Gerdau S.A.

Good afternoon. Good afternoon, everyone. Here is Rodrigo Maia, Investor Relations at Gerdau. Welcome to our conference call to discuss Gerdau's results for the second quarter of 2021. Here with us today are Mr. Gustavo Vernecchi, CEO of Gerdau, and Harleys Carduelli, CFO of Gerdau. They will both do the presentation for you today. All analysts and investors connected via the web can send their questions through the chat. Those that connected over the phone will also have the opportunity to ask questions at the end of the presentation. We would like to say that any information related to Goodell's business outlook, productions, and operating and financial targets are near complete. predictions and forecasts based on the management's beliefs that even though we believe that the company's comments are based on reasonable assumptions, there is no guarantee the future events may affect this evaluation. Now 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 our meeting to discuss Virdal's results related to the second quarter of 2021. I hope you're all well and in good health and also going through these hard times the best possible way. As Rodrigo said before, also joining us today is our CFO, Harleys Cardoelli. And for both of us, it's always a pleasure to talk to you about our quarterly performance and also clarify possible issues that may come up during this presentation. Scarduelli will start with the highlights of the results for the quarter. And next, he will talk about the performance of our operations. After that, I will share with you some information about our ESG agenda. and comment about the markets where we operate. At the end, we will both be available to answer your questions and give you more details about our results. Well, Scarduelli, now the floor is yours, and please continue with our presentation. Thank you, Gustavo, and good afternoon to you all. It's always a pleasure to be with you once more to discuss the results of the quarter, and I also hope that you are all safe and well. We will initiate the presentation with the financial results and the main factors that impacted the consolidated EBITDA of the company, which went from 4.3 billion BRLs in the first quarter of this year to 5.9 billion in the second quarter of 2021, a record EBITDA for Gerdau in a single quarter. All of our operations had an excellent performance in the second quarter, with a production capacity utilization of approximately 80%, which is the best level since 2018, attributed not only to the favorable moment of the steel industry, but also as a result of our diligent capital allocation in the last few years in all of our operations. These investments helped us to be more agile and efficient to capture all the profitability gains brought about by the current scenario. This quarter, we posted a record performance in our North America operation with 1.4 billion BRLs, over three times higher than last year's EBITDA, with a margin of 20%, something that only happened back in 2008. This result reflects the rebound of the industry and non-residential construction sectors, in addition to the gradual resumption of the activities that drive our industry as the vaccination campaign advances in the country. In the second quarter, the utilization of the steel capacity in North America operation reached more than 90% when compared to less than 75% in the same quarter of last year. The Brazil BD posted a very strong performance once again with an EBITDA of 3.6 billion BRLs in Q2 and an EBITDA margin of 40.7%, which is another all-time record for EBITDA in terms of a quarterly EBITDA. Brazil remains strong in the main consumer sectors. Therefore, we are allocating a large portion of shipments to the domestic market, and only 10% will be earmarked to the foreign market. As you may recall, a few years back, we had between 30% to 40% of all of our shipments in Brazil being exported, but that's not the case now because we are putting priority in the domestic market. In the second quarter, Sterilization capacity in the Brazil operation exceeded 80% when compared to about 60% in the same quarter of 2020. The South America business operation posted a performance similar to that of Brazil, with an EBITDA of 494 million BRLs and a margin of 38%. This operation has also benefited from the good performance coming from the civil construction industry, particularly technology. In countries like Peru, in Argentina, we face production restrictions in the period due to challenges posed by COVID-19 in the quarter. However, our production is back to normal levels in that country. In the second quarter, steel capacity utilization in South America was close to 80% when compared to approximately 40% in the same quarter of last year. And last but not least, our special steel operation that, due to the rebound of the automotive industry in Brazil and in the U.S., showed a very good performance in the second quarter of 2021, posting an EBITDA of 495 million barrels in the quarter and an EBITDA margin of 18.7%, close to 19% in the quarter. We are closely monitoring the situation with semiconductors supply. to the automotive industry in order to adjust our production. In this second quarter, steel utilization capacity of the special steels operation exceeded 70% when compared to less than 30% in the same quarter of the previous year. Now moving to slide number three, we will talk about free cash flow and working capital. As you can see on the left-hand side of the slide, we see our positive free cash flow at 1.2 billion barrels in the quarter. Starting with the historical EBITDA, as explained in the previous slide, it reached 5.9 billion barrels. Furthermore, this performance was also attributed to the way we