Gerdau S.A.

Good afternoon and welcome to Roudal's conference call to discuss the results related to the second quarter of 2020. At this time, all participants will be in listen-only mode, and later on, we will initiate the Q&A session. Should any participant need any assistance during this call, please press star zero to reach the operator. We would also like to emphasize that any 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. Even though Gerdau believes that its comments are based on reasonable assumptions, there is no guarantee that future events will not affect this evaluation. Here today are Mr. Gustavo Werneck, Director, President, and CEO of the company, and Harley Scardoelli, Vice President and CFO. With no further ado, I would like to give the floor to Mr. Gustavo Werneck. You may proceed, sir. Good afternoon, everyone. I would like to start by welcoming all of you to Gerdau's conference call to discuss the results of the company related to the second quarter of 2020. I hope you're all well, healthy, and safe, and navigating through this period the best way possible. Joining us today is our CFO, Harley Scarduelli, and we are both very glad to share with you our performance in the quarter, and also clarify possible issues that might come up during our presentation. I would like to point out that this conference call is being conducted in compliance with all social distancing protocols adopted by Gerdau. Scarduetti will talk about the highlights of the results in the quarter, and also he will talk about the performance of our operations. After his presentation, I will comment on the markets where we operate and the landscape looking forward, even though the moment still poses many uncertainties. And as usual, at the end, both of us will be available to answer your questions. So now, I will give the floor to Ms. Cardoelli. You may proceed. Thank you very much Gustavo and good afternoon to you all. It's always a pleasure to be with you again for another earnings release call and I hope that you're all well. I'll start by talking about the financial results for the second quarter 2020. As you can see from the slide, In the second quarter 20, we posted a positive free cash flow of 205 million BRLs, even considering the dire period of the COVID-19 pandemic. This improvement vis-a-vis Q1 20 reflects the combination of an EBITDA 12% higher than in Q1 and a maintenance of a stringent financial discipline in terms of capex and the control of some items like delinquency and accounts payable. It's worth mentioning that in the last 12 months, the company posted positive free cash flow of around $4 billion, reinforcing its liquidity position. The cash conversion cycle went from 83 days in March 2020 to 95 days in June due to lower net sales in the period. It's worth highlighting that part of the working capital increase was influenced by the exchange variation in the period caused by converting the working capital of the North America BDs into Brazilian BRLs. Now, moving to slide three, I would like to point out to talk about our debt position. Also, I would like to point out that we entered the second quarter of 2020 with a stable net debt of around 14 billion BRLs. I also take this opportunity to mention that 82% of the debt is long-term with an average tenor of 7.2 years and with an average cost of 4.7%, which is a very balanced and distributed schedule for the next coming years. Currently, we have 18 billion BRLs in dollar-denominated debt, representing 85.5% of our total debt. We understand that. that as a large portion of our EBITDA is generated in U.S. dollars and having a significant portion of our assets and operations located in North America due to our geographic diversification, we have a natural hedge to support this debt position, coupled with the fact that it's a long-term debt with maturities scheduled along this period with no accrual of payments in any specific year. The net debt over EBITDA ratio went from 2.55 times in Q1-20 to 2.78 times in Q2-20 due to lower EBITDA in the last 12 months, and mainly due to the exchange variation in the period attributed to the dollar-denominated debt that was converted into Brazilian BRLs. The company remains focused on reducing leverage in reaching the KPIs defined by the board, which is between one to 1.5 times in the long term. Now moving to slide four. One of the most frequently asked questions we get from the market, especially on the onset of the COVID-19 pandemic, refers to the company's financial liquidity. Therefore, I take this opportunity to present our credit line position of 4.4 billion BRLs, of which by June 30th, the cash-in-cash equivalent was 2.4 billion, which means, I mean, together with our cash flow, it accounts for a total liquidity of 9 billion BRLs, as seen on the previous slide. It is worth mentioning that our credit line is committed and structured available at any time and structured at eight very sound international banks with maturities in October 2024 and available for immediate withdrawal in most of our operations and geographies. It's also important to highlight that since 2015, the company has not carried any financial covenants or MAC clauses. This allows us to be more comfortable and have enough time to adjust our operations and capex to our long-term commitment of maintaining debt aligned to the financial policy of the company. To finalize the liquidity topic, we would like to draw your attention to the low delinquency of our customers, which has been capped at historical levels despite the COVID-19 pandemic period. This is attributed to our policy of being proactive and close to our customer base. On slide five, we'll elaborate on the main factors that impacted consolidated EBITDA that went from 1.2 billion BRLs in Q2 20 to 1.3 billion in Q2 20. This increase was mainly attributed to higher shipments in the Brazil BD. Moreover, adjusted EBITDA contemplates the elimination of non-recurring effects of fixed cost of the non-operating mills in the quarter, mainly due to the impact of COVID-19 in April, net of credit provision recoveries in the period. We emphasize that in the EBITDA of the operations, these non-recurring effects were purged and in keeping with what has been done in the last few quarters. Also, another highlight is the EBITDA margin of 15.1%, notably 18.6% margin in Brazil and 10.5% in North America. Together, they account for over 80% of the