the largest social project in Gerdau's history, which will contribute to the improvement of more than 13,000 vulnerable homes in Brazil over 10 years. The renovation was carried out at a home of a Gerdau employee in the city of Barao de Cocais, state of Minas Gerais whose home was damaged by heavy rains in the state at the beginning of the year. We reaffirm our commitment to be a part of the solution to the challenges of the stakeholders with whom we interact in our daily activities and the society at large. To conclude, I would like to point out that we remain keen on building the company's future through initiatives to attract talent and retain talents such as G.Future, our training program. In the 2022 edition, we reached a record volume of registrations, exceeding 40,000 applicants and more than 200 hires. They started their careers with us at Gerdau. I'm confident that for this group of trainees, well, they come to join our 30,000 employees, and I'm confident that we are on the right track to build the next 121 years of the company. Thank you very much for your attention. But before we move into the question-and-answer session, our debate session, I would like to give the floor back to Japur, so he can make an announcement.

Thank you, Gustavo. I would just like to take this opportunity to let you know that Rodrigo Maia, our IR Manager, is leaving Gerdau in May for personal projects. For more than 13 years, Rodrigo was an important spokesperson for us at Gerdau. The community that is with us today is with a lot of recognition in his performance with IBrX and Abrasca. Rodrigo, on behalf of Gustavo and the whole Gerdau team and everybody who were touched by you in your time with us, we would really like to thank you and wish you a lot of success in this next step in our journey. And soon, there will be a new IR leader with us. Thank you, Rodrigo.

Thank you, Japur. Thank you for your kind words. I also wish you a lot of success. And I say that our lives are broken down in quarters. So we have more than 50 cycles at Gerdau that are constantly changing the future. It's a great school. I also thank the capital markets community here. We have more than 400 participants in our conference call. And also our internal colleagues, particularly Gustavo Werneck, Rafael, and our IR team. So after 18 years in the market, I'll go into data science in Europe, and I'll see you again in the future. Having said that, let us open up the question-and-answer session.

The first question is from Rodolfo Angele with JPMorgan. What is the outlook for metal spread in the U.S., considering there is a shortage of scrap, are prices firm? And the other question, what about costs in general? We've seen a lot of cost inflation in the industry.

Rodolfo, it's a pleasure to talk to you. Thank you for sending your question. I'd like to begin my answer. And by the way, Japur, feel free to add anything you want to comment on. As for scrap shortage in the U.S., it's not related to prime scrap with a reduction of automotive production. This brings a shortage of scrap in the U.S. market, but also lesser scrap that we use, particularly in our long steel, we have an adequate purchase volume and volatility over the last months, in our point of view, it will continue to be like this. However, the outlook for metal spread over 2022 is quite positive. We understand that with this metal spread at historic high levels and the evolution over the last 4 years, considering also our performance in North America, we have conditions to support the results that we achieved in the first quarter. So they continue over 2022. And moving forward, if we consider demand, I made a point and remind you that we continue to have a very, very strong backlog. This backlog has not been reduced. Quite the opposite, this April it increased a little. So we still don't see any demand effect coming from the infrastructure package. It is possible to be more visible by year-end demand-wise. So wherever we look in our U.S. operations, we are very confident that the result level will be sustainable. The greatest challenge ahead right now in North America has to do with manpower and labor. Recently, we checked the data that was disclosed of unemployment in the U.S. The number is going up, opportunities of 10 million to 11.5 million job opportunities, which is very significant. Almost 4.5 U.S. citizens changed jobs in the last month. So that's a challenge for us. But despite the challenge, this is the best time of our history in terms of industrial and operational performance with a historic level of delivery this May. And we currently, we reached levels of production in our mills over 400,000 tonnes, rarely did we see that in the past. And considering this despite the lower number of mills that we have since the divestments, we've been managing to have a performance in the growth level that has been unprecedented in the U.S. market. With regards to the cost, the pressure goes on, volatility also goes on. Although for the greatest challenge ahead are costs related to metallurgical, they have an impact on plant, but costs related to our scrap mills and bioproducer, I would say they are relatively under control as we speak. This inflation rate, to some extent, was already included in the cost that we had in the first quarter. And the challenge is to keep on managing the supply chain in general. Any possible disruption, particularly in logistics that may happen in the coming months, so they don't have an impact on our production capacity, particularly in North America.

