Earnings Call Transcript - GGB Q3 2024

Mariana Dutra, Head of IR

Good morning, everyone, and thank you for joining us at Gerdau's Third Quarter Earnings Release. I'm Mariana Dutra, Head of IR. Here, we have with us our CEO, Gustavo Werneck; and Rafael Japur, Gerdau's CFO. This webcast has simultaneous translation into English, and you can choose the language of your choice by clicking on the globe icon in the bottom part of your screen. During this presentation, all participants will be in listen-only mode and right after that we will initiate the Q&A session. Analysts and investors should also be on the queue by using the raise hand icon. All of the forward-looking statements are beliefs from the company based on information currently available. Forward-looking statements are not guarantees of performance and depend on circumstances that may and may not occur. Now I would like to turn the floor over to Gustavo to begin the presentation. Gustavo, you may proceed.

Gustavo Werneck, CEO

Thank you, Mariana. Good morning, everyone, and I hope you are well. Thank you very much for joining us for another earnings release call. We will briefly comment on the highlights of the quarter. We will also talk about the outlook for our operations. This time, we will allow more time for the Q&A session. First of all, I would like to point out that we ended the third quarter of 2024 with an injury and accident frequency rate of 1.58. It's the best track record in the last 123 years. I reinforce our commitment to people's health and safety, which has always been our priority. We ended the third quarter with an adjusted EBITDA of BRL3 billion, mainly reflecting the progress of our cost reduction initiatives and the optimization of our assets in Brazil. Even against the backdrop of an oversupply of steel on the world market and uncertainties in the global macroeconomic environment, Gerdau's shipments grew both quarter-on-quarter and year-on-year, underscoring the successful execution of our commercial and operating strategy. In Brazil, we recorded an increase in steel demand in the domestic market in the third quarter. Despite the improved domestic demand, our shipments were impacted due to excessive steel imports into the country, even with the mixed trade defense system called a quota tariff or a tariff rate. This has not brought about the expected results, and it needs to be constantly improved by the federal government. The monthly average of steel imports in the first nine months of 2024 was almost 80% higher than the historical average. We have seen with astonishment a large volume of imported steel entering through cities like Manaus, showing how steel is being rerouted to other regions of Brazil in order to avoid payment of the required import taxes. I will now turn the floor over to Japur for the financial highlights.

Rafael Japur, CFO

Thank you, Gustavo. Hello, everyone. It's always a great pleasure to be here with you in our earnings conference call. This quarter, we posted net income of BRL1.432 billion or BRL0.64 per share, a significant increase of more than 50% compared to the second quarter of 2024. In the same period, we had free cash flow totaling BRL3 billion. Almost BRL1.8 billion was due to the withdrawal of the judicial deposit for the lawsuit over the exclusion of ICMS tax from the PIS and COFINS calculation base. Excluding this event, free cash flow generation was approximately BRL1.2 billion, driven by a higher level of EBITDA, as Gustavo mentioned, and a significant release of working capital during the period. This significant cash generation enabled us to end the quarter with a leverage of 0.32 times net debt over EBITDA, the lowest level in the last 12 months. Our strong financial performance was recognized by the main rating agencies, which raised the company's rating, reflecting the strength of our balance sheet. Regarding return to our shareholders, including dividends payout and share buyback year-to-date in 2024, we have a payout on net income of 55%, significantly above the mandatory minimum set out in our bylaws. By the end of October, we had executed around 57% of the buyback program, investing more than BRL700 million, approximately 2% of the market cap of the company. We also announced the cancellation of approximately 77% of the shares that were repurchased by Gerdau S.A. Moving on to the next slide. I'd like to look at the evolution of our cost reduction initiatives. As we mentioned at the beginning of the call, they were very important to foster our results this quarter. In Brazil, we captured BRL210 million in savings in this quarter. Still, we believe that there are more opportunities and initiatives to be pursued until the end of 2024. In the other business divisions, we carried out most of the initiatives that were planned, and some of the benefits, in our view, are already being fully captured and benefiting our results with the efficiency gains during 2024, which makes us confident that we will achieve our guidance of starting the year of 2025 with BRL1.5 billion in savings versus the 2023 base. I now turn the floor back to Gustavo, and I'll join you during the Q&A session. Thank you.

