Earnings Call Transcript - GGB Q2 2025

Mariana Velho Dutra, Head of Investor Relations

Good morning, everyone, and welcome to Gerdau's Second Quarter 2025 Results Presentation. I'm Mariana Dutra, Head of Investor Relations. And joining us today on this conference call are our CEO, Gustavo Werneck; and CFO, Rafael Japur. Please note that this call is being simultaneously translated into English, and you can choose your preferred language by clicking on the globe item at the bottom of your screen. It is worth noting that the forward-looking statements contained herein are based on the company's beliefs and assumptions based on information currently available. Forward-looking statements are no guarantee of future performance and are subject to risks and uncertainties that may or may not occur. I will now turn the floor to Gustavo to begin the presentation. You may proceed, Gustavo.

Gustavo Werneck Da Cunha, CEO

Well, good afternoon, everyone. I hope you are all well, and I really appreciate the opportunity to be together for another earnings release presentation. I will briefly comment on the highlights of the quarter and the outlook for our operations. Well, firstly, I would like to highlight that we ended the second quarter of '25 with another positive milestone in our historical series of workplace accident rates, reinforcing our commitment to the health, well-being and safety of our employees and all stakeholders with whom we interact. Reaffirming our commitment to sustainability, I would also like to highlight that we recently published Gerdau's annual report for the 2024 cycle. Among other indicators, the report highlights that we achieved an average GHG emissions of 0.85 tonnes of CO2 per tonne of steel, the lowest in our historical series and less than half the global average for the steel production sector. Now in terms of the financial performance, I highlight the strong recovery of our North American operations, which in the second quarter posted the highest all-time share in our results, representing 61% of consolidated EBITDA. I would like to emphasize that Gerdau operates as a U.S. company in the United States, meeting domestic demand with steel produced 100% locally without relying on imports from Brazil. Our decades-long presence in the North American market reflects a favorable business environment in the country and is part of a business strategy of internationalization and geographic diversification, which allows us to operate autonomously in the 7 countries where we are present in the Americas with independent executive and operating management. Meanwhile, in Brazil, the domestic market continued to be impacted by excessive imports of steel throughout the second quarter. The import penetration rate reached 23.4% in the first half of the year, once again demonstrating the ineffectiveness of the current quota system with tariffs and the urgent needs to implement measures that can effectively defend the Brazilian steel industry and domestic jobs. Given this scenario of lack of competitive quality in the Brazilian market and the slowness of the authorities in taking more effective measures, we decided to reduce our investments in Brazil and the details of which we will announce over the coming months. At the same time, we are continuing to adjust our current production capacity to this alarming scenario of high penetration of imported steel. And now I will hand over to Japur, who will detail the financial highlights and the impacts of this current scenario in the Brazilian market on our results.

Rafael Dorneles Japur, CFO

Thank you, Gustavo, and hello, everyone. It is always a great pleasure to be here with you in our earnings release presentation. Our adjusted EBITDA was BRL 2.6 billion, 6.6% higher than in the first quarter of 2025, with the North America segment's performance standing out, as mentioned by Gustavo. And on the other hand, we saw a reduction of our operations in Brazil as well as in South America. Net income stood at BRL 864 million or BRL 0.43 per share, up 14% compared to the first quarter of '25. During this first quarter, we issued 2 important debt issuances, a USD 650 million bond maturing in 2035 and a 7-year debenture totaling BRL 1.4 billion. The issuance was aimed at strengthening the cash flow of the company while extending the average maturity of the company's debt. Speaking about leverage, the company's leverage ratio, net debt over EBITDA, ended the period at 0.85x, way below the level established by our debt policy, reinforcing Gerdau's capacity to continue executing the investment necessary for our business despite a more adverse scenario. Now regarding CapEx, we invested BRL 1.6 billion in the quarter, where we allocated most of it in our Miguel Burnier sustainable mining project, which has already reached 72% completion. We are in the pre-operational planning phase, starting up at the end of this year. This will really change the competitive scenario of our Ouro Branco mill, adding 5.5 million tonnes of high-quality iron ore. The potential of the project is to generate about BRL 1.1 billion a year once the ramp-up is finalized. Now in North America, due to the excellent moment of the market, both in terms of shipments and prices, the company decided to postpone the implementation of Phase 1 of the Midlothian expansion project in Texas, which will not significantly change the project completion of that expansion process because it will take years and not even the amount of CapEx allocated to the project. Based on the results for the quarter, we approved the distribution of dividends in the amount of BRL 0.12 per share, totaling BRL 239 million. In addition, we continue to execute our 2025 share buyback program, which already reached 68% completion, representing 2.2% of the company's outstanding shares, totaling almost BRL 700 million throughout the year in terms of returns to our shareholders. We continue to believe that share buybacks at the moment are an excellent way to allocate capital and, at the same time, return value to our shareholders. And speaking about shareholder return, if we take into account dividends and share buybacks, our payout ratio came to 90% in the second quarter of the year, which is basically very close to 3x what has been set up in our bylaws. And with that, I conclude my remarks, and I'll join you again during the Q&A.

