Earnings Call
Gerdau S.A. (GGB)
Earnings Call Transcript - GGB Q4 2021
Rodrigo Maia, Head of Investor Relations
Good afternoon. This is Rodrigo Maia, I am Investor Relations Head at Gerdau. Welcome you all to our earnings release call for the Fourth Quarter of 2021. Here we have Gustavo Werneck, the CEO of Gerdau; and the CFO, Rafael Japur, who will do the presentation for you. Analysts and investors can send their questions beforehand using the Q&A option. Any forward-looking statement that may be made during this conference call related to Gerdau's outlook, projections and operating and financial targets are simply predictions based on the management's outlook. Even though Gerdau believes that its comments are based on reasonable assumptions, there is no guarantee that future events may affect this evaluation. Now, I would like to turn the floor to Gustavo Werneck. Gustavo, you have the floor.
Gustavo Werneck, CEO
Thank you, Rodrigo, and good afternoon, one and all. I would like to start by welcoming each one of you to Gerdau's earnings conference call to discuss the results for the fourth quarter of 2021. I honestly hope that you're all still very well and healthy. Today, this is a special call for us, because it marks the end and the beginning of a new cycle. I would then like to start by deeply thanking Scardoelli for the partnership, the learnings, the friendship and the legacy he leaves behind to all of us at Gerdau after more than three decades of extreme dedication. Scardoelli's dedication has been a determining factor for our financial soundness. Also, it was important for market confidence and a positive image with all of our stakeholders, particularly our investors. Gerdau, at the present, which in 2021 celebrated its 120th anniversary, posted the best performance of its centennial history and this is certainly thanks to Scardoelli's efforts and leadership to guide, support the teams and also his long-term strategic view. So Scardoelli, I wish you, in this new phase of your life, a phase of great accomplishments and joys with your family. For this reason, I would like to take this opportunity to present Scardoelli with this tribute on behalf of Gerdau's 30,000 employees for being a personal and professional role model for all of us at Gerdau. So, thank you very much, Scardoelli. I make this acknowledgment before everyone here today. And now, I'll give you the floor, so you can address your many friends that you have in the company.
Harley Scardoelli, Former CEO
Thank you, Gustavo. This is a significant moment for me. First, I want to express my gratitude for the years I spent with the Gerdau family, the company, and colleagues like you. I also want to welcome Gerdau, a longtime friend and colleague who will be taking over my position. I appreciate the support of all those who are with us today, including analysts and investors who have stood by the company for many years, gaining insights into our business and asking important questions that help clarify our market understanding. They interpret our results and grasp our business model, making them true contributors to the market. Thank you very much. I have developed close relationships with many of you over the years, and I am grateful for that time spent together. I just received a plaque with heartfelt words thanking me for my journey of over 30 years with the company, emphasizing a friendship that will endure. I also want to welcome Japur. I am confident he will perform excellently, as we always hope that those who follow us will surpass our accomplishments. I know the company has come from a year of record numbers, which is always a good time to leave, similar to soccer, where it’s preferable to exit on a high note. However, I hope this year is not the best yet and that we continue to exceed our results and improve constantly. Thank you very much.
Rafael Japur, CFO
Scardoelli, thank you so much for your kind words. I am very, very happy to be in this occasion now with you. I remember like it was yesterday, the first time I talked to you when we had a chance to speak in more detail and I was really impressed with the deep knowledge you have of this business. I mean, we all know that very well. What really drew my attention is that you are such a humble person and so simple when it comes to dealing with all of the things we deal with every day. You have been a role model during all these years, not only a role model for me but for everyone else who had the privilege of working side-by-side with you. So I'm honored to give continuity to the legacy you are leaving and I'm sure that we will continue to inspire other people in your journey ahead. Thank you very much.
Gustavo Werneck, CEO
So thank you again Scardoelli and Japur for your initial remarks, and I emphasize that the preparation for the transition between the executives also reflects our very strong culture of developing our teams and it has been carefully planned with the purpose of maintaining Gerdau's financial soundness. Japur has been with us for several years. He worked directly with Scardoelli. Japur is only 39 years old. He is very young, but he is certainly well prepared to give continuity to Scardoelli's legacy. As Scardoelli mentioned, I'm sure we will be able to look for even better results going forward. We know that the search for these results and our excellent relationship with shareholders and partners in the financial markets are important in this transition process with Japur. Welcome and I wish you all the best with these new challenges and I hope we can work together throughout this journey. We are starting today a very successful partnership, as it has been the case in other partnerships, like mine with Scardoelli and I'm sure the same thing will happen between the two of us and certainly we will contribute to help the company continue to post excellent results. So Japur will start by talking about the highlights of the overall results for the fourth quarter and also he will talk about the full year of 2021. Also he will talk about the performance of our business operations and next I will share with you some information about our ESG agenda, which has been increasingly important for our journey, and then I'll talk to you about the markets in which we operate. To conclude this first part, Japur and I will be available to talk to you later on about any questions or any details that you would like to elaborate further. So with no further ado, Japur, I'll give the floor to you and then I will come back after your final remarks.