Gustavo Werneck, CEO

Okay. Thank you, Japur. I would like to emphasize that Gerdau is very well positioned to deliver solid results in the coming quarters, and we remain focused on cost discipline and capital allocation. In all the markets in which we operate, there will be the natural impact of the year-end seasonality. Here in Brazil, we remain very attentive to the unfolding of trade defense measures on steel imports. We have a positive outlook for steel demand, especially coming from the construction industry, whose GDP for 2024 is expected to grow by 4.8% driven by continued improvement in the real estate segment. For North America, we know that our steel shipments and prices will be temporarily impacted by the slowdown in economic activity, influenced by the presidential elections and the steel imports in the United States, a scenario that should be reversed during the first half of 2025. Well, with that, we thank you all for your attention, and we look forward to answering all your questions.

Mariana Dutra, Head of IR

Thank you, Gustavo and Japur. We will now begin the Q&A session. The first question comes from Daniel Sasson at Itau BBA. Please go ahead, Daniel.

Daniel Sasson, Analyst

Good morning. Thank you for this opportunity and congratulations on your excellent results, especially in the Brazil BD due to all of your efforts to optimize your assets and achieving more reasonable margins. I see the results are much better than before, so congrats on that delivery. My first question has to do with the U.S. BD, specifically the North America BD. Gustavo, you were just referring to a potential impact in terms of shipments and prices in the U.S. in a shorter period of time. One of your competitors just announced a drop in prices early in this fourth quarter. So could you give me a little bit more color on how much of that comes from lower demand? And I think that led you to change the mix and alter the amount of rebars in your mix. How much of that competition with imported goods in the U.S. could probably help you? I don't know whether you anticipate any kind of protection measures now with the recent election of Trump to the presidency of the country? And my second question, perhaps to Japur, is whether you could tell us a little bit about capital allocation. You had a very strong cash generation even if you exclude the reversal of taxes. So maybe you could tell us a little bit about what's on your mind in regards to an optimal capital structure. Almost 60% of your buyback program was already concluded since it was initiated. Or do you think that with Trump's election, you would have a different mindset in terms of your investments in Mexico or do you still think about growing more specifically in the U.S. or perhaps Brazil? I would just like to understand how this very strong cash position dialogues with investments or probably shareholder returns.

Gustavo Werneck, CEO

Well, thank you. Well, Japur, let's split the answer. I will answer the first two questions, the first two topics. First of all, Daniel, you talked about cost reductions. I would just like to say that this cost reduction and the search for greater efficiency had a positive impact on our results for the quarter. They stem from a plan that I believe I have been talking to you about in past quarters. So once we talk about these initiatives, all of them are based on very detailed plans. We don't want to discuss wishes or desires that are not backed by very detailed plans. So what happened is that we were very good at executing according to plan. This contributed substantially to our results in Brazil. Execution has been very efficient in the plan that we have discussed in previous quarters. Regarding North America BD in general, the results of the election will be quite positive for us. No matter where you look, especially if you look at the main point, certainly the results of the election will be more positive for us in North America. What happened now prior to the election is that there was a lot of expectation in terms of what would be the final outcome, and when the polls indicated a fierce competition between the two candidates, clients and all of the businesses that work with us were somewhat apprehensive. This affected demand in the previous months. This is why we decided not to reduce the use of our assets, especially the rolling mill. Hence, we placed a larger amount of rebars in our production mix. This is a flexibility we have in the remaining mills after the sale of our main rebar assets to NMC. We are making better use of our assets. We believe that even if the mix has a lower average profitability due to cost reductions, it's still maintaining very high optimization of the assets, which is beneficial for our business. However, we will analyze in more detail the speed of the rebound, especially in terms of steel to our clients. We still need to wait and see what will happen regarding a stronger rebound.

