Gerdau S.A.
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Rodrigo Mala:]

Good afternoon, everyone. I'm Rodrigo Mala, Investor Relations of Gerdau. Welcome to Gerdau's First Quarter Earnings Results in the first time using video Conference platform. Here today is Gustavo Werneck, CEO of Gerdau; Harley Scardoelli, CFO who will present to you today. All analysts and investors can send their questions to the chat. And then the questions will be answered by both Gustavo and Scardoelli after the presentation. I would like to clarify that any information, forward-looking statements that might be made during this conference call related to Gerdau's business outlook, projections and financial and operating goals are mere assumptions based on the management's expectations related to the future of the company.

[Gustavo Werneck:]

Thank you, Rodrigo, for this brief introduction, and good afternoon, everyone. I would like to start by welcoming each one of you to our conference call to discuss Gerdau's results related to the first quarter of 2021. This is the first time we present with audio and video. And this is an attempt to be more aligned to the reality of our society today. I hope you are still well and healthy and also going through this period at the best possible way. On our side, and speaking on behalf of our 30,000 employees, we've managed to remain healthy and safe and keeping our well-being and also pursuing an adequate routine in all of our operations by rigidly complying with all of the health and sanitary protocols established by the local authorities. In this last quarter, we did not have any interruption in the production of our industrial plants attributed to COVID-19. As mentioned by Rodrigo, also joining us today is Scardoelli. And for both of us, it's always a pleasure to talk to you about our performance and also clarify possible issues that may come up during this presentation. Scardoelli will start by talking about the highlights of our results of the quarter. And also, he will talk about the performance of our operations. After that, I will return to talk about the markets where we operate and also share with you some thoughts about what we see the landscape going forward. And then at the end, we will both be available to talk to you and discuss any issue you want us to elaborate further. So Scardoelli, the floor is yours. And we can then start talking about our results.

[Harley Scardoelli:]

Thank you, Gustavo, very much, and good afternoon to you all. It's a pleasure to be with you using this new format, which I think will be very good, both for us and for those joining us today. We will start the presentation with the first slide when we look at our financial results. And we will also talk about the main factors that impacted our consolidated EBITDA. We went from BRL 3.1 billion in Q4 of '20 to BRL 4.3 billion in Q1 of '21, and this was a record EBITDA for Gerdau in a single quarter. All of our operations had an excellent performance in the first 3 months of the year. And this was not only due to a favorable moment for the steel industry, but also as a result of our diligent capital allocation over the last few years in our operations.

[Gustavo Werneck:]

Thank you, Scardoelli. Thank you for the first part of the presentation. So please let's go to our next slide, Slide number 7. And here, we will talk about how Gerdau -- we talk about Gerdau's performance in the first quarter of 2020 and the global landscape for the steel industry. As we heard from Scardoelli's comments on Gerdau's performance in the first quarter, I would like to split the slide into lots. Of course, we will talk about the market. But we also understand that part of the results that we achieved in the first quarter stem from all of the benefits we are reaping through this intense transformation we've been going through in the past few years. This led us to be lighter, simpler and more agile. And I would also say that we are ready to deliver greater value to our customers. As a result of this simplification of the company, SG&A expenses this quarter accounted for less than 3% of net revenue or net sales when compared to 6% that we had 5 years ago. And this is the equivalent to savings of approximately $300 million every year. By the same token, our digital view that aims at integrating and optimizing all of our operations, ensuring total customer focus introduced financial gains of almost BRL 700 million since 2018. I think a good example of this initiative is the number of new customers in business that were captured through the digital channels. More than 3,500 customers bought still online in the first quarter of the year. And another BRL 35 million came from new sources of digital revenue. And all of that was added to our long and flat steels operations in Brazil.

[A - Rodrigo Mala:]

Thank you, Gustavo. We will now initiate the Q&A session. We received many questions through the chat box. The first question comes from Carlos De Alba from Morgan Stanley. Do you see any possibility of further improvement in the landscape in 2021? Do you see any further potential for the company to deliver special dividends -- to pay out special dividends?

