Gerdau S.A.
Q2 2013 Earnings Call Transcript
Published:
- Operator:
- Good afternoon, and welcome to Gerdau's presentation of the third quarter (sic) [second quarter] of 2013 earnings. [Operator Instructions] We would like to highlight that forward-looking statements that might be made during this conference call relative to Gerdau's business prospects, its projections and operating and financial goals are mere predictions -- forecasts based on the expectations of the management regarding the future of the company. Although Gerdau believes that its comments are based on reasonable assumptions, forward-looking statements are no guarantee of what is going to happen. Here with us today, we have Mr. Andre Gerdau Johannpeter, Managing Director and CEO; and André Pires, Vice President and IR Officer. I would like to give the floor now to Mr. André Gerdau Johannpeter. You may proceed, sir.
- André Bier Gerdau Johannpeter:
- Thank you, good afternoon, everyone. Welcome to our third quarter (sic) [second quarter] of 2013 earnings conference call. We will start this presentation with an assessment of the global status of the steel market, then we'll move to Gerdau's performance in the second quarter of the year and talk about the outlook for the regions where the company operates. After that, André Pires will give you details on the financial performance of Gerdau. And at the end, we will be available to answer questions you might have. It is important to highlight that in our presentation we will be assessing the performance of the second quarter of 2013 vis-a-vis the same period of last year. However, in the case of Gerdau's balance sheet, we will also analyze the figures as they relate to the first quarter of 2013, showing our performance in the period. Let us a start with the industrial view in global steel production, which reached 401.1 million tonnes in the second quarter of 2013, up 1.8%, compared to the same period of 2012. Excluding China, global production reached 203 million tonnes, down 1.8% vis-a-vis the second quarter of 2012. This is data from the World Steel Association. In Brazil, steel production reached 8.6 million tonnes, a volume which is in keeping with the same period of last year. Steel production in other Latin American countries, not including Brazil, showed a 3.9% increase in the second quarter of 2013, compared to the same period of last year, reaching 8.3 million tonnes. Steel production in the United States was 21.8 million tonnes, 5.3% below the figure posted in the second quarter of 2012. As for the outlook for the economy, according to IMF estimates, global GDP growth should be 3.1% for -- the estimate of the IMF pointed to a 3.1% increase in 2013. The estimates were revised downward by the IMF. According to the World Steel Association, global steel consumption this year should grow 2.9% compared to 2012, reaching 1.45 billion tonnes. Now let's us talk about Gerdau's performance. In comparison with the first quarter, the improved performance in the second quarter of 2013 reflects a gradual rebound of the market at decent levels, as well as the management's effort in our operations, which resulted in a reduction of BRL 1.1 billion in working capital, which boosted to the company's cash. In addition, shipments to the Brazilian domestic market showed their best performance since 2008. As for North America and other significant markets to go down. The outlook points to growth in the next couple of years. Net sales amounted to BRL 10 billion in line with the same period of 2012, primarily driven by the rally of the Brazilian market in the segments of long steel and specialty steels, which offset part of the reduction in the volume of exports from Brazil and lower sales in North America. Earnings before interest, taxes, depreciation and amortization, known as EBITDA, was BRL 1.2 billion, down 3.9% compared to the second quarter of 2012. Net income in turn amounted to BRL 401 million, compared to BRL 549 million in the same period of 2012. As I mentioned in the beginning of my speech, the balance sheet of the second quarter of 2013 also reflects the recovery of Gerdau's performance when compared to the first 3 months of 2013. EBITDA, for instance, showed a 48.6% increase and net income had a positive variation of 150%. Talking about investments or CapEx. In the second quarter, Gerdau's investments reached BRL 635 million and year-to-date, BRL 1.2 billion. These funds were geared primarily through the implementation of projects already announced, highlights going to the start-up production of flat steel products in Brazil scheduled for this week. Now in the beginning of the month of August, and the increase in our own capacity to produce iron ore, which is unfolding as planned. According to work we have announced previously, BRL 8.5 billion are planned to be invested in the company's