Gerdau S.A. Q1 FY2023 Earnings Call

Good afternoon, everyone, and welcome to Gerdau's First Quarter 2023 earnings release call. My name is Renata, Head of Investor Relations, and participating in this video conference today are Gerdau's CEO, Gustavo Werneck; and CFO, Rafael Japur. We would like to inform you that this video conference is being recorded and will be available on the company's IR website where the complete material of the earnings release is available. You can also download the presentation on the platform to access the Operator Instructions. We would like to emphasize that the information contained in this presentation and any other statements that may be made during this video conference concerning Gerdau's business prospects, projections, and operating and financial goals are based on the beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are not guarantees of performance; they involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions, and other operating factors may affect Gerdau's future performance and lead to results that differ substantially from those expressed in such forward-looking statements. I will now turn the floor to Gustavo Werneck to initiate the presentation. Gustavo, you may proceed.

Good afternoon to all of you. I hope you're all well, and thank you very much for the opportunity to meet in this video conference call to discuss Gerdau's results for the first quarter of 2023. Here beside me is our CFO, Rafael Japur. So it's always a pleasure for both of us to talk to you about our performance and answer questions that may arise during our presentation. I will start by talking about the business macro environment, the highlights of the overall results, and then I will give you more details on the performance of our business operations in the quarter. Next, I will call Japur, who will share with you some information about our financial performance. Finally, I will come back to highlight some important points from our ESG agenda. At the end, we will both be available to talk to you about some points that you would like us to elaborate further. Now let's jump to Slide #2. Here, I will talk about the macro environment in which Gerdau operates. I would like to start by saying that during the first quarter of 2023, we once again demonstrated our capacity to transform, innovate, mitigate risks, and also generate value for our customers against a very challenging macroeconomic background. We closely monitor the uncertainty surrounding the economic and inflationary scenario worldwide, particularly in Brazil and in the U.S., where some of our main facilities are located. We also closely monitor the continuity of the Russian and Ukraine conflict, which continues to impact the dynamics of raw material costs, particularly coal. We also saw the recovery of China's economy in the period, whose GDP grew 4.5% in the first quarter. Also, in the midst of this challenging scenario, in the first quarter, Gerdau performed quite well as the company benefited from its business model, geographic diversification in the Americas, and also our flexibility in production routes, especially those we have in Brazil. Now in the next slide, before I talk about the highlights of Gerdau's results for the first 3 months of the year, I would like to point out that we came to the end of the first quarter of 2023 with an accident frequency rate of 0.52. This result is even better than that of 0.73 reported in the consolidated 2022 period, being the lowest rate ever recorded in our historical series of 122 years. This performance renews our commitment to the health and safety of all our people. At Gerdau, safety always comes first. Since no result will ever matter more than people's lives. In that sense, during the last week of April in celebration of World Safety Day, we promoted various chat rounds, seminars, and events in all our plants and corporate offices in the countries where we operate, with the intent of sharing learnings and reinforcing our culture of active care and safety, focused on the monitoring of critical activities and job accident prevention. So I must congratulate our team for these excellent results. Now in the next 2 slides, I briefly bring you some highlights that reflect the company's solid performance in the first quarter of 2023. Later on, Japur will come in to elaborate on our financial performance. But I will give you just some general highlights about our results, starting with our EBITDA. We ended the first quarter of '23 with an adjusted EBITDA of BRL 4.3 billion, the second best EBITDA for this period in our historical series. Even in the midst of the challenging landscape that I mentioned before, we continue to post strong financial results, reflecting not only the recovery in our steel shipments in the first months of the year when compared to the last quarter of 2022, but mainly the company's agile and innovative mindset focused on the challenges and needs of our customers and other stakeholders. I also emphasize that this good financial result achieved in the first quarter reflects the consistent efforts of our team in pursuing operating excellence. During this period, not only did we see the recovery in steel shipments, but we also saw a significant reduction in costs, resulting in improved margins in all of our business operations when compared to the fourth quarter of '22. Once again, I would like to highlight the level of our SG&A expenses which appears in our SG&A results that have been maintained below the steel industry average. In addition to the financial highlights, I would like to point out that Gerdau recently launched together with Cubo Itaú and partner companies, something that we call Cubo Construliving, the first hub focused on creating innovative experiences in the journey of the housing and construction ecosystem. The purpose of this initiative is to boost growth in the construction and housing sectors through connections among the main players and also to generate business opportunities in Latin America and in other parts of the world. Our expectation is to increase the number of start-ups by 300% in the first year of activity, offering solutions in segments related to design, feasibility, construction, acquisition, and housing in general. Through Gerdau Next, and as you know, this is our new business arm, Gerdau supports open innovation initiatives by supporting entrepreneurs and also partnering with large companies. I emphasize that construtech is one of the four strategic clusters of Gerdau Next, and that our purpose is to contribute to industrialization, modernization, digitalization, and also the reduction of the housing deficit in the construction sector, especially in Brazil. So with the Construliving hub, we aim to generate even more value for the entire chain of this segment, jointly seeking improvements in productivity, efficiency, and more sustainable practices. Now looking at Slide #6, I will talk about the highlights of our business operations, and I will also take this opportunity to talk about the outlook for the markets where we operate. I will start Slide 7, talking about North America. Our North America BO that includes Mexico, the U.S., and Canada continues to deliver strong results in early 2023. In this first quarter, adjusted EBITDA for the business totaled BRL 2.4 billion, with an adjusted EBITDA margin of 30.2%. Shipments in the local market remain high, in line with good levels of activity in the steel-consuming