Thank you, Gustavo. Next, we open the screen so that Daniel Sasson from Itaú can ask his question. Daniel? We can see you, Daniel, but we don't hear you, which is the most important thing.

Rodrigo, maybe Daniel can send his question via chat.

Perfect. So let's move to the second question, Caio Ribeiro.

My question is about the buyback program. Would it be reasonable to assume that you will keep on using the buyback program as long as the net debt over EBITDA and indebtedness. Was indebtedness close to your goal? And secondly, about the pipeline of infrastructure in the U.S., should we expect to become material in the second half of the year or should we wait until 2023?

Caio, thank you. Japur, maybe you can answer Caio about the buyback program, and then I'll come back about the pipeline of infrastructure. And maybe we can listen to Daniel after that.

Okay, Caio, I hope everything is fine. In our buyback program, both in Gerdau S.A. and Metalurgica, we understand that our stocks are underappreciated by the market, in general, but consistently over the years, this is why we believe that considering multiple studies that we carried out in our securities, for instance, considering the ratio of our results in the operation. Just to give an example, this shows that we have an important discount vis-à-vis the price we have in our stocks. That's why we opened this program. As to the continuity of this being open only for 18 months. And we understand that once that we work on this program, we'll be reassessing this scenario of our leverage, our cash generation capacity, our indebtedness, and we'll consider if it is the case to renew and start a new program. But at first, we are opening this program considering 5% of our free float for Gerdau S.A. and 10% of free float for PN Metalurgica Gerdau, and we believe it's an important step in terms of improving return to shareholders and significantly reinforcing our commitment to long-term value generation for our shareholders.

Thank you, Japur. Caio, we are working very closely with the infrastructure package and the breakdown and details on this project in more specific areas. When it comes to timing, we have advancements in specific projects, and we believe this will only be converted into real demand around November or December this year. It's interesting to say that in addition to this package, spending on infrastructure in the U.S. is very strong. Recently, they disclosed the numbers for March. And in the quarter, almost BRL 360 billion was invested in the North American construction sector. The backlog is very robust for us. Today, we have more than 1 billion tonnes of steel in our backlog. So we expect to see this package adding to the backlog starting November. Another important thing to say is the U.S. government and administration recently announced that infrastructure projects will preferably use local domestic production in the U.S., which includes steel. So they will only buy steel for these projects should they fail to meet the local demand. This is very good. And it's also a guarantee that the demand is going to continue with high demand for us also in the midterm.

Thank you, Gustavo. Now Daniel Sasson with Itaú.

Brazil, the improved demand that you expect to see in infrastructure with the maintenance of demand of formal construction, do you think it should or could offset the drop in volume that you expect to see in distribution and auto and construction sectors? As for price, we have a discount of 20% of long steel in Brazil vis-à-vis the parity of imports. This has been on for a while now. Can we comment on any possible difficulties that we might be facing to transfer prices to the local market? As for the U.S., do you believe that a 33% margin in Q1 could be maintained in the second quarter? And what about metal spread in late March vis-à-vis the average for the quarter?

Thank you, Daniel. I appreciate your question and will provide an overview of the Brazilian market in more detail. Initially, there was some exaggerated pessimism regarding demand in the first quarter, which we don't believe will persist in the upcoming quarters. The early part of the year faced challenges due to rainfall and COVID, but demand rebounded significantly in March and April, with positive numbers reported. We anticipate that demand in Brazil for the year 2022 will increase by around 2% compared to 2021, which was also a strong year. In 2020, our deliveries in Brazil were about 4 million tonnes, increasing to 5 million tonnes in 2021, surpassing the previous two years. We expect this demand and delivery level to be sustained in the domestic market. In the first quarter, the main issues we faced stemmed from two factors. First, there was an increase in imported wire rod products due to logistical delays at Brazilian ports, which has now been resolved. We expect imports to return to historic levels moving forward. Second, the drop in demand was affected by the current fundamentals in the market, which we believe are strong and will support future growth. For context, as of April, there are currently 9,100 active construction sites in Brazil, the highest number in 15 years, which all require steel. Furthermore, real estate launches in Brazil have seen a 36% increase in sales in the first quarter compared to the same period last year, indicating healthy activity in the civil construction sector. Regarding interest rates and potential impacts on demand, we don't foresee significant changes in the short term. While we expect reduced demand for steel in civil construction early next year, this will likely be offset by increased infrastructure-related fuel use. Historically, the percentage of our rebar sales for infrastructure has been lower, currently at 10%, down from 40%, but we anticipate this trend reversing with more infrastructure projects in the pipeline. Steel demand from the industrial sector remains robust, particularly in agribusiness, machinery, and energy, suggesting a consistent demand outlook for the year in Brazil, alongside strong profitability. Although competition this year has been fierce, we have taken time to return to expected profitability levels, and we anticipate levels in Brazil for the second quarter to surpass those seen in Q1. In the U.S., we expect to maintain margins above 30% in the coming quarters. This is due not only to a favorable spread but also to our historically high operational performance at our mills, following investments and improvements made over the past few years. Overall, our outlook remains very positive.