Gustavo Werneck Da Cunha, CEO

Thank you, Japur. And in North America, we continue to see steel demand at high levels, with the order backlog above historical levels, mainly driven by demand coming from the nonresidential construction sector. Our capacity utilization in the U.S. continues to be positively impacted by steel import tariffs announced over the last few months. We maintain a very healthy market outlook while remaining very attentive to the macroeconomic scenario and interest rates, which remain high. In Brazil, on the other hand, the domestic market, although experiencing good demand for steel continues to be impacted by excessive imports, as I mentioned at the beginning of my presentation. Therefore, much of the increase in steel consumption recorded at the beginning of this year was met by imports. There is even a risk that new import records will be set in the coming months if trade defense mechanisms are not improved. For the coming months, we see a resilient civil construction market. And we are closely monitoring the level of activity in the automotive and agricultural sectors, which are already being impacted by high interest rates. In addition, we are cautiously monitoring the possible impacts that the imposition of tariffs by the U.S. on Brazil may have on our domestic industry. I will now hand the floor over to Mari and Japur and I will be available to answer your questions.

Mariana Velho Dutra, Head of Investor Relations

Thank you, Gustavo and Japur. We will now begin the question-and-answer session. First question from Lucas Laghi with XP.

Lucas Laghi, Analyst

I would like to tap into some topics with you geared to investments and your CapEx expectations. First point, perhaps you could give us more color regarding the mining project. We see this CapEx being executed, start of operation expected through the end of the year with ramp up next year. So in the context of the current exchange rate, price of iron ore, pellet premium, how do you see that BRL 1.1 billion CapEx materializing over time? Do you have any estimates regarding how much of the incremental EBITDA come from the operations today? How much would be incremental if you do not make the investments considering loss of competitiveness if you don't have a sustainable mining operation advancing with the new investment? And then the second point is a broader question regarding investments. We see a more difficult context in Brazil and some projects are included in the strategic CapEx. Meanwhile, we see a clearly better outlook for North America. So how are you thinking about capital allocation? Are you thinking about a structural change in terms of levels of return for projects in North America, perhaps assessing new projects there or given the more advanced execution of strategic CapEx, although there are other investments in competitiveness, should we be thinking about a reduction in the level of investments for 2026 and beyond? So these 2 points: mining and a broader question about what you're thinking in terms of capital allocation when we have different contexts in Brazil and North America.

Gustavo Werneck Da Cunha, CEO

Thank you, Lucas. This is an important topic for discussion. I'm pleased we are addressing it. I'll provide a general overview, and then I'll let Japur share more specific figures. We have always prioritized our capital expenditures and annual spending, while being mindful of our cash flow generation over the years. Recently, we have determined that an annual capital expenditure of around BRL 5 billion to BRL 6 billion is quite sustainable. Qualitatively, there has been a notable shift in our spending. We are investing significantly more in competitive and cost-reduction projects rather than solely focusing on expanding production capacity. Even with consistent spending levels, our capital expenditures have changed considerably in recent years. This annual range of BRL 5 billion to BRL 6 billion has satisfied the capital needs in both Brazil and North America, allowing us to meet investment requirements in both areas without having to choose one over the other. In light of recent developments, particularly the decision made during the COMEX meeting on July 24 not to implement stronger trade defense mechanisms, we have decided to reduce global capital expenditure from 2026 onward. However, we will not halt any ongoing projects, especially in Brazil, like the one at Ouro Branco, as these are crucial for our competitiveness and cost efficiency. The BRL 6 billion investment we announced for this year will be fully executed. After 2026, we plan to lower the level of expenditures, but details on the new spending levels and which projects will be cut are not finalized yet. We will conduct a more detailed analysis in August and September, and share further details during Investor Day in October. The decision has been made to lower future investments in Brazil while continuing investments in North America, as we believe these investments are vital for increasing market share and meeting current demand. In the U.S., particularly in beams and merchants, maintaining a balance between supply and demand is crucial in the coming years, which is why building new facilities does not align with our strategy. However, we are incrementally adding capacity and expanding our product mix to include higher-value items. Recently, we made a significant decision to postpone a planned shutdown at our Midlothian plant in Texas, allowing us to proceed with another phase of investment, as Japur noted. Given the current strong demand, we prefer to keep production capacity available to meet it, defer the shutdown, and continue with our investment program, which includes various shutdowns without jeopardizing the overall project. Looking ahead to next year, we will see a reduction in capital expenditures, which will no longer reach BRL 6 billion. The focus will shift to investing less in Brazil, while maintaining investments in North America to ensure a competitive presence, given the ongoing strong demand. That's the general approach. I’ll now pass it to Japur for additional figures.