[Gustavo Werneck:]

Well, thank you. Let me answer Carlos’ first question about the landscape and what we see going forward. And then I'll give the floor to Scardoelli, who will help us with the second part of the question about dividend payout. Well, certainly, we see the possibility to expand our results in the second half as -- in the second quarter as well. As I said during my speech, whatever we look in different geographies in our different businesses, we see many positive signs not only in terms of maintaining the demand, but growing the demand for steel. I mentioned the case of Brazil, where the demand for steel in the construction industry remains very strong. Without mentioning more numbers, all of the numbers are public. But looking at our own case, we just look at the growth in construction sites. So this is increasing every month. And I believe that this is a sign that shows how strong this sector is. More recently, we had some infrastructure options. And we anticipate an increase in the demand for steel. The industrial sector, as I said, not only the domestic market is quite strong, but our customers are also identifying many opportunities to export locally made products, products made in Brazil. So this has encouraged demand and consumption of steel. And in the U.S., I just gave you this very positive outlook going forward. This bill recently announced by President Biden reinforces the positive outlook, not only if you look in the short term, but looking forward -- no, going forward next year. And this encourages to say that we believe that we will be able to expand or to grow our results further down the road. So now I'll give the floor to Scardoelli to elaborate on the dividend payout issue.

[Harley Scardoelli:]

Perfect. Thank you, Carlos, very much for your question. This is a very recurring question, especially in view of the good improvement in our results. I would like to say that our dividend payout policy set up a percentage over net income and not as it's common in the U.S. when companies set up dividend payout based on cents per share. But this has an automatic adjustment based on the results. So with the improvement of our EBITDA. And in terms of EBITDA and net income, we have some fixed expenses. So the EBITDA improvement represents a better improvement in terms of net income. So dividends are, in fact, increasing. The dividend payout is increasing. At first, we are not contemplating any changes to our dividend payout policy. I would like to remind you that now that the Board just approved BRL 0.4 cents per share for the Gerdau and BRL 0.2 at Metalurgica. This is the equivalent to almost the totality of all of the dividend paid out last year. Therefore, dividend -- the dividend payout is being adjusted. Going forward, certainly, we can revisit that topic. But the dividend policy still remains at 30%. But again, we are generating some strong dividends. And I showed during my presentation that the dividend yield, considering the beginning of the period, if you consider the last 12 months, it's already at 8% and if we take the dividend that is being paid out this quarter. And if we just annualize it, the dividend yield would be at around 5%. Therefore, it's quite strong due to our more robust results.

[Rodrigo Mala:]

Our next question comes from Caio from Crédit Suisse. And the question is related to your last comment. Capital allocation, with leverage going below 1x net debt over EBITDA ratio, do you think there is a likelihood of dropping even further? So what would be Gerdau's capital allocation going forward?

[Gustavo Werneck:]

Well, in a way, part of that question that -- is linked to the dividend part. And I think I already answered that in my previous answer. In terms of capital allocation, we should also remember that we will still have a very strong cash generation, but we also have a more robust CapEx program for this year. So even though we spent BRL 400 million in the first quarter, we intend to spend BRL 3.5 billion throughout the year. And I think CapEx investments with a slide that we also showed you related to return on employed capital. So our level of ROCE is 14%. With lower leverage, that means a return that goes straight to shareholders. So what do I mean by that? Dividends remain strong and CapEx based on ROCE. Today, the return is already quite high. Therefore, we believe that the return in terms of results to shareholders is well equated. A view of the good returns of our employee capital and as a consequence, our CapEx.

[Rodrigo Mala:]

Our next question is from Daniel Sasson from Itaú Bank.

[Daniel Sasson:]

Now looking beyond the second quarter, in terms of contracted volume, better prices at international market in Brazil, do you believe that the margins could be sustainable going forward, margins above 35%. If you could elaborate a bit about the global dynamic related to steel exports to China, I think this could be helpful. Thank you.