managed our assets in the past few months, which reduced the exposure of our gross debt to foreign currency and, as a consequence, minimized the impacts from the exchange variation affects over the interest on the debt. In the last 12 months, cash flow was positive at $7 billion, reflecting our efforts and commitment to the adequate remuneration of the invested capital coupled with the company's commitment to its liquidity position. The cash conversion cycle went from 57 days in March of 2021 to 60 days in June 2021, mostly attributed to to accounts receivable and inventories, given the fact that global demand for steel remains at an all-time high. We estimate that the first half of this year was mostly impacted in terms of building up working capital. We now have a more balanced cash conversion cycle for our industry, which allows us to take advantage of the positive moment that we are experiencing now. Moreover, in the course of the second half of the year. Now, moving to our next slide, slide four, we will talk about our debt position. I would like to underline that at the end of June, our net debt was $10.2 billion, which is $600 million less than the net debt reported in March of the same year. This certainly was due to the impact from the exchange rate on the debt denominated in foreign currency, because there was a depreciation of The Brazilian real of approximately 12% vis-à-vis the U.S. dollar between March and June of this year. Currently, 74% or approximately 12 billion euros of our total debt amount is denominated in U.S. dollars. It's worth mentioning that in the last few quarters, we implemented a strategy to reduce the foreign exchange exposure of the debt and take advantage of the opportunities brought about by the current scenario of interest rates in Brazil. Therefore, we increase our exposure in Brazilian reals to about 26% of the total debt to protect ourselves from the high volatility of the dollar as seen lately. This level puts us closer to a natural hedge, giving that a substantial part of our EBITDA is generated in U.S. dollars in addition to the fact that a significant portion of our assets in operations are located in North America. I would also like to highlight that 99% of this debt is long-term with an average life of 7.7 years and nominal average cost of 5.4%. The debt amortization schedule is well distributed along the next coming years and more concentrated only after 2027. And finally, on slide 4, we show the results of the financial leverage measured by the EBITDA the EBITDA over net debt ratio of the last 12 months, which went from 0.96 times in Q1 to 0.65 times in the second quarter of this year as a consequence of the strong EBITDA generated in the second quarter of 2021. With this kind of leverage, we would like to point out that we exceeded the goals defined in our financial policy approved by the board of the company, which was to keep this ratio between one and one and a half times. meaning that we are at lower levels, which we believe to be adequate considering the cyclical situation that the company usually goes through. Now, on the next slide, I would like to show the evolution of the company's return on capital employed, which is something that we monitor very closely. Combined with the cost of debt, you know, in the last 12 months ending in June 2021, the company posted much higher returns than its cost of capital, 22.5% versus a cost of capital of around 9.5%. This is translated into value generation to our shareholders, and this is also translated in the appreciation of our shares traded in the stock market. And finally, to conclude, now we go to slide number six. We show the evolution of net income and dividend payout in the last few years, demonstrating the that a combination of better results and the significant reduction of our net debt had a very positive effect on the dividend yield, or rather, in the percentage of dividends and interest on equity paid over the closing share price at the beginning of each period. This dividend yield went from 0.7% in 2017 to more than 8% in the last 12 months. Yeah. until the end of June. The prepayment of annual dividends paid out this quarter is based on adjusted results. Therefore, it does not reflect a non-recurring effect of recognized gains related to the Supreme Court's ruling from May 13, 2021, which is the exclusion of ICMX taxes from the base of Peace Confines. That totaled 856 million BRLs. meaning 565 million BRLs, not up taxes. So in the prepayment, these amounts have not been included. So thank you very much for your attention, and I will turn the floor to Gustavo, who will comment on the market outlook. Very good. Thank you, Scarlet. Now let's move to the next slide, slide number seven. Here I would like to give you an update. on the most relevant topics involving Gerdau's ESG journey, and I will also talk about the highlights in progress in our agenda. The topic of sustainability is central to Gerdau's strategy, and we will try to talk more and more about this topic in our conference calls. Having said that, I would like to stress our commitment to the sustainable management of natural resources and all of our efforts to enable the production of renewable energy. Recently, we announced our plans to develop a photovoltaic power station in Brasilândia de Minas, in the state of Minas Gerais, in partnership with Shell Brazil. Named Aquari, the solar park will supply part of the clean energy supply to our production units in the state of Minas Gerais starting in 2024. This project is part of our strategy to pursue our energy self-sufficiency. Also, we want to find cleaner sources of energy to accelerate the decarbonization process of our mills. Moreover, this marks our participation