Gerdau S.A. Q3 FY2022 Earnings Call

We have years of experience in logistics and allocation. In the following slides, we will discuss the highlights of our business operations and the market outlook for Gerdau. This will be elaborated on during the Q&A session. On Slide 6, I want to begin with North America. The adjusted EBITDA for our North American operations reached BRL2.6 billion, with an adjusted margin of 32.9%, both representing historical records for our third quarter and surpassing the margins of local competitors, demonstrating the success of our strategy in North America over the past few years. Remember that we previously experienced single digit margins. The metallic spread remains historically high, and this trend is expected to continue in the upcoming months. Our volumes were robust in the third quarter, reflecting strong demand from the non-residential manufacturing and energy sectors. We maintain a very positive outlook for the fourth quarter, despite seasonal fluctuations, as our order backlog is stable and favorable. In light of this, we plan to operate our mills in the region at capacity utilization rates exceeding 90%. We are also optimistic about steel demand in North America, particularly from the construction sector. Indicators such as the Architectural Billings Index and the Institute for Supply Management Index remain comfortably above the 50-point mark, showing positive activity in non-residential construction and manufacturing. The US Census Bureau reported that spending on domestic non-residential construction hit a record nearly $80 billion in August. Additionally, the reshoring trend is bringing in new customer orders, along with a significant infrastructure investment package valued between $1 trillion and $2 trillion, expected to create an additional steel demand of up to 5 million tons in the US market through 2023 as states advance their projects. In this environment, we continue to invest in digital transformation and enhance the productivity and profitability of our North American units, which makes our steel more competitive and increases the value we provide to our customers. Looking ahead, I want to highlight our investment in the Whitby mill in Canada, where the new melt shop is scheduled to start operations in the first half of next year, and the expansion of our product offerings at the Jackson unit in Tennessee to meet the evolving needs of our local customers. Other critical issues we are closely monitoring in North America include labor shortages, inflation, interest rates, energy costs, general economic performance, and the logistical challenges posed by global value chains, which have affected not only Gerdau but many other companies in the region. I'll jump to now on Slide number 7 to talk about our special steel operations, and I'd like to highlight the financial aspects. We reported third quarter adjusted EBITDA 17% higher than the same period last year, driven by current profitability levels. While in North America, the impact of chip shortage in the light vehicle market has been decreasing by logistical challenges and labor shortages have affected local light vehicle production. Anyway, light vehicles in the country should reach 14.4 million units of volume, much higher than the figures reported in the last two years. For 2023, the expectation is that production should be above 15 million units, confirming the recovery of the light vehicles market when compared to historical levels. With the recent approval by the American Congress of the so-called CHIPS Act, there will be a significant localization in the United States over the next few years of the manufacturer of semiconductors, definitely solving this problem that has been impacting the production of vehicles in recent years. Now, in regard to heavy vehicles, the market remains positive with truck production expected to total about 300,000 units this year or more than 320,000 units by 2023. The oil and gas sector, in turn, continues to expect growth, influenced by fuel prices in the international market, and the rig counts, for example, should reach an average of 901 units this year when compared to 603 last year. I would also like to highlight the approval of an additional investment of around BRL200 million in our specialty steel mill in Monroe, Michigan, for the modernization and technological upgrade of the rolling mill as part of an investment plan of approximately BRL2 billion aimed at making our special steel operations in the US, especially in Monroe, one of the most modern plants in the world. With this new investment, Monroe will become one of the most technological SBQ bar producing plants, one of the most technological ones in the global market, with a goal to continue meeting the future needs of our customers and also to pursue solutions for the potential demand of the electric and hybrid car segment. While the special steel market in Brazil continues to be affected by the lack of semiconductors and other inputs, there has been a recovery in the light vehicles market in this third quarter, whose production volume rose 34% year-on-year according to ANFAVEA. For 2022, the production of light vehicles should grow around 4.4% according to the same association. Meanwhile, the heavy vehicle market remains positive with a 16% increase in production between July and September on a year-on-year comparison, especially in the bus segment. The agricultural machinery sector should advance 4% this year when compared to 2021 to reach approximately 100,000 units, reflecting the expectation of a record harvest in Brazil according to ANFAVEA. I would also like to emphasize that the sectors that consume special steels, especially auto parts, have shown to be very competitive in the global market, also generating good export opportunities starting in Brazil. I would like to point out something very important because we have recently started the operations of the new continuous casting of blooms and billets in the Pindamonhangaba mill in Sao Paulo. This equipment will allow the special steel unit in Pinda to have a much more automated process with better yield producing cleaner steels and also resulting in the delivery of differentiated products and in an even higher level of quality to suit the needs of our demanding clients. Also, the technological updating of the unit in Pindamonhangaba is more aligned with the future prospects for a growing number of electric and hybrid vehicles in Brazil. Well now, I'll move to Slide number 8, and here I will talk about the long and flat steel landscape in Brazil. And in the third quarter, the performance reflects an accommodation of demand for steel from the different sectors in which we operate. With shipments of steel from our Brazil BD growing 2% between July and September when compared to the second quarter of this year, and I see that this is the most important comparison to be made. The steel consumption in the industry remains high, which is reflected in the number of active construction sites in Brazil that once again reached historic record in October. I'd also mentioned here some other points that make us confident about the future of the sector. For instance, the FGV's Civil Construction Confidence Index reached its highest value in the last six years in September with 101.7 points. Furthermore, I would like to highlight that the analysis of civil construction GDP for the second quarter of '22 when compared to the same period of 2021 shows a strong performance in the sector, growing 9.9% according to the latest survey conducted by the Brazilian industry. This reflects an increase of 3% of construction GDP in 2022. Now speaking about retail, sales are flat, impacted by inflation, the decline in Brazilians’ average household income. So I think by 2022 that consumer confidence index should reach a 2.8% increase. And this shows higher investments in infrastructure and investments are supposed to be over BRL151 billion by 2022 according to BNDES. In addition, there is a demand for steel coming from the industrial sector that remains at a high level. This reflects good performance coming from agribusiness, capital goods, machinery and equipment, and especially yellow line and the energy segments. Still discussing energy, it's worth noting that Brazil's installed capacity has now surpassed 20 gigawatts from solar sources. This represents a 44% increase from January to October 2022, making photovoltaic energy the third major power source in Brazil's electricity mix. Furthermore, I want to highlight the launch of our new business platform called Gerdau Mais. This platform is a significant step in our digital transformation as it enables our customers to manage their entire relationship with Gerdau, providing us with valuable insights to offer more personalized services. This is part of our ongoing efforts over the past few years to better serve our clients. Now moving to the next slide, I will discuss South America, starting with Argentina. In Argentina, the demand for steel from sectors such as construction, agribusiness, energy, and mining remains strong, driving sales in the local market. The Argentinian construction sector grew 6.4% from January to August compared to the previous year, according to the latest data from InTech. The forecast for 2022 is also quite positive. A similar scenario is observed in the Uruguayan steel market. In Peru, steel demand remains robust, primarily supported by the construction industry, leading to a 6% increase in local sales in the third quarter compared to last year. This aligns with the central bank's estimate, which projects a 2% GDP growth for 2022. Now I'll hand it over to Japur to discuss these items in more detail. Japur will now talk about our financial performance.