sectors and with the rebuilding of stocks in the distribution sector that we've been looking at throughout this first quarter. In February and March of this year, we had record monthly shipments in this business. Our backlog of orders in the U.S. remains stable at a very high level of approximately 60 days, above the pre-pandemic level. I would also like to point out that since the U.S. government approved an incentive package last year, investments in the industrial sector in the U.S. have already exceeded $200 billion indicating a favorable environment for investments and for the continued generation of jobs in the country with positive impacts on the economy, especially in the Energy segment. In this respect, in addition to the Inflation Reduction Act, IRA includes USD 370 billion in tax credits for Clean Technologies, while the CHIPS Act provides USD 39 billion in investments to encourage local production of semiconductors. These measures, together with a reshoring process, will certainly increase future demand for steel in the region. In this sense, our North America BD is very well positioned to meet the needs of our customers operating at full capacity, as it continues to focus on improving the profitability and productivity of its mills while sharing, as I said before, even more value with its stakeholders, in particular, in the case of North America with our customers. Noteworthy here are the investments in long steel units in the U.S. in the mills of Jackson, Tennessee, in the U.S., and would be in Canada, which will have new equipment ramping up in the coming months, increasing the capacity to serve our customers even better. Moving to the next slide, I would like to talk about our special steels operation, this operation is split between the U.S. and Brazil. I would like to point out that the CHIPS Act will help bring semiconductor factories to the country over the next few years, thereby addressing the issue of chip shortages in the U.S. that has impacted the demand for special steels in recent years, especially in the U.S. In terms of the market, we continue to see a rebound in the production and sale of vehicles in the United States, but it's still at a level below the historical average. The production of trucks, for instance, increased almost 30% in February year-on-year, reaching almost 50,000 units according to data provided from the local automotive association. The production of heavy vehicles should total approximately 300,000 units this year 2023, while the production of light vehicles should stay above 50 million units. Moreover, the oil and gas segment, which is important for us in the U.S. or in North America keeps on picking up, approaching to the monthly mark of 1,000 rig counts in the coming months. Now moving to Brazil, the outlook for the special steel market in Brazil continues to be influenced by uncertainties related to access to credit lines and high interest rates leading to restrained demand for vehicles. Among light and heavy vehicles, right now, there are 8 automakers that have announced shutdowns in the first quarter of 2023, impacting 35,000 units according to ANFAVEA, the national association of vehicle manufacturers. For 2023 ANFAVEA itself, even in the midst of an uncertain scenario continues to project an increase of about 4% in the production of light vehicles in relation to the previous year. The agricultural machinery sector, on the other hand, should maintain a positive outlook with the prospect of a 4% increase as the fleet is being modernized in the midst of a good harvest in Brazil. I would also point out that the competitiveness of the special steel-consuming sectors, mainly in the auto parts sector decreased in the first quarter due to the appreciation of the BRL against the U.S. dollar. I would like to emphasize again that we continue to advance in the operation of the new continuous casting of blooms and billets at the Pindamonhangaba plant in Sao Paulo. This is going to be in the near future whose products are currently being certified by our customers. This equipment allows the Pinda unit to have a more automated process with lower CO2 emissions, better yield, resulting in the delivery of differentiated and higher quality products to the demanding markets in Brazil. Now moving on quickly to the next slide. I will talk about the long and flat steel landscape in Brazil, whose performance in the first quarter reflects a recovery in our sales shipments to the different sectors in which we operate when compared to the previous quarter. Steel consumption in the residential and commercial construction sectors is still at a high level despite current market concerns about the number of new launches and the level of inventories in some geographies. The number of active construction sites in Brazil, for example, reached a new historical high in April, standing above 10,000 units, up 3% year-on-year. The sector may also benefit from the reforms in the housing programs, aimed at the low-income segment over the next few quarters. The Industrial Construction segment continues to generate strong demand, especially from the paper and pulp, mining, and oil and gas sectors. We've seen reports of new investments, especially in these sectors. Even the Brazilian chamber of the construction industry, the so-called CBIC, foresees a 2.5% growth in 2023 for the construction industry. This production includes consistent market growth, which we've seen over the last two years. In addition, this also validates what is happening in the real estate market and also with a very sound housing demand going forward. Also, there was a slight recovery in retail sales in the first quarter when compared to the last quarter of last year, positively impacted by one-off government aid measures. But the sector's performance continues to be hampered by high interest rates and credit restrictions as I was saying earlier on. In addition, I anticipate the resumption of public and private investments in infrastructure works. These are an engine to drive the country's growth such as, for example, the subway works in Fortaleza and in Sao Paulo. According to ABDIB, investments in infrastructure should be around BRL 173 million to BRL 175 million in 2023, the highest since 2014. In addition, I would like to highlight the accommodating of the demand for steel coming from the industrial sector, especially road equipment, which grew 4% in the first 3 months of the year as well as the demand from the energy sector, especially solar and wind power, in addition to other demands coming and growing when it comes to oil and gas. My last slide and briefly talking about South America. In Argentina, demand for steel from the construction, energy, and mining industries remain strong, encouraging sales in the domestic market. The Argentine construction sector should repeat in 2023, the good performance reported in 2022 when the level of activity increased by around 3.5%. The same scenario is repeated in the Uruguay steel market. And in Peru, in turn, economic activity was impacted in the first quarter by weather issues related to social conflicts and an atypical phenomenon that we had to address, weather issues related to a cyclone that hit the country in March. And for a while, it brought a slightly lower demand for steel. So this concludes my first part. And now I'll turn it over to Japur to tell us more about the financial highlights, and then I'll come back so we can talk about our ESG agenda.