Rafael Japur, CFO

Hello, Daniel. Now, shedding some light on what Gustavo just said, when you look at the results of the quarter and compare them with the data from the U.S. economy, we noticed that since June of this year, PMI is negative, below 50%. This is an indication that demand, especially industrial demand, which is an important market for our merchant production in the U.S., was a bit slower, even before the election process that was finalized today. This impacted the prices of merchants early in October, and we expect the prices to be lower in the coming quarters. When we look at imports, there has been an increase in merchant imports going into the U.S., which has also impacted prices. Now speaking about the midterm, after this election period, we understand that once the key positions in this new administration are appointed, we will have a better outlook in the second half of next year. I'm sure the steel market will be more dynamic, and this is our initial reading regarding the outcome of the U.S. election. On capital allocation, yes, I was going to address that. When we think about capital allocation, we are moving forward with our buyback program. We already had the opinion on the exclusion of ICMS from the PIS and COFINS space, so there were buyback executions. I know that you monitor our reports on a monthly basis. We started the buyback in September, and therefore, in two months of buyback between September and October, we invested almost half of all the CapEx for the quarter. This means a significant amount. Year-to-date, in terms of dividends, we have over 25% of payout of our net income. We believe that as long as our shares are discounted compared to peers and in terms of intrinsic value, once our cash position remains robust, we can continue with our buyback program. We can also keep investing in CapEx, not only to generate short-term value through buyback but also in the long run with projects that will pave the way towards our future. Our net debt for the long term has not changed significantly, but we just have to meet our short-term obligations in terms of interest rates and exchange rate. This makes us consider the best way to maintain our balance sheet in terms of capital allocation amidst higher volatility like this year.

Gustavo Werneck, CEO

Thank you, Leo. I’ll let Japur answer both.

Rafael Japur, CFO

Regarding share buyback and payout of dividends to shareholders, I'd like to remind you that we have relevant distribution, considering dividends and share buyback, more than BRL2 billion year-to-date until the nine months of the year. We still have more to do until year-end. We have other obligations that we will handle tactfully in our day-to-day operations regarding the amounts. There are presumably small acquisitions and capital investments, like the acquisition of scrap in North America, which we closed last week. This is an investment of BRL600 million. We must consider cash consumption for this. We will tactically pursue other obligations while keeping these factors in mind when executing our plan. However, we are committed to continuing and completing our share buyback program. Once complete, our goal is to cancel the shares we repurchased. We haven't yet canceled them fully because part of the sales will be used for our long-term incentive program. Once we complete the buyback program, if price levels remain substantially discounted with an enterprise value multiple below 4x, as we have seen Gerdau trading in recent months, there will be no reason why we would not reassess our position. Regarding Brazil, I'd like to ask my team for assistance to display the slide on cost reduction to illustrate our initiatives. In the past quarter, we mentioned BRL150 million captured in cost reductions. In this third quarter, we captured an additional BRL210 million in costs and expenses reductions in our results. We've estimated around BRL400 million in Q2, meaning more than 50% of what we intended to capture in the second half of the year has already been captured in the third quarter. We believe we are on pace to fully capture these savings of BRL415 million by 2024. Although we started working on these at the beginning of the year, the benefits will accumulate throughout the year. The cost base will only be fully realized when we annualize the savings achieved this year. The savings captured in Q3 will be realized only partially, as there’s only one quarter left. However, when we run through all of 2025, with a lower cost base, that's when we will fully capture these reductions, equating to BRL1 billion lower in comparison to the end of 2023. This is where we stand on capturing all the benefits.

Gustavo Werneck, CEO

To add to Japur's detailed explanation, we will continue pursuing efficiency gains and cost reductions. The market remains very competitive, and there's an ongoing issue with steel imports that remains unresolved. Trade defense measures have not been as effective as we anticipated. However, other opportunities may arise next year. We are in the process of reducing the Ouro Branco capacity secured for exports. However, this process takes time, and we may have chances to grow our shipment volumes next year.