Thank you, Gustavo. Good afternoon to all and everyone. It is a great pleasure to be here with you once again in our earnings conference call. I hope everybody is fine, healthy, and safe. So let us talk about our financial performance for the quarter. Now we have the best first nine months of our track record, like Gustavo said, very well during the highlights of the period. So let us talk about cash flow and work in capital. Like Gustavo said, this quarter, we generated an EBITDA of BRL5.4 billion. This is the second best EBITDA for a third quarter in our history and confirms the resilience of our performance in different scenarios. We invested in this first part around BRL1 million in working capital, very much in line with what we said in the previous quarter, and we invested BRL1.1 billion in CapEx disbursement. Let me give you more color on the investments that we made and that we are investigating and performing, and I'll be detailing this later on in the presentation. What about operating cash flow? Take into account what we had in costs and obligations for our debt and income tax paid. We have free cash flow of BRL3.1 billion this quarter, equivalent to nearly 60% of EBITDA or 15% of our net revenue for the period transformed into free cash flow. During this quarter, if we take into account this BRL1.2 billion that we paid in the third quarter related to dividends paid in the second quarter, plus BRL600 million that we invested in share buyback of GGBR4, we’ll have nearly 60% of our free cash flow of the quarter invested in return to shareholders. Moving on to the chart below, now focusing more on working capital. We can see that basically we didn't have a lot of working capital used this quarter. It remained flat at a level very close to that we had in the previous period with the cash conversion cycle, which is measured as a function of revenues for each quarter, because we had a drop of 8%, like Gustavo said early in the presentation. We had an increase in the number of days, 64 to 70 days, but within a very comfortable level, and taking into account the seasonality that we naturally have for the year in normal levels according to the company's track record. Now moving on to our investments and how we've been allocating capital in our CapEx. Like we said in the previous slide, this quarter, we had disbursement of BRL1.1 billion CapEx. Of this amount, BRL400 million were invested in competitiveness projects, trying to increase our capacity to generate results over this cash conversion cycle in the long run. For 2022, we follow the same projection of CapEx disbursement of BRL4.5 billion. And the chart below, we would like to take this opportunity of being with our investors and the markets in general to bring more color on the main initiatives that we've been performing, and which have already been approved by our Board of Directors, or which are being studied in-house. Naturally, they are in different stages of maturity. As you can see, the major focus behind these projects are in three categories; first, ensure competitiveness access to raw materials in the long run, improve our production capacity or cater to our customer’s needs, and add increasingly more products or added value in our portfolio to our customers. In the earnings conference call for the fourth quarter of 2022, scheduled for early 2023, we will delve deeper into these initiatives and provide an update on the expected capital expenditures for 2023. Now, let's discuss our cash position and debt. This quarter, we achieved the lowest net debt over EBITDA ratio in our history at 0.16 times. This improvement is a result of the deleveraging efforts made in previous years and the strong performance we experienced in the first nine months of 2022, as highlighted by Gustavo. We ended the third quarter with a strong cash position of BRL 8.6 million, which is approximately 2% higher than the same period last year. Our gross debt at the end of the third quarter was BRL 12.9 billion. The increase of around BRL 500 million is primarily due to a 3.2% foreign exchange variation, considering a significant portion of our debt is in dollars from bonds issued in the capital markets. It’s important to note that we are committed to keeping our gross debt below BRL 12 billion and aim to reduce the dollar-denominated segment of our debt. Additionally, we want to remind you that on November 21st, we will have the maturity of the 15th issuance of our debenture from 2019, with a principal amount of BRL 1.5 billion. So with that, we basically go back to a level below BRL12 billion of gross debt. The lower chart shows our debt profile with an average maturity term of 18 years, distributed with amortization over time, and with a long term profile. I’ll also highlight that in this third quarter, we made use of the strong results that we have been posting and our solid cash position to renew our global credit line. It used to be $800 million and now is $875 million, which further increases our resilience, our financial flexibility, and we will make the most of this moment to extend the term. This line would be due in October 2024 and now it will be due in October 2027. We would like to thank our partners, our banks that allowed us to extend this term. I’ll highlight that in the closing of this quarter, this line is absolutely operational and fully available and not withdrawn by Gerdau or by any of its subsidiaries. Moving now to Slide number 14. Let us talk about return to our shareholders. Owing to the significant cash generation in the first nine months of the year accruing more than BRL9 billion and taking into account the solid financial position, the Board of Directors of the company has a dividend payout and interest on capital of approximately BRL3.6 billion, or just to round it up, BRL2.15 per share to be paid to our shareholders on the 14th of 2022. At Metalúrgica Gerdau, we're also going to have interest on capital and dividends amounting to approximately BRL517 million or 50 cents per share. The payment of proceeds in Metalúrgica will happen on December 15th, and both for Gerdau S.A. and Metalúrgica, we will consider the position of this year’s held now on December 2022. With that, we highlight the payment of proceeds and accrued for the first nine months of the year, we declare almost BRL5.8 billion as dividends at Gerdau, equivalent to more than 60% of the free cash flow generated over this period. We moved from dividends to our share buyback program, which was launched in May. In Gerdau S.A., we have completed 81% of the program, buying back more than 45 million shares for BRL24.08. This includes not only the first quarter but also up to the beginning of the quiet period on October 24. Over the year 2022, we invested nearly BRL1.1 billion in share buybacks. For Metalúrgica Gerdau, we executed nearly 70% of the announced program. It's important to note that at Metalúrgica, the program is larger than at Gerdau S.A., accounting for 5% of preferred shares, while Metalúrgica has 10% of the free float of preferred shares. Before the quiet period, we almost completed 70% of Metalúrgica, buying nearly 47 million shares of GOAU4 at an average price of BRL10.36. As previously announced, the Board of Directors of Gerdau S.A. decided to cancel all GGBR4 shares in the buyback program along with a block of 1.7 billion common stocks already held by the company. Similarly, Metalúrgica Gerdau will cancel all shares in its buyback program and an additional block of 6 million preferred stocks that were in the company's treasury before the program began. Taking into account share buybacks and dividends, over the last 12 months, we returned a significant total of BRL7 billion to our shareholders. This is based on adjusted profit for the period and a payout ratio of nearly 55%, exceeding the 30% stated in our bylaws. The lower part of the slide features a chart demonstrating how a combination of improved results and ongoing debt reduction over recent years has positively impacted dividend yield growth for our securities, increasing from 3.6% in 2018 to 14.1% over the last 12 months. So thank you again for your attention. And now, I turn the floor back to Gustavo, who will make comments on our ESG initiatives for the quarter, and I'll come back in the Q&A session.