industrial plan in the 2013 to '17 period, considering steel and mining activities. It is also important to remember that due to the large volume of investments made in 2012 and of the uncertainties about the world's economic market, Gerdau is becoming more selective in the evaluation of its future investment projects. Now let us talk about the quarterly performance of our operations. If you're following us over the web, we are on Screen 4. Starting with Brazil, I'd like to remind you that this does not include specialty steel operations in Brazil. In the Brazilian domestic market, except for specialty steels, Gerdau sold 1.5 million tonnes considering both finished and semi-finished goods, 6.2% more than in the same period of last year. While exports dropped by 47.4% to 262,000 tonnes. The current Brazilian economy outlook the forecast report points to a 2.3% GDP growth in 2013. However, we believe that in order to boost the economic activity levels, the country requires more investments in infrastructure, and that the necessary structural reforms be made. According to Instituto Aço Brasil, Brazil Steel Institute, steel consumption should reach 26.2 million tonnes, 4.3% more than last year. Regarding the major industries supplied by Gerdau, the expectations are as follows
- André Pires de Oliveira Dias:
- Thank you, André, and good afternoon, everyone. Now I'll be addressing the consolidated results of the second quarter of 2013. Then I'll give some details about every business operation. The idea is to conclude the presentation, specifically addressing the capital structure, indebtedness and cash generation. Starting on Screen 8 for those who are following us over WebEx. The net revenue had a slight reduction of 0.9% in the second quarter of 2013 vis-à-vis the same period of the previous year, and that was due to lower volumes sold around 3%, which were partially offset by an increase in net sales revenues per tonne, which was 2.1%. When compared with the first quarter of 2013, there was an increase of 7.8% in that sales revenue, mainly due to the higher net sales revenue per tonne, growing by 6% in Gerdau's consolidated basis. Cost of sales had a slight reduction this quarter, mainly due to the reduction in volumes sold, therefore leading to a lower dilution of fixed costs. As a result, gross margin went down 0.7 percentage points this quarter, closing at 13.6%. The share of SG&A expenses vis-à-vis the net revenue or net sales remained stable at 6.4% in the second quarter when compared to the same period of the previous year. Therefore, reflecting the company's efforts to rationalize these expenses. We highlight that with the real depreciation, particularly vis-a-vis the U.S. dollar, the pressure of SG&A stemming from our operations abroad tend to increase in real. And this shows the company's efforts to maintain this stable figures. EBITDA was BRL 1,196,000,000 in the second quarter of 2013, dropping 3.9% vis-à-vis the same period of the previous year. If we look on the big chart on Slide 8, we can see that the main factor to lower EBITDA was a reduction in net revenue. Compared to the first quarter of 2013, EBITDA increased 48.6%. Lastly, the EBITDA margin closed at 12.1% in the second quarter of 2013. On the right, at the lower part of Slide 8, we can see EBITDA margin performance since 2012 up to now. The higher negative financial result in the second quarter of 2013 stems mainly from the higher negative net exchange variation and to a lesser extent, the higher financial revenue and higher -- lower financial revenue and higher financial expense in the first or vis-à-vis the first quarter of 2013, it stems from a net exchange variance that was negative in the second half of 2013, compared to a positive variation in the previous quarter. At the end of the presentation, we'll be addressing a comparison with our balance sheet and our P&L, which is more important when we work on our figures. There was a drop in net income in the second quarter of 2013 vis-à-vis the same period of the previous year at BRL 401 million. When compared to the first quarter of 2013, net income increased 150.6%. As for dividends, based on the company's income, we'll be anticipating a dividend payout amounting to BRL 44.7 million to Metalurgica Gerdau shareholders or BRL 0.11 per share related to performance in the second quarter and BRL 119 million for holders of Gerdau SA securities or BRL 0.07 per stock. These dividends will be paid on August 21 based on the status of August 12. On Slide 9, we show the result and performance of each one of our business units. Starting with Brazil, the reduction of 1.2% in net revenue stem mainly from a drop in volumes sold, approximately 7.7%, offset by the better market mix, domestic versus foreign market and better net sales revenue per tonne. The domestic market grew 6.2% in shipments and 