Thank you, Gustavo. Good morning, all. It's always a huge pleasure to be here with you again in our earnings conference call. Let's start with Slide 12. Let us talk about our cash flow and working capital. In the chart on the left, we see the evolution of our working capital and cash conversion cycle. This is the upper part of the chart. We ended the quarter at a level of BRL 16.3 billion with a slight increase of BRL 100 million vis-à-vis the end of the last year. Despite a scenario of higher shipment and net sales, like Gustavo said earlier in his presentation, pretty much driven by Brazil and North America. And looking more closely at the working capital for the quarter, it's important to highlight that there was positive exchange between the inventory of our accounts. The inventory is the closest to easily convert into cash by the company. We reported a cash conversion cycle of 78 days, a reduction of 3 days compared to the previous quarter, pretty much favored by the increase in net sales, like we said before. It's also important to say that we are happy with the current level of financial numbers yet. We believe there is room for improvement. And we do have some action plans in progress in all our BDs, aiming to improve our metric performance. Now let us move to the right-hand side of the slide and talk about the cash flow this quarter. Based on our adjusted EBITDA of BRL 4.322 billion, a margin of 23%. We invested BRL 550 million in working capital owing to a higher operating leverage this quarter. The physical sales volume was 11% above the previous quarter. Our CapEx disbursement totaled BRL 954 million this quarter, as we can see on the slide, of which almost BRL 300 million are earmarked for expansion and updating of our IT operations, trying to pursue long-term competitiveness. It's important to say that in line with our commitment to sustainable economic and social development of the state of Minas Gerais, nearly half of the total disbursement for the quarter was allocated to this region. After disbursement with income tax and net interest, we ended the period with a cash flow of BRL 2.700 billion or 140% higher than the previous quarter, which is equivalent to approximately 14% of our net sales, up 62% of EBITDA, showing a significant capacity to convert revenues into cash. In the lower chart, we can see the historical performance long-term since 2014, our quarterly cash flow. Typically, as we can see, the first quarter of each year, which in the chart is shown in green, when positive or in red when cash flow is negative. Typically the first quarter is a time in which the use of cash is mostly related to an increase in inventory resulting from seasonality, usually with lower volumes of operations in the fourth quarter and a resumption in the first quarter. Important to underscore that this time, we have the third consecutive time that we report a positive cash flow in the first quarter. Let's move now to Slide 13 to address our liquidity and indebtedness. We continue with a very healthy level of net debt over EBITDA of 0.31x. In March, our net debt was BRL 6.4 billion, a reduction of approximately BRL 800 million compared to the previous quarter due to a reduction in gross debt and an increase in cash. So we are very much in line with the parameters of our financial policy and pursue and are very close to what we consider to be an optimal capital structure for our business. Moving to the right-hand side of the page, I would like to point out that we ended the first quarter with a solid cash position of BRL 5.8 billion. We continue having our $875 million revolver line, which is fully available and undrawn. As a result, our liquidity position immediately for use exceeds BRL 10 billion. Now briefly addressing our debt amortization schedule and sharing a little spoiler about the second quarter. Now in April, our 2023 bond was due and settled in the amount of approximately $190 million. And now next week, on May 8, we have the tranche of our 16th issue of debenture to be matured in the amount of BRL 600 million. The second tranche will follow you only in 2026. As you can see on the chart, the 800 down the road will be amortized. To conclude my part, right now, I would like to move on to the next slide, Slide 14, to talk about our proceeds. Due to the earnings of the first quarter of this year, the Board of Directors of Gerdau S.A. approved the payment of proceeds, interest, and equity in the amount of BRL 892 million or BRL 0.51 per share. This payment will take place on May 29 based on the shareholding position on May 15. Metalurgica Gerdau, in turn, will pay BRL 310 million or $0.30 per share. And for Metalurgica, there will be a mix of approximately BRL 0.25 as interest on capital and BRL 0.05 per share as dividends. Now moving away from dividends and addressing our holistic performance. And now on the right-hand side of the chart, we can see 4 bars. Here, we show Gerdau's relative performance in yellow within a group of peers in the industry, which we believe are closer to our segments and our regional footprint. The top of each bar shows the best-performing peers for that indicator. In the middle, we have the average peers. And at the bottom of the chart, we show the lowest performers. We can see by looking at the different bars that Gerdau has an outstanding and above average performance on different metrics, whether in our margins, our return on capital employed, our austerity with SG&A or our same financial position. Consistency in different pillars allows us to remain committed to return value to our shareholders over time, increasingly leveraging our position as one of the companies in the industry with the lowest level of CO2 emissions. Well, Once again, thank you very much for your attention, and I give the floor back to Gustavo. He will talk about ESG topics and highlight the important progress achieved this quarter on our operations.

Thank you, Japur. Actually, on the next 2 slides, we have 2 topics to share about our ESG agenda. First, Japur talked about Minas Gerais. I would like to say that considering the best sustainable mining and responsible economic practices that we can give to the new practices, we adopted the most modern technologies in the market. And since February 2023, we are using only the dry stacking method to dispose of 100% of the tailings from our iron ore production process. So this has turned out to be a reality. And all the iron ore produced in our mines is via this method of dry stacking and no longer having tailings to the dam. Gerdau was once again recognized by the Women in Leadership 2023 survey in the metallurgy steel and mining category promoted by an NGO in Latin America known by the acronym WIL. Gerdau was highlighted for encouraging female leadership. Currently, women hold 27% of leadership positions at Gerdau; the target for variable compensation of the company leaders is to increase this number to 30% by 2025. Gerdau's purpose is to empower people who build the future. The promotion of a diverse and inclusive environment is one of our pillars. We are committed to being an agent of social transformation, engaging our whole ecosystem and all ecosystems where we are globally present and building a future with opportunities for all people. So on behalf of myself and Japur, I thank you all for your attention. And I give the floor back to Renata for the Q&A session.