Thank you, Japur. Well, about the three final slides, I would like to comment on some relevant aspects related to our ESG agenda. Well, starting with some piece of information that has been already disclosed, because in August, we received certification for Gerdau Summit, which is our JV with a Japanese Sumitomo Corporation and JSW for the supply of rolling mill rolls and parts for wind power generation as a B Company. As a result, Gerdau Summit became the first two manufacturers in the world to become a B Corporation. The certification reflects our commitment to the B Movement Builders program and its ambition to certify all of our operations in all of the countries where we operate as a B Company by 2025. As part of our sustainability agenda, the certification recognizes that Gerdau follows good sustainability practices and effectively connects our businesses with our purpose of empowering people who build the future, living a legacy for society. I should also mention that the certification as a B Company is given by an independent international nonprofit organization called B Lab, represented in Brazil by Sistema.bio, which was able to verify in a very tangible and measurable way how Gerdau Summit has worked to build an even more sustainable, diverse, and inclusive business environment. Furthermore, I would like to mention that we received a certification from the World Steel Association for our reporting on greenhouse gases in line with the institutional agenda. Through our participation in the Climate Action Program, we are included among the 15% of companies with the best performance in CO2 intensity, which is a result of our governance and investments in the improvement of environmental practices. We are the largest recycler of steel scrap in Latin America, and our greenhouse gas emissions rate is about half of the global average for the steel sector. But as previously announced, we want to go even further. So this year we committed to new targets to reach 8.83 tons per CO2 equivalent of ton of steel by 2031, and we aim at being carbon neutral by 2050. Finally, I would like to point out that in September this year, we were present at Hawkin Hill, Brazil 2022, being the official steel supplier of the festival. We supplied 200 tons of 100% recyclable Gerdau steel for the construction of the largest world stage in the history of Rock in Rio, bringing the concepts of sustainability, circular economy, and innovation, not only to the event but to the entire Brazilian society. So I would like to conclude by thanking all of you for listening to our remarks. And now we are available to take your questions and elaborate further on any point of greater interest to you. So now, Renata, I'll give the floor to you so you can help us organize this Q&A session.