consolidated EBITDA of the company in the second Q. In Brazil, when compared to Q1-20, EBITDA was higher due to increased shipments, including export opportunities and also a favorable exchange variation in the period. I take this opportunity to highlight the 10% increase in total shipments of long steels, mainly attributed to the resilience of the civil construction industry. In North America, EBITDA and EBITDA margin in Q2 20 were flat when compared to Q1 of this year, despite lower shipments in the period. that was offset by efforts to reduce costs of the operations, coupled with more favorable metallic spreads that went from $411 per short term in Q1 to $415 per short term in Q2. In South America, lower shipments, mainly due to the state of emergency in Peru, that led to a decline in EBITDA. To conclude, In the special steel business division, the shutdown of the automotive sector resulted in utilization rates below 30%, impacting the main operating results. Still, the cost reduction efforts contributed to promote a relative stability in the EBITDA margin when compared to the second quarter of 2019. I would like to thank you for your attention, and now I'll give the floor to Gustavo, who will comment on the market outlook. Thank you, Scarduelli. So please let's move to the next slide so we can talk about how Gerdau has operated during this pandemic. The second quarter and particularly the month of April was a very challenging period due to a landscape of uncertainties and volatility brought about by COVID-19. As we saw from Scarduelli's report on Gerdau's performance in the period, I would say that we benefited from our business model that focuses on a strong proximity with our customers, flexibility of production routes, market diversification, and also an agile culture for decision-making, and all of that achieved through a culture of transformation started a few years back. Today, we are a company that seeks to add even more value to our customers. We are lighter and less hierarchical, which allowed us to react faster, I would say, and even more efficiently to whenever we saw signs of recovery in the markets that we operate along the second quarter. Now, going to the next slide, slide seven. Now, I would like to talk about the markets served by Gerdau and the outlook for the next few months. I would start with Brazil. In Brazil, this agility in decision-making led to an efficient restart of the industrial activity in the country throughout the quarter and also led to the resumption of the blast furnace too in Ouro Branco in Minas Gerais, allowing us to serve the demand of the different markets we operate in addition to capturing spot expert opportunities because of the favorable exchange rate effects and also due to a better global scenario of product supply. As we have seen, the pandemic hit Brazilian regions in different ways and moments. And our diversified geographic presence, as well as our flexibility in raw material routes, including feral scrap, coal, and bioreducer, allowed us to quickly respond to the needs of the market, which in turn performed better than initially anticipated. According to data from Instituto Aço Brasil, steel consumption in the country grew 30% in June when compared to May, when it grew almost 20% vis-à-vis the previous month of April. The construction industry remained resilient during the period, And due to that, 95% of all construction works remain active in the last three months, according to data from the Brazilian Association of Real Estate Developers. The rebound of the retail industry was also surprisingly good, boosted by purchases of construction materials from self-builders benefited from the emergency support measures provided by the federal government in an effort to assist the population. Looking ahead, we remain confident that the demand for longs in Brazil will be resumed, given the continuity of the construction works, the increase in retail purchases, and the resumption of the infrastructure projects. On the other hand, the industrial sector was more adversely impacted this quarter. But we are already seeing a gradual rebound of the activities in the different areas and sectors we operate. One of the highlights is the good performance of the wind industry and agribusiness. Both sectors have posted high levels of activity in the period. One positive example is an industry survey conducted by Fundação Getúlio Vargas that shows an increase of almost 13 points of the Industry Confidence Index, ICI, according to preliminary July figures when compared to figures from the end of June, reaching 90.1 points. If this result is confirmed, the index will have recovered 74% of the losses incurred in March and April. Now, let's talk about our special steel operation. In Brazil, all automakers resumed their activities between May and June, but it's still at much lower levels. causing us to take measures to reduce production. Sales and demand recovery is slow and gradual. And Favia, the National Association of Manufacturers of Automotive Vehicles had a review its projections for this year, estimating a 45% drop in vehicle production when compared to 2019. For the next coming months, we anticipate that the wind and the agricultural machinery industries will be even more resilient, and we also see growth opportunities in the domestic production of auto parts, driven by the new behavior seen in the international market. In the United States, the demand for special stills was also affected by the shutdown of all automakers and also the low level of activity in the oil and gas industry. The North American automotive industry is already showing signs of a gradual recovery with almost 2% increase in sales of live vehicles in June when compared to May. Furthermore, We move forward with our initiatives to optimize costs and increase productivity in the special steels operations in the U.S. with the shutdown of the Jackson unit in Michigan. On the other hand, and now looking at our lungs operation in North America, Shipments of this BD suffered a slight decline early in the second quarter, especially in April, but returned to good levels in the following months, driven by the positive performance of the construction industry, which was active in the period. Even in June, the order backlog in the US went back to pre-crisis levels. which was seen in March. As for metallic spread, it posted a slight recovery in the quarter, above $415 per short ton. And this amount should remain stable throughout the following months. Furthermore, I would like to mention our efforts to reduce fixed and variable costs like our decision to shut down the sample unit in Minnesota last June. The market supply will remain the same, even with the shutdown of that meal, as our customers will be served by our other plants located in the United States. As part of our sustainability journey, we also announced an important partnership with 174 Power Global to develop a solar plant in northern Texas that will generate clean and renewable energy to our lotion mill. In the US, in the short term, we believe that both civil construction and the infrastructure sectors will remain resilient, while the industrial and energy sectors will react slowly. Also, it is expected the major public infrastructure investments amounting to $1.5 trillion will be in part released, thus boosting the recovery of the U.S. economy and the consumption of steel. And we remain vigilant in regards to unemployment levels in the country. And obviously, we are very attentive to the development of the presidential elections next November. And in South America, I would like to highlight the return of the industrial and construction industries in Argentina and Uruguay, where we could resume our industrial activities in mid-April. And in Peru, we resumed production at the end of May after almost two months of limited industrial activities and suspended deliveries to our customers. Lastly, on this slide, I emphasize that this quarter we invested 271 million BRLs in PP&E, planned property and equipment. Cap expanding for the three-year period between 2019 and 2021 remains at 6 billion BRLs with an investment estimate of 1.6 billion BRLs for 2020. And as I mentioned before, in Q1, we reviewed our investment plan and adopted a more conservative position to approve projects due to the uncertainties and the volatility of the market. Now moving to our next slide, slide eight. I would like to highlight the creation of Gerdau Next, our new business arm that was recently announced. The arrival of Giuliano Prado to lead this new VP position will certainly allow us to expand and accelerate the new business as created by Gerdau in the last few years, linked to the steel chain and its related products, reinforcing our view towards long-term growth. Moreover, as part of our ESG strategy, in June we launched the integrated report related to the year of 2019. For the first time, the report contemplates the company's materiality matrix and complies with the international reporting standards of the Global Reporting Initiative. This is another important move towards our commitments to transparency and sustainable development. Finally, I reiterate that we have introduced a series of measures to mitigate the risk of spread of COVID-19 in our facilities to ensure the health and safety of our employees all values that are non-negotiable to us. This active care that follows all protocols from healthcare authorities has resulted in low levels of contamination in our units, promoting an even safer workplace. In addition, with most of our employees working from home for nearly five months, We managed to keep a high level of productivity and be quick at decision making. All that very much due to our enhanced culture that focuses on simplicity and independency. We continue to invest and to operate collaborative in the communities where we are located, donating equipment and assisting the local healthcare structure. thus leaving a legacy to help society go through this difficult period in the best way possible. And to conclude my presentation, I would then like to express my deepest thanks to the Virdal team, to all of our employees and service providers, our partners for their outstanding work, and efforts and dedication this last quarter in particular. Without you, we wouldn't be able to go through this challenging quarter, delivering such solid results, and especially preserving the lives of people. Well, with that, I conclude my part of the presentation. And now, as Cardoelli and I will be available to answer your questions. Ladies and gentlemen, we will now initiate the Q&A session. As a reminder, participants are limited to two questions. For questions, please press star one. To remove yourself from the list, please press star two. When asking a question, please do not leave your phone on the speakerphone to improve the quality of this. conference call. Our first question comes from Mr. Daniel Sasson from Itaú BBA. Good afternoon. Thank you, Gustavo and Harley, for your presentation and congratulations for the results. And thank you for the opportunity of taking my question. Gustavo, during our last call, you said that the May order book was only 25% below normal levels. Can you please try a similar analysis and elaborate a little bit on your order book and how is the June order book behavior vis-a-vis the first quarter and whether you believe that you may have more stable numbers to the end of the year or maybe increase the order book. And my second question maybe to Harley. Harley, can you help us reconciliate the members for your fixed cost. I'll shut down operations for each operation. This can help us figure out what could happen from now on after the third quarter because I imagine that the bulk of this impact may not be repeated because I know that the you interrupted the blast furnace stew in Ouro Branco. So that's my question. Thank you. Thank you for your question. It's been some time since we last talked, and I hope you're all well and healthy. I'm located in a different geography than Scarduelli, so I will start answering your question, and then Scarduelli will answer the question about the reconciliation. This is a very good opportunity for us to give you more details and to give some color to how we see the markets and the segments we operate throughout the second quarter. Maybe this is an opportunity to tell you what we see, what is the outlook. Danielle, back on May 6th, that's when we had our last Some people were surprised when I said that maybe the worst period is over. In fact, back then, we already saw some clear signs that the recovery was already taking place in a more consistent way. If you recall what I said, the worst is behind us. It means that maybe I think we are very optimistic with the second half of the year. But in general terms, when