1.6% in net sales revenue per tonne. Whereas in exports, there was a drop of 47.4% in the sales volume and an increase by 16.6% in net sales revenue per tonne. Please note that these revenues include iron ore and coal plus the exchange effect. The better net sales revenue per tonne vis-à-vis the cost per tonne and the better market mix allowed for growth of 27% in EBITDA in the second quarter of 2013 vis-à-vis the same period of the previous year. The EBITDA margin growing in Brazil from 15.8% to 20.3%. The increase in sales volume in the domestic market and the growth of net sales revenue per tonne also contributed to increased EBITDA and margin vis-à-vis the first quarter of 2013. Please note that on the right, at the bottom of Screen 9, we can also see the performance of our EBITDA margin since the second quarter of last year. On Slide 10, and now more specifically about North America. We had a drop of 3% in sales volume in the second quarter of 2013 vis-à-vis the second quarter of 2012. This was mainly due to the implementation of our new management software throughout 2012 and early 2013 and also to our growth in exports, which amounted to 20% of the long steel products market at the end of the first half of 2013. This lower sales volume and better prices in dollar led to a reduction of 2.9% in net sales revenue vis-à-vis the same period of the previous year. The lower dollar-denominated prices and lower dilution of fixed cost reduced our EBITDA from BRL 328 million in the second quarter of last year to BRL 158 million in the second quarter of 2013. As a result, the margin went down from 10.3% to 5.1% in the same period. As to the first quarter of 2013, EBITDA and margin were relatively stable, despite the narrow spread and the slightly higher pressure. Now on Slide 11, I'll address in Latin America, always excluding Brazil. The sales volume grew 6% in the second quarter of 2013 vis-à-vis the same quarter of last year, mainly due to improved demand in some countries in the region. As a result, our net revenue grew by 4.6% this quarter. An increase in EBITDA in the second quarter of 2013, where it total BRL 109 million stemmed from the higher volumes sold and consequently higher dilution of fixed costs, providing a better EBITDA margin, which was 8.2% this quarter vis-à-vis 5.5% in the same period of the previous year. As to the first quarter of 2013, EBITDA more than doubled, whereas the margin grew from 4.6% to 8.2%, especially due to an increase of 12.4% in volumes sold. On Slide 12, we address specialty products, including our business operations in North America, Europe and India. There was an increase of 4.8% in sales volume in the second quarter of 2013 vis-à-vis the same quarter of the previous year. And this stems from stronger growth in our units in Brazil, where there was a recovery in vehicle production, increasing 23.2% according to ANFAVEA's figures, particularly the trucks, an increase of 67.7%. This increase in sales was not fully reflected on the net revenue, which increased 2.5% in virtue of a lower net sales revenue per tonne that took place in Spain and in the U.S. As a result, there was a reduction of 23.8% in EBITDA in the second quarter of 2013, with a total of BRL 276 million and a drop in margin from 17.5% in the second quarter of 2012 to 13% in the second quarter of 2013. However, vis-à-vis, the first quarter of 2013, there was a significant recovery in EBITDA and margin due to an increase of 14.8% in volumes sold. EBITDA grew 78.1% and the margin increased from 8.5% to 13%. On Slide 13, the idea is to slightly address indebtedness and liquidity and also cash generation. First of all, about amortization, I would like to remind you that in April this year, Gerdau issued bonds worth $750 million. And the purpose was to extend the average debt maturity, which came from 5.7 years in June 2013 vis-à-vis 4.6 in March. The use of these funds was exclusively to pay short-term debts, as we said on that occasion. On top of that, we also reduced our short-term debt in another BRL 284 million by using our higher cash generation. In other words, we amortized more than $1 billion as short-term debt in the second quarter of 2013. As a result, our short-term debt dropped down from 20.1% of the total debt in March to 9.3% in late June. The Increase cash from March 2013 up to June 2013 was driven by lower working capital and an increase in cash generation. On June 30, 36.9% of cash was held by Gerdau's companies abroad, particularly in U.S. dollars. The exchange effect over debt denominated in foreign currency was offset by higher cash, which allow for a reduction of 2.8% in net debt on June 30 when compared to March 31. As a result, the net debt over EBITDA ratio went down from 3.2x in March to 3.1x in June. Please note that this happened at a time in which the dollar appreciated 10% vis-à-vis