Rafael Dorneles Japur, CFO

Lucas, so going back to your first question, which was more specific about CapEx for the Itabirito's project at Miguel Burnier. It is kind of hard to get to the scenario to say how would it be if we didn't have that investment because we will not be operating with this level of prices for iron ore and pellets to make the comparison. But we have some big numbers to remember. This project of ours was approved, taking into account CIF China price for 62% ore, that now will be changed to 61%. The price was $80 per tonne. That was one of the assumptions of the project. And the second assumption was regarding the quality of the ore and the replacement of pellets in our production route and considering a price of $45 per tonne. Now we know that the premium is below $45 of pellets. On the other hand, the price of ore is higher. But even with that combination, we understand that the guidance that we provide as a reference that this project should lead to BRL 1.1 billion incremental EBITDA to our current result when we have the ramp-up, and that assumption remains kind of at the same order of magnitude. But our understanding is that over time, if we hadn't made this investment, we would have less and less access to granular iron ore in Minas Gerais. And so we would need to increase even further the consumption of pellets, and this would lead to a cost inflation that could be close to BRL 300 million, BRL 400 million. But since we don't have that scenario in mind, it would be very difficult to compare. But we understand that the investment is proceeding well, more than 72% physical progress. We continue with our plan to start it up in the end of the year. And in 2027, we would expand the new mining project. And an important part of this BRL 1.1 billion will start being captured along 2026. Of course, the project will not start operating at 100% capacity. There will be a ramp-up, but we understand that an interesting part of this benefit should be materializing in our results along 2026.

Mariana Velho Dutra, Head of Investor Relations

Next question from Leo Correa with BTG Pactual.

Leonardo Correa, Analyst

So I have 2 points I'd like to explore. Perhaps the first one to Japur. Japur, based on the debates we had this morning and in the last quarters, Gerdau continues to post a very healthy balance sheet compared to some of your peers. And I don't want to convey a different message from this in my question, but there is some concern regarding the pace of increase when we look in the last 2, 3 quarters. Net debt increased from BRL 5 billion in the end of the year to BRL 9 billion now in Q2, which is an expansion, which is kind of unusual when we look at your results posted in the last few years. I know that you've probably heard criticism from the market that you were being too conservative that there was room for more. And then now you're hearing that your leverage is slightly higher. I know that the market always oscillate in our wishes and in our points for discussion. But the reality is that we are not having a cash conversion. We have very little cash flow. EBITDA to cash conversion has been below the results of the prior quarters. So how are you thinking about this? What should we expect looking forward? Free cash flow will come in the second half of the year. And I imagine that this debt level will follow or will fall a little bit. So what would be your target for net debt? And how do you see all that? So that's the first question.

Rafael Dorneles Japur, CFO

No, go ahead. Go ahead, ask all questions and we'll answer them.

Leonardo Correa, Analyst

Yes. My second question is, Werneck, you have been an advocate of more balanced trade practices and competition and quality in the domestic market. And we have been voicing together with the sell side that what the government is doing has been insufficient, and the quotas clearly did not help. They didn't change anything in the market. Prices dropped. I don't remember seeing a rebar price deflation that strong as what we've seen this year. Please correct me if I'm wrong, if you remember another drop like this. But my question is a competitor in the morning announced an increase in rebar like 8% or 10%. The premium today is low. Theoretically, by the book, we could accommodate this price increase. The competitive landscape is complicated and demand, there was some slight deceleration, but demand is still resilient. So Werneck, how do you see this? Is there a room for this increase? You're leaders, of course, but how does Gerdau see these price movements with the current dynamic?