Rafael Japur, CFO
Thank you, Gustavo. Good afternoon. It's a great pleasure to be with you in my first earnings release call and I hope you're all well. We will start the presentation with the financial results for the year 2021, which was a historical year for Gerdau. On our 120th anniversary, we've reached BRL23 billion in EBITDA. Most of the factors that influenced our results this year were sustained in the fourth quarter with an EBITDA of BRL6 billion and an EBITDA margin of 27.8%. Now, I would like to show the results for each of our business operations. The Brazil BD reported an EBITDA of BRL2.8 billion in the fourth quarter and an EBITDA margin of 31%, reflecting the strong demand for the industry even with the normal seasonality of the construction sector that occurs usually at the end of each year. Exports were intensified, growing from 12% of shipments in Q3 of 2021 to 25% in Q4 of 2021. Taking advantage of a moment of accommodation, after consecutive quarters of strong demand driven by the replenishment of the supply chain and then in the fourth quarter, we carried out some maintenance downtime in our mills. Now moving to our North American operation. That operation posted a record performance of BRL2.2 billion in EBITDA in the fourth quarter, which is a level higher than the EBITDA for the entire year. The EBITDA margin of 27% is also a record for this operation. This result reflects the resilience of the construction and industrial sectors as well as the maintenance of the metal spread at high levels. Regards to volumes, this BD posted a slight decrease due to the effects of seasonality and climate with demand for non-residential construction and industry still at high levels. The special steels operation followed a gradual recovery path throughout 2021. The challenges with semiconductor shortages were partially offset, but the good performance of the oil and gas sector in the U.S. and the heavy vehicle segment in Brazil, which consumes significantly more special steels when compared to light vehicles and therefore is less impacted by the supply of semiconductors. With that, the operation reported an EBITDA of BRL540 million and a margin of 18% in the quarter. South America achieved an EBITDA of BRL521 million with a margin of 23% in the fourth quarter 2021. This operation has also benefited from the good performance of civil construction, especially in Peru and Argentina. Gustavo will give you more details about our operations during his presentation. Now moving to our free cash flow slide, we will talk about free cash flow and working capital. As we see in the chart on the left, we had a positive free cash flow of BRL3.4 billion in Q4 2021. This is the second-best quarterly result in terms of cash flow in our historical series. In the last 12 months, the cash flow was positive by BRL9.6 billion, an all-time record for annual cash flow and double that of the previous year. Now looking at the chart on the right, we noticed that there was a reduction in our cash conversion cycle from 63 days in Q3 of 2021 to 60 days in the fourth quarter due to the higher net revenue in the period in our operations and also by inventory normalization adjustments throughout the chain. Working capital was down by BRL567 million in the quarter, a natural movement in a moment when we experienced a return to the typical seasonality of our business. As a consequence of the strong operating results, well, in 2021, in the capital allocation policy, which was very rigorous, by the end of 2021, our return on invested capital was 33.4%. Finally on that same slide, in terms of capital allocation, I would like to highlight that approximately 60% of the BRL9.6 million of free cash flow that we generated throughout 2021 was earmarked to shareholders in the form of dividends, whereas almost 40% was used to reduce our liabilities and indebtedness. We will talk a little bit more about our debt position and liquidity in the next slides. Well, we were able to reduce our gross debt in the fourth quarter of 2021 by BRL3.1 billion, mainly due to the offer to repurchase part of our bonds in the amount of BRL2.2 billion and the payment of some bilateral loans. With this, our gross debt was BRL14 billion by the end of 2021, approaching our main objective of our financial policy of keeping our gross debt below BRL12 billion. Our debt is almost 90% long-term and has a well-distributed amortization schedule over the next few years. Now speaking about our liquidity, besides the robust cash generation in the period in the fourth quarter, we had significant movements in our liquidity position with the highlight being the payment of BRL3.4 billion in dividends and the receipt of BRL1.4 billion related to the reimbursement of losses incurred with Eletrobras' compulsory loan. With this, at the end of the period, our cash balance was BRL6.8 billion. At the end of 2021, our net debt was BRL7.3 billion, BRL1.4 billion less than the amount reported in the third quarter. This position, coupled with the significant results of 2021, led to a reduction in our financial leverage, measured by the net debt over EBITDA ratio for the last 12 months which landed at 0.30 times in Q4 2021. To conclude, on this last slide, we have the evolution of the adjusted net income and dividends paid out over the last years, showing that the combination of best results and the significant reduction of our debt position through our time had a very positive effect on the dividend yield, meaning that the percentage of dividends and interest on equity paid in the closing price of the share at the beginning of each period. We went from 0.7% in 2017 to 12.8% in 2021. Due to the results of the fourth quarter, the company will pay dividends equivalent to BRL0.20 per share. And with that, we will distribute throughout 2021 the extraordinary amount of BRL5.4 billion, more than the sum of dividends distributed by Gerdau S.A. in the last 10 years. I would like to thank you for your attention. And now, I'll turn the floor to Gustavo, who will comment on the market outlook and our businesses. Thank you.