Thank you, Werneck. We will now start the question-and-answer session. We already have a couple of questions via chat. We have Leo Correa, an analyst with BTG Pactual.

I have two questions. With regards to dividends at GOAU, we noticed a dividend payout, which is lower at GOAU vis-à-vis GBBR. I would like to understand the rationale behind this difference. There is a second question also from Correa about trends of profitability in Brazil. He says, we have come to a level that is lower this call in terms of EBITDA margin around 18%. I would like to learn more about profitability trends for the coming quarters, considering the drop of raw materials prices and one-off adjustments of price in the domestic market.

Let me answer in the sequence. First about Galdau Metalúrgica S.A. dividends, okay? Leo, excellent question. It gives me the chance to bring an important clarification about this recurrent topic. There are many questions by analysts, so some reminders. We opened the share buyback program because we strongly believe our shares are depreciated vis-à-vis intrinsic value. And we keep on working on the share buyback both at Gerdau S.A. and Metalúrgica, which is larger at Metalúrgica compared to Gerdau S.A. Considering the cash at Metalúrgica, if we do the math, we reasonably have today funds enough in Metalúrgica to conclude the buyback program, which is already open at Metalúrgica Gerdau. When we started the share buyback program, we started from historical levels of the intrinsic level of Metalúrgica vis-à-vis Gerdau S.A., so from 24% to 26%. And even though we perform a program, which is twice the size of Metalúrgica vis-à-vis Gerdau S.A., we keep on having a discount, which is very significant, around 20%. And the company's management doesn't consider it to be adequate considering the nature of Metalúrgica Gerdau, which is a holding company that carries a single asset, which is Gerdau S.A. So the intrinsic value of the participation of Metalúrgica in Gerdau S.A. is not a reason to have such a significant discount, considering that Metalúrgica has very low costs, very little expenses, basically no carryover costs to take this portion at Gerdau S.A.. So to summarize, if we take into account the level of price, we continue to consider it adequate as a long-term investment to shareholders to allocate value to keep on having share buyback at Gerdau S.A., and it makes more sense to keep on buying back shares from Metalúrgica Gerdau. So part of the dividends that will be received at Metalúrgica from what is proposed by Gerdau S.A. to all its shareholders, this will be used over the coming quarters to follow the share buyback program of shares issued by Metalúrgica Gerdau. I know it's a long answer, but I just wanted to make it very clear. And I hope I've answered Leo's question. Gustavo, let's talk about profitability.