Gustavo Werneck Da Cunha, CEO

All right. So let's respect the order of the questions. So Japur can answer, and then I'll elaborate on the market and rebar.

Rafael Dorneles Japur, CFO

In response to your question, it seems you already touched on the point regarding the market's perception of our leverage. In the third quarter of last year, we noted an increase of about BRL 5 billion in our net debt, yet we maintain a low net debt to EBITDA ratio of 0.85, which is less than 1x. This increase in leverage was largely directed towards returning value to our shareholders, with over half of that BRL 5 billion invested in dividends and share buybacks. Specifically, we've allocated nearly BRL 2.8 billion toward these efforts since last year. Our primary objective in increasing leverage has been to enhance shareholder returns. It's worth noting that around 30% to 35% of the proceeds were used to support our negative free cash flow in equity, which is a routine aspect of our business strategy given our robust capital expenditures in Brazil, including the completion of the hot-rolled coil mill and the BRL 3.2 billion investment in the Itabiritos mining project, the largest in our company's history. We anticipate that this will yield positive results in the coming quarters. We operate in a cyclical industry where there are periods of investment followed by periods of profitability. Gerdau has prepared for this by deleveraging and maintaining a strong balance sheet so that we can continue our projects even during challenging cash generation periods. Our goal during this critical expansion cycle is to continue delivering shareholder returns, as we are confident in the investments we are making and in our capacity to generate cash in the future.

Gustavo Werneck Da Cunha, CEO

Leo, I want to address the situation regarding rebar and the trade defense measures. It’s quite disappointing that after a year of understanding the quota tariff system, we have yet to see the ministry implement any stronger measures. We’ve come across numerous articles, not just about steel, which indicate the government's desire to please various stakeholders, but this approach doesn't seem effective. It's baffling to me that the federal government is willing to forgo BRL 6 billion in taxes from the steel industry while accepting nearly 30% imports from China. There is legal assurance and knowledge within the Mercosur framework that could create a secure environment for stricter trade defense measures, so I find it perplexing that this hasn't been pursued. Specifically in the rebar market, there are concerns about new launches in civil construction, but currently, we see solid demand. Our backlog shows no signs of a slowdown, although that may change later. Despite ongoing analysis, demand remains robust. In terms of market share, we are committed to maintaining our rebar share in Brazil, and this isn't just hope but a mathematical reality for us. The entry of imported products does reduce profitability a bit, and it’s worth noting why we see more flat steel imports than long steel. Our measures have effectively blocked some long rebar imports, particularly from Santa Catarina due to the ICMS deduction in a bilateral agreement with Egypt that would have brought more long steel through Northeastern Brazil. The pricing of rebar has kept imports at bay, as the economics didn't favor importers. We have reached a premium or profitability level that is above an optimal balance, and now we see potential for some recovery in profitability and pricing for rebar. However, I don't think this will be straightforward. The path to restoring profitability is likely to be challenging, involving continuous discussions. There are multiple factors at play, and I believe margins and prices are currently below where they should be, suggesting room for improvement. We anticipate that in the second half, our results in Brazil will be more influenced by cost management. We finished Q2 with costs at Ouro Branco exceeding our potential, but we are actively working to reduce costs in our Brazilian operations. If the competitive landscape intensifies, we will be well-positioned to compete with lower costs. Overall, this summarizes my perspective. Japur?

Rafael Dorneles Japur, CFO

Yes, I have additional information to share. I realize that I didn't fully respond to Leo's question. Let me revisit an important point. We expect a positive cash generation in our business during the second half of the year. We do not foresee an increase in our capital expenditures. In North America, we experienced a consumption of working capital due to higher volumes and prices, and we expect this will begin generating more cash in the third quarter. Typically, we generate more cash in Q3. Therefore, we anticipate that our free cash flow to equity ratio will improve in the second half of the year. Regarding costs, as Gustavo highlighted, we mentioned this in our earnings release. Our significant capital expenditure program in mining involves various interconnected aspects with our Ouro Branco plant, such as our raw materials yard and some cold processes for using pellets in the centralization process. We completed several interventions during the quarter, which we believe impacted the production pace of our blast furnaces at Ouro Branco. We estimate that around 100,000 to 150,000 additional tonnes could have been produced under the same fixed cost base if we hadn't encountered these issues at the Ouro Branco industrial unit. In terms of variable costs and production volume, we anticipate a nonrecurring effect, which is part of the challenges associated with our extensive capital expenditure program at Ouro Branco and its related mining project. I believe that production should increase and we will return to our normal pace at Ouro Branco, contributing to improved dilution of fixed costs in the coming quarters, as Gustavo mentioned.