in the production and management of solar parks, and fits within the new business strategy of Gurdal Next. I would also like to underscore that in this past year, our gas emission was half the global average of GHG for the steel industry. This performance reflects our commitment to search for solutions to the global challenges, such as climate change and the production matrix where the recycling of steel scrap is the main raw material and the use of charcoal from planted forests. The carbon intensity indicator is one among dozens of KPIs that we publish in our annual report, where we report on the social, environmental, and financial progress of our journey in 2020. Our progress in diversity and inclusion was also a highlight in this document. Back in 2018, we had 17% of women in leadership positions in our Brazil operation. Now, in 2021, we increased this percentage to 23% through several initiatives to promote gender equality in our operations, trying to give equal opportunities to everyone in the company. The goal is to reach 30% by 2025. There was also a significant increase in the number of blacks in leadership positions in the last years. In 2019, they were only 16%, and now 26%, meaning 570 black leaders, due to the participation of Black employees in all of our internal leadership programs, and also in the trainee and internship programs. Certainly, we still have a long way to go, mainly in terms of the top leadership positions, but we understand that inclusion is a journey, and step by step, we will arrive at a more inclusive and diverse environment. Most recently, we signed the Pact to Promote Racial Equality, which will serve as a guide for companies interested in promoting further equality and the adoption of affirmative actions and social investments to improve public education and foster the education of black professionals in the country. Encouraged by the cultural transformation we are experiencing, we continue to boost the ESG agenda into our business decisions in order to promote an even more sustainable company than it has been throughout its 120 years of history celebrated earlier this year. Well, let's move now to our next slide. And here I would like to talk about the markets where Gerdau operates. And also, I will talk about the highlights of the steel industry in the next coming months. I would like to start by highlighting shipments from our North America operation that should remain high in the third quarter, with a substantial amount of new orders. Currently, our order backlog in the U.S., is equivalent to approximately 100 days of purchases, mainly attributed to the recovery of the economy of the country and also the robust activity coming from all steel-consuming factors, particularly the construction industry. An important point is that the levels of consumer trust in the country continues to increase, reinforcing our optimistic view for the next coming months. The index from the Institute for Supply Management that measures the activity of the non-residential construction sector in the country reached 57.1 in June, the highest value in almost 10 years. The infrastructure investment package, estimated in $1.2 trillion, one of the priorities of the Biden administration, gives us another reason to be optimistic in relation to the North American market in the long run, assuming that this package will improve the future competitiveness of the U.S. industry in general, adding an additional demand for steel ranging from 2 to 5 million tons a year, depending on the final composition of the package and the time that it will take to hit the economy, which could vary greatly. anywhere between five to eight years. Also, I would like to say that we remain very well positioned to serve this growing demand for steel coming from these new infrastructure projects. It's worth mentioning as well that in this context, we are moving forward with our strategic plan designed for our long-sue operations in the U.S., focusing on a robust operating performance, value generation for our customers, and the expansion of the product portfolio that allows that operation in the second quarter to post margins above 20% for the first time since 2008. Today, our mills in North America are operating with over 90% of capacity utilization. We recently concluded the modernization and technological update of the profiles and structural skills rolling mill at the Pittsburgh unit in the state of Virginia that will certainly allow us to increase our production levels and serve the different needs of our customers in the next months. Now, I will talk about our special seals operation, starting with the U.S. In the U.S., the production of vehicles is not in tune with the sales volume due to lack of chips in the market. It is estimated that approximately 1.5 million units will not be produced in the country because of that. Globally, OEMs anticipate that they will fail to produce more than 4 million units due to lack of components. However, the outlook for the U.S. market remains positive, and projections point to a 45% increase in heavy vehicle production this year in an annual comparison, mostly attributed to the economic rebound. and the gradual improvement of the oil and gas sector as the so-called recounts increased by 75% in June when compared to last year. Also, the Monroe Mill in Michigan concluded the modernization and technological update, and that will allow us to improve costs and also to offer products with higher added value. In Brazil, despite the impact from the scarcity of chips in the automotive sector that prevented the industry from producing close to 230,000 vehicles between January and August of this year, the demand for special skills remains strong, both for