Thank you, Werneck. Thank you, Japur.

The first question is in relation to the U.S. metal spread, we've seen a correction that gets to almost $120 per tonne since the beginning of this year. I understand that this is not a perfect analysis, but I would like to hear you elaborate a bit more about Gerdau's metal spread. Is it more resilient? And I have a second question related to prices in Brazil. We noticed pricing being 10% lower every quarter. How do you see the environment in terms of deploying price adjustments in the second half of 2023 or in the second quarter of '23?

So Japur, I think I can start answering the question, but please interrupt me anytime. I was also looking at my notes, and I struggled with that number for the spread. This is very far from reality. I mean, there was indeed a decline in metal spread in the first month of the first quarter, but it's much lower than that BRL 120 million that you mentioned, even less than half of that number. That might be some misleading information that we can talk about later regarding that information. But this is not in line with all of the information we have in terms of metal spread. Now in pricing in Brazil in general, well, first of all, I think it's important to say and to repeatedly say that we don't want to be seen as producers of only low-cost products because we serve more than 10 different segments, 40 different sectors of the economy that benefit from Gerdau's products, traditional materials for civil construction, like bars, rebars, and products ready for consumption. They account for about 1/3 of the products that we earmarked for the domestic market. And I would say that somehow export premiums are balanced. The largest difficulty, I think, we've seen since last year is with rebars. Other product categories, I think, have adequate profitability premiums; probably rebars are what have taken that average down a bit. And specifically speaking about rebars, it's been a little more difficult to cover profitability, but this is a process that will take time, and that's why it's difficult for us to say how long it will take us to recover that profitability to a more adequate level. But this is a process that we will gradually evolve. Also, when we look at the general margins of our operations in Brazil, we must also take into account the difficulties we are encountering to have positive margins regarding our exports. Traditionally, we export above our production capacity in Brazil, and the levels have been down during the first quarter and it came down to 5% because we made a decision to prioritize the domestic market. But we have already resumed to old levels of production. It's been a bit more difficult to find businesses for exports. Our export margins are low, but we believe that this quarter there should be an improvement. We obviously have a bit of concern about the drop in international prices. All of the deals to deliver in the next quarter will have margins that will be somehow affected. But in general, in Brazil, I would like to say that demand is not an issue for us at the moment. And everything indicates slightly higher than what we saw last year. Therefore, our main concern at the moment is recovering rebar profitability to a level that we believe is adequate. So Japur, if you want to add anything.

Hello, I think Gustavo already explained the issue of metal spread. We understand that the number you mentioned is very different than the current players. But I'm sure you can talk to Renata about that later on. In terms of Brazil, I think the main point is that we are pursuing our volumes in the first quarter, and we could see that our shipment in the market. We did some efforts in that regard and we understand that the dynamic for the next coming quarters will certainly depend on that balance between foreign exchange that fluctuated a lot in this first quarter and in the next quarter, which is an important thing when it comes to price dynamics going forward.

Our next question comes from Caio Ribeiro, sell-side analyst from Bank of America.

My first question would be about the outlook for the second half of the year in your North America BD. We noticed that there are some concerns on the part of the market concerning a possible recession in the U.S., a downturn in the real estate market, and a contraction in metal spreads. Could you please give us an idea about what you see going forward in the next half? And if you believe that the reshoring program could mitigate that effect? And also, if you could tell us a little bit about price increases in the domestic market for long steels. If you could say something about that, that would be nice.

Thank you, Renata. I think in terms of pricing, I somewhat answered that. And Japur, if you want, you can also add anything. It is great because we always have a good discussion with you. I will start talking about North America and Japur can add to my comments. In terms of concerns with the U.S. economy, this is something that comes up every quarter. Every quarter, this is a point that comes up and we kind of postponed that debate because we look at all of the indicators from the U.S.; we still see great resilience on the part of the economy so much that we are not talking about that in terms of quarters about the U.S. because we believe that all of the factors that are in place will accommodate a strong demand for long steels in the U.S. We are not very much exposed to the real estate market because once we sold our rebar operation, we are now more exposed to infrastructure and the non-residential sector. There's low penetration of imported goods. There are no imports coming into the segment. I would also like to reinstate the benefit that all these U.S. packages will bring to the steel industry in the U.S. So when we put together the infrastructure package together with the Inflation Reduction Act and the CHIPS Act altogether, once you combine all these acts this will bring about more than USD 1 trillion in terms of incentives and taxes, and this will boost steel consumption in the U.S. Therefore, we are sure that, well, certainly, in one quarter, there might be some recession or some setbacks in the U.S. economy. But in the very specific segment of steel and demanding parties, they will still be moving forward. And the same thing applies to metal spread. It's been resilient in 2021 and 2022. Certainly, there have been some variations in some given months. But it still remains at very high levels. There is a short-term concern. Some people are concerned about whether this drop in scrap, especially driven by Turkey because they reduced substantially their imports of scrap from the U.S. There was a momentary drop in scrap. And I believe these are volatilities that we will also see in the coming quarters. But in terms of this equation of supply and demand in the U.S. for both metal spread and other indicators that are translated into resilience in our margins and results, we remain very sound, very solid. But I would like to take this opportunity to talk about Mexico. We had some record numbers in Mexico. We've never had such strong results coming from Mexico. And this will continue. Just to give you an idea, every year since we started operating in Mexico, we've never heard people talking about a lack of rebars in Mexico. But there was a scarcity of rebars in Mexico. I am sure that Mexico will become a good reshoring market for the U.S. Only OEMs for automakers have announced productive capacity. I mean, Tesla will have a new plant in Mexico, BMW has invested in facilities, and a lot of investments are coming from the private sector. Therefore, the numbers in Mexico remain very strong and will contribute to the numbers in the U.S. as well. So what we see are very, very positive things coming from that geography. Japur, would you like to add anything? I think in terms of North America in general, one relevant aspect is that all of these major packages in terms of a short-term impact will have a long-term impact throughout our journey of investments and expansion of our mills. We see further resilience in the mid- and long-range in the segments where we operate. Despite the volatility we see in the market with some indicators going up and others going down, our portfolio, as you mentioned, remains positive. We still have a 60-day order book. Therefore, we do have some good elements to start this new quarter in terms of our volumes and sales.