Marcio Farid, Analyst

Thank you, all. Gustavo and Japur, thank you for your time. I have two questions about the two primary markets of Gerdau. First, in the U.S., there’s a very specific question that we've been discussing among investors concerning the spread of structural beams and merchant bars compared to rebar. Historically, this was very low, a maximum of $50, and now it's at a premium of $200 to $300. We are wondering whether these spreads for structural beams will revert to previous prices. If not, will this spread remain high for an extended period? Regarding Brazil, you spoke a lot about the high levels of imports from China, which have reached new export records. We've seen attempts to stop some of these imports in the past 12 months, but I'd like to know where we currently stand on that. You were more vocal at the beginning of the year, Werneck, regarding the need to curb these imports. We saw some tariffs introduced to the market, which frankly, we don't understand how they're helping the market. Are they temporary? Are there further antidumping discussions happening? Please give us an update on the industry's push regarding this exchange rate scenario. Can we expect a more controlled scenario in terms of profitability and pricing?

Gustavo Werneck, CEO

Thank you, Marcio. I'll start with China. Japur, please remind me to speak about the exchange rate environment you mentioned and address the spreads as well. Let me begin with China by saying that any debate surrounding stimuli from the Chinese government to their economy won’t diminish the level of exports. It’s an illusion to think that such stimuli will increase domestic steel demand in China. That demand has already been accounted for; infrastructure, residential, and commercial developments have largely been completed. They will be using the infrastructure already built to boost the Chinese economy. Therefore, we don’t foresee a reduction in China’s export levels in the next 10 to 15 years. We're not assuming that at all. China will continue to export given its excess capacity. The 4 million tons Brazil consumes in rebar from China are negligible compared to their 400 million-ton capacity; this volume will continue to flow in an unfair way. This is a reality we will need to confront. Hence, the effectiveness of the trade defense measures and mechanisms adopted must be improved. The federal government took 12 to 18 months to adopt the initial trade defense measure concerning the mixed tariff rate quota system. They publicly pledged to assess effectiveness after four months. In the last four months, this mechanism has proven ineffective. Therefore, it is essential to adjust this mechanism urgently. The measures should restrict the extra 30% of volumes that arrived and target just the average imports that Brazil typically maintained, especially from 2020 to 2022, eliminating this excess. We believe that raising the tariff is essential; it must include the entire gamut of steel products competing unfairly in the market. We have formally communicated to the federal government about these growing imports of steel via Manaus, which have been concerning. We've asked the government to thoroughly analyze this, regardless of whether it complies with the law. This is the current state.

Rafael Japur, CFO

Regarding the exchange rate, approximately 20% to 25% of Gerdau's costs in Brazil are denominated in dollars while about 10% to 15% of our revenue is in dollars; however, most local prices depend on the exchange rate due to parity rate setting. An increase in the dollar price—compared to the average prices of the dollar last quarter—means competitiveness improves for Brazilian products versus imports. In the last quarter, the dollar was 5% to 6% above the average current price. This competitiveness drives volume shipments and exports, enhancing our domestic competitiveness. Now, about the broader spread differences, which can be attributed to various factors, one critical factor to highlight is the supply and demand dynamics for different products. Historically, the key investments in U.S. steel capacity expansion were mostly in flat products. There has been minimal investment in long steel expansions. Consequently, we are seeing structural and merchant bars gaining pricing power compared to rebar. The second factor to consider is inflation from labor sectors in the U.S. since 2020, which has increased post-COVID. Higher-value, industrialized products such as structural and merchant bars are reaping the benefits of increased productivity, while more manual processes, like those generally used for rebar, remain less profitable. This helps clarify the pricing dynamics leading to the current disparity.

Marcio Farid, Analyst

Super clear, Rafael and Japur. Thank you very much.