Thank you, Gustavo. The next question is from Thiago Lofiego. Thiago, please feel free to ask the question.

Can you hear me?

We can clearly hear you, Thiago. Nice to talk to you.

Great to see you all. Congratulations. Rodrigo, thank you for all you've done for us. For the last 13 years, it was a pleasure to work with you, always supporting us and to better understand the company. Congratulations on the job, and good luck on this new phase.

Thank you, Thiago.

So let's go for it. Two questions. Coming back to margins in the U.S., I understand that in the short term or maybe for the coming quarters, margins might be at a very high level. However, what's your mindset about long-term margin in the U.S.? Should we expect to consider a new level for margins? And considering the scenario of a potential new level, do you believe that we should expect to see some announcements for new plants in the U.S., profitability is very high, and it might bring more supply and offers, so what about your mindset about it? Second question is about expansion in Texas. You mentioned this in your presentation. I don't recall having heard about this expansion in previous lines. Could you tell us more about it? 700,000 tonnes, I guess, what about CapEx timing and rationale?

Great, Thiago. Actually, we can see these margins sustain in the short and long term or midterm. Despite these concerns, we have in the U.S. about inflation, etc., and recession ahead, we believe that owing to the infrastructure package as well, our steel industry will be less affected. So we have a very positive outlook considering the short and midterm. In long term, considering all volatility, it's very hard to understand what margins will be, but certainly higher than in the past. Back in 2017, like I said, when we were margin is around 6.3%, to be more precise, we had a fairly strong robust plan to recover the margins. There was a significant gap in performance vis-à-vis our main competitors. Part of it was closed over the last 2 or 3 years. It was settled by changing the leadership. And we also were very assertive in our investments in the main mills. In order to provide more flexibility and have a stronger focus to cater to our customers' needs, one-stop-shop, and we also build some technology gaps. So today, we are more prepared than we were in the past. Margins from the past certainly will not be back. We have more conditions internally to deliver high margins than we delivered last year. As for new entrants, we know very well how the dynamic works. In all the margins in flat steel in the U.S. in recent years, this encouraged big investments in flat steel in the U.S., not so much in long steel. So if margins are sustainable, it might be attractive for new investments, not by chance that we are very early on. We keep on investing there, Thiago, to be better prepared. So we recently approved by the Board of Directors, a significant investment in the Jackson, Tennessee mill in order to have more capacity there. It's one of the most productive mills in the world when it comes to long steel. We want to have it prepared to be more competitive cost-wise and obviously in terms of product mix. So we can be in a scenario that might be more difficult in the future. As for Midlothian, like I said, we had investments to produce clean energy. Investments to improve the plant are still being discussed. This is the greatest plant we had in North America, Thiago. We believe this plant will unleash a growth capacity. But so far, we haven't concluded all the details of the investment in this plant.

What about timing and potential expansion?

Well, our intention is to have investment approved by the Board for Midlothian by the end of 2022. We are looking for alternatives that allow to have this investment in the best way possible when it comes to cost and timing. It's always complex to invest in such a great plan, so we want to prevent scheduled maintenance. Engineering is very sophisticated, and we want to have the least impact possible. So in future quarters, we expect to give you more detail on this investment because this plan is very relevant for us in our U.S. portfolio.