Gustavo Werneck, CEO
Thank you, Japur, and thank you for your participation. Now, I will ask you to move to the next slide. Here, I would like to start by providing an update on some important points of Gerdau's ESG agenda, presenting the highlights and progress of our journey. I would like to emphasize our commitment to reduce greenhouse gas emissions from Scopes 1 and 2 to a value below 50% of the global average for the steel industry. Currently, we have one of the lowest averages of greenhouse gas emissions of 0.93 tonnes of CO2 equivalent per tonne of steel, which represents approximately half of the global average for the sector, which stands at 1.89 tonnes of CO2 equivalent per tonne of steel according to the 2020 data released by the World Steel Association. By 2031, our carbon emissions will decrease to 0.83 tonnes of CO2 equivalent per tonne of steel. In order to reduce greenhouse gas emissions in this period, we will expand the use of steel scrap as raw material for steel production, we will expand our planted forestry area responsible for the production of charcoal, which works, as you know, as a bio-reducer in the production of pig iron, and we will increase the use of renewable energy, such as the solar farms already announced in Brazil and in the U.S. We will also invest in initiatives to enhance energy and operating efficiency of all of our units. We will invest in new technologies and also we will continue with our open innovation plan. We also aim at being carbon-neutral by 2050. But I would like to point out that carbon-neutrality demands mature technologies that are still non-existent on an industrial scale in addition to public policies that enable the global steel industry to neutralize its carbon emissions. Moreover, earlier this February, we signed a binding agreement with Shell to form a joint venture with equal stakes from both companies in this business 50:50 for the development, construction and operation of a new solar farm in the State of Minas Gerais to be built in 2023. This agreement, which still depends on the approval of conditions precedent, including the approval by the Brazilian Regulatory and Competition Authorities, sets the basis for the joint venture's activity in generation and long-term contracting for the acquisition of clean energy. This new solar farm, which should have an installed capacity of approximately 260 megawatts, will supply 50% of the volume produced to Gerdau's steel production units in Brazil in the form of self-production and the other half will be traded in the free market through Shell Energy Brazil, which is Shell's energy trader. These investments in solar energy reinforce Gerdau's commitment to significantly reduce greenhouse gas emissions in the coming years in Brazil and also worldwide, building a more sustainable future for all of us. I emphasize that our initiatives in renewable energy are part of a broader plan to diversify into businesses that are complementary to steel. Currently, we are also evaluating opportunities in wind power in the other countries where we are present in the Americas. Now let's move to the next slide and here I would like to talk about the markets in which Gerdau operates and also I will talk about the steel industry outlook for the coming months. Initially, I would like to point out that as in previous quarters, shipments from our North American business operation remained at high levels in the fourth quarter, even considering the seasonality which is common for the period. The outlook for the first quarter remains positive since our backlog of orders in the United States is still above the historical average level, equivalent right now to about 70 days of purchases. In view of the scenario, we continue to operate our units in the region with capacity utilization levels above 90%. Therefore, we remain very optimistic about the demand for steel in North America, mainly coming from the construction industry and with the local economy as a whole. I mean, the U.S. GDP grew 5.7% in 2021 being the highest annual increase since 1984, according to the Center For Economic Analysis of the country. Now, for 2022, the forecast is that GDP should grow about 4% according to the latest projections from the IMF. Another example that reinforces this positive view is the Architectural Billing Index that measures the activity of the non-residential construction sector in the country and the Institute For Supply Management Index, which monitors the performance of the manufacturing sector. Both indexes remain above 50 points between December and January, which indicates the continuity of the solid and strong trajectory reported throughout the year of 2021. So in this regard, we continue to invest in improving the productivity and profitability of our units in North America, delivering even more value to our customers. For 2022, I would like to underscore the investments planned for the Whitby site in Canada, which will allow us to achieve a higher level of productivity and also broaden the portfolio of products offered to Canadian and North American customers in the manufacturing, construction and also distribution sectors. A point of attention, however, remained labor shortages, the inflation rate and also logistical challenges that have impacted many companies in North America in the last few months. Now, I will discuss our special steels operations, starting with the United States, where we estimate that around 2.5 million vehicles were not produced due to the well-known semiconductor shortage. This led local production to total 13 million units in 2021, remaining stable compared to the previous year. For 2022, we anticipate a recovery, with vehicle production expected to reach 15 million units, according to various local consultants who predict a gradual return to normalcy in component supply, particularly semiconductors, until the market fully normalizes in 2023. The outlook for the heavy vehicles market appears more positive, with truck production expected to total 300,000 units in 2022 compared to 215,000 to 250,000 last year. Additionally, the oil and gas sector is on track for continued recovery, with rig counts averaging 604 in 2021 and projected to rise to 730 this year. I also want to highlight our progress with our business strategy at the Monroe plant in Michigan, which, following the conclusion of last year's investment cycle, will provide an extra 150,000 tonnes of special steels to the market as early as 2022. Furthermore, this year we plan to begin expanding the rolling mill capacity to deliver higher added value products to our customers in the coming years. Now moving to Brazil, I will still talk about special steels. In Brazil, the market has also been impacted by the lack of chips, which led to weak growth in vehicle production of about 11% in 2021 in the annual comparison according to data recently released by Anfavea. It is estimated that worldwide 10 million vehicles were not produced last year due to the shortage of electronic components. In 2022, the production of vehicles in Brazil should rise around 9% according to Anfavea. However, last year the heavy vehicle segment posted its best performance since 2012 and still according to Anfavea, the production of heavy vehicles grew nearly 75%, driven by the high levels of activities in the sectors of construction, agribusiness and machinery and equipment. This year, the production of heavy trucks should confirm its growth trend with a high of more than 8%. In addition, I would like to comment that consumption of special steel in Brazil has been influenced by larger shipments of auto parts, whose local producers have been benefiting from opportunities in the global supply chain, which has made their products more competitive in the foreign market. Also, we intend to start up the new continuous casting unit in the Pindamonhangaba operation in the state of Sao Paulo. This new equipment will allow Gerdau to have a more automated process with improved performance, resulting in the delivery of differentiated products and an even higher level of quality for the demanding markets. The technological update of our Pindamonhangaba unit is also aligned with the future perspective for the growing use of the so-called clean steel. In 2021, the special steel operation in Brazil reported the highest historical annual revenues coming from new products, especially clean steel, which reinforces our commitment to the growing demands from our customers. Now still about Brazil, I will talk about longs and flat steels whose performance