Rafael Barcellos, Analyst

Hi, Mariana. Thank you. Hello, Werneck and Japur. I hope you are well. Can you hear me? I have two questions. The first question is regarding the U.S. market and I would like to hear more about your short-term view. I would like to understand how you see the results trajectory, especially looking at the fourth quarter and whether it would make sense for us to believe that the fourth quarter should see worse margins. And maybe throughout the year 2025, margins will stabilize or even improve. To put this into context, in recent weeks, we've heard some news about a $30 increase in rebar prices in the U.S., and I would like you to comment on that piece of news and the potential unfolding of that, plus the impact on merchants. On the Brazilian market, I've heard participants complaining about increased entries of Egyptian rebars. Could you provide clarity on the domestic market? I know Werneck already talked about that, but I want to understand whether the situation is worsening or if this is just a seasonal situation that occurs in the fourth quarter. I want to better gauge market dynamics regarding pricing. Lastly, still regarding Brazil, I want to understand profitability. I've seen great work on cost reduction and optimization but have you got other initiatives on the roadmap beyond what you've already announced? Or will the improvements be tied to market conditions?

Rafael Japur, CFO

In the short term, the fourth quarter typically sees seasonal trends, mainly due to climate and holidays such as Thanksgiving, Christmas, and New Year. This often translates to reductions in output, usually ranging from 5% to 10% in shipments versus other quarters. Therefore, we anticipate a decrease in operating leverage this year due to maintenance shutdowns at our mid-low mills. Additionally, we have observed a decline in merchant prices occurring in early October, which will influence our profitability in the North America BD for this quarter. While we do not expect a total impact equal to the full measure of that $120 price drop, we believe that portion of that will indeed be felt in our consolidated figures. We are estimating a net sales reduction of between $25 and $35 due to our current mix. However, we remain optimistic about 2025 and the potential benefits of the new administration under Trump, which can lead to an economic rebound. While PMI has been in negative territory since July, this should reverse when we move past the seasonal end of year period. Regarding price movements, we view fluctuations in rebar prices as tied to short-term shifts in scrap price trends. There's been a change in the spreads involving the metallic qualities, so this adjustment reflects only short-term tactical movements. We don't see a structural decline in margins.

Gustavo Werneck, CEO

You mentioned very valid concerns about the Egyptian rebar situation. I haven't highlighted this as vocally as I did regarding Manaus. Brazil has a bilateral agreement with Egypt that allows for the increase in rebars coming into the country as China attempts to export to different markets. We're seeing a growth in imports through countries like Egypt and Vietnam into the U.S. and Mexico, and it's natural they may target Brazil as well. We don't anticipate a continuous influx of these rebars, but that will persist to a certain extent. Unlike what we've observed with Manaus, which took us by surprise, we are already factoring in this revenue stream into our calculations, but it should not be impactful enough to destabilize the Brazilian reinforcement concrete industry. We are seeing competition from rebar and other products related to reinforced concrete; however, for next year, we believe it will present a generally more favorable market than this current year, especially not just due to market factors, but also because we have additional initiatives underway to enhance profitability. We're not planning to close any of our production facilities, and our capacity remains aligned with market realities. We will continue to seek opportunities with raw materials like ore, energy, and other inputs to bolster our overall profitability. Our forecast for Brazil anticipates improved profitability in 2025 compared to what we experienced in 2024.

Caio Ribeiro, Analyst

Thank you. Good afternoon, and thank you for this opportunity. I would like to talk about special steels in South America. It's evident that in North America, there will be significant benefits following the recent elections, with discussions about infrastructure, reshoring, etc. Could you provide insights into the special steel dynamics? We've observed strong demand in Brazil due to heavy vehicle production. I would like to get your views on demand expectations in the U.S. in light of the election results. In South America, margins have been flat around 16%, considering historical over 20%. What levels do you expect to be sustainable in the future? Are there cost initiatives that could help enhance this division's profitability?

Gustavo Werneck, CEO

Okay, Caio. I believe I can address both of your questions. To start with special steels and specifically regarding North America, in the U.S., unlike Brazil, where a significant portion of our production serves heavy vehicles, our North American production focuses more on light vehicles. This sector's performance is directly dependent on affordability and related reductions in interest rates, a trend we're beginning to see. As we head into 2025, considering Trump’s administration efforts to boost local production and instigate near-shoring, we anticipate heightened demand in the near term as interest rates decrease, particularly affecting end-users of vehicles. Now concerning South America, it's crucial to note that earlier this year, we divested our joint ventures in Colombia and the Dominican Republic, which allowed us to avoid cash equivalent impacts in our EBITDA. However, 2023's early performance without including that comparison showed our margins could range from 15% to 25% over the long run, influenced notably by our operational steel unit in Argentina. We've noted diminished shipments there, ranging between 40% to 50% compared to last year. It's difficult to maintain excellence and cost efficiency with lower shipment volumes, but we’re optimistic about mid-range recovery as we seek further efficiency improvements.