light and heavy vehicles. That was driven by opportunities in the domestic market and the reallocation of shipments of our clients to the foreign market. Data from Amfavia indicates that the production of vehicles should grow 22% in 2021 year-on-year to 2,463 units, with the highlight pointing to a 42% growth in the case of trucks and buses. The landscape is also positive because of the continuous inventory replenishment of vehicles that still remains at very low levels of approximately 15 days, and the projections coming from agribusiness and construction segments that have a favorable effect on this sector, mainly in regards to heavy and semi-heavy vehicles like trucks. It's important to highlight that the market for heavy vehicles is less impacted by the lack of electronic components. For every chip added to a truck, another seven are included in the production of a light vehicle, just for the sake of an example. And as a result of this long-term optimistic view, I... I am glad to say that we resumed our activities in the melt shop of Mochilas Cruzes in the state of São Paulo earlier this month, just a few days ago, thus expanding our product offering to the market. Well, now I will refer to the long and fat steel market in Brazil, which in the second quarter just reinstated the good momentum of all steel-consuming sectors. anticipate a positive performance in the second half of the year. Our shipments of lawns and flats to the domestic market grew 46% between April and June in an annual comparison and 10% quarter on quarter. The construction industry remains very active. The number of construction sites with active projects was at 43% in the second quarter when compared to the previous quarter, and the landscape going forward remains very favorable. In 2021, real estate launches and sales should grow 14.2% and 7.5% respectively, according to studies from Tendacious Consulting Company. Retail sales remain very strong, boosted by the emergency aid measures from the federal government, and they should increase about 6% according to the same consulting company. On the other hand, investments in infrastructure continue to develop, and according to the Brazilian Association of Infrastructure and Basic Industries, should total 127 billion barrels this year, mostly influenced by public and private projects, like, for instance, the duplication of Highway BR-280 in Santa Catarina, the port of Itaqui in Marino, and the Brazil-Paraguay Bridge in the state of Paraná. I would also like to highlight the continuous recovery of the industrial sector in the second quarter, which was very strong, mainly driven by the agribusiness, highways, energy, durable goods, and machinery and equipment segments. This increment in the activity was not only solely attributed to the internal demand, but also by the reorganization of the global supply chains that gave our industrial customers the opportunity to expand their exporting activities. According to IBGE, the industrial GDP should grow 4.2% in 2021 with a spotlight on the agriculture, energy, and highway equipment sectors. Now, speaking about South America and starting with Argentina, we resume operations of our melt shop in early July after a period of restrictions in the supply of oxygen in the plant due to measures to fight the pandemic in the country. Service to the Argentinian market was not affected because the rolling operation of the unit was served by our plants in Brazil. The local civil construction activity in Argentina remains high, growing 6.5% monthly and 31% year-on-year, according to the latest monthly figures from the construction chamber of the country. And finally, in Peru, steel consumption remains at good levels, driven by the civil construction sector as a result of public investments and also the good performance of the retail sector. The construction industry grew 20.5% in May, year on year, according to the latest survey from the Central Bank of the country. Well, of course, we continue to follow the local presidential elections in the country. However, right now, we do not expect any major changes to our sector. Now let's move to slide 9, and here I would like to say that in the second quarter, we invested 566 million BRLs in VP&E, globally contributing to a total investment of 1 billion BRLs in the first half of the year. CapEx spending for 2021 is estimated in 3.5 billion BRLs. And I would like to now invite you to jump to slide 10 to connect to that CAPEX investment. And here I would like to highlight that this amount includes, as you can see from this slide, the early investments in modernization and expansion of long and flat steel capacity in the Ouro Branco Mill in Minas Gerais. I would also like to let you know that This investment covers increases in the annual production capacity of coiled hot roll strips of 250,000 tons and also structural profiles where we intend to increase the capacity to 500,000 tons aimed at meeting the growth of the Brazilian demand for both products. In the case of structural profiles, we reinforced our role of being the pioneers in the development of the metallic construction market in Brazil, which started back in the years 2000, expanding the mix of products available to our customers. Our focus remains in the full supply of the domestic market. And to that end, I would like to take this opportunity to talk to you about the growth of production in our silat plant in Ceará, and that plant that was recently renamed to be Gerdau Calcaia, continues as plant, playing an important role to serve the markets of the north and northeast of the country. Moreover, at the end of July, we resumed operations in one of our rolling lines of rebars, bars, and profiles at the Cozigua unit in Rio de