I want to add to what Thiago mentioned. It's crucial to emphasize what Gustavo presented regarding our history from 2016 onwards. Our past portfolio was primarily focused on wire rod and rebars in the U.S., which had margins below 1-digit. This segment has traditionally been more vulnerable to exports. Today, we benefit from price hedges in the U.S. market, with some concessions granted by the U.S. government on a country-by-country basis. Generally, our profiles in merchant bars are less susceptible to imports compared to wire rod and rebar. We are undergoing an important process to reposition our assets in North America. Currently, we have a franchise for long premium products mainly related to structural products and profiles. We view the long steel market sector in the U.S. as significantly more resilient than it has been historically, especially concerning our margins.

Thank you very much. Our next question is from Leonardo Correa from BTG Pactual.

Congratulations for the quarter. Capital allocation, given that your indebtedness goal has been delivered in BRL 12 billion of the gross debt, what should we expect going forward, a new dividend policy? Second question profitability over your business in Brazil, given all the price increases expected by the second quarter, could we just say that Q1 '22 was like a low profitability in cash generation for the year?

Thank you very much. I want to be clear that the first quarter was lower because we saw a significant recovery in profitability in March. Taking into account our exports and pricing costs, particularly concerning Ouro Branco, we expect to see substantial growth in margins between April and May.

Can you help me with the outlook?

Now discussing Brazil, our analysis of special steel in South America and Brazil over the last eight quarters shows that we have consistently increased our quarterly EBITDA. Over the past year, the total EBITDA exceeded BRL 8 billion. By comparing industry multiples with our peers in the U.S. and our operations in North America and Brazil, we believe that buybacks have been a suitable move, aligning with our goal of disciplined capital allocation. We will also maintain our brand strategy and dividend payouts, which have been above 20% to 30%. While we may consider adjustments to our dividend payout policy, exceeding the minimum set in our bylaws, our current policy provides adequate profitability. This allows us, as we did in the third quarter of last year when we had substantial cash flow, to increase our dividend payout to 30%. The newly initiated share buyback program is a solid approach to rewarding our shareholders effectively.

Thank you, Japur. Our next question is from Carlos De Alba from Morgan Stanley.

We noted an increase in working capital, what can we expect going forward in related to working capital? The share buyback program also focused on GDPR3 or GDPR4? How would you price the buyback of the shares from Metalurgica S.A.?

I hope you are very proud. This quarter, we made an investment of BRL 1.9 billion in working capital. Traditionally, in the first quarter, we experience some maintenance activities for North American Brazil, resulting in a low overall cycle. This is the second lowest cycle we have seen in the last 10 years. Back in 2021, during the low levels in the U.S., we were in a phase of replenishing inventories across the entire chain. Looking ahead to the next quarter, we remain optimistic about increasing our shipments in North America, and considering Gustavo's earlier response, we expect to enhance the profitability of our operations in Brazil. Therefore, it is expected that we will continue making some investments in working capital. I'm not sure if Gustavo would like to add anything regarding working capital.

No. I think it's fine. I think we can just go to this next point, which refers to buyback program. In terms of the buyback program for Gerdau S.A., we are only focusing our preferred shares. And there's a very small fleet of original shares. So we understand that due to the amount of shares, it would make sense right now to also include common shares. Now in terms of funding for the buyback, today in the first quarter, Metalurgica Gerdau just with BRL 80 million of net cash. And if you look at our 12 months, it acquired 109 million preferred shares, if we were to take this cash divide it by 69 million, we will have about a price of BRL 1.60 per share, which is close to what we are trading our shares. We understand that cash with the Metalurgica has today we're not considering financial revenues that this cash will improve from now to 2023. When the program is concluded, it's more than enough to fund the buyback of the 69 million shares.

Thank you, Japur. Our next question is from an unidentified analyst.

Congratulations for your excellent results. My question relates to price and costs in North America for the remainder of the year. At what level can we anticipate metal spreads to be for the remainder of the year? The other question is at what level of your cash conversion cycle could we expect a higher consumption of working capital?