Leo, about Brazil. Let us focus on the main points of the business, addressing Q3 onwards. Think about demand. Demand is very solid. It remains solid in the third quarter and you keep on being solid in our opinion over 2023. The segment that has more difficulty now with a slight drop in our portfolio is retail. It is very much affected by the level of ineptness of family, family and household and income generation. And there is some growth in infrastructure. Sanitation is an example of progress in Brazil converted into demands for us right now. Demand from the industrial segment or agribusiness and also from construction in general remains very resilient. I also mention in my opening remarks one important indicator, which is the level of construction sites active in Brazil and once again a record in October. I keep on showing this indicator in our calls as something very relevant for us for the resilience of this sector. So demand in general in the domestic market is okay and to keep on being at this level, I would say positive in the future. What about profitability level in the domestic market? They are also adequate. It's not by chance our import premium increases a lot. Prices in Brazil do not follow the drop in prices in the international market. I would say that when it comes to profitability, this is okay, pretty okay, and will remain as such in the future. And now I come with the main points which explain the margins in Q3. This will be important drivers if we consider margins for the future. The first highlight is what just happened in Q3 about coal. So coal increased a lot in the first and second quarters this year. This is purchase and transport to Brazil and the costs happen in the third quarter. So when it comes to the rising cost, this is happening owing to the coal. Coal prices remain very volatile in the world. In latest weeks we had a rising coal. We cannot tell exactly how the price will behave over 2023, but that's a driver that might explain higher margins or lower margins next year. A second highlight happening in the second quarter, which is a maintenance shutdown in Ouro Branco unlike other mills we have based in EAF and the scrap life cycle is shorter and some pieces of equipment are being in maintenance and we keep on going under maintenance over the next five years. So it had a maintenance of blast furnace number two with results in the second quarter. Blast furnace is now up and running again, and maybe a factor that should bring more attention. It had an impact and it may keep impacting positively these margins in Brazil. I'm referring to exports. Margins in the domestic market, like I said, remain very solid. However, exports are driving down, driving margins down as we speak. We are preparing the operation for the coming quarters, including 2023. So we can keep on exporting despite lower margins. So we don't intend to have any demobilization of our capacity. It's not clear yet whether prices and international margins will remain at these levels. So in the short term, there is an impact. We slightly reduced our export levels in the third quarter around 22%, which was our traditional number to 9% now. We keep on exporting a little particularly for our sister companies in order to have operation levels that will bring opportunities for exports in the future. So these are the drivers behind the margins achieved in the current quarter and, to some extent, the factors that will guide general margins of our operations in Brazil in the coming quarters. But just highlighting that in the domestic market only margins remain pretty solid. We believe they'll keep on being solid because the main factors that contribute to these margins remain stable. They will continue to be solid down the road. So overall speaking low, these are our answers to your questions. I give you the floor back.

Our next question from Danielle Sasson, sell-side analyst from Itaú BBA. Danielle asks for his video to be enabled. So Danielle, you can accept the authorization to go live on video.

My first question in terms of capital allocation is whether you could give me a little bit more detail about the way you arrived at that extraordinary dividend to be distributed? Now you said that you don't want to change the rule of 30% buyout also because you wanted to have more flexibility throughout the cycles. But what was behind that view? I mean, do we have any view about gross debt for the end of this year or the end of next year? That could probably put a ceiling in terms of a leverage target because now in addition to that 12 billion of gross debt, your leverage would be 1.1, 1.2 times net debt over EBITDA. So if you could please give me a little bit more color. And now my second question relates to the US market. You had a quarter where shipments were not as strong, but prices were strong. Is this just a temporary dynamic because of lower demand at the end, or was it something more deliberate when you look at your policy of value per volume so that looking forward you would really, it will really be okay to lose a little bit more so that you could still remain posting high profitability levels.

Well, thank you, Daniel. Well, let's start with our capital structure. It's important that we make a distinction because we didn't do any extraordinary dividends because we didn't move forward on the reserves of the company. In 2022, we have more than BRL10 billion of net profit. So when we look at net profit in our base, we are not advancing towards our reserves. So we are not using that to pay out dividends or even to execute our buyback program that is coming around the corner. I mean, our philosophy or mindset is pretty much in keeping with what I said earlier on, which is to maintain net debt over EBITDA levels close to BRL8 billion in our cash. Also, considering the different countries where we operate different businesses and the needs to be flexible and also considering our financial soundness, this would be around BRL 6 billion as well. Therefore, at the moment, we do not anticipate any structural change in our capital structure. This is not on the radar. I think that we missed a little bit of the beginning of your question. So if I fail to answer your question completely, please let me know. And now I turn the floor over to Gustavo to talk about the North America part of your question.