you look at the main segments where we operate, particularly in Brazil, Danielle, I will start with the super construction sector, particularly if we refer to residential and commercial construction, this segment. is very intense with a lot of activity. There were some highlights in the second quarter, and we noticed that when the sector resumed their sales, in fact, sales exceeded expectations of the sector. And throughout the quarter, we also saw some construction companies that They believed in the pickup of the demand, and that's why they are accelerating their work and expediting their steel orders. This segment paid an important contribution to our steel's operation, especially, you know, on concrete, and the sales of steel was very important because of rebar sales. profiles, et cetera, in the second half of the year. We saw 10% more steel for concrete in the second quarter of this year when compared to the same period of 2019. And when we compare the second quarter of this year to the same period of this year, there was an increase of 20%. This shows that this sector paid an important contribution to our shipments. Now, going to the second segment, that is equally important, which is the infrastructure sector that was stagnated for some time, we also notice a slight recovery. We, I would like to mention some projects that were resumed, you know, the yellow line, the green line of the subway, the subway in Fortaleza, the Beltway in Sao Paulo. So there was a slight recovery in this industry. And there were also other important advances in the energy sector, wind farming, and every business. They all posted a strong demand. And the third segment out of the four, which is the retail segment, was another major highlight in the second quarter. Because the retail construction business launched, they launched a lot of products. Our deliveries in this segment in June alone were the best one ever since March of last year. Because of all of the government incentives, we had a very good performance. We also noticed an increase in self-construction. People were home during the quarantine and decided to make renovations. We had record sales of nails and wire for the agri-industry. We had an excessive sales to our digital channels in June, and this just reinstates our success in the digital area. And I once told you that you can also sell still on the web. The Internet is playing an important role in our digital company, posted very good performance, reaching about 80,000 construction stores with more than 600 participants. And now, Daniel, jumping to your last question, the industry is also another segment that showed signs of recovery, maybe not as robust, but also a good recovery. The agricultural side was more robust because of agribusiness. The yellow line, I mean, Brazilian companies are taking advantage of of the current export advantages, and so they are exporting more. And I would also like to mention, you know, white line, you know, springs for mattresses. Therefore, we were able to take advantage of all of these opportunities. I do not want to refer to the numbers from June. But June and July were strong months. And June was not a single month, but we are already on August 5, and I'm sure we will have some very good developments this month. I think it's important to give you a general overview of our businesses so that you know where these results are coming from and what we expect looking forward. So now I'll give the floor to to talk about reconciliation. Thank you. Thank you, Gustavo, that was very clear. Good afternoon, Daniel. In terms of reconciliation and the fixed cost of all of the different shutdowns, out of the 119 million that we announced, 75 million refer to business operations in Brazil. 28 million BRLs relate to special steels operations, both in Brazil and in the U.S., 28 million for both. And South America, 26 million rails. So 75 Brazil, 28 special steels. And still along the same lines, we want to keep consistency so that you can see some not recurring items in our results. That's why we open up the figures. And you could see that we had positive advances in credits and provisions. And there were also some other negative aspects, like losses in terms of fixed costs of the operations that were shut down. Okay, thank you. Thank you, Ms. Cardoelli. Our next question comes from Tiago Ojea from Goldman Sachs. Good afternoon, everyone. Thank you for taking my question. My first question, I think it's addressed to Ms. Cardoelli, refers to TAPEX. CapEx was reviewed as expected because of the pandemic. But could you tell us what you anticipate for CapEx, not only for this year, but for next year as well? And what will be your priorities in terms of expanding CapEx? And where do you see the market having further opportunities? And my second question may be addressed to Rene, it's more like a long-term view. We've seen a major change in the last few years. Gerdau is one of the major players in this industry. Now, we're already seeing some behavioral changes on the part of the consumers, which are using online shopping more frequently. Can you tell me something more about this Gear Down Next initiative? Do you think that this will encourage further collaboration from the stimuli industry? What are your main targets? The board, you know, looking a little bit further ahead? Hi, Tiago. Well, I will refer to your first question about CapEx, right? Good afternoon, Tiago. In terms of CapEx, we still focus on the plan that was reviewed earlier this year. So our CapEx for the year should be $1.6 billion. We spent $271 million in this quarter, so we have about $740 million in the year. So the idea is In fact, we reached $1.6 billion for the total year of 2020. After that, Tiago, we usually wait until the end of the year to review our biannual plan or our multi-annual plan like we do every year. And so we will have to wait, particularly considering the volatility of the market this year. So we were very cautious when reviewing. we review our position for 2020, and we will revisit it again at the end of the year. Scott O'Reilly, if you could tell us about what is the main project in the short and mid-term of the company, if there is any priority. We have already announced, Tiago, that we will give continuity to our refurbishing project of Ouro Branco. I think this is one of the major projects that we have for the near future. As a reminder, you may