the real. As you all know, we have more than 60% of our gross debt in dollars. The weighted nominal average cost of the gross or principal debt on June 30 was 6.1%. Now more specifically about working capital and the cash conversion cycle. There was a significant improvement this quarter. Working capital had a reduction of 6% vis-à-vis March, despite the growth of 7.8% in net revenue in the second quarter of 2013 vis-à-vis the previous quarter. And this shows the company's effort to reduce working capital and improve liquidity. As a result, the cash conversion cycle had a reduction by 13 days vis-à-vis March 2013 closing at 85 days. Please note that reduction in working capital from BRL 593 million from March to June, which is in our corporate figures, considered the exchange variation, particularly on working capital in companies abroad. Net of this variation, the net effect of this reduction, was BRL 1.1 billion, the cash effect. As I said in the beginning, I would like to address the exchange effect in our performance in general. Gerdau, through its Brazilian operations, owns investments in assets abroad in U.S. dollars amounting to $6.6 billion, which are greater than capital borrowed from Brazil under the same currency, totaling $4.8 billion. Therefore, the real depreciation vis-à-vis the dollar in the second quarter of 2013 had a positive net effect to the company when it comes to our property and assets. Usually, the exchange effect on asset investments abroad is directly recognized in shareholder's equity, where there's the same effect on or in foreign currency should be posted in the P&L. However, as you all know, based in IFRS standards, the company has a policy to earmark part of the dollar-denominated investments as hedge -- net investment hedge recognized as shareholder equity in order to offset. However, despite of the hedge effect, the company also owns other net liabilities under different currencies or functional currencies in the countries where it operates, which led to a negative exchange variation of BRL 130 million in the second quarter of 2013, which were then posted in the P&L. From the operating standpoint, in the second quarter of 2013, revenues and cost from operations abroad once converted by reais by the average U.S. dollar rate of the period led to higher absolute amounts, but with no effect on the company's operating margin. As of now, concluding this part, André and I will be happy to take any questions you may have. Thank you very much.
- Operator:
- [Operator Instructions] Our first question comes from Mr. Marcos Assumpção, Itaú BBA.
- Marcos Assumpção:
- My first question has to do with the net sales revenue per tonne. Could you talk about the price of rebar. And what is your price expectation looking at the second half of the year? My second question has to do with the volume of the domestic market. The volume grew 6% quarter-on-quarter. And you mentioned that you redirected the sales of semi-finished goods in Brazil. Could you talk about how much the volume has grown x semi-finished goods?
- André Pires de Oliveira Dias:
- This is André Pires. As for the premium for rebar compared to imported, it is about 13%. We don't envision any change in this level of premium price in the second half, nothing significant. As for the mix, you're correct. There was a growth in the sales of semi-finished products in the domestic market. That phenomena had happened already in the first quarter and continued in the second quarter, a growth of 6.2%. If we exclude this volume, in other words, x semi-finished goods, growth would be around 2%, for traditional rolled products.
- Marcos Assumpção:
- And my follow-up question, André. With the sales -- regarding the sales of semi-finished goods in Brazil, do you expect it to continue to be high? Are you selling to other players, other local players?
- André Pires de Oliveira Dias:
- Well, it is hard to say. It is a market opportunity that we enjoyed in the first and second quarters. The international market remains with relatively pressurized prices, but improved a bit in the end of the second quarter. The trend is that, if there's a demand, we will continue to supply the domestic market.
- Operator:
- Our next question comes from Ivano Westin from Crédit Suisse.
- Ivano Westin:
- I want to ask about the North American unit. You had a recovery in the sales volume, but the EBITDA margin remains at around 5%. You, André Gerdau, mentioned the rally of the residential construction and nonresidential construction in the region. What is your expectation for the second half of the year for 2014? Could we expect a normalized margin for the North American unit? My first question. My second question goes to André Pires regarding working capital. You reported a 6% reduction. Could you comment on the expectations for the second half of the year and 2014?