In the U.S., we experienced some downtime for maintenance, which allowed us to make key investments that support our profitability. While our demand is still strong, our backlog is lower compared to 2021; however, it remains healthy. Currently, we can operate at full capacity, but our rolling mills are experiencing some limitations due to labor shortages. There was a slight improvement in labor availability during July and August, but challenges remain. We haven’t halted our production despite the labor issues. When comparing the flex market in the U.S. to Brazil, it's clear they are quite different. Over longer periods, the long steel market in the U.S. generally offers higher and more stable margins with less volatility than the flats market. It's also worth noting that the long steel market is controlled by three major suppliers who each hold a third of the market, with no new capacity entering. We are currently observing trends that we anticipate will lead to further developments. For instance, the recent approval of the U.S. Chip Act is expected to enhance chip production, which will likely increase demand for long steels. Additionally, the significant infrastructure investment of BRL 1.3 trillion has yet to translate into demand, but we expect it to materialize, potentially boosting demand in the first half of next year. Overall, the long steel market is well-positioned to handle inflationary pressures compared to other sectors in North America. The metallic spread remains stable, and while scrap prices are lower, logistical pressures from droughts in the Mississippi River could influence scrap pricing. Nevertheless, long prices are holding firm, keeping our operational health strong in the U.S. Moreover, over the past five years, we have successfully closed the gap in our operating costs and improved our mills. In summary, the North American market outlook is positive.

Thank you. Next question. Gabriel Simmons, sell-side analyst with Goldman Sachs. He has a couple of questions.

First question, we saw a very significant acceleration in dividends announced this quarter in addition to fast performance of the buyback program. I would like to understand how you see the leverage of the company down the road. You often speak of the target of BRL 12 billion as gross debt and investors had in mind a target close to 5 billion for net debt. Does it make sense to continue in the debt in these terms or are you working with an optimum leverage level expected by year end? What is the best way to consider this?

Werneck, would you like to answer. There are other questions from Gabriel, and then I can ask you later. Maybe that's easier.

Okay, great. Hi, Gabrielle. Well, we don't see major changes when it comes to our philosophy about our balance sheet or our capital structure. The same applies to BRL 12 billion as gross debt, something around these numbers. We wouldn't like to have it downwards or upwards. And we also have some tactics about debt rollover over time. As for dividends, they are a result of our capacity to generate profit and cash over time on a resilient basis. So this is why we accelerated this quarter because we have more visibility in our cash generation capacity until the end of the year, more than BRL 9 billion as free cash flow. With regards to the leverage, we are not piloting the balance sheet to come to position A or B when it comes to the year-end position. We have some obligations, some payments to be made there are some questions in the Q&A.

Gabrielle has some questions here. I'll pull all the questions. So, he says that the U.S. operation delivered increasingly strong numbers this quarter with a very strong margin. I think it would be a call for you to give us more color on the outlook for this segment. We used to speak of a margin, stable margin close to 10% or 20% or 12% for this business front. Does this level make sense considering a normal level? If the answer is yes, when do you expect to see this phenomenon?

And then he also made comments on, well, he would like to understand how we think about investments in orders and expectations about the timeline for these investments to flow into the company's earnings results. I give the flow back to you. I think this is what I answered to Danielle. If we think about the expression normalization in a world that is no normal anymore, makes no sense, so many things that will keep on happening in the world. I don't think it makes sense to talk about normalizing, I think it makes more sense to say that we are absolutely prepared as a company to grab all opportunities that are brought to us from the market. This is the transformation that we've been going through seven years. It didn't start yesterday. The company is very light, very agile, SG&A, our revenues with historical levels this year, this is evidence. So I don't know exactly what will happen over 2023 or what the world will bring us in terms of surprises. But if you focus on what we can see now in the short term or what we envisage about the margins for 10% or 12% today, they are not on our radar. We expect to work with higher margins. Like I said, we have demand backlog and possibilities, new orders in terms of new production capacities in the U.S., our customers, the infrastructure package, and also the transformations performed in our plant. So we strongly believe that we'll be working with margins that are way above this level in the coming quarters. There will be seasonality at the end of the year, not only in the US but also in Brazil. Seasonality has been different after the pandemic. But considering this, well, then we may go back to normal by year end with collective or blanket vacations or maintenance shut down, vacations, holidays, and this year more specifically the World Cup, which affects some markets. So we have lower seasonality in December. And I'd like to say that December, whatever happens when it comes to seasonality, will be a decisive month. How close will be to the historical level we achieved next or last year? We closed the first nine months of the year above historical year last year. So let's see, November and December, how close we will get to the results achieved in 2021. So overall speaking, when we consider North America, maybe the resilience and optimism, this is what drives us now and that's how we are getting ready to be on 2023.