Mariana Velho Dutra, Head of Investor Relations

Next question is from Daniel Sasson from Itau BBA.

Daniel Sasson, Analyst

It's always a pleasure to talk to you. I want to revisit Leo's question regarding your debt position and leverage levels. The current ratio of 0.85 is below your policy, yet your gross debt is approximately BRL 18 billion, which is slightly higher than your guideline of up to BRL 12 billion. This guideline was established when EBITDA was around BRL 5 billion before COVID, and the exchange rate was 4:1. Is it time to reconsider that policy? Just to clarify, are you not significantly worried about your gross debt in absolute terms when assessing dividend payouts, buybacks, or other ways to return value to your shareholders? Is it acceptable for your gross debt to remain high as long as your cash position is also strong? We're currently facing tough challenges in this industry, which you've discussed extensively. You mentioned the importance of cost control and efficiency improvements, which are within your purview. My concern is, given that government efforts to safeguard the domestic market have been quite limited and ineffective, how long can you postpone investments, reevaluate CapEx, and make difficult decisions to possibly reduce overhead or personnel? What kind of structural changes would be needed for Brazil to overcome the persistent low per capita consumption that has persisted over the last three decades?

Gustavo Werneck Da Cunha, CEO

Let me address your questions directly. Daniel, there are two main points. Firstly, while high interest rates and gross debt are not ideal for us, we are also facing internal challenges, such as generating more cash in North America compared to Brazil. Consequently, we won't transfer funds directly from North America to Brazil. We have a significant capital expenditure program in our Brazil segment, with around BRL 4 billion allocated for investments there, but we aren't producing the same level of cash in Brazil. Additionally, Brazil is responsible for paying dividends and conducting share buybacks. This can lead to discrepancies that result in a temporary increase in cash relative to gross debt. Nonetheless, we anticipate resolving this issue in the upcoming quarters as we expect to generate positive cash flow in the second half, allowing us to reduce our leverage. You've raised an important point regarding our long history. I cannot simply focus on potential layoffs or minor cuts. Earlier today, during a press briefing, I mentioned that we have let go of 1,500 employees this year, particularly in Pindamonhangaba and Mogi after the announcement of potential tougher measures that ultimately didn’t materialize. All of our current actions are proceeding as planned. The future is indeed uncertain. Many countries worldwide are implementing protective measures, primarily against China and unfair competition. When I spoke to a Chinese manufacturer, they were perplexed when I inquired about their cost of capital and the public funding they receive to sustain their production capacity, which makes global competition challenging. We need to consider whether investing in the short term will yield benefits in the future. We haven’t waited for circumstances to change; perhaps that’s why past challenges led us to transform our assets. We divested from several countries and raised capital through those sales. Now, we are facing a new reality that necessitates long-term adjustments in Brazil. Despite our investments, we don't wish to contract as a company. Our overall size is optimal because it allows us to meet the needs of all stakeholders. In the long term, not all imported goods can satisfy our customers' needs due to the demand for more service. We are evaluating the sensibility of maintaining our production levels and capacity, and revisiting our assets is part of that process. Currently, Japur and I are focusing on structural solutions rather than quick fixes. Our team is capable of implementing effective initiatives, but we are considering broader responses to the current landscape, which seems to be leaning toward deglobalization as the U.S. seeks to bring industries back home. Thus, Daniel, the complete answer to your question is still pending. We will share more insights during our Investor Day. We are applying all our lessons learned and fostering our relationships to explore long-term strategies that will not only deliver favorable returns for our shareholders but also align with societal needs today.

Mariana Velho Dutra, Head of Investor Relations

Now the question is from Rafael Barcellos from Bradesco BBI.

Rafael Barcellos, Analyst

First, I'd like to understand your strategy regarding rebars in Brazil. We've seen that the market has been competitive since the beginning of this year, and it appears that Gerdau is maintaining its market share. Can you elaborate on how effective this strategy has been? Additionally, in terms of competition, how do you view Gerdau's standing compared to your main rivals? My second question pertains to the structural and merchant segments. What is your perspective on the demand versus price dynamics in these areas? Lastly, regarding capital expenditures, I recognize that you plan to decrease the company's CapEx moving forward. While I appreciate that you'll provide more details during Gerdau's Investor Day, I would like to inquire about how you intend to balance lower CapEx with essential decisions, such as refurbishment of furnaces. What would the minimum CapEx requirement be? These are my inquiries.