- André Bier Gerdau Johannpeter:
- This is André. Well, about North America, the first half of the year was somewhat slower than what we expected in terms of volume. There was a significant pressure by imported products. So even if we increase our volume a bit, there was a pressure from the imports putting pressure on our prices and margins down. This has been a challenge in North America, and with an excessive supply the world, the U.S. is the traditional importer and their imports have grown for some structural and merchant products in this quarter -- in the first 6 months actually. Well, what will you expect, according to the KPIs published, beginning with residential construction, which have been picking up again. And normally the next cycle is the nonresidential construction and that is our main consumer market. So we envision that for next year. And the year following that, we should see a substantial rebound in the nonresidential construction segment. The industrial sector is another important industry to us. They remain with positive KPIs, growing. And again, that has to do with the competitiveness of the U.S. for energy with shale gas and now shale oil, which really lowers the price of gas, electricity and productivity, and also positively impacts the automotive production chain. So our expectation is that the U.S. will grow more next year. This year, they expect to grow 1.7% their GDP. For next year, preliminary figures by the IMF on the market points to a 2.5% of GDP growth. So overall, we expect a rebound in sales volume and demand in North America.
- André Pires de Oliveira Dias:
- As for working capital, indeed, the company spared no effort during the second quarter. That effort was started in the first quarter, but the results appeared in the second quarter in all lines -- in all line items particularly inventory. And there was a reduction of 13 days in the financial cycle. Our expectation is that there are opportunities to reduce even further during the second half of the year. We are working on it. We have a strong focus on that. We don't want to disclose any figure. I would say that the second quarter was above what we were expecting, but we believe that there are opportunities for reduction. There's a lot of homework to be done, and we are working mainly to reduce the financial cycle even further to below 80 days, that would be the objective.
- Operator:
- [Operator Instructions] Our next question comes from Mr. Carlos de Alba of Morgan Stanley.
- Carlos de Alba:
- I would like to understand the strong performance that we saw in the Latin American division, which is the one that has been a struggle in the most, I will say, in the recent quarters, is sustainable. I mean, it's the only business unit that increased shipments year-on-year and quarter-on-quarter. And also the only one that increased EBITDA margin year-on-year and quarter-on-quarter. So if this is the beginning of a turnaround, it will be very encouraging. And I would like to understand how sustainable this is?
- André Bier Gerdau Johannpeter:
- So just repeating Carlos' question. His question is about the performance of our unit in Latin America, which improved both in terms of delivery and also sales and also margin. So he wants to know if this recovery is consistent or is expected to continue in the future.
- André Pires de Oliveira Dias:
- Carlos, thank you for your question. So this stems from our efforts in these countries. It's worth mentioning that basically all Latin American countries had better performance, both in delivery and also in EBITDA generation more specifically. This stems from higher growth, how should I put it, in the economies of these countries, but the major focus is on Peru, where we improved results, and also Argentina and Chile, to some extent. And we feel this recovery is consistent and also stems from our efforts to reduce cost and improve efficiency in our operations.
- Carlos de Alba:
- Excellent, and then just coming to the iron ore business. Can you comment about when do you expect to make the decision to pursue the second phase of your expansion? And I think a key element of that expansion is the availability of a port which -- you have an option to develop your own, but it will take a few years for you to do so. And right now, there may be an opportunity to do a negotiation with MMX and get access to their Sudeste port. Could you comment about the planning for the decision of your expansion? And also your views on potentially doing something with MMX?
- André Bier Gerdau Johannpeter:
- André, speaking. So Carlos wants to know about ports. Our projects in the port terminal in Rio. So what is the schedule, the expectation of the expansion project or process? And if we are interested or if we are considering the port option MMX, from company MMX. Well, in our project, we keep on working on engineering to define the project as a whole. We also maintain the license [indiscernible] for, but we don't have any dates provisioned but the idea is to have the project ready so we can make decisions as to where we'll be building the terminal or not. As to MMX, there are no negotiations. We are involved in a process. But as logistic clients, we've been following up to see whether this will be sold or not. So we use the existing port options in Brazil to our exports. And we have already 150,000 tonnes for iron ore exports, and we expect to have 700,000 using the existing alternative MMX port. It is not completed yet. It is not in operation. So that's why we are still following up to see when the investment will be over. And when the operation will be valid because one of the alternatives of existing ports in Brazil that we are assessing, we have also our own terminal project and then we'll see how and when to invest. So this is what we think about port logistics in our mining business.