Thank you for your question. And before I give the floor to Rafael Japur, the U.S. or North America, it's pretty much along the lines that they were before. We understand that we have reached a very stable level, price and costs in spread. Certainly, there will always be volatility along the way. I believe that one of the strengths we have as the company is our capacity to quickly adjust because we responded quickly. These are times when we can really extract the best one within the company. So we believe that margins will be maintained, especially considering the numbers we posted for the first quarter. Now referring to that cycle in working capital, I'll give the floor to Japur because he'll be able to give you more details.

All right, as we mentioned before, also when we answered the others question, we believe it was our public outlook is funding for Brazil and ordinary operations. We believe that we should have some investments in working capital taking into account our historical cash conversion cycles, which fluctuate between 60 and 90 days. There are some fluctuations, this is pretty much a range. I am also taking into account price adjustments that occurred in Brazil and the current dynamics of the American market, but before we leave that in the second quarter, we will still have some adjustments in the meantime.

Thank you, Japur. Our next question from Jonathan Brandt from HSBC.

My question is about the North American steel market. While given the high interest rates in the U.S. and high inflation, what is the outlook because of that? Do you have any concerns about the potential slowdown? So my second question is on the share buyback. What type of decision we announced today? And what will be the final destination of the share? Do they remain in treasury or do you think they will be canceled?

It's a pleasure to talk to you, Jonathan. Well, I'll start from the last question. In Brazil, we have a limit to be held in treasury, which is up to 10% of the free floating of the preferred shares. I mean this is the top that a company could hold in treasury. Well, once we actively buyback the program, we will then evaluate the destination of the proceeds. But mainly, this is for capital allocation and return to shareholders. So it's just natural to assume that there will be cancellation of the shares if the program is conducted. In terms of long-term sectors for North America, I think it is important to highlight here despite the volatile macroeconomic environment with the recent decision from the Federal Reserve to adjust figures, we've seen the business change and our order portfolio being very robust. However, we haven't yet seen the firm entry of new steel volumes or steel orders related to the package recently approved by the Biden administration. Gustavo mentioned that when we were talking about our different scenarios, therefore we believe that in case of a possible slowdown of the activity due to inflation and interest rate, the infrastructure program that represents an important increase in demand could buffer some reduction in demand in the second half of 2022 and in early 2023. If Gustavo wants to add anything, please feel free.

Well, I think we already talked about it enough. Now I'll turn the floor back to Rodrigo for the next question.

Next question from Rafael Barcellos from Santander.

Would you tell us a bit more about the scrap business in Brazil? And what about the inventories in the steel chain?

Thank you, Rafael. The scrap operation in Brazil reflects trends seen globally. Our approach to buying scrap in Brazil is one of our key strengths, which we established over 15 years ago. Our purchases are diversified, giving us a competitive advantage in production costs. The market remains robust. Similar to the U.S., we face challenges in acquiring premium scrap, but we are sourcing these materials by type. The historical price levels of scrap are a concern for us moving forward.

Thank you. Our last question is from an unidentified analyst.

Are you expecting any improvement in the margins for special steel for the next quarters? And how do you think the future margins in South America should behave?

Yes, we anticipate a recovery in special steel margins in our core operations, which we saw begin in the first quarter of this year. That quarter was our strongest in recent years, although demand is still not at healthy levels. The margins we achieved in the first quarter were largely due to our effective cost management and our overall business profitability. In Chile, there is potential to increase margins. In Brazil, we benefit because over half of our deliveries are linked to the heavy vehicle sector, which is less affected by semiconductor shortages. Our shipments remain robust. In Peru, we faced challenges with defects and delivery issues by truck in March. Moving forward, we expect South America to deliver results similar to those we experienced in the first quarter.

Thank you, Gustavo. Now we will conclude the Q&A session. The questions that by any chance have not been answered can be then submitted to our IR team, and we'll get in touch with you to provide the necessary answers. Now I'll turn the floor back to Gustavo Werneck for final remarks.

Thank you, Rodrigo. Once again, thank you so much for your decision not at least more than 15 years at you all. And I'd also like to thank all of you who joined us today. I hope you have a good day. Thank you, Japur. And Rodrigo, I really wish you the best and great success in your new journey. And again, I would like to thank all of you who will join us today. It's always a pleasure to talk to you. And I would like to take the opportunity to invite you to join us again for our next earnings release call on August 3rd for our second quarter results. Thank you very much, and please take care.