Next question Thiago Lofiego, Bradesco BBI. He would like to use the camera. So, please, accept the camera enablement.

Thank you, Renata, Japur, and Werneck. I would like you to elaborate a bit more on Brazil BD and the market dynamics going forward. On the demand side, Werneck mentioned some seasonality in the business during the fourth quarter. I would like to understand if the anticipated drop in potential volume for the fourth quarter falls within the typical seasonal patterns, or if you believe it could differ from the normal trend. My second question is about how costs might evolve in Brazil. We've noticed a significant decrease in scrap prices recently, while coal prices are increasing. How do you view these pricing dynamics? Additionally, looking at the company as a whole and not just Brazil, is there any unusual maintenance capital expenditure that could be relevant in the next two to three years? I'm asking because we've seen some competitors announce unexpected capital expenditures in various industries, including steel milling, due to re-evaluation of maintenance CapEx. Do you foresee a similar possibility at Gerdau, both in Brazil and in your other business divisions?

Thank you for your valuable insights, Thiago. Seasonality is something we have been aware of for many years, particularly since the beginning of the specialty steel markets. There may be more inventory along the supply chain due to the downtime our manufacturers have experienced over the last two years, which has affected the continuous flow of materials. I recognize that the industry aims for a more stable flow concerning working capital, which may require higher working capital needs. For specialty steels, we anticipate fewer downtimes as we prepare for market recovery, especially in relation to heavy trucks and buses. We have discussed these issues with our customers, so I believe seasonality might not be as relevant in this context. However, it depends on one's perspective on demand. The costs associated with mini mills have remained relatively stable, allowing us to maintain profitability, although we face challenges like rising energy costs and falling scrap prices. The cost structure for mini mills is consistent, with coal being the exception, which is beyond our control. The focus now is on how coal prices will trend in the future. We have purchased some coal at lower prices, which will influence our costs in the coming months, and with recent peaks in prices, it’s uncertain how they will behave moving forward. The coal situation will significantly impact our Ouro Branco mill. Regarding capital expenditures, there are no surprises. I understand your concerns, likely about potential larger greenfield projects, but we don't foresee similar capital outlays compared to what others in the market are undertaking. Our investments will primarily focus on Ouro Branco, which will span over 5 to 7 years involving refurbishing the blast furnace. While there may be some capital spending, it aligns with our cash position. Currently, we do not have any plans for large new capacities or critical maintenance outside of what we've outlined.

Well great, thank you. I just have a very quick follow up related to call. So in the fourth quarter, maybe we should consider that what is part of your cost, I mean you will not have any large cost pressure especially coming from coal and scrap prices are coming down. So the net of your production cost, I mean when you look at COGS in the fourth quarter, whether you anticipate something better or still flat?

I mean, it's still very flat because the coal that we acquired is still being used in this quarter, and there will be still some seasonality and downtime. So more specifically, referring to coal, we will see lower costs impacting this throughout. But this is more in terms of COGS. Japur wants to add something.

I mean, when you look at the demand dynamics and downtime, I mean we have some expectations that may not be materialized and this relates to a higher or lower decline of fixed costs. So the fourth quarter, I mean this change in the level of operation may be something important if you think in terms of BRLs per ton. Now referring to CapEx, I would just like to say the opposite of what I said when I was presenting it. In the third quarter, BRL1.1 billion that we spent in CapEx, I mean BRL400 million was invested in competitiveness and growth, and 70% of that amount was dedicated for maintenance. Still very much concentrated in some of our operations in Brazil like Ouro Branco. It's not something that will happen that will change overnight, but as Gustavo was saying, it will take a few years. I mean we will continue doing what we've started doing last year when we increased significantly our CapEx investments in 2022 when compared to 2021.

Next question, Carlos de Alba, sell-side analyst with Morgan Stanley.

Your comments in the press release were relatively optimistic on the coming quarters in 2023, yet your shipments have declined quarter-over-quarter and global demand, including U.S. and Brazil with a slight slow down, and probably, Brazil we also have a slow down. How can we reconcile this? What do you expect in terms of working capital in the coming months? Is it correct to assume that only the investment in would be will add net steel volumes to Gerdau with all other only improving product mix?