[Gustavo Werneck:]

Let me answer that question. And Scardoelli, please feel free to add. As I was saying, Daniel, it's a pleasure to talk to you. Today, we see a structural condition in the next coming quarters. We believe that these margins will be maintained. But even more than that, to answer the second part of your question, which was a very good question. My reading right now about all the variables that I can see for me is that maybe there is a structural change in the world steel scenario. Maybe if you look at this landscape in the longer term, it will be different than what we saw in the past 10 years. And a good part of that is linked to the moves coming from China. And as you know, China has a very intense influence on the global steel market. Changes like that, not only this thing that you mentioned, the discount rate for several steel milling products that was in force since May 1, like rebar, wire rod, et cetera. But at the same time, and on the same day, we heard about a policy to readjust import taxes and ferrous raw material, aiming at reducing import costs and these changes can be seen in the short run. But for me, I see them in the long run, in the long term. Another point that also indicates long-term changes in China refers to the very strong growth in steel production in China through electric furnace or through scrap. So China increase its production of electric furnace from 15 million tons a year to a production close to 200 million tons a year of steel production via electric furnace. This will put pressure on the global cost of scrap, and this is something that we haven't seen in the past few years, and this represents an important structural change that should be noted. And also, the Chinese government is making continuous efforts to reduce GHG emissions, and this is something that is here to stay. China is giving clear signs, according to my reading, that very important changes will take place in the next coming years. I would just like to emphasize that the next quarters, I mean, the fundamentals are very sound. But if you look in the long range, I believe that we will experience a cycle of many years where results will be more robust, unlike what we experienced in the past 10 years. So Scardoelli, if you want to add anything, please feel free to do so.

[Harley Scardoelli:]

No. Thank you, Gustavo. You said it all.

[Rodrigo Mala:]

Our next question comes from Thiago Lofiego from Bradesco.

[Thiago Lofiego:]

The margins of your North American BD are still growing in the second quarter as volumes are better, and the spread is higher. And the second question is, in your special steel business, do you feel any impact in demand for lower -- because of the lower production of automobiles?

[Gustavo Werneck:]

Well, let me answer that. Thiago, thank you for your questions. Our long steel operation, in that regard, we see an even more positive landscape. Demand is quite strong. And with this good outlook, of an expansion in the next coming quarters with the recently announced infrastructure package. In fact, what we see is that our spreads are growing even with the increased price of scrap. So in North America, the landscape is positive. Now speaking about special steels, we haven't been quite impacted with the difficulty to produce vehicles, not only in the U.S. but also in Brazil, because we see a strong recovery in the inventories of steel. In the U.S., there are about 400,000 vehicles still parked in the yard of the OEMs still waiting for electronic components. This, obviously increases the difficulty to expand the fleet of vehicles. But in our case, we didn't feel any strong drop because of the renewal in inventories, and this happens in Brazil as well. And what we anticipate in the next quarters is that this will be gradually stabilized and to be finally stabilized in the fourth quarter. And in our case, in the case of special steels, right now, we believe that the impact, in our case, will be very mild and much lower than the rest of the chain.

[Rodrigo Mala:]

Our next question comes from Leonardo Correa from BTG Pactual.

[Leonardo Correa:]

How is your order portfolio and inventory levels in Brazil, how long do you think it will take for the inventories to be replenished? Are we looking at a new level of EBITDA margins in Brazil, the competition is -- there is a big debate about recurrency. They see 30% margins as being the new normal. This is a similar question as the one asked before in relation to the margins in Brazil.

[Gustavo Werneck:]

Okay. I can answer that as well. The inflow of orders, as I said, in all segments, remains very strong. We see new portfolios being very robust, looking forward and this allowed us to have a more intense replenishment of inventories. But I would like to say that we serve our customers. We provide full-service to our clients. So they did not suffer from any scarcity of steel. Basically now in March and April, inventories are very similar to what we had in February and March. And at the moment, we believe that these inventories will resume normal levels by June or July. And maybe Scardoelli, if you can add something about the new normal of margins. I think this is very much related to my previous comments. When I said that the fundamentals of steel demand remains very robust in Brazil in all segments and that's what we see in the next coming quarters. So I think I already answered this question before. But Scardoelli, if you want to add anything else, please feel free.

[Harley Scardoelli:]

Now maybe that leads me to think that our business model in Brazil has been very resilient in the lower part of the cycle. Even in the most complicated moment, our model proved to be very resilient, and we were able to be above-average when compared to the global industry. And obviously, it's also a very good model, if you consider that the markets are very positive. We're very bullish, which is the case right now. I think you already mentioned what is happening in China, which is something very structural. And we noticed a trend going forward for the next quarters or even years. Therefore, our business model responds quite well to this momentum. In terms of being the new normal or not, it's something that will depend on other circumstances or assumptions. But certainly, in a situation of a more prolonged cycle of commodity. It's more positive. So the trend is that our margins will still be capped at very good levels. Scardoelli, when you say that we learn to deliver results even in our scenarios, I would like to mention our efforts in reducing SG&A. No, I mentioned $300 million of annual reduction and also the fact that we successfully adapted the ZBB methodology, zero-based budget methodology. And in more positive scenarios, we were able to keep the company very lean, very simple and agile. We are always able to capture the benefits from the transformation that we started years ago. Rodrigo, back to you.