Ricardo Monegaglia, Analyst

Hello. Thank you for the opportunity. I have two key questions. First, about cash flow, which was a positive surprise even excluding the withdrawal of that deposit. I'd like to pinpoint two areas: working capital performance. How should we view this line item in the next quarter or the next few quarters, considering the reduction in the cash conversion cycle this quarter? Regarding taxes, I noticed the level was significantly lower than projected; was there a different seasonality of payments this quarter? What specifically happened, and how should we think about the reversal of any specific factor, if applicable, to gauge how free cash flow will evolve? For my second question, returning to the United States, the impression after the second quarter call was that July was also a good month in terms of profitability in the U.S. operation. Could you provide clarity on the margin deterioration magnitude for Q4, so we can understand if we start Q4 at a better level than initially anticipated?

Rafael Japur, CFO

Regarding free cash flow, we anticipate a release of working capital in Q4 due to standard yearly seasonality. Lower sales volumes typically lead to reduced working capital. Thus, we expect solid cash generation from operations in Q4 despite high CapEx disbursement. As a reminder, we have a BRL6 million CapEx guidance for the year, and we have completed around BRL300 million to date. We anticipate more CapEx outlays in Q4. Concerning tax payments, it’s essential to understand that we operate in multiple countries. Analyzing quarterly results can be tricky as actual payment timing varies between countries. Tax obligations can fluctuate; in North America, for instance, we see heightened tax expenditures in specific periods of the year. Payments generally peak in April, while preparations for tax in North America usually result in limited tax outlays at other points throughout the year.

Unidentified Participant, Analyst

Hello. Good afternoon. Thank you for taking my questions. How are you doing? All good. I have some follow-up questions: one regarding North America and another regarding the Brazil operation. Japur, regarding North America, could you give us a better understanding of the impact from the recent adjustment of inventory values? Additionally, thinking of the cost structures for North America in Q4, could you clarify expected impacts in terms of volume and pricing? Is there anything we should consider that could affect the cost structure for Q4? Now regarding Brazil, the industry seems more fortunate with less impact from imports on demand for longs. However, imports from Peru and Egypt appear to be increasing. Can you share your view on the industry's capacity? Is this a concern for 2025, or is it more gradual impact?

Gustavo Werneck, CEO

Jap, can you address the inventories. But first, I'd like to clarify that we're not projecting a lack of capacity to address demand. We want to evaluate the cost impact in terms of inventory valuation adjustments we had in Q3 and its effects on margins. So we can more accurately forecast moving forward. Now, regarding Brazil, we're interested in the impact of increased production capacity from your competitors, not Gerdau.

Rafael Japur, CFO

Generally, when prices fall quicker than costs, we need to adjust our quarterly inventories to reflect current pricing versus inventory asset values. This past quarter didn't present a significant impact on the margins for our product. While seasonality typically leads to a 5% to 10% volume decrease in Q4, maintenance downtime will apply some cost pressures. Additionally, with recent decreases in scrap costs compared to earlier in the year, we predict some advantages of cheaper scrap will translate to lower variable metal costs for Q4. Regarding Brazil, your concerns about competition and increases in production capacity from competitors do not significantly worry us. Gerdau's recent capacity increases primarily serve domestic customers, ensuring competitive pricing and domestic market stability. Although some additional capacities might go online, many industry players have postponed their projects. We will monitor import trends closely; if they continue to grow, it could impact the overall equation. If the growing demand for longs is replaced by increased imports, we may again face challenges.