Next question, Daniel Sasson sell-side analyst with Itau BBA.

Hello, everyone. My first question, I apologize for going back to the metal spread topic in the U.S., Gustavo. You already said that over 2021 and 2022, the position was solid despite acceleration. But could you comment more specifically about scrap and dive deeper, perhaps if the level of scrap costs in our earnings in the first quarter, how does it compare with a scrap inventory you currently have. I'm asking you this because we recently saw an increase in U.S. scrap. So how can it hit the margin in the U.S., which was at 30%, so healthy this quarter? My second question is very to the point. Maybe could you give us an update about the tax credits that you had this quarter? And as for Mexico, just a follow-up question about your last comment. You said there was a shortage of rebar in Mexico. Is it possible to supply this market from another region, maybe from Brazil, considering this challenge that you mentioned about having a profitable rebar in the domestic market.

Thank you, Daniel, for consistently engaging with us. You always bring valuable discussions. Regarding metal spread, I appreciate your question, but we don't consider it a significant concern internally. The market isn't as fragmented as it is in Brazil, and we have developed a strong ability to source scrap in the U.S. I believe I've previously mentioned our strategic acquisitions in this area. We have scrap agents and additional capacity, so I don't foresee any inventory issues that would greatly impact metal spread. We don’t aim to stockpile scrap; we maintain a lean operation. Although scrap prices have recently increased, they are starting to decline again. Given our strengths in the U.S., we can similarly position ourselves in Brazil to take advantage of these price fluctuations. Currently, scrap prices are falling. We looked at the situation in Turkey, where expectations for increased demand for steel had driven prices up, but recent developments suggest we are not near that scenario. Various factors in Turkey indicate that the demand for rebuilding will not materialize in the short term, particularly with upcoming elections and currency devaluation. As a result, Turkey is experiencing a slowdown, and the scrap price has decreased by about $50. We are also managing prime scrap effectively. These market fluctuations will continue to occur. Overall, I can assure you that metal spread in North America remains robust and aligns with our demand plans.

Sure. I'll try to be brief. Sometimes these are hard topics. But in February, we had a gain where we won a case. We had a tax client for PIS and COFINS on scrap. It was an old case. And the judgment was favorable for us in February. The main thing was the BRL 845 million launched as a nonrecurring item, and BRL 253 million is the monetary restatement from the core capital as a financial result. But because we have this extraordinary item nonrecurring, we also had income tax, which was higher by BRL 270 million owing to this gain of BRL 845 million, plus BRL 253 million that you found in the financial line. So the net of nonrecurring factors this quarter is huge, our PIS and COFINS over scrap, which was BRL 828 million, which increased our capital net income. People joke you cannot give adjusted numbers going up. In our case, we did the opposite; we corrected down both our EBITDA and our net income, excluding from the BRL 828 million. And the dividends that we are paying out actually consider the capital net income. So the payout this quarter, which is net of the non-cash effect of PIS and COFINS on the scrap, considering only the cash effect from the moment we benefit from PIS and COFINS credit to offset what will be payable in fewer quarters. If we didn't have this effect, the dividend would be lower. So with an adjusted net income, we paid more than 40% of payout this quarter. It is a long answer. Maybe we can talk later or Renata can also give you further information. So this is the origin of the BRL 253 million of the total decision that we have.

Our next question comes from Thiago Lofiego, sell-side analyst with Bradesco BBI. He also wants to ask the question live.

Can you hear me? Great. Werneck, the first question is, in the last call, we talked about margin recovery. And you described the dynamics in the first quarter, and you actually delivered. So now I repeat the same question about the second quarter. What about the process more specifically in Brazil with margins? We have some drivers that are in conflict. So I would like to understand your mindset about a potential margin recovery continuation in Brazil. And could you give us some color about shipments? And what about the results in April and May? What is the visibility? The second question is simple. What about the price drop in imports in the first quarter in Brazil of 10%? How much was owing to the mix effect? Could you tell us the reasons?

Thiago, look, this has been one of the main challenges of our Brazilian BD since last year. If you look at demand, we don't have a single rationale to explain a drop in margin and working with export premium at a level that we had. So when it comes to demand, we are very bullish or realistic that there will be steel demand in Brazil in line with what we had last year. For us, considering the shipment that we recovered in the first quarter, maybe this is slightly above our last year's deliveries. So our concern right now is not demand. Some sectors are being more challenged like the automotive industry, where we have 8 automakers that are idle, and we made the decision to stop our Mogi das Cruzes mill, experiencing an equal demand on special steel. On the other hand, civil construction, considering this discussion is very strong for us. Our cut and band portfolio is great by year-end. It's very consistent. And the figures that we showed yesterday, we had a report at Secovi, Sao Paulo, and other indicators that we measure, showing sound demand for launches in the construction industry. So our overall concern right now is not demand. The moods around might be difficult; however, for our special steel operations, we have expectations or maybe some optimism when we look at ANFAVEA numbers for the second half. But in practical terms, we didn't see any signs from our customers that would indicate that this would happen in the next few months. All of the announcements are more to align supply and demand. It's interesting to see the percentage of light vehicles in Brazil that are bought cash. So the curve is now inverted. And in terms of heavy plates, we also saw the reduction of engine Euro 5 to Euro 6. This led to a reduction in heavy vehicles and the expectation of increases with some vintages. We may see some increase in supply and demand, but nothing that will cause us to start up our melt shop in Mogi. I think in the U.S., we hear things louder than here. Maybe here, we would see slight recoveries in results compared to what we delivered in the first quarter, but nothing that would lead us to extraordinary results when compared to this first quarter. I think by the end of 2023, we will post good results vis-à-vis historical results, but it may be below the results we posted in 2021 and 2022. So now Japur, you can answer the second question.