in the fourth quarter reflects the normal seasonality for the industry in this period of the year due to summer vacations and also due to accommodation of the demand for steel in high levels in a scenario that should be maintained at the beginning of 2022, especially considering the inventories of all the chains back to normal levels. Our shipments of long and flat steels in the local market grew 14% in 2021 year-on-year, in line with the strong performance of all-consuming sectors, especially from civil construction and industry. The construction sector continues to have a positive outlook for this year with the sector's GDP forecasted to advance 3.2% according to Pendences consultancy. An example that reinforces this optimism is the number of active construction sites in the country, which in January hit its highest number in the last two years. Another point that brings us confidence is the number of real estate inventories which is normalizing at 9.9 months; retail sales boosted by emergency aid measures implemented by the Federal Government last year have stabilized at high levels, and this is a trend that should be maintained in the coming months, still anticipating a favorable scenario of credit availability. Anamaco projects growth of up to 2% in retail sales in 2022. In terms of investments in infrastructure, they are being unlocked. I highlight the resumption of auctions in the Energy segment with 50 auctions expected this year alone. According to the Ministry of Infrastructure, investments in infrastructure are expected to reach BRL165 billion in 2022. I also mentioned the continued high demand for steel from the industrial sector, driven by agribusiness activity, capital goods, machinery and equipment, road equipment and energy. The machinery and equipment sector foresees a growth of 4% in 2022, according to Abimac while the Road segment should increase by 8%. Furthermore, I would also like to highlight the investment of BRL200 million in the Hugrandensi unit in Rio Grande do Sul earmarked for the modernization of the melt shop as well as improvements in the industry for that old journey, which is so important for us and enhancement of improvements in environmental and safety conditions in the steel production process such as the update of the dedusting system. I also emphasize that focusing on our values and increasingly closer to our customers; we started the production of a new high-strength rebar, the Gerdau GG70 which meets the needs of our customers since it offers a high-performance solution with important productivity gains and sustainability. This new product is intended for several segments of the construction industry with an emphasis on industrial and commercial constructions. In Argentina, in turn, the demand for steel from the construction and agribusiness sectors remains strong, which has boosted sales in the local market. Argentine civil construction activity for instance grew about 27% in 2021 and has already posted a 4% increase in January in a year-over-year comparison according to monthly data from the Chamber of Construction of the country, Camargo. The same scenario is replicated in the Uruguay steel market. Finally, in Peru, steel consumption continues at good levels encouraged by the industry and aligned with the levels of demand for cement. Estimates from the country central bank indicate that GDP will grow around 13% in 2021 with the local economy returning to pre-pandemic levels. Now on the next slide, let's talk about CapEx. I begin by saying that throughout the fourth quarter of 2021 Gerdau invested BRL1.2 billion, of which BRL961 million in maintenance and BRL255 million in expansion initiatives and technological upgrading. Over the year 2021, disbursements totaled BRL3 billion. I underscore that we continue to adopt an austerity stance in the approval of our investment plan which by 2022 is estimated at BRL4.5 billion. This robust plan covers initiatives to improve the competitiveness of our operations, including projects for technological modernization and growth of our business, such as the ones I mentioned before and I can give you more detail in the Q&A session. We also continue to focus on performance and operating excellence of our activities related to CapEx investments. I would like to close this first part by thanking you all for attentively listening to our early explanations. Now, am I right Rodrigo? Rodrigo will be leading us now. Japur and I will be here to take your questions. Any detailed points of greatest interest to you. Over to you, Rodrigo.
Rodrigo Maia, Head of Investor Relations
Thank you, Gustavo. We will begin now the Q&A session. We thank you all for being with us. We have more than 350 listeners in our conference call. Now we have eight questions. Feel free to send further questions via Q&A. I'll begin by reading the questions in the Q&A by mentioning the analyst in question. Our first question is from Rodolfo Angele with JPMorgan, the topic is capital allocation. The Company generated more than BRL4 billion of cash last quarter and is expected to have another strong year of free cash flow in 2022. We already know CapEx will be BRL4.5 billion for the year. Rodolfo is mentioning our material fact of today; in addition to BRL7.3 billion of net debt, the company's balance sheet is not a concern. If we don't have M&A in our plans, all we have is dividends, as an option of allocation of capital, should we expect that excess free cash flow turns into dividends? What do we need to come to a more aggressive solution in this case, still about capital allocation? Could you give us more detail on the investment plan of BRL1.4 billion to expand your operations? Thank you. Rodolfo.
Gustavo Werneck, CEO
Rodolfo, it's a pleasure to talk to you. Gustavo speaking. Let me begin by giving an overview about CapEx and then I'll turn it over to Japur, he's going to give you more details on dividends and other aspects related to capital allocation. Firstly, in the disbursement plan of BRL4.5 billion in 2022, there is a part of it about BRL500 million as disbursement not made in 2021. When I mentioned in my earlier remarks about austerity stance, and being stringent with CapEx in disbursement, this is very much related to the moment that we're facing, not only in Brazil but also in the U.S., a little bit more challenging execution of CapEx owing to labor, availability of equipment and suppliers. We are being very careful and diligent in our disbursement, understanding that some investments that are not as critical when it comes to our timeline, we decided to postpone some disbursement trying to go for more favorable commercial negotiations. So these BRL500 million came from last year particularly for this reason, and over this year we will be addressing the same way. We will be very careful, so we can actually implement and work on investments that really bring the return rates expected by the Company of the BRL4.5 billion. We begin to consider, like I said, for a couple of quarters ago, the need to invest in maintenance in Ouro Branco, which is a plant, a mill that is coming to the end of its cycle, unlike our many mills. Annually, we maintain them and they are able again to run operations under adequate health conditions of our equipment. Our integrated plants have longer life cycles. Ouro Branco is coming to the end of the cycle and it will take, for the future years, a higher level of investment but perfectly absorbed by the company's balance sheet in order to renew the lifecycle of these equipment like blast furnaces, coking units. So of the CapEx, that's it. We are also searching for opportunities to increase our productions in a timely manner for some product categories in which we are leaders. We understand our profitability level, which is adequate, like for instance the coiled hot-rolled strips, with disbursement already started. We are also increasing by 250,000 in Ouro Branco with our rolling mill after the startup in 2015. It's fully at full capacity, so we understand that we are on the supply channel commercial get down. We have plenty of conditions to meet our customers' needs fully with the 250 additional thousand plan units. So we'll be very careful adding capacity, so we can bring returns in the same time frames and adequate rates for the company. As for the rest, Rodolfo, we're investing in IT upgrading. We understand that Forjados is very relevant to reduce our costs. So that's the rationale about CapEx. Certainly, Japur can give you more color on what I said and also address dividends.