Mariana Dutra, Head of IR

Thank you, Lucas. The next question is from a representative at Morgan Stanley.

Unidentified Participant, Analyst

Good morning, Gustavo. Good morning, Rafael. Thank you. I have two questions for you. One relates to the minimum cash level you'd like to maintain on the balance sheet. Cash increased this quarter due to significant inflows. I'd like to learn about your future targets for cash levels and what leverage levels you then feel comfortable holding. Leverage is quite low for the company now, so I'm curious about your expectations over the next three quarters. Regarding the South America BD, do you have any new outlook compared to what was presented at Investor Day this month? Has anything changed in each one of the countries?

Gustavo Werneck, CEO

Thank you, Virginia. I'd like to clarify that regarding our optimal capital structure, there isn't a structural change at this point. We might reconsider this given the significant fluctuations in exchange rates during the latter half of the year. Remember, we had an asset value of about BRL12 billion and cash reserves around BRL6 billion when the dollar was approximately BRL394. The current reality has shifted quite drastically. However, we are not modifying our targeted cash structure immediately. Regarding leverage, our maximum threshold is not more than 1.5x net debt over EBITDA, and currently, we operate well below this level. Please note this is not a target but a limitation for our capital expenditure approvals. Additionally, there aren't significant modifications to our South America plans since our Investor Day. We're observing a slower recovery in Argentine market activity, but signs of improvement emerged in September compared to earlier quarters. The resumption, particularly for construction and steel-consuming industries, is expected to progress slower than initially projected.

Igor Guedes, Analyst

Good afternoon. Thank you for taking my question and congratulations on your results. We have seen your strategy to earmark your shipments to the Brazilian BD. In the past, you mentioned that this would be the case in the third quarter due to a favorable exchange rate. But now with Trump's election, the exchange rate is higher today. Given the current dynamics, should we thus expect an increase in your exports in Q4 and into 2025? If yes, what types of products would you consider for export—higher value-added items or semi-finished products? My second question, following up on the exchange rate. I know Japur has addressed the topic before, but I want clearer details on its impact on costs. A higher exchange rate could pose a downside risk and reduce costs for the Brazil BD. I understand that some mills rely heavily on third-party supplies, and the exchange rate has influenced the industry overall. Is that the case for Gerdau, or what inputs would be particularly affected by this elevated exchange rate?

Gustavo Werneck, CEO

In response to your inquiry on exports, we have shipped significant volumes for export this quarter, especially considering our previous statements. Given the current dollar levels, we're starting this quarter with a 5% to 6% higher exchange rate than last, making us more competitive in exports. As we also manage our costs better comparatively with the second and third quarters, we believe we can grow our export volumes from Brazil. With this exchange rate enhancement, we might prioritize exporting more flat or higher value-added products. Initially, we viewed this uptick as transitory, but now, we see a longer-term scenario with potential continued impact. On costs, within our Brazil BD, our dollar-denominated inputs chiefly comprise iron ore since we procure this from third-party suppliers. The pricing is tied to international iron ore markets, even if not paid in dollars. Similarly, metallurgical coal pricing corresponds with import costs. Considering our production structure—comprising integrated and scrap-based plants—about 25% of our costs are 'denominated' in U.S. dollars. In our cost-saving strategies, we primarily address maintainable costs and other specific material consumptions. Variations in scrap, iron ore, and coal prices aren't included in the projected savings of about BRL1 billion, when comparing Brazil BD to 2025 against 2023. Thus, a higher exchange rate might not trigger a risk against our strategic efforts in Brazil BD.

Mariana Dutra, Head of IR

Thank you, Igor. Thank you, everyone. With that, we conclude our Q&A session. I would like to thank you all for joining us, and I'll turn the floor back to Gustavo for his final remarks.

Gustavo Werneck, CEO

Thank you, Mariana, for organizing this earnings conference call. On behalf of Japur and myself, I would like to thank you again for joining us. It’s always a great pleasure to talk to you. I would like to take this opportunity to invite you to our next results video conference for the fourth quarter of 2024, which will be held on February 20, 2025. Thank you all very much, and take care.