Gustavo Werneck Da Cunha, CEO

Rafa, thank you. As I already answered that part on rebars, I will just give the floor to Japur because he can also have his own way of answering that issue on rebars. He can give you some more light to what I said before. So Japur, the floor is yours.

Rafael Dorneles Japur, CFO

Sure. As we mentioned earlier, in our initial interactions with the market regarding our position in long steels, we previously met with you and some other investors. We have no intention of giving up any market share. We have made adjustments to our capacity and reassessed our mills over the past few years, reaching an optimal level on the cost curve. Therefore, it doesn't make sense for us to reduce our presence in long steels considering the significant investments and capital involved, along with Gerdau’s capability to manage our volumes. Given our market presence and positioning, we believe it is not sensible to cede any market share. On another note, we are seeing high import volumes, which in the past were not significant. Currently, while the percentage of long imports is less than flat imports, the growth in long imports has been more pronounced. This could negatively impact rebar prices, an area we are monitoring closely. As for other products, such as merchants and structurals, they typically see higher prices compared to rebar but are closely tied to the metal and mechanical industries, especially impacted by the civil construction sector. We have noticed some price adjustments there and are being cautious, particularly regarding the potential effects of newly imposed tariffs on the mechanical industry. Our marketing teams are assessing sectors that did not receive exceptions from these recent tariffs. Regarding capital allocation, we need to consider the cause-and-effect relationship. We are not reducing our CapEx just because our leverage has increased from 0.3 to 0.8. We are looking to scale back our CapEx plans mainly in Brazil due to the lack of viable economic returns on investments in a steel industry heavily affected by unfair competition from imports. This decision is not out of necessity but rather a strategic choice due to poor return prospects. While Brazilian authorities are taking more assertive measures against increasing imports, we will continue to maintain essential investments to ensure competitiveness and the health of our operations, including necessary refurbishments of blast furnaces and other critical facilities. However, given the current landscape in Brazil, many growth-related investments appear less viable.

Mariana Velho Dutra, Head of Investor Relations

Next question from Rodolfo with JPMorgan.

Rodolfo R. De Angele, Analyst

I would like to ask 2 questions. The first, still on Brazil. And then I'd like to hear from Werneck about the United States. So my question on Brazil. I think it is clear that it is a complex situation. Looking back when we saw something similar happening, the company was very different. So you are not considering the same mechanisms now. The message via capital allocation is very clear. I think that you're not envisioning growth in Brazil. But you kind of mentioned, Gustavo, about the possibility of cutting costs. You said that there are possibilities to cut costs further. And I would like you to elaborate on this. What are the opportunities? Because I think that this is an extremely important lever, particularly when you're thinking about defending our market share in Brazil. And now to ask a question with a smile on my face.

Gustavo Werneck Da Cunha, CEO

Yes. I was waiting for a question in the United States so that we can be happy. Rodolfo, good things that you raised. Japur, can you speak about the costs? And then I will answer the question about the United States.

Rafael Dorneles Japur, CFO

All right, Rodolfo. I think that we had a super relevant program to cut costs, thinking about the 2023 level and reducing it to date. And these gains have happened already. But this quarter, and we actually mentioned this in the earnings release, given the high number of works and interventions that we are making at Ouro Branco mill with mining, with the flat rolling mill, our mining program, for example, includes some adjustments and adaptations to centralization to centering and the raw materials we have there. So we reduced the production pace of our blast furnaces. So we understand that we might have missed an opportunity to produce at a regular pace for Ouro Branco between 125,000, 150,000 tonnes in Q2. Even considering a marginal return on this additional production volume, for exports, for example, we saw that within export, there was an almost 40% reduction in our exports quarter-on-quarter. So if we think about contribution margin, of this volume, it would have been an important improvement, about BRL 150 million in our EBITDA. But this is what I call growing pains. That's the CapEx investment we are making there. And considering this additional production volume, we would have had a more significant fixed cost dilution in our results. But we believe that once a good part of these adaptations that Ouro Branco have been made already, so we believe that we would have a greater dilution of fixed costs with a higher production pace in Q3 and Q4.