Rafael Japur, CFO
Thank you, Gustavo. Rodolfo, I'd like to talk to you again, very nice. Something we've been working internally, Gustavo, is that we were not going to lower our requirements on quality for investment purposes. We will be very stringent not only in returns but also in the scope of quality of the investments that we wanna make. When it comes to capital allocation, I understand that we've been reasonably aggressive this year, increasing by 60% our cash generation after paying CapEx and further obligations and working on the necessary working capital to meet market needs and have the level of profitability we had. So 60% of free cash allocation was earmarked to dividends over 2021. If we look at our payout included on our slide, we can see that for the last four years, we always paid more than 30% of our income. So we understand that if things remain positive when it comes to cash generation, we will keep on having the same flow of approving and having dividends greater than the 30% in our bylaws. But it's too early to make any deep changes right now. So important changes of changing or amending our bylaws to change our payout provision considering that today, we have the availability required when you have higher or lower cash generation, we have the right level of dividends in order to maintain our commitments to our business and our commitments and remuneration to our shareholders.
Rodrigo Maia, Head of Investor Relations
Thank you. The next question is from Caio Ribeiro with Bank of America. Good afternoon. Thank you for taking my question. My question has to do with costs in the Brazil BD. I would like to know if you could make comments on how you envision evolution in the future quarters, particularly when it comes to charcoal? And what about the evolution of margins in Brazil over the year? Secondly, long steel prices in Brazil. Today, we can see a very high discount vis-a-vis the Turkish rebar prices apparently are going down in the domestic market, could you comment on what the trigger would be to revert the trend and close this discount vis-a-vis the Turkish rebar? Thank you.
Gustavo Werneck, CEO
Thank you for your comments. I would like to address your questions by first providing a broader overview of what is happening at Gerdau. Afterward, Japur will offer more specifics about our volume, margin, cost, and profitability for Q4 and earlier this year. In 2021, we achieved a record EBITDA of BRL23 billion, marking a significant year for the steel market as we celebrated our 120th anniversary. The previous historical best was in 2020 with BRL27.7 billion in EBITDA, indicating a substantial improvement in our cash generation from 7 to 23. As we look at 2022, we are optimistic this year will be among the best for the company, aiming to match our 2021 performance, and we feel confident in delivering closer to BRL23 billion than reverting to the BRL7 billion seen in 2020. The first quarter of this year has begun strongly, exceeding the strong start we had last year, largely driven by results in North America, which helped offset some challenges we faced in Brazil at the end of last year and the beginning of this year. Our outlook for Gerdau's results this year is very positive, especially since the first quarter is performing stronger than last year's first quarter. However, we need to monitor how the market will evolve in the second and third quarters. Regarding Brazil, I want to clarify what occurred in Q4 and early this year to prevent any misconceptions about the market's future. In December, we experienced typical end-of-year seasonality. The pent-up demand from 2020 contributed to inventory recovery, and seasonal factors during the holiday period affected performance. Additionally, inventory levels in the supply chain are now stable, preventing artificial demand growth in 2022 similar to that seen in 2021. Another factor was scheduled maintenance in December, which aligns with seasonal norms. We also faced an unusual situation with imported products that were negotiated in 2020 and arrived in Brazil in 2021, creating a non-recurring effect. Our team worked hard in December to maintain margins, balancing volumes and margins during that period. Challenges in January, especially due to COVID, impacted our business, compounded by heavy rainfall in Minas Gerais. Record order entries started from January 15 and continued in February. In terms of demand, segments like civil construction, industrial, retail, and infrastructure have shown similar levels to last year. The most significant cost impact currently comes from charcoal, which we expected to see a price reduction for in February, but that did not materialize. We still anticipate a price drop in the coming months, which will affect costs, although we have mitigation strategies in place. Regarding the import premium, it currently varies, but for our plants, it's around a positive rate of 8%, while for long steel, it is negative. We expect this to correct itself in the coming weeks. We do not anticipate increasing our import volumes in Brazil in the near term, maintaining regular import levels. I aimed to provide a detailed understanding of both the global and Brazilian environments regarding volumes and margins to facilitate a deeper discussion on these matters.
Rodrigo Maia, Head of Investor Relations
Thank you, our next question is from Leonardo Correa with BTG Pactual. Thank you. Good afternoon, everyone. I thank Scardoelli for everything and congratulations for your job and good luck. For Japur, good luck, Japur. There are two questions that have already been mentioned before in the call. Gustavo, Japur, anything to add? First question: margin pressure in the Brazilian operation. In Brazil, do you think you can have a stable profitability level in the region or do you expect to see some pressure in the first half of 2022? Second question: the goal for gross debt of BRL12 billion particularly now with BRL closer to 5, should we expect to see a new dividend policy to come up soon? By the way, we can also ask question by Thiago Lofiego with Bradesco which has to do with gross debt as well. Also, he wants to know if it makes sense for Gerdau to consider a minimum dividend formula back to EBITDA or free cash flow in order to provide more visibility to investors on this topic. Thank you.