[Rodrigo Mala:]

Our next question comes from an individual investor. And I'll take this time to say that Gerdau has 200,000 individual shareholders. Thank you. has the next question. question is in terms of the company's governance. Does Gerdau intend to migrate to Novo Mercado? And what about the payout. Do you intend to increase the dividend payout?

[Gustavo Werneck:]

You can answer that, Scardoelli.

[Harley Scardoelli:]

In terms of dividend payout, I think I already answered that earlier on. Dividends are increasing significantly because of our payout of 30% of net income. In terms of governance and Novo Mercado, 1 thing that is important to mention is that today, we are at Level 1 at Bovespa, which is a very good governance level. And one of the main points in terms of Novo Mercado, we're already complying with that. We are 100% tag along. We -- many of our governance practices are well advanced. In terms of Novo Mercado, I mean, a company with a very defined control as is our case, it's something that at this time, it's not something that we look forward to because we already have several practices that put us in a very advanced and good governance level.

[Rodrigo Mala:]

Thank you. Our next question is from Rafael Barcellos from Santander.

[Rafael Barcellos:]

Could you comment on the utilization capacity in Brazil? And also talk about a strategy behind the restart up of the Araucaria unit in Parana?

[Gustavo Werneck:]

Well, I'll answer that question. Rafael, thank you for the question. Utilization capacity in Brazil is not close to limit. We do have available capacity and the restart of Araucaria is a good example of that, our utilization is around 75% in Brazil. The highest utilization today of Gerdau assets in the U.S., as I said, or in North America, is close to 91%. The restart of Araucaria aims at increasing the availability of crude steel to our operations. In our Brazil operation, we have great flexibility between our plants, not only in terms of steel production and rolling mill, but also with regards to raw material. Scrap is something that I often mention. Scrap can be mixed. I mean, we can mix the use of scrap through our bio reducer. We have pig iron also in the state of Minas Gerais. So we have great flexibility in Brazil from raw material to the end -- to the final product. So the idea with Araucaria is to increase the steel production that will be used in our several rolling mills from new burns at the state of Ceara. In terms of production planning and logistics, aiming at better serving our customers and reducing our costs. The restart of Araucaria aims at increasing the delivery of crude steel to be used in our rolling mills in all of the corners of the country.

[Rodrigo Mala:]

Our next question comes from Marcio Farid from JPMorgan.

[Marcio Farid:]

Could you comment on the levels of premium in Brazil versus the same parity abroad? What is the balance level considering supply and demand in the steel industry?

[Gustavo Werneck:]

Premiums are still low due to the continuous increase in the prices of international products and FX. In general, mentioning longs and flats, premium is around 10%. So when you look at historical figures, it's still low. And this balance between supply and demand in Brazil, with the advent of new capacity and the restart of production is already in place. As I mentioned before, what is happening now is the recovery of inventories. Well, it's happening slower than expected. But we believe that by mid-June or July, the entire chain will be able to recover their inventories. But demand and the inflow orders will remain strong.

[Rodrigo Mala:]

Gustavo. Our next question comes from Geraldo Mellone Jr. from Bresser Asset Management.

[Gerlado Mellone Jr.:]

What is the amount of recurring CapEx for Gerdau considering 2022 and looking forward?

[Gustavo Werneck:]

Can you answer that, Scardoelli, about CapEx?

[Harley Scardoelli:]

About CapEx, this is something recurring. Right now, we are investing more intensively in our Ouro Branco Mill because that's an integrated operation that follows a different investment cycle when compared to the investment cycle of our other mills that are scrap based. They have a more continuous and constant CapEx cycle as we cannot use as recurring CapEx. The low levels we experienced in past years where we have to have a tighter operation. We cannot afford to perpetuate a stronger CapEx, when we are investing more in our integrated mill of Ouro Branco. In terms of the long-term, to draw a long-term projection, I would say that will be slightly below depreciation, slightly below or equal to depreciation. Obviously, this is not something that will happen every year, 1 year and also the next, but you have to look at a longer period of time. But in terms of our projection, I would say that it should be something close to depreciation. But what will really happen in the next few years is that we will continue to inform the market about our intention to spend. We know that this is very dynamic market. And therefore, we decided to inform the market every year in the beginning of the year, how much we intend to spend in terms of CapEx, to give a clear view to analysts.