Gustavo Werneck Da Cunha, CEO

Rodolfo, regarding the United States, I often joke that as managers we enjoy intervening and creating action plans. However, sometimes the best approach is to refrain from interfering with what is already successful. I remind my team to be cautious not to overreach and disrupt effective processes. The results we saw in Q2 reflect this mindset. I would say we are currently experiencing our strongest performance in North America as we look towards 2025. In terms of price increases, that wasn’t particularly a factor in our segment but was more evident in flats. I believe we are well-positioned to deliver strong results in the short, mid, and long term. A significant portion of our backlog aligns with mid- to long-term opportunities in the United States, particularly regarding reindustrialization. If you ask me what’s robust in our backlog, I would point to solar, which remains very strong. We anticipate that the reduction of incentives from the current administration may lead to accelerated investments in this area. Our backlog is crucial for supplying steel for solar panel racks, transmission towers, energy distribution, and data centers—all of which require substantial steel. Additionally, we are supplying steel for new industrial facilities and factories manufacturing chips, as well as for the naval industry, which has seen a decline in capacity. There is a growing need for both military equipment and private vessels requiring refurbishment and retrofitting. Therefore, we foresee significant mid-term demand. It wouldn’t be prudent for me to suggest opening a new greenfield operation in the U.S. as it could disrupt the balance of supply and demand. We are being very deliberate in our actions to ensure we do not harm what is already performing well. We believe we will continue to succeed this year and may see an opportunity to slightly expand our margins. In terms of demand, considering our cost structure, we have reached a favorable position. We have made strides to be competitive with our rivals, which has been encouraging. Our specialty steel business has also improved recently due to a decline in imports. We expect to maintain this positive trajectory, and we should avoid contemplating actions that might interfere with our progress.

Mariana Velho Dutra, Head of Investor Relations

Next question is from Gabriel Barra from Citi.

Gabriel Coelho Barra, Analyst

I have 2 questions. Also about good things, Gustavo. When we look at next year, if everything remains constant in the United States, you will have some projects maturing. You have Midlothian, you have Miguel Burnier. So maintaining the same base, we should expect a higher EBITDA. When we look at the current debt of the company, if everything is constant, the EBITDA should be higher with the net debt not increasing that much. And perhaps with a lower CapEx, perhaps we should have more room for cash generation by the company. So my question is, in terms of capital allocation, given what you said in this call and in the interviews today, it seems that you're not going to invest in growth. Perhaps you would have more room for share buyback and dividend payout. So my question is, how will you allocate capital given that you are going to have more cash generation with the United States doing better? And looking more specifically at the projects, we talk about BRL 1.1 billion always. Those 3 projects maturing next year. But also, you have the point that Japur mentioned about BQ. The ramp-up had a relevant impact on the cost. It should be a one-off. So we should think about numbers above the numbers that we were considering, perhaps even greater than the number that we had been talking about. This is one-off of the second quarter. So I'd like to hear what you're thinking about this number next year. If you could rethink it, given that we're getting closer to the completion of the projects, Miguel Burnier, 75% physical progress. So I'd like to hear more. And if I may ask about Ouro Branco, does it make sense to think about the normalization of production starting in Q3? And what I talked about the one-off, should we think about this for next year as one factor to add to the EBITDA? If you could put all of this into context, it would be very helpful.

Gustavo Werneck Da Cunha, CEO

Excellent. Let me address your questions in order. With Gerdau's current share prices and various metrics, we believe that repurchasing company shares would be an effective use of capital and a good return for our shareholders. If we see a decrease in debt and an increase in free cash flow in the coming quarters, our top priority will be share buybacks rather than extraordinary dividends. This aligns with our previous discussions, leading to a share buyback in 2024 and the approval of a new buyback program for 2025. Regarding our projects, we are in a transition period, currently completing significant projects in our Brazil segment. These growth projects will generate cash and EBITDA in the future, notably with the hot coiled rolled mills expected to start producing in 2025, although full ramp-up will occur in 2026 when the mill is expected to run at full capacity for the entire year. The Miguel Burnier investment in mining is also on track, with the full benefits anticipated in 2027. Given the expected returns from the mining project, we foresee considerable growth and potential increases in EBITDA. For instance, if we take half of the BRL 1.1 billion reference for expected returns from mining, along with the returns from our HRC project and accounting for the normalization of one-off costs related to the adaptations at the Ouro Branco mill, we believe there is substantial room to enhance our EBITDA in Brazil, especially next year if conditions remain stable.

Mariana Velho Dutra, Head of Investor Relations

Next question from Carlos De Alba with Morgan Stanley.