About the mix, there was some effect. If you look and check our quarterly statements and check variation, we have a higher increase in long steel compared to flat steel. So there was an effect considering Q4. So a heavier weight in long steel considering compared to flat steel. And when we check our revenue broken down into volume or shipment and price, we saw 8% rise and 1% mix in variation but nothing so significant. Slightly driven, you're right, by the rise in long steel. And the net sales per tonne are slightly lower. And like we said before, just to close, we managed to recover. We gained room that we lost last quarter, and it has an impact as well. So Thiago, just overall speaking, let's close April numbers first. Then we can talk later with Renata as well, and you can share more information about this specific topic.

Our next question comes from Rafael Barcellos, a sell-side analyst from Santander. He would also like to open his camera and ask the question live.

Can you hear me? I think so, right? My first question is about your Special Steels BD. In fact, even though your results still remain at a very robust level, I think that the main negative highlight in the quarter, and that's what you also talked about during this earnings release call, we've been monitoring the recent shutdown of OEMs in Brazil. Werneck, you said that you don't anticipate a demand problem, but maybe the main aspect would be that. Could you please comment on your expectations for the year or whether you are noticing some recovery possibilities? So what can we anticipate going forward? And my second question relates to capital allocation and leverage. The company's policy is to have BRL 2 billion of gross debt, and whether you already reached that level and the net debt level is comfortable. So what would be, in your view, the minimum cash position for the company? In addition to that, I mean, the results of the company remain very robust in the first quarter. So I think the natural question would be on extraordinary dividend payout. When we look at the buyback program, you already did almost 60% of the buyback program. Are you thinking about renewing that?

Well, Rafael, I'll address the first part regarding special steels, and you can handle the second part of the question. Currently, I anticipate that Gerdau's performance throughout 2023 will resemble this quarter in terms of results, particularly EBITDA and gross cash generation. The upcoming quarter should align closely with the first quarter. Special Steels appears to have potential for improvement moving forward, particularly in North America, while Brazil's influence is less pronounced. Demand seems stronger in North America, and we may observe an uptick in light vehicle production in the U.S. along with improved stability from our larger mill there. We've made significant investments in that U.S. mill, which includes a new melt shop and furnace, leading to cost reductions in Monroe. Regarding heavy and light vehicles, we don't expect any signs of a downturn. There may be a slight positive trend. In Brazil, while some optimism appears to stem from ANFAVEA numbers for the second half, we have not received indications from our customers that short-term improvements will materialize in the coming months. Announcements seem more focused on aligning supply and demand. Notably, the trend of cash purchases for light vehicles in Brazil has shifted. In heavy plates, the transition from Euro 5 to Euro 6 engines has resulted in fewer heavy vehicles. While we might see some increases in supply and demand, it's unlikely to prompt us to activate our melt shop in Mogi. It seems we're hearing more positive news from the U.S. than from here. We could experience a slight recovery in results compared to the first quarter, but not at a level that would yield extraordinary results. By the end of 2023, I expect to see good results relative to historical performance, although they may fall short of the figures from 2021 and 2022. Now, Japur, you can tackle the second question.

Regarding the minimum cash, I mentioned that our goal is to maintain around BRL 6 million in high cash. Our gross debt stands at BRL 12 million, and we currently have BRL 6 million in cash. Consequently, our current net debt of approximately BRL 6 billion aligns with what we consider an optimal structure for Gerdau, taking into account our potential opportunities and balance sheet obligations. As for the significant dividend payout, I addressed that earlier in response to Thiago's question. The payout reflects a considerable share of our results based on corporate net income that didn't factor in cash, specifically the BRL 828 million from income tax related to PIS AND COFINS on scrap. Essentially, we are already distributing more than the anticipated 30% payout. While the current quarter has just started, we also have substantial payouts coming up, including dividends and a BRL 1 billion bond payment we made two weeks ago. Additionally, there's a BRL 600 million debenture maturing next week. Thus, while we have BRL 5.8 million available, nearly half of it is already designated for upcoming payments. We will continuously evaluate our ability to generate more cash in relation to our optimal structure. If opportunities arise, particularly in quarters where we generate more cash, we may issue higher dividends, which has been common in recent years, especially in the third quarter, known for being stronger in both Brazil and the U.S. The buyback program follows a similar theme; when we have more cash available from our operations and investments, we will increase returns to shareholders. Historically, we've paid significantly more in dividends and buybacks over the past two years, exceeding the 30% payout defined in our bylaws.

Our next question comes from Marcio Farid, sell-side analyst from Goldman Sachs. He would also like to open his camera.

I have 2 follow-up questions. I think the first point, Werneck, and I believe you mentioned that you are very confident with your North America operations; the market is more confident. But there was a positive surprise in the first quarter. And based on the comments from your peers about North America, we see a generalized confidence increase in the market. What do you think could be an impediment in terms of generating increased capacity or even exports into the U.S. Because it doesn't seem to be so reliable to see such high margins for a long period of time. So what would be the risks on the supply side, considering that we may see a good outlook for the next 5 years according to what you said? The second point, there was a comment today during your press conference when you talked about CapEx for Minas. You gave a few details, but it seemed to me that you said something about the next 10 years. Could you comment a little bit more about that BRL 5 billion? Whether that is already part of the plan or that is outside the plan? Or this would be a diluted CapEx, diluted throughout a longer period of time? And now going back to my previous question, could you elaborate a little bit more about Mexico? It seems like the metal spread in Mexico is detached from that of the U.S.; even though it's higher, it's still different than that of the U.S.