[Rodrigo Mala:]

Our next question comes from Marcelo Audi from Cardinal Partners. Capital allocation, we talked a lot about that today. He would like to know how can we ensure that right now, capital allocation will produce a return on the investments that are being conducted? And whether this current cash and consideration -- considering cash flow generation, whether you think that the ROE should come down because of excess cash? What should be expected going forward of this new scenario of Gerdau's cash generation, especially considering your discipline of capital of investment.

[Gustavo Werneck:]

Can you answer that, Scardoelli?

[Harley Scardoelli:]

Yes, certainly. Marcelo, in terms of our discipline in capital allocation, it's something extremely important to the company. You know that we experienced a very strong period of growth and then a period of crisis in the industry, especially when China decided to export high volumes of steel and we, as a company, we had to revisit our portfolio. We had some divestments, which was something we did for several years and that brought us back to a level of return on employed capital, which is the level we intend to keep going forward. We are -- so Gustavo and the other executives of the team and the Board as well are very, very rigorous. Whenever they consider CapEx and investments. So we want to ensure adequate returns to the capital invested. Well, in regards to cash generation, today, with the level of interest rates, we can certainly work with a lower level of cash when compared to our historical levels. We had something like $2 million of cash in the company. So today, we work closer to BRL 1 billion. We could even work with a bit less, if that is the case. Because today, we already have a credit line that is -- sure. I mean, this is something that is a line of credit where we can withdraw at any given time. So that line of credit is available in 24 hours. So we are very comfortable to work with a lower level of cash from no one.

[Rodrigo Mala:]

Our next and before last question is from Ricardo Caballero from Investimentos. In terms of the cash of Metalurgica Gerdau S.A., which is very robust. Do you already have a destination to that cash?

[Gustavo Werneck:]

Scardoelli, up to you.

[Harley Scardoelli:]

This cash is invested in very safe instruments with good liquidity. That's why this is not separate or destined to anything specific. It's invested and it has a lot of liquidity, but we do not know exactly what we will do with it, but Metalurgica will stick to its core business which is to be a holding of Gerdau S.A. So our intent is to keep that cash and liquid instruments.

[Rodrigo Mala:]

Our next question from Markus from GTI. In relation to your financial cycle or cash conversion cycle, do you think that this can be considered something recurring going forward? And this is our last question from the chat, and I would like to thank you all.

[Gustavo Werneck:]

Well, I'll leave that last 1 with you as well.

[Harley Scardoelli:]

So I understand that we are talking about our working capital financial cycle. So at the end of 2020, the level was probably below normal. Today, the cash conversion cycle is 57 days. So I would say between 55 and 60 days is a very adequate level of cash conversion cycle in terms of working capital. We had to consume cash to adapt to the working capital in this first quarter because of the moves in the market. And that's the trend going forward as well. Possibly, in the second quarter, we will still see some consumption of cash for working capital because the level of activity remains very strong, as Gustavo mentioned during his presentation.

[Rodrigo Mala:]

Thank you, Scardoelli. We now conclude the Q&A session. And I would like to reiterate that this was our first video call. So if there was any connection issue, you can get in touch with our IR department to clarify your possible issues. Now I would like to turn the floor back to Gustavo and Scardoelli for their final remarks.

[Gustavo Werneck:]

Well, Scardoelli, I will then conclude this conference call. And I would like to thank you all for joining us today. It's always a great pleasure to talk to you. We remain available, not only by myself, but Scardoelli and our entire IR team. So please talk to us if you have any additional question. And right now, I'll take this opportunity to invite you to our next conference call related to the second quarter of 2021 to take place on August 4. So thank you very much. Please take care and take care of your health. I wish you all a very good end of week.

[Rodrigo Mala:]

Thank you, Gustavo. Gerdau's conference call is now concluded. Thank you all very much for joining us. We had more than 200 participants with us today. Thank you, and have a very good afternoon.