Let's break this question down, Japur and myself. So we're very comfortable when it comes to demand, Carlos, not only in Brazil but also in the US. Wherever we look, all the signs we read, all the clients we talk to, all the investments made, all the deals already closed, we keep on being very optimistic demand wise for 2023. As we speak, we cannot precisely predict however we try to get prepared. Think about costs we don't manage, well we don't know the impact on our production. Maybe a clear example is coal and to some extent energy costs as well. So to some extent, this is how we look at this. I don't consider demand specifically in our case for geographies where we are or our product mix in the U.S. and the way how we set our operations in Brazil, I don't think it should be a problem. Maybe the most important issue about volume shipment is how much we will export from Brazil as to speak. We are not dismantling any production capacity. We're not demobilizing any mill. We believe today. There are possibilities, concrete possibilities, early next year to see some recovery or resumption and maybe we can have a more positive export margin favoring the average margin in Brazil. So in terms of production capacity and shipment, this is what we see. Japur, anything to add?

In response to the question about working capital, taking into account the maintenance shutdown and our usual operations, we anticipate that in Q4, there will likely be a cash release from working capital due to a reduction in inventory and finished goods. With the maintenance shutdown, we aim to resume sales. Regarding investment in CapEx, we can refer to the list on the slide, which outlines the proceeds and capacity expansion I mentioned. It's important for us to increase capacity since some of our operations, like in Michigan and Monroe, require investment to grow the casting operation. Currently, we do not sell billets or blooms from this operation, thus creating an imbalance between the rolling capacity and the melt shop. When we boost the rolling capacity, it will effectively increase the market volume. At this moment, there isn't a strong market in North America for billets or rounded billets from the Monroe operation. As for the projects listed, I would say that the Ouro Branco coiled hot roll strips project is more about changing our product mix rather than increasing capacity, as it will ultimately add more value for shareholders. Additionally, nearly all other projects will contribute to an increase in shipments for the company. Gustavo, do you have anything to add?

In North America, our primary focus is not on growing shipments from our plants, except perhaps for the Midlothian site where we expect some slight growth. Instead, we are concentrating on enhancing our competitiveness and addressing our customers' needs by diversifying our product offerings and striving to become a comprehensive supplier at most of our mills. A key example of our investment strategy is the expansion of our Jackson mill in Tennessee, which will be heavily oriented towards fulfilling our customers' requirements. In short, this outlines our approach to advancing our investments in North America. Back to you, Renata.

Thank you. Our next question from Guilherme Rosito, a sell-side analyst from Bank of America.

Could you provide an outlook on volumes for the second quarter and the second half of 2023 in Brazil, as well as insights on pricing and competition with imported volumes in Brazil?

Okay. Imports in Brazil, it's quite flat. It has an 11% historical level. It was up a little bit in 2020 during the pandemic or 2021, and it reached 15%. This year, it should be around 13%. And next year, you should go back to historical levels of 11%. So steel imports in Brazil, that's not a problem. Our outlook for volumes for this next quarter is slightly lower due to seasonality, all the holidays, and the World Cup. But in January, we should resume to regular demand levels that we have experienced throughout the year. So for us and still to reinstate the comment for 2023, this will be a year where demand is not the main issue that we should manage. Profitability levels in the Brazilian domestic market are very stable and flat, I would say. We don't see major, I mean, large possibilities of growing profitability because of price issues. But we don't see any pressure right now for further reductions of our profitability level. So in general, this is what I can tell you.

Thank you. Next question Alejandra Andrade, sell-side analyst with JPMorgan.

You discussed the payment of 2022 debentures, what are the plans for U.S. dollar bonds maturing in 2023?

Alejandra, how are you? We discussed debentures earlier, but we don't believe it's the right time to issue new bonds. Our goal is to reduce our dollar-denominated debt to around $1.5 billion. Currently, we stand at about $1 billion, with a maturity coming up in April of next year. We aim to achieve the desired debt level in dollars and fully settle this matter with cash. Thank you for your question.

Well, in case you have still any more questions, please send them through the Q&A icon of the platform. As there are no further questions that were posted through the platform, in case you have any other questions or if you would like us to answer anything else, please send us your questions in writing or give us a call, and then we will get back to you because it will be a pleasure for us to get back to you. So now I turn the floor back to Werneck.

Thank you, Renata. I just have a few final remarks. Because we are constantly trying to increase the relationship we have with the market in general, so any point that probably was missed during this conference call, please let us know. Because all of us, we will always be available to you because our intention is to be fully transparent and to give you all of the details about our operations. Thank you so much for joining us today. It's always a pleasure to talk to you. And I would like to take this opportunity to invite you to join us again in our next earnings release call for the fourth quarter and end of the year of 2022, which will take place March 1st, 2023. Thank you all very much. Please take care and have a great holiday season.