Excellent points, Marcio. Japur, you can start.

Marcio, regarding risks, we need to consider the financial sector and regional banks and how they might impact industries in certain areas that rely on steel consumption to sustain economic activity. However, we have seen the U.S. government and agencies actively working to ensure liquidity in the system to prevent any systemic risks. In the medium term, we do not foresee any significant risks. That said, key economic factors like inflation and the occupancy rates of commercial properties should be monitored. As Gustavo mentioned, we are observing demand for construction projects in the U.S., specifically for manufacturing plants, which haven't yet translated into economic activity this quarter, but with plans for reshoring from the current administration, this demand appears to be lasting. Additionally, as Marcio pointed out, supply is crucial. We have benefited in many ways, particularly since, aside from rebars, we are well-positioned in long steels. There's a low presence of imported products in our operational segments, which complicates matters as it ties into manufacturing and importing for large infrastructure. Rebars exemplify the struggles we've encountered because they threaten our margins. There are also incentives to promote local production, and most initiatives aim to encourage domestic manufacturing while investments in these areas add minimal productive capacity to existing plants, which is our situation. We are expanding our factories in Virginia and Tennessee and are also investing in our Midlothian mill in Texas to marginally meet demand. The supply side is balanced; new plants do not start operating immediately. I believe the U.S. steel market remains attentive to the competitive environment, particularly in the flat market, so we will focus on this aspect. We have no new updates regarding the Minas Gerais capital expenditure; this mainly pertains to our investment strategy in Brazil for the coming years. Any reports suggesting increased CapEx beyond what was announced last quarter are not accurate. The current CapEx level is appropriate going forward. The media discussions are likely aimed at clarifying our geographic investment strategy. We will continue investing in mining not as a primary iron ore player but to support our mills’ demand while also improving processing quality. We no longer use tailings in dams; 100% of our ore processing is through dry stacking. We are also placing investments in Ouro Branco, specifically to enhance value-added production. Furthermore, we are developing a new plant for coiled hot-rolled strips. If a third phase is viable, we will invest in Ouro Branco to increase product value. Additionally, we are investing in a buyer reducer, which is cost-effective and leads to lower CO2 emissions. Therefore, the BRL 5 billion CapEx is primarily aimed at refining our investments at specific locations and seeking opportunities within Brazil.

Oh, sorry. If you could also comment on Mexico, Werneck?

Sorry, I forgot to talk about that. Mexico, regardless of Mexico's decision to support the U.S. in its economic growth, we were very fortunate in the past to invest in our Sahagún plant that was there to produce large structural profiles because Mexico used to import from Spain and Korea. So now this mill is reaching its maximum capacity. So aside from these Mexico things, all this reshoring, had this discussion not been in place, we would nonetheless be delivering strong results in Mexico, reaping benefits from our growing capacity and also serving the local market. But right now, we always get additional results from the 2 plants we have. We have 1 that produces rebars and another that produces commercial profiles. We are benefiting from this interesting moment of the U.S. economy. Our results are outstanding in these 2 lines of products.

A question from Vanessa Quiroga, sell-side analyst with Credit Suisse.

What is the margin dynamics in North America and Brazil? What about the future? And the second question is how many inventory days for scrap and other raw materials does Gerdau own in North America and in Brazil?

I will also answer it with Japur. Margins, like I said before, naturally, they will be a little bit up or down. But let us wait to see what happens in the second and third quarter. I think the dynamics for results will be similar to what we currently have. In Brazil, we want to have a capacity to recover margins in rebars. Let's see how it goes. In the U.S., things are very sound, maybe some volatility, expansion of the spread depending on the scrap dynamics. But overall speaking, when you think about the second and third quarters, we expect to see similar dynamics that brought us these results in the first quarter. Japur, anything to add?

We won't get into details for scrap because this strategic and sensitive information for us. But about finished goods, we do everything we can to make sure that we deliver everything we manufacture. And we highlight that for many quarters, our use rate is very high. So we've been manufacturing a lot of what we actually believe that we managed to sell. Our current inventory coverage is slightly lower than our order book, maybe 60 days like Gustavo said for the order book. But for finished goods, our shipment is slightly lower. As a reminder, and thinking about a previous analyst's question, in the U.S., we don't use FIFO or IFO; we use average cost. So we cannot set this is higher or lower. It will always be the average scrap and may be connected to the Turkish dynamics or the Ramadan influence in the Middle East. We have low pressure for scrap and also lower inventory costs in North America. Gustavo, anything else to add?

I have 2 questions. First question is what about the backlog in North America compared to the same period of last year? The second question, do we consider any opportunities of reinvestment in the U.S. market, considering the positive scenario? Most of the CapEx is currently coming to Brazil.

Alex, thank you for the question. The backlog is pretty stable, pretty flat. Overall speaking, it was at a certain level pre-pandemic. And post-pandemic, in late 2020, early 2021, it reached a peak and went slightly down, but it's pretty stable for some months now. Levels are above what we saw even in good months and good pre-pandemic periods. So they have proved to be very solid and consistent in the latest months. No signs of reduction or problems in the backlog. So it is at pre-pandemic levels and some peaks, but lower than what we saw in 2020 and 2022. 5 or 6 years ago, I used to mention this gap in performance and cost vis-a-vis our peers in North America. Ever since then, we started to have a very consistent CapEx investment plan in North America. We understood it wouldn't be worth it with a greenfield operation but to update our IT and the plants and additional capacity, and it has turned out to be our strategy. So the investment level that we have in the U.S. has proved to be enough to deliver very adequate performance. We imagine this will still happen in the coming years. When it comes to investment decisions, the last movement was our Midlothian in Texas. We are just considering whether new investments might bring interesting returns for existing operations when it comes to cost and productivity. We consider the current level is more than adequate to bring to our mills and plants the best performance in North America.