recall that we had plans, you know, or things that we did in the past, and there are things to be done until 2021. It's part of a schedule, but I would say that this is one of our top priorities. It is the Ouro Branco Mule. Tiago, talking about the future, next January the company will celebrate its 120th anniversary. When a company has 120 years of history, I think we have to be even more humble and reflect more because when we look abroad, a lot of companies that are more than 100 years old, sometimes they do not keep pace with the current momentum. And we have to work hard not to be left behind. What is causing us to accelerate our transformation is the fact that all the studies show that there is no other material with the potential of stills that could replace steel in the long run. So it will all depend on how we will serve our customers. And this will change, and it has been changing significantly. Who would say that we would be able to sell steel through digital channels? And this is a reality that is here to stay. So certainly in the sectors where We have expertise. Some others will come and we'll try to take advantage of that. But we want to take the leadership and rip the opportunities before everybody else. There is still some investment in civil construction that is wasted. I mean, we can – build things very fast in brazil we build up a hospital in only 40 days using modular construction metallic construction we used to see the constructions in china and they could do amazing things but now we can do the same things in brazil so opportunities like that can be found everywhere we started looking for opportunities in the past through operations as you know in brazil I think that we had the opportunity to talk to you about things that we were doing, like logistics, companies, and other things. But things gained such proportion that we couldn't do everything at the same time and accelerate and generate new businesses. That's why we decided to create Girdow next. And I am pretty sure that This new arm of the company will be very successful, and we will be able to deliver good results with the good businesses that were created in the past. We are very optimistic because we will be able to generate good value through Griddle Next. We believe that in 10 years' time, Griddle Next will be able to have sales of 10 billion BRLs. And at the same time, there is another topic that is here to stay and that will certainly occupy most of our conversation, and this is ESG. We are creating everything that is necessary to become a very young 120-year-old company and continue to generate value to our customers to continue our journey for another 100 years. Thank you. I only have two very quick follow-ups. Well, the sound is not very clear. Next hopes to achieve 10 billion BRLs in sales in 10 years. In this context of change, do you believe that the steel milling industry will be further consolidated worldwide? Yes. As we announced before, we hope that 20% of Gurdal's revenue in 10 years' time will be able to generate new businesses with annual revenues of $70 billion. So that figure comes from that curve that I mentioned before. Now, Tiago, I particularly see a period of further consolidation of the steel industry in the world. We see this happening in China despite the crisis. And I take this opportunity to reinstate changes that we made to our strategy in the past. What matters to us is profitability now. We are very attentive to profitability. and we are constantly seeking for further opportunities to add value to our customers by offering more services, less commodities, and this is an important path forward. And we also look at niche market opportunities, and a practical example is the Girdow Summit. This involves our GV with the Japanese, and we continue to grow. This is a segment that continues to grow in Brazil, and I'm referring to wind farming. Most of the steel for that industry was imported. the steel used in the wind generators, but now we can produce that steel locally in Brazil. That was a nature opportunity, and we will certainly look for other opportunities of that type in Brazil. Fine, and thank you, Vernet and Scarduelli, and congratulations for your results. I know that this was a very challenging quarter. Our next question. comes from from Credit Suisse. Good afternoon, everyone, and thank you for this opportunity. My first question is about the margin for Brazil, and this quarter was almost 19%. When we look towards the third quarter, you could benefit from stronger volumes and better prices, and now it's in July. You see the price has crept. It has been increasing recently. I just want to understand what do you think should prevail and whether we could see or not any margin expansion towards the second quarter. And about Resolution 232, if we could shed some light about the benefits that you attribute, you know, given the review of tariffs or even the removal of the tariffs, this would be very helpful. Hi, Kayum. When we talk about margin in Brazil, it's important to consider some elements throughout the second quarter. And the first is I will talk about products, then scrap, and then exports, and then export premium. As I was saying, there was a rebound of certain segments, and we were able to deliver nature products that have a higher margin when compared to the mixed that we delivered before. So the mix is better now. And about scrap. Scrap in Brazil, just to help you understand what happened, because this is an important topic for us, scrap in Brazil in the first quarter of this year had prices very similar to prices at the end of 2019, but already showing signs of increase. So in the first quarter, it already reflected increases of the international scrap prices. During the crisis, we saw also a rebound in the domestic market. In April, there was a total collapse of the market, so we were able to navigate through an opportunity in April. We were able to buy scrap at very competitive prices. We expanded our spread because of that. And now, with the recovery experience in the last few months, we already saw that scrap prices resumed to the levels of the first quarter. There was a very significant contribution of metallic prices in our results. Also, I would like to add another element, which is exports. In 2018, we had strong exports and then the international prices were down. But now, also due to the transformation that the company