Janeiro, after seven years of hibernation, with the purpose of serving the high demand from the construction, industrial, and distribution sectors. The plan to resume the activities of the Araucaria new in Paraná continues as planned, with the reinitiation of activities estimated to occur in the second half of the year, and that will certainly contribute to help us optimize the supply of our plants. product portfolio to our customers all over the country. So once again, I would like to thank you all for joining us today and to listen to our initial explanations. And as always, Cardoelli and myself will be available to answer any questions you may have. And also we'll be available to elaborate further on your points of interest. So Rodrigo, I turn the floor back to you to organize our Q&A session. Thank you very much for your time so far. So, Rodrigo, up to you. Thank you, Gustavo. Thank you, Scarduelli. And now we will initiate the Q&A session for questions coming over the phone. I would like to ask you to limit your questions to two questions for a participant. For questions, please press star 1. Our first question comes from Rodolfo Angeli from J.P. Morgan. Rodolfo, please proceed. Good afternoon. My two questions are, first, I would like to ask Scarduelli to elaborate a little bit more on the working capital of the period. the potential cash flow of the company. But we also know that when prices are escalating, it's just natural that this would impact your working capital. But I would just like to hear something more on the strategic side. Is there anything in the numbers that is part of a preparation to a better second half Gustavo just described? mentioned that we have a new melt shop at Cozigua and also in the plant in Paraná. I would just like to learn more about your working capital strategy. And my second question is to Gustavo. I would like you to comment on the business environment in Brazil in regards to prices, because we've been hearing that the price increases are have stopped. I just want to know whether this is true or whether we should expect a carryover towards the next half year. And also, if you have any concerns related to imported goods. Thank you, Rodolfo. Before I give the floor to Scarletti, who will talk about the working capital, and then I'll come back to talk about the market. In terms of working capital, certainly this involves a very strategic discussion And this is something we've been discussing for some time. Well, this is like, well, as we are going to an Olympics, you have to run a lot in that running track. So now what we see is we anticipate a very strong market in the second half. In our preparation in this past quarter, in order to serve, fully serve the market in the fourth quarter, third or fourth quarter, is very important. So now is not the time for us to deliver, you know, more free cash flow because this moment will come throughout the second half. Therefore, in our view, our preparation to serve this very strong market is strategic. But if you look at the month of July, the growth in construction sites and the Teton Bend, but quite significant, and it's growing again. Therefore, this decision to resume operations at Coziga, the rebar rolling mill where we put great tonnage to the market, we intend to deliver a very strong EBITDA in the third and fourth quarters. Now, I mean, as Cardoelli can give you some more light about that, but certainly we had a very strategic discussion in the past few months to get us prepared to serve this market. So now I'll give the floor to Scarletti, who can elaborate more on the subject. And then I'll come back and talk about the market, prices, and business environment. Fine. Good afternoon, Rodolfo. In fact, all of the points that Gustavo mentioned are very important points to help us run a more strategic evaluation of our working capital. And it's also important to mention that this first half in terms of free cash flow, I mean, this was the best free cash flow in a half year, in years, unlike other previous years where traditionally, if you look back eight years ago, Gerdau in the first quarter always had a negative free cash flow, meaning that this reconstruction of working capital, which is something that usually happens earlier in the year was so impacting that free cash flow became negative in the beginning of the year to then become positive. But this is not the case this year because we started in the first quarter already posting a positive free cash flow, and it remains positive in the second quarter. So, for the year, we are not concerned about our cash flow position because it remains strong. And the trend towards, you know, the end of the half year is that we will have an optimized working capital of and we will no longer have the need to build working capital. But now, referring to the strategic side, we see a very highly demanding market, and we are ready to serve the third and fourth quarter, which are expected to be very strong. We expect to see, you know, a significant growth in demand, and we see many good opportunities. The other point is that we are market leaders in many segments, Therefore, we are constantly pursuing our commitment to fully serve these markets, you know, providing excellent service levels. And to do that, we need an adequate working capital level. We must have all the necessary inventories to ensure full service to our customers. We gain market share during the pandemic period. And to maintain that market share, we have to maintain good service levels and an adequate ROE. reinforce also our inventories of some inputs, and I'm talking about coal, alloys, and refractories, and to do an offset of costs and risk mitigation that could occur in the second half of the