Gustavo Werneck, CEO
So, Japur, I'll respond first, and you can add to my comments. It's great to see you, and I'm glad to hear your question. Scardoelli is also here with me and appreciates your kind words, as does Japur, who has been with us for many years and will carry on the legacy established by Scardoelli and other former CFOs who significantly contributed to Gerdau's 120-year history. I also want to acknowledge Thiago for asking about dividends, which Japur will address. Regarding margin pressure in Brazil, we reached a margin level last year around 40%, which is significantly higher than in previous years. While margins in Brazil will not be at that level this year, they will still be historically high. We do have more challenges in distribution, which accounts for 30% of Gerdau's deliveries in Brazil, leaving 70% not tied to distribution and linked to industries with strong demand, particularly in the industrial sector. Therefore, we expect margins in Brazil to be high this year, though not as elevated as last year's figures. Overall, margins have been buffered at Gerdau due to the historically high margins we achieved in North America, which should continue in the upcoming quarters. The slight fluctuations in margins are closely related to international market prices. We will not reduce our production capacity in Brazil or withdraw any capacity from production, personnel, or shifts. Any production not absorbed by the domestic market will be allocated entirely to exports. This gap between domestic and international markets may affect the overall margin for Brazil, potentially making it slightly higher or lower based on international market conditions in the coming months. We are anticipating historically high margin levels. Now, Japur, do you have anything else to add? You can also address Leo, Thiago, and everyone regarding dividends and debt.
Rafael Japur, CFO
Thank you, Gustavo. Just greeting Leo and Thiago. Thank you for your kind words and best wishes to Scardoelli and myself. An important point to say, Gustavo, not only the chain and our customers who have been through an important moment of supply replenishment in their inventories for Gerdau, if you compare our level of working capital in absolute BRL numbers or cash conversion cycles over 2021, we had important investment in working capital in the construction of our cash flow. So it also ensures over 2022 that results that perhaps might not be as good when it comes to EBITDA or margins compared to 2021. However, when it comes to cash generation, we are very bullish about the outlook for North America and Brazil BDs and also other businesses of the company. As for dividends that's an interesting point and once again, we understand the adequate means to ensure long-term return to shareholders is not only with dividend payouts but also having a healthy balance sheet within the policies we set in order to have a perennial capacity to invest in business generating value and dividends to our shareholders, right? When you check our historical outlook, we are very close to our BRL1 billion Escrow but we are at 14, we have to sell a lot of steel in order to generate or reduce BRL2 billion in our debt. Our dividends from the moment we have assured cash generation, then you revisit this topic and like I said, once we have surplus cash generation, we can earmark these funds over the 30% set, like we're having a new policy that's interesting but we understand, it is too early to say anything and we would like to wait a little bit longer and unfold our CapEx program, move forward in the results up to Q4 and maybe one day, we can have a more structured discussion of amending a policy in our bylaws because it has been working fine for the last years.
Rodrigo Maia, Head of Investor Relations
Thank you. Our next question is by Daniel Sasson with Itau BBA. With regards to the U.S., the goal prior to COVID was having an EBITDA margin of 10% regardless of the scenario. In the post COVID world, what do you consider to be a sustainable margin level in the North America BD? I also add a question by Andreas Bokkenheuser with UBS. U.S. non-residential construction spending increased 11% year-over-year in 2021 but construction cost inflation is over 20% year-over-year. Does that mean that real non-residential construction activity is declining? Thank you.
Gustavo Werneck, CEO
Thank you, Daniel. It’s great to speak with you, and I appreciate your excellent memory. I remember the promise I made to you four years ago when our EBITDA margins in the U.S. were at 6.2%. We focused on breaking down our work into operating expenses and capital expenditures to boost the margin to double digits. We worked hard and successfully increased the market margin to 10%. Our efforts over the past four years in seeking cost competitiveness and executing our CapEx plan in North America have strengthened our position, making us competitive with any U.S. player in terms of structural and commercial profiles. This has led to a robust economy in the U.S. and a solid order backlog, enabling us to achieve margins around 27% in Q4. We are actively working to enhance margins in the first quarter, and there is a possibility for this to happen. Although we are focused on this goal, we also recognize that it’s uncertain how far we can extend these margins. Based on our observations from 2022, we have high confidence that we will deliver margins at these levels or even better than in Q4. I want to emphasize that our strong order backlog currently does not include demand from the U.S. government’s infrastructure package, which is anticipated to generate steel demand only at the end of this year and early next year. This represents a technical demand reserve that we can utilize in the future. Moreover, we have achieved significant savings and are experiencing unprecedented spread levels. Our CapEx structure is being reinvested to provide better service to our customers and an improved product mix. As seen with Brazil, we possess the internal capacity to deliver favorable results under conducive market conditions, and we are optimistic about the future. In the first quarter, we will start to see the concrete outcomes reflected in our financial results once we deliver our earnings. Regarding Andreas's question, we see things a bit differently. Non-residential construction remains very strong for us, with 71 days of order backlog. We have not experienced variations from strikes, and we believe the demand for non-residential construction will continue to stay high, based on feedback from our close customers and the broader market.
Rodrigo Maia, Head of Investor Relations
Thank you. Our next question is from Marco Travaris from GTI Investments. Good afternoon. I would like to understand how you see domestic demand for long steels in the coming months considering client inventory levels and consumption. The Steel Institute Brazil reported a significant drop in January, and this week we noticed a sharp decline in rebars in the southeast of Brazil. I would also like to ask another question from an analyst at Goldman Sachs. Could you please discuss imports in the second half of 2021, when you expect this surplus will be absorbed by domestic demand, and how this has influenced pricing discussions?
Gustavo Werneck, CEO
Thank you for your questions. The main difference between 2021 and 2022 relates to inventories in distribution. Last year, we replenished inventories due to low levels, but this year, we started with good inventory levels, so we won't see any replenishments. Excluding that factor, we expect steel demand in Brazil to evolve between 1% to 4% compared to 2021 and 2022. However, actual demand in our industry—civil construction, industrial sector, retail, and infrastructure—remains high, with many projects currently progressing. The only aspect to note about rebar prices and import premiums is that rebar distribution has faced stronger competition for market share. There was an influx of imported goods in Brazil during the second half of last year, but logistics issues caused delays at Brazilian ports, contributing to increased volatility in rebar distribution. It's important to note that distribution accounts for 30% of our shipments and includes a variety of products, not just rebar. We experienced significant volatility in December and January, making it a crucial element of our business. We do not anticipate a surge in imports since there is no incentive to increase them and we believe that the situation regarding rebars, particularly in distribution, will normalize and return to normal levels within this quarter.