- Operator:
- [Operator Instructions] Next question from Renato Antunes from Brasil Plural.
- Renato Antunes:
- First of all, about long steel products operation in Brazil. Could you comment on the demand scenario and how do we envisage demand when it comes to these long steel products. Based on June figures, I would like to know if there has been any changes compared to what you have in July, and also how you see the second half of the year? That's my first question. The second question, well, what about specialty steels in Brazil? Can you talk about the market in the second half of the year, please? So what about -- because we had the heavy vehicle production. That was very strong in the first half of the year. Do you think you can maintain the same pace in the second half of the year?
- André Bier Gerdau Johannpeter:
- Thank you, Renato, André speaking. About long steel products, what we saw in the first half of the year, was a relatively stable market compared to the same period of the previous year. Some lines with slight growth, others with lesser growth, but nothing so significant. The outlook for the second half of the year is to have an uptick, so we do expect to see increased consumption by the end of the year. Early this year, we consider 3% to 4% steel consumption growth. And because in the first half of the year, we did not have this result, we expect to have a recovery for the second half of the year. But that's for long steel products. As to specialty product, as you put it well, the first half of the year was very positive, with an important reaction particularly for trucks. And we expect to keep on growing, but not as strongly in the second half of the year. So that's about what we see in the market. And based on some signs, we had record production, sales record, so we don't expect to have it repeated. So these are unfeathered data, maybe there will be growth, but not as strongly as we had in the first half of the year.
- Operator:
- Our next question comes from Thiago Lofiego from Merrill Lynch.
- Thiago Lofiego:
- I have 2 questions. If you could talk about prices in the domestic market, please confirm the figure that André mentioned, I think 13% compared to imported goods. Do you see a potential for price increase in the domestic market? Are you saying that this price would be sustainable? What level do you think is sustainable?
- André Pires de Oliveira Dias:
- Thiago, this is André Pires. Thank you for the question. As for the premium price in the domestic market compared to imported goods. As I mentioned, before, it is around 13%. We believe that this should be fluctuating between 10% and 15%. That is a relatively comfortable level. It's hard to say regarding what we expect looking forward. It really depends on whether the FX depreciation in Brazil can sustain, however, if the real will rebound, it's too early to say. And then also it depends on the international price. It also depends on the international market. So I would say, it's too early to say where this is going, but the premium today is at a comfortable level and should remain, as I said before, between 10% and 15% in the coming months.
- Operator:
- Our next question comes from Mr. Leonardo Correa, HSBC.
- Leonardo Correa:
- My first question has to do with the margin trend. If I look at the Brazil EBITDA margin, the level is quite strong, close to 20%. I would like to understand from you, can we expect a level above that, 22%, 23% for 2014? Considering that we're going to have high production of iron ore? And are we going to see the coiled hot-rolled rolling mill operating? And my second question has to do with CapEx in 2013, 2014. If we look at the number for the first half, you're talking about BRL 2.5 billion for the year. For 2014, can we work with something close to BRL 8 billion for the 5-year period? Can we work with that? These are my 2 questions.
- André Pires de Oliveira Dias:
- This is André Pires. Thank you for the questions. As for the margins, you're correct. In 2014, we will have some transformational projects, that will be coming on more definitely; the BQ, rolling and also the mining part with higher volumes, then it should contribute with better margins. As you know, we don't like to give a guidance. If it's 20%, 22%, 23%, it's hard to say. But we believe that around 20% of EBITDA margin for Brazil, which is what we achieved in the second quarter, would be a good number to work with looking forward. Particularly, considering the BQ mining that should give us an upside rather than a downside. I'll give the floor to André to talk about the CapEx.