went through and our agility in making decisions and considering the international market landscape, we were very quick to identify good export opportunities. We were able to close some very good expert deals when we saw that they could turn into businesses with positive margins. We made a decision to resume our blast furnace, too. We were one of the first companies to resume production, not only at our mini mills, but to resume production of the blast furnaces that were shut down. We have expert businesses going into December with margins. that are interesting when you look at the average margins of the market. And finally, I should say that we navigated with negative expert prices. Also, in terms of our hot roll strips, it was 20% negative, but now with increased prices, our objective is to lead our margins to where they should be. And even with all of that, at the end of this price round, our export price should be close to zero. Traditionally, that export premium fluctuates around 10% positive. All of these elements explain a little bit of what happened in terms of our margins in Brazil in the second quarter. But But also, I know I can talk about Resolution 232 in the U.S. The 232 resolution impacts the U.S. operation, but not the Brazilian operation, because we do not export from Brazil into the U.S. So the 232 impacted our operations in the U.S., but I would like to remind you that after our divestment in rebars, we are less susceptible to to the impacts coming from exports. So at this time, I do not see the elimination of 232, but I must say that we are much better prepared today to operate in the U.S. market without the benefits that Section 232 promoted in the market. So that These are my answers to your two questions. Thank you, that's very clear. Thank you, Werneck. Our next question from Tiago Losiego from Bradesco BBI. Good afternoon. Thank you, Werneck. I have two questions. The first is about exports. I just want to understand What is the level expected of exports looking forward? Should we continue to expect a sequential recovery? And where are you exporting? Where do you see better export opportunities? And the second question is whether you could comment on SILAD, if you could tell us a little bit about the outlook, numbers, and synergies, et cetera. Hi, Tiago. So let's split the questions, and I'll give Scaruella the opportunity to answer part of them, too. We are very much up to speed in terms of the topic about Silat. We can see increased exports this quarter vis-a-vis the first quarter. We already have a portfolio for the next few months. We have a good outlook for September and October, and we are already negotiating a portfolio for November and December. So there will be an increase in exports. I believe that the major change that we saw in the market is that after 11 years, China became a net steel importer. Last time they imported any steel was 2009. So the fact that China is exporting steel gives us other opportunities because we were able to identify opportunities with good margins, maybe not as good as the ones we had in the past, but it can certainly contribute to give us a positive average yield. margin in Brazil. And the markets are the traditional ones, our affiliated companies in Latin America, and we also identify other opportunities in the Middle East, in Asia. Therefore, I believe that our expert portfolio for the second half is well underway with very good opportunities. In the next 30 to 40 days, our experts portfolio will be, you know, fully concluded until the end of the year. So does it make sense for you to go back to an export, you know, annual regime as we had last year when you compare this quarter to the same period of last year? It was still lower. I just want to have a better idea of the level. Do you think that now the levels are better than it was in the past or not? Tiago, in terms of comparison, I think we can resume exports in the second half at the same levels we had earlier last year. I think that's a good comparison parameter. Can you talk about Silet? Good afternoon, Tim. In terms of Silet, the latest news is that we received Cadiz approval in June and early July. We are still pending a last resort to get the final authorization and approval. This final approval will come probably late August and early September, but this certainly depends on CADA's internal schedule. It's just a matter of time, and I believe that in the next two months we will have the final approval and the company will then be part of our business. It makes a lot of sense, you know, because strategically speaking, it's a region where we are already present and there are lots of synergies with the company and the region. Therefore, it's important that we take advantage of the growth that this will give us in Brazil. Do you think you can talk a little bit about numbers or you would like to leave that for the next earnings release call? I think we should better wait for the final approval because it has a lot to do with logistics, et cetera. But we would rather wait before we give you any solid figures. Okay. Thank you. Thank you, Scarduelli and Bruneck. Thank you, Tiago. Our next question is from Rodolfo Angeli from JP Morgan. Good afternoon. I have two questions. First, in addition to being very surprised with the market recovery, We were also surprised with your performance vis-a-vis costs and expenses. Many of your businesses posted high margins. You already talked about some of the reasons why, you know, you were so successful, but maybe you could tell us a little bit about SG&A and costs, what – is here to stay and what will be compensated further on. And then my second question is about the tax reform, whether you have any study or any view about the impact that this could have to Metallurgica Gerdau. We'll talk a little bit about cost. in a more qualitative way, and then Cardoelli can add any figures related to costs and expenses. And I think you can also talk about our impact analysis, both for Gerdau-Essia and Gerdau-Metallurgica in relation to the tax reform. Rodolfo, in the last few years, I mean, our company is very lean and very well prepared to navigate despite the scenarios. And the more we reduce expenses and the more we look for more competitive costs, the company can move even faster. This is quite interesting. This quarter, we saw that this agility that we brought into the company has been crucial for us to