Carlos De Alba, Analyst

I have a question regarding working capital. You mentioned that in the second half of the year, the company should generate cash as working capital decreases. However, looking beyond just the second half of this year and into 2025, I'm interested in how your current levels compare to those between 2017 and 2020, which were lower. Are there any structural initiatives the company can pursue to permanently reduce those levels and increase free cash flow? This seems central to the discussions today, as the company needs to boost cash flow and return more money to shareholders, which could enhance share value in the market.

Gustavo Werneck Da Cunha, CEO

Carlos, I can address your question in two parts. First, we underwent a significant transformation process. Looking back, our divestments in North America, particularly in iron ore and rebar, involved lower-margin products. However, these also had a shorter cash conversion cycle. We moved away from niche high-value products towards more direct sales to end users, which has improved our profitability, evident in the EBITDA margin of Gerdau U.S. when compared to peers. Conversely, this shift requires higher cash investment due to increased unit costs in the inventory. Nonetheless, we believe there is still potential for enhancing our cash conversion cycle, focusing on working capital rather than absolute dollar amounts. Currently, the cycle is around 84 to 85 days, and we aim to reduce it to about 80 days. Although we face challenges, especially during market fluctuations like those seen in North America this quarter, we are actively seeking to lower our cash conversion cycle by 4 to 5 days from where it stands today.

Mariana Velho Dutra, Head of Investor Relations

Our next question from Caio Ribeiro with Bank of America.

Caio Burger Ribeiro, Analyst

I do apologize if probably my question sounds repetitive. But first of all, about the tariffs in the U.S., many of the discussions about the topic around some possible exemptions for Mexico and Canada in light of what happened in previous years. So it's very difficult to have a very concrete view of whether this scenario will be materialized or not. But given the current landscape, how do you think this would impact your operations in also Mexico and Canada? And still on the same note, whether you believe that the incentives that you were mentioning and also the spike in long prices, is that mostly due to demand in the domestic market or whether this is related to that share of imported goods? And how will be the impact if the exceptions come along? And my second question is about special steels. What is the progress in terms of demand in the Brazilian market? And how would this possibly impact your margins going forward?

Gustavo Werneck Da Cunha, CEO

I will respond to your first question, and then Japur will take over. We think the discussion among the U.S., Mexico, and Canada will continue, leading to a review of that agreement between the U.S. and these countries. This ongoing debate is influenced by a quest for a new structure of the agreement. Therefore, we expect this discussion to persist for a while. Regarding rebars, it relates mainly to supply. Brazil has excess supply, and if that’s insufficient, we could see price reductions that might limit the entry of imports. For now, we recognize that our current market share is crucial for our short- to mid-term plans, and we don't anticipate significant changes in the rebar market in the coming months. We believe there is potential for some recovery in pricing and profitability, but it won't happen easily. In the next few weeks, we will have a clearer idea of what recovery we can achieve. That's our current outlook. Now, Japur can discuss special steels in both Brazil and the U.S.

Rafael Dorneles Japur, CFO

I mean, you had 2 questions, but in there, you also added a third question. We think that this has to do with capturing shares from imports and the industry as a whole, is managing to capture that share. I mean, this is the reverse process that we see in Brazil. I mean, we see positive demand in the U.S. We don't see any apparent issues with demand. But local importers are losing ground. And in general, the situation is improving, especially in terms of longs. Now about special steels, we have 2 different opinions here. Maybe in Brazil, we are a bit more concerned in the second half of the year because there might be potential impacts coming from the tariffs imposed by the U.S. to Brazil. And so this should have an impact on the automotive and auto parts industry. And that's an important supplier. I mean, that's an important segment for us, 15% of our deliveries in Brazil are earmarked to the automotive sector. On the other hand, in North America, this quarter when compared to previous quarters, we saw the growth of margins coming from our special steel products, not much in terms of SBQ prices, but mostly due to operating improvements because of all of the investments we made in our Monroe mill in the past few years that they are approaching the end of the investment cycle. And now this is bringing results of efficiency, capacity utilization, costs, and this, together with a better metal spread, this is leading to better margins for SBQs in North America.

Mariana Velho Dutra, Head of Investor Relations

Well, due to the limited time, our Q&A session is now concluded. And I would like to take the opportunity to invite you all to our 2025 Investor Day that will take place in Sao Paulo on October 1. Thank you very much for your attention, and I'll see you then.