Rodrigo Maia, Head of Investor Relations
Thank you. Our next question is from Rafael Barcellos from Santander Bank. Could you please elaborate on the competitive environment in Brazil today? Is it possible to see further price discounts in longs in Brazil in the next coming months? Is there any specific effect related to Omicron and the January rainfall in Brazil, going further in the first quarter of 2022, and then in regards to the United States, how do you see metal spreads in early 2022?
Gustavo Werneck, CEO
Thank you, Rafael. I apologize for the technical issues. It seems the microphone is muted. Let's focus on the situation in the United States first. Generally, we find that the business metrics are looking quite favorable, which supports the maintenance of our margins. In Brazil, however, the situation is more complicated, particularly at the end of the fourth quarter and the beginning of this year. The impact of Omicron affected our business and others in Brazil during the first few weeks of January. However, our internal data indicates that by January 15, there has been a decrease in the number of cases and in the workforce affected by Omicron. We prioritize the health and well-being of our people and have been monitoring this closely. On another note, heavy rainfall in the state of Minas Gerais has posed significant challenges. I want to express my solidarity with the people there. We have been doing our part to assist the population in Minas Gerais, and now Rio de Janeiro is also facing severe weather issues. We're committed to helping these states recover. The rainfall has disrupted business operations in Minas Gerais, affecting us and many of our competitors in the region. While this may lead to some cost increases in the upcoming months, we have identified strategies to mitigate these financial impacts. As I mentioned earlier, December and January were particularly challenging due to seasonal factors and the influx of imported rebar affecting distribution. However, as we approach the end of February, we are starting to see a return to normalcy, and we do not foresee these challenges impacting the competitive environment moving forward.
Rodrigo Maia, Head of Investor Relations
Now, I will address five questions regarding capital expenditures. These questions are from Victor Burk, Antonio Luis Eso, Rafael Shakur from SFA Investments, and one that I'm unable to clearly identify. In general, they are interested in understanding how capital expenditures will be integrated into Gerdau's strategy for growth and sustainability, Gerdau Next, innovation, and any potential acquisitions of new assets. Thank you.
Gustavo Werneck, CEO
Japur, would you like to take this one?
Rafael Japur, CFO
Sure. Let's go for it. Good afternoon, everyone. It's a pleasure to talk to you all. When it comes to our CapEx, let's go by parts. In our greenhouse gas effect reduction plan, we consider energy efficiency, general efficiency of our operations, investment in forest and investment in clean and renewable energy. We are searching for alternatives and initiatives in each one of these verticals in our program, not only for this year but also on the long term. We had a material fact showing today, making it crystal clear that in this disbursement for 2022, we have about BRL800 million greater than we had over 2021 to increase investments that generate return or impact in sustainability, better energy efficiency, reduction in emission, wastewater control and increase in water recirculation. We believe that in each one of our operations, we are investing in a very mindful manner. We're very cognizant in order to have investments that really assure perennial business on the long term. As for strategies in new investments, like Gustavo addressed in a couple of questions, our current investments are pretty much focused on our assets. We don't have big investments in green fields for the future. We are more focused on maximizing returns on our current assets, particularly in North America, where we've been investing for the last four years, trying to revamp, modernizing our units, reducing lack of efficiency and, Gustavo, we managed to have success when it comes to competition. In Brazil, like we said, our idea, our intention is to invest in expansion of coiled hot-rolled strips, which is a line of product that we embarked on in a couple of years. Now we have the portfolio sold up to them. This is the rationale of our investments. Pretty much focused once again on improving the profitability of the assets that the company's management already has to generate more and more value to our shareholders. Gustavo, anything to add?
Gustavo Werneck, CEO
I want to add that when we consider Gerdau's future, our growth will be different from the past. This time, we will focus more on organic growth in niche markets with high profitability. Opportunities are emerging, but sequential acquisitions like last year's are not part of our plans. Any potential M&A opportunities, such as Salati in Sierra, will not be included in the CapEx plan and will be handled separately. I want to clarify that the investments already approved for Gerdau Next are part of the CapEx plan, and we do not anticipate announcing any additional plans for the Next CapEx. Our organic growth strategy spans ten years, and we believe Gerdau Next is on the right path with its established pillars. Decisions such as the joint venture with Shell will take a couple of years and are covered in the disclosed amounts. There will not be an additional CapEx plan for Gerdau Next; we will proceed smoothly and calmly over the next year within the disclosed CapEx amount.
Rodrigo Maia, Head of Investor Relations
Thank you. Could you elaborate on Brazilian exports in the Auto Parts segment? Is this a new structural factor, or is it just a temporary opportunity? Do you anticipate the auto parts industry becoming more competitive? Can you specify if these exports pertain to light or heavy vehicles and provide some quantification?
Gustavo Werneck, CEO
Okay. So that's a good statement, a good question and it's very much related to what happened over the pandemic. In terms of finding windows of exports with our customers, a disruption in the global logistics chain, we understand this is not going to be solved in the short run. So, not only in automotive but also machinery and equipment segments, many Brazilian companies, our clients proved to be ready and prepared to benefit from these opportunities. Just as a side comment, many times we hear that the Brazilian industry is not updated enough, quite the opposite, if it weren't like this it wouldn't be able to benefit from these opportunities. Our industry is very well prepared, not only the steel industry but our customers' industries as well. What we ask over time is to have the right conditions, so we can be competitive enough to be on equal footing with any international investor or player. It's not by chance that we're very excited about progress in the tax reform and other policies that will bring more competitiveness to the industry. Everybody is very competitive and ready and some players found these opportunities in the logistics disruption and we are also ready. When we put it all together, we found opportunities in the auto parts industry and all the other industries as well. We could really work on short-term opportunities translating them into volume. Other than that there is a lot of things being done in Brazil over the years. We are taking the leading role in this, in terms of generating competitiveness for Brazilian auto parts to increase the export volume. Not by chance that our investments in the BMW and GABA in cleanliness. This is going to happen over time. That's a strategic plan, a very robust plan involving Gerdau and our customers. We want to increasingly become a relevant player in the global auto parts market. Thank you.