capture customers. Other opportunities, sometimes we talk about transformation, not only of SG&A or fixed or variable costs, but we also refer to a cultural transformation. These are the times that we can put all that to a test, and we realize that this speech to market and the fact that we are making some appropriate decisions is something that has been very present in our day-to-day operation. We draw up a very robust plan to reduce expenses, fixed and variable costs during the pandemic period. Some of these costs and expenses will not continue with time, like the decision we made to reduce working hours, and the reduction of the paycheck of our employees. I mean, things will eventually go back to normal, but we were able to identify opportunities to cut more structural expenses where we thought there was no more opportunities. We found additional opportunities. Even with declining revenues, we were able to reduce 3.5% of our net revenue, we can always look for better results. And there were also some other initiatives that they will certainly help us. Our special skills operation in North America, we shut down our Jackson Meals in terms of our lawns operation. We shut down the Minnesota Meals. So these are all structural costs that are being reduced. It's a combination of those things that will help us have a more competitive and lean company. Scarduelli, if you want to add to what I said or add more figures and also answer the question about the tax reform, please be my guest. Okay, good afternoon, Hodofu. There is another minor component related to cost our SG&A in the quarter when compared to the first quarter. went from 360 to 306 as a percentage of our sales net revenue, even from 4% to 5%. That means that half percent of the improvement of our EBITDA margin from the first to second quarter was what Gustavo said. We were very quick to move and deal with our cost structure, and this produced a very significant impact. In terms of the tax reform, there are two important points. First of all, I believe that this proposal deals with goods and services, and I believe the tax reform is moving in the right direction. I mean, a better legal security and other things We also know that it's pending Congress approval, but there has been many suggestions for improvement that we have to monitor that closely. We believe that, in fact, it's moving in the right direction. There is another specific aspect of your question related to the impact of a decree law about the accrual And this refers to the gross revenue of the company. I think the main objective is to participate in holdings. We think that, in a way, interest on equity comes as a revenue that is included in the core business of Metallurgica, of the ceiling mill. And this remains over recurring revenues of interest on equity. But again, this still has to be further improved. I mean, it's still very soon to tell what will happen, but this is just our first reading of the situation. Excellent. Thank you very much. Our next question is from Leonardo Correa from BTG Pactual. Good afternoon. Good afternoon, Vernacki and Harley. I had some problems with the connection, so I do apologize if I repeat myself. I know that this call has extended over an hour. Therefore, I'll try to be very brief. First of all, in terms of demand in Brazil in 2020, there are still some differences in numbers between, you know, still and longs. And when we look at the data for long stills, there has been an increase in June. And probably the same thing will happen, I mean, happen in July and will happen in August. I just want to make sure that it makes sense for Goodell to think about some sort of stability, or maybe an increase in shipments in the domestic market for long stills, and whether it would make sense for us to work with that scenario, or you would rather be more conservative. The second question, I mean, Bernadette, I know you do not comment on pricing, and we are aware of that, but as it is a public issue, widely Publicized. Well, we talked about long stills, I mean, between 7% to 10% increase, and there were also talks about another increase in September. Is it fair to say that there will be an increase in September, and how do you see that zero parity? Does that contemplate the increase in July and in September, or only the July increase? I just want to have an idea. And if you can also tell me, give me an idea about capacity increase. Well, it's a pleasure to talk to you again. It's been quite some time since our last conversation. Looking at the IDR numbers, They give an average of the entire industry, including different segments. Obviously, it depends on the situation. There are companies that operate in different segments, so their numbers maybe could be up or down. The numbers are just drawing some comparisons when we look at your down numbers and the numbers from the IBDR. If we look at the first three months of the first six months of 2019 and the first six months of 2020, the Institute informs a drop of 5%, and our drop was lower than that. When you look at flats, the IBR number in the first half of 2019 when compared to this year, they informed a drop of 14%, and in our case it was zero. When we look at flats, you know, was less in the automobile industry, automobile industry, and more in the construction. So their data collection covers the average of the industry. But then you have to look at the specific segments, and certainly companies have different performances, as it was our case in the second quarter of this year. In terms of pricing, even though we are very cautious when it comes to talking about commercial details. As announced, we had our first price adjustment between 8% to 10%. This has been in the market for some time, and a great part of these increases have been captured in the June results. And in longs, the second increase of 8% will happen in August, not in September. This increase has been announced, and it's being negotiated with our customers now in August. In September, there will be an increase in flats. So this is for September, about 11%. When we talk about expert premium, if all of these increases are materialized, the expert premium will get down to zero. And then maybe the numbers will go to the positive side if you compare the expert averages. That's fine. It's very clear. Thank you, Lil. Thank you. Our next question is in English from Mr. Carlos de Alba from Morgan Stanley.