- André Bier Gerdau Johannpeter:
- As for the CapEx, we have a number of BRL 1.2 billion in the first 6 months of the year. And we should close the year with about BRL 2.1 billion or BRL 2.2 billion, something around that. When I talked about BRL 1.6 billion per year looking forward, it's very difficult to define. When we announce an BRL 8.5 billion for a 5-year period, that is an estimate. That needs to be readjusted every year. So it's hard to say that we are going to have a BRL 1.6 billion invested every year looking forward because there's a level of depreciation, there's a minimum CapEx, which is a 50 CapEx that has to invested in infrastructure. And then we have to invest in expansions or more strategic projects that need to be implemented. So it's very difficult to give you specific figure for every year.
- Leonardo Correa:
- It is clear. But if I might add in CapEx, perhaps you could give the information about the plates? Anything expected for that, for heavy plates? What are you expecting?
- André Bier Gerdau Johannpeter:
- Well, the project is expected for the second half of 2015, that is the schedule. We are really focused on starting the operation of the coiled hot-rolled sheets rolling mill this coming week, and we continue with the civil construction for the heavy plates project. That is the schedule that we are working with. The equipment has been purchased. So now it depends on how faster we'll be able to do the civil construction, then the building, and then all the assembly part.
- Operator:
- [Operator Instructions] Our next question from Mr. Carlos de Alba of Morgan Stanley.
- Carlos de Alba:
- I just want to know. I mean, clearly, you are doing a good job managing the working capital and your CapEx should continue to come down. So what are you planning on doing with the extra free cash flow that you will generate? If everything goes well, the free cash flow yield is going to improve significantly going forward. So would you return this money to shareholders via dividends? Would you plan on just repaying debt? Or perhaps you'll start another cycle of M&A activity that in the past the company used to expand outside Brazil?
- André Pires de Oliveira Dias:
- Thank you, Carlos. So just repeating your question. Your question regards -- well, if we take into account this reduction in working capital, and also the slightly lower CapEx vis-à-vis last year, we are giving more cash flow. So you want to know the company's purpose? If it's ready to work on distribution in terms of dividend payout or to lower indebtedness or perhaps your expectation to improve the M&A activity? Basically, our main goal is and will continue to be working with lower leverage levels, compared to what we currently have. Obviously, our focus is to maintain the investment grade. This is key to the company. And this additional free cash flow generation has the purpose to lower net indebtedness and consequently, lower our level of net debt over EBITDA ratio. It's important to say, and I mentioned this in my talk, that we lowered this from 3.2x to 3.1x this quarter, despite the impact this quarter of foreign exchange variation that would naturally lead this figure close to 4 rather than 3. I also mentioned that we had amortizations of short-term debt close to $1 billion. So clearly, the major goal of the company when it comes to free cash flow is the reduction of our net indebtedness level.
- Operator:
- Our next question is from Renato Antunes from Brasil Plural.
- Renato Antunes:
- Just a brief question, about the figures of the second quarter. When we consider the cash flow statement, we have about BRL 400 million, if I'm not mistaken, in the line of noncontrolling shareholders, now when we look at the balance sheet, well, I would just like to have a better understanding, if you could explain what had an impact on the cash flow of this quarter?
- André Pires de Oliveira Dias:
- Renato, André Pires speaking. It goes as follows
- Operator:
- We are closing now the Q&A session. I would like to turn the floor over to Mr. André Gerdau Johannpeter and André Pires for the final remarks.
- André Pires de Oliveira Dias:
- This is André Pires. Just to close, I would like to thank you for all your question and for your interest in our company. To sum up, in this quarter, we were very focused on a continued improvement of our balance sheet. This has been one of our main goals. And we will continue with this objective. And this is my final message to you, my take home message. I'll give the floor now to André Gerdau Johannpeter.
- André Bier Gerdau Johannpeter:
- Likewise, thank you for participating, for your questions, and I would like to invite you to our next earnings conference call on October 31. Please join us then, and thank you very much. Have a good day.
- Operator:
- Gerdau's conference call is coming to an end. We would like to thank all of you for attending. Have a good afternoon.
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