Rodrigo Maia, Head of Investor Relations
The next question is from Carlos de Alba from Morgan Stanley. First, thanks for the partnership with Scardoelli in the last few years, and its position is with interest rates escalating both in the U.S. and Brazil. How is the company getting to prepare to react to a possible change in the demand landscape in the coming months? Thank you.
Gustavo Werneck, CEO
Well, hello, Carlos. Well, I suppose we'll talk about the macroeconomic landscape, but first of all Scardoelli is right next to me. He is thanking you and also thanking you for this good partnership. I will not refer particularly to the interest rate because I'll leave that to Japur. But I will refer to the capacity that we acquired in the past few years of agility in terms of capturing these opportunities and market volatilities. We've been talking for quite some time about our cultural in digital transformation. At Gerdau today, we have a very lean and horizontal structure with a very quick decision-making process. Therefore, I reinforce my point with indicators related to market share in Brazil, something that we were able to capture in 2020 and '21. Our capacity to operate in very complex and volatile landscapes. We will continue to be like that. And as Gerdau and in all of our geographies, we are very well prepared. We have very good risk plans and an opportunity plan to capture the volatility that will certainly occur in the world in the next coming years. So in terms of a more conceptual answer, this is what I have for you, but I think, Japur, can elaborate more on the numbered part.
Rafael Japur, CFO
We are starting the year with an inventory of construction sites very high, historically especially and then comparing with numbers from the past, we are two to three times higher and even though we have a landscape of higher interest rates in Brazil and in other geographies as well, I believe we have a very good visibility in terms of the demand coming from the construction industry in Brazil. At least in all for the next coming quarters. Eventually, we also understand that the major investments are approved in infrastructure and the resumption of the industry, the rebound of the industry, will also serve to accommodate some movements coming from the construction demand if we feel that indeed there will be a reduction in terms of new launches in the fourth quarter of 2022 or in early 2023. But we are very optimistic about the demand in Brazil and in the U.S. and we continue to operate with very high volumes, very much driven by the industrial sector and the construction sector as well. So I think in general, this is what I would like to highlight. Before we proceed, I just heard that there was a problem because when I was talking about the spreads, Rafael from Santander, my microphone was on mute. So I would like just to repeat what I said because some people couldn't hear me. Our spread in North America is at historically high levels. Therefore, our outlook for the next coming quarters, at least in 2022, is that these levels will be maintained, driven by the strength in demand. In March, U.S. scrap could increase to around $30 to $50, which will help sustain the prices in North America. Therefore, our outlook going forward is that this spread at high levels should be maintained.
Rodrigo Maia, Head of Investor Relations
Thank you, Gustavo. Our last question comes from an unclear source. Given that Gerdau is in a position of almost zero cash and has positive free cash flow, could you provide us with your outlook for the net debt target?
Gustavo Werneck, CEO
Thank you, Jacqueline for your question. Our financial policy has some well-defined targets. One is our limit of gross debt of BRL12 billion and the other one is our net debt over EBITDA target. In fact, that Gerdau is present in several geographies. You know, we are not in a single geography. We have some limitations in terms of moving our cash. When we compare ourselves to other companies in terms of the consolidated numbers, maybe in our case, our numbers are higher when compared to other peers. Taking into account these two factors and usually historically Gerdau has always had a cash level of about BRL5 million to BRL6 million. I think we can probably estimate what lays ahead. Our focus is gross debt. We believe that, in fact, especially in situations like this one, when we have increased interest rates. I mean, we cannot carry cash and carry debt at the same time, that's why we are very much focused on reducing our gross debt throughout 2022, if it's possible. Thank you.
Rodrigo Maia, Head of Investor Relations
Now our last question comes from GTI. Dividends announced by Metalurgica Gerdau include the transfer of the share received by Gerdau, maintaining a high level of cash at the holding company.
Gustavo Werneck, CEO
Thank you for the question, Marco, the dividends of BRL0.10 per share is basically a pass-through of dividends received by Metalurgica Gerdau with 32%. We don't have any resolution, any decision vis-a-vis the use of this cash at Metalurgica. In the past, we had a leverage at the holding company with a net cash position of the holding company and now we have flexibility in some strategic alternatives, which have not been decided yet.
Rodrigo Maia, Head of Investor Relations
Thank you. So this concludes the question-and-answer session. Just making comments at here backstage there are several messages paying compliments to Harley Scardoelli for his full support to Investor Relations on behalf of the team for more than 10 years. I also wish a lot of success to Japur; we've met many years ago, and I'm very confident that Japur will be very successful in this challenge. Questions which have not been answered can be submitted to the Investor Relations team, and they will contact you with the answers. Now, I would like to give the floor back to Gustavo for the final remarks.
Gustavo Werneck, CEO
Thank you, Rodrigo. Japur and Scardoelli and myself, thank you all. Thank you all again for being with us today. As usual, it's a huge pleasure to have this interaction with you when we share and learn so much from you. This is part of our goal to be closer and closer to all of you. So, right now I invite you all to be in our next earnings presentation call for the first quarter 2022 on May 5. So thank you very much. All the best and take care.
Rodrigo Maia, Head of Investor Relations
This concludes Gerdau's earnings conference call. Thank you all for being with us, and with the statement by Rafael Japur's aka, congratulations, fantastic, Harley and all the best to you. Thank you.