Thank you for the presentation and I have 2 questions. Our cost expectations and working capital for the second quarter of 2023? The second question is, what is going on with steel prices in the domestic market? And what about our efforts for price increase?

Well, we are not happy yet with our cash conversion cycle; we consider there is room for a further reduction in our financial aspects. We've been having some moves this quarter, for instance, a migration in our inventory into our customer account. So this is a good sign that we have conditions and elements to pursue a reduction in our overall working capital level for future quarters. Ideally, something around 60 to 70 days closer to what we consider to be adequate to our industry level. If everything turns out fine, well, this is not guidance, but we are working in this direction for better results. When it comes to cost, it will largely depend on our operating leverage volume. Our fixed cost in the North America BD fluctuates with no depreciation between 20% and 23% of our cost. So there is a significant cost share in BRL or U.S. dollars per tonne of product sold that largely depends on the operating leverage. We understand that if we maintain the current production levels, we see particularly in this quarter, or maybe except for Q4, we may have conditions to pursue more competitive costs. As for price dynamics, like I said before, I think the most significant concern about profitability in Brazil and particularly in civil construction and rebar and byproducts, there was a significant concern by the end of last year. We had the World Cup, seasonality, and concern about elections in Brazil. So at that time, competitive dynamics were different compared to what we usually see. At that time, we tried to maintain profitability. But moves in the market made margins go down dramatically, and now we have a recovery process. It's always faster to go down than recover. So this was the major problem last year. A typical month, we hadn't seen the competitive scenario. Now the recovery has been going on for some months. Like I told Thiago before, let's see how agile we will be to recover these margins, particularly for rebar. For other products, in general, I don't think there was a dramatic change or concern when it comes to profitability compared to the competitive scenario in Brazil for a while.

Okay. We already talked a lot about short-term quarters. My question is more going towards the future. I mean today, the company is very different from the day when you took over, Gustavo. We are looking at earnings, but certainly, the company is much bigger today compared to what it was pre-pandemic. Your balance sheet is almost free of debt. Now looking ahead, when you sit and talk to the controlling agents looking towards the next 5 years, are you leaning more towards, let's say, the 5 coming years would be more inclined towards paying more dividends to shareholders, or your growth agenda is going to be the main topic of debate? We know everything about CapEx. We know that you have some one-off opportunities to invest in certain areas. But thinking in strategic terms, do you think that you would be leaning towards more growth? Or would you rather focus on increasing your payout to your shareholders?

Well, all of these are always subjects for a good debate. I remember that you had the opportunity to talk to Faraco, who for a long time led our operation in Brazil. He is probably also joining us today. He gave us an important contribution to our BD Brazil. He had a beautiful history in Gerdau. He knows the business very well. And certainly, the fact that now Faraco is our strategic head, and he is almost leading the company in terms of these debates. But we have our feet on the ground. We want to grow, but more in niches. We want to grow our profitability. Therefore, what we are doing is we are just learning from our past history, learning from our mistakes and from the things we did right. Our ears are more open because we want to hear the opinions that also contribute to us. There are very few companies with a track record like ours. We really like when we can serve in a moment of stability. We like to return value to our shareholders because they've been with us for the long run. But a growing agenda is normal, but we want to benefit from the platforms we already have and ways of adding more value. I mean, we have to use our capacity to add more value. All of that is translated into growth. But we want to grow in products that can serve the domestic market, adding more value to our customers. So, overall, we’re just a very down-to-earth company. We are investing close to our core business, looking for synergies and logistics synergies. We are really pleased with this moment of peace. But also, whenever we talk to the Board, we pursue a growth agenda. But different from what we had in the past; I think the learnings we had are here to stay. I mean, they will not disappear. Maybe someday we can sit with you and just draw up a specific agenda. But all in all, we want to extend that tranquility period for longer. We want to invest with our feet on the ground and with more assertiveness because this will certainly bring good returns to the company and our stakeholders. So in general, this is what I have to say to answer your question.

Well, in view of everybody's agenda and time concerns, we will end the Q&A session. Questions that have not been answered will be certainly answered by our IR team right after the call.

Well, in terms of my final remarks, I will start with great thanks. As I said at the beginning, this was a very challenging quarter, but I really enjoy all of the interactions that we have with you. We always learn a lot. We are all ears, and we are very attentive to all of the opportunities that arise from all sides. The environment is very challenging, but it's amazing to see so many opportunities in-house. We're putting our focus on our performance, details, and SG&A. We also have a great focus on the customer and how we can add more value to our customers. So this has been a challenging quarter. But again, I would like to thank all of you because you've always been close to us, looking at our results. And I would like to invite you again to join us once again in our next earnings release call on August 9, when we will discuss the results for the second quarter of this year. So I hope to see you soon. I wish you all the best.

Statements in English on this transcript were spoken by an interpreter present on the live call. We have a strong emphasis on our performance, details, and SG&A, while also prioritizing our customers and enhancing the value we provide them. This quarter has presented challenges, but I want to express my gratitude to all of you for your continued support and attention to our results. I invite you to join us for our next earnings release call on August 9, where we will discuss our second-quarter results for this year. I look forward to seeing you soon and wish you all the best.