Thank you very much. Good afternoon, everyone. So my question is the company posted a very strong quarter definitely from an EBITDA perspective. The only thing that I was a little bit – the numbers could have been a little bit better probably was working capital. So I wonder if you can comment how you see the evolution of these in the coming quarters Typically, the company tends to have a much better or much reduced working capital levels in the second half of the year than in the first half of the year. Do you still expect to see the same developments in 2020? And then maybe a clarification on what happened in the first half of the year is the rate of spread increased quarter-on-quarter from 411 to 415, but the gross profit declined about 22% quarter-on-quarter. So I wonder if you can comment more specifically maybe about some of the other expenses or costs that could have affected the North American business unit gross profit in the quarter. Thank you.

The first part of Carla's question refers to our free cash flow and the impact of working capital because we posted an increase in working capital this half year. I think the second question is about the U.S. cost structure, whether there was an improvement. So I will answer the first part of the question about working capital. In fact, in the second quarter, we used up more cash. And there was, I mean, this result reflected better shipments in our operations, especially in Brazil, in North America also, but not as much. And this has an impact in working capital, especially concerning accounts receivable. We had We consume working capital, and this was mainly in the second part of the second half. In terms of cycle days, there's a cycle. It captures working capital with the end of the quarter and the average of the last three months, meaning that there is an increase in the cash conversion cycle. From now until the end of the year, the trend is that we'll be able to revert the number of cycle days. At one point at the end of last year, we were close to 60 days and then 70 to 80. So the trend for us is to go back to 70 to 80 days. So our trend is to reduce working capital looking forward as we move towards the second half of the year. The connection was poor at a certain point, but I understood that his question refers to metallic spread in North America. In terms of North America, I can mention three variables. Volumes, purchasing price of scrap and pricing of products. There was a slight recovery of the metallic spread. On average, in the first quarter of 2010, it was $410 per short ton, and then at the end it was $415. We see some stability in the main variables, but at the same time, we are improving our cost competitiveness in the U.S. Two years ago, when we had margins, we did some very extensive work in terms of productivity because there was a gap of $25 per ton vis-a-vis our competitors. And we said that we will try to reduce that gap. And part of that would come through CAPEX. So part of that CAPEX is something that has now materialized. as of yet, because we are still making the investments. And the other part would come through, you know, performance improvements. We've managed to make some improvements, and we made other decisions, like the shutdown of the St. Paul Mill. It's something that also contributed to that. But our operating performance is now much more robust when compared to to six months ago in North America. We are making progress, and we are now focusing on closing that gap. It's just a matter of improving costs in our North America operation, and our efforts have been very consistent. Gustavo, I think an additional point that Carlos made has to do with the decline of gross profit due to lower shipments, it grew more, even with the metal spreads. And the answer to that is the reduction in fixed costs, because once volumes are down, there is a compression in our gross margin. So there is that aspect of the mix. But I think that that is the reason why. That explains why.

Thank you very much.

Our next question from Marcelo Audio from Cardinal Partners. Hello, Gustavo. I have the following question. What could be worse looking towards the third quarter? And I would like to mention two points. You said that you managed to take advantage of scrap prices that is now going back to normal levels, and you said that you wouldn't have that benefit from now on. And the second part of the question has to do with retail demand in the domestic market. My question is, what was the relevance of that segment, you know, considering total sales in the domestic market? Shouldn't we expect that as of the fourth quarter with the end of the emergency package, don't you think that we could see a slowdown in demand? And probably this takes me back to 2012 when we had another tax incentive for my How's My Life project because there was a spike in demand and then it came down again. Yeah, we understand what you're saying. This spike in demand is very much in tune with the current momentum. And most of the demand is catered to the domestic construction segment. I don't think that in the next few months, we will see the same behavior. But certainly, if Brazil does not implement more structural reforms, there should be even a reduction. in demand. We don't think that this will happen this year. If additional measures are not to be in place, we should see probably a decline in 2021. This is maybe one of the major risks we see. In terms of scrap, we will navigate a period of spread because of the inventories, but We are reducing costs. We are looking for further, you know, expert opportunities. We are reducing the costs of our meals. And I would say that we will be able to maintain a good competitiveness and we will be able to deliver good margins. And how much the retail segment contributed to the whole scenario in the first place? Could you repeat Marcel specifically speaking about sales to the retail market? How much of that accounted for your total sales? Did you see an increase of retail sales when compared to your historical average? In this retail segment, Steel sales accounted for 25%. This is a very high figure when you compare it to our historical averages. In terms of we were able to increase our penetration in the retail segment because of all of our measures that have been adopted in the last few months. Thank you. We now conclude the Q&A session. Now, I will turn the floor back to Mr. Gustavo Vernac for his final remarks. Once again, I would like to thank you all for joining us today. We're always very happy to talk to you. It's always a pleasure to clarify your issues and questions. And I take this opportunity to invite you to join us once again for our next earnings release presentation related to the results of the third quarter of 2020 that will take place on October 28th. Thank you very much. Take care because there is nothing more important than the life and health of all of the people. Thank you very much and have a good day. Your Dallas conference call is now concluded. Thank you very much for participating and have a very good afternoon.