year. I mean, in the second half of the year, we face issues related to energy that are not yet solved. Therefore, having a good inventory level puts us in a more comfortable position to serve our markets and our customers. And finally, to the points that Gustavo mentioned, and it's important that I mention it, is that we are also adjusting our production to face this stronger demand. So we are bringing back the rolling mill. We are resuming operations of the rolling mill at Cozigua. We are resuming operations at the mail shop in Araucaria, as we did with the one in Mujitas Cruzes. We have a new rolling new in the northeast that used to be the old Silak. It's now Gedal Kalkaya. Therefore, we need working capital to operate these new operations. So that's what I wanted to say about working capital and the free cash flow. Because once again, this first half of the year was very strong. and still now talking about dividends, I mean, it remains positive even though we pay 1.6 billion BRLs in dividend payout. Thank you, Scott. I would just like to add that we are industry leaders in many segments, so we do not even think about not supplying, fully supplying to the market. We see many good opportunities for exports. Therefore, we are getting prepared to meet the growing demand, and we see that there is still room for further demand growth in the country. Pacific construction, which is a very strong segment, and it's growing significantly in Brazil, we experience a very strong growth in terms of new construction sites. Therefore, it's important that we prepare ourselves. And in our case, you know, growing our inventories and the way we are managing our working capital was very much in keeping with the new demand coming from the market. You know, the retail segment, industry, civil construction, all of these segments remain very strong. Also, with all of the infrastructure projects, we anticipate a very strong demand in the coming years and months. We do not get into many details because of the competition and then we have to respect that. But we understand that the pricing levels in Brazil are moving towards stability. But that doesn't mean that we don't have to go after additional margins going forward. Part of our strategy is our working capital strategy for the second half involves a very strong cost management, you know, looking at the escalation of costs of some inputs. Carter Riley mentioned, you know, electric energy, but we also look at the price of metallurgical coal. And so in terms of thermoelectrical plants, I mean, on the one part of the world, they are suffering with the heat, whereas in the south we are suffering with the cold weather. And in regards to scrap, there was a slight decline in prices of about $20. But in Brazil, we will notice in the second half a reduction in scrap prices as well. Therefore, you know, I think that we are well prepared in terms of our costs because this will allow us to deliver consistent results in the quarters ahead. I just have one more final point. We have a very unique capacity to make some anticipated readings in terms of what the market holds. And an example of that is the market share gain we had in Brazil. I mean, at the when the pandemic gave in a little bit, we were able to succeed even more. I mean, that was a more elaborated answer to your question. But that gives you some more light in terms of how we see the company performing in the next coming quarters. Thank you very much. Thank you, Rodolfo. Our next question comes from Daniel Sasson from Banco Itaú. Daniel, please proceed. Thank you, Rodrigo, Gustavo, and Harley. My first question relates to the potential prepayment of extraordinary dividend payout, whether you anticipate the taxation of these dividend payouts due to the tax reform, or what would be your target? How do you see that potential tax reform in terms of capital allocation? My second question is about your cash cost. And you just talked about, Gustavo, about a possible expected drop in scrap prices in the second half. In the second quarter, your cost performance was slightly better vis-a-vis your peers, even though the scrap prices were not as high as iron ore prices. What should we expect in the second half? Is it possible to imagine that scrap prices will drop? I mean, could we still see some margin increase? Thank you. Cardoali, can you please start with the dividends, and then I will continue talking about scrap prices. Good afternoon, Daniel. In terms of dividends, we believe that our policy is adequate. So we will maintain the 30% of dividend payout. We know that there is a tax reform in the pipeline, but that is still in the motions. So it's hard to tell when it will be concluded. And considering the fact that we usually prepay our dividend payout, we have three dividend payout moments. But in a way, I would say that we are protected in terms of the bulk of the dividend payout. Therefore, for the moment, we will maintain our policy, and let's wait and see what comes out of that tax reform. I think we still have time. I would like also to emphasize that this year, because of the current results, and I usually say that I know that I may even be a bit repetitive, but whenever our EBITDA increases the way it is increasing between the EBITDA and net income, we have a portion of fixed expenses. So interest rates are stable and lower than expected. So when EBITDA goes up, you know, net income goes up as well. That's why we had this level of dividends. In this first half, we already paid out almost twice as much as what we paid last year. Therefore, we believe that the policy is adequate. And once again, any aspect related to the tax reform is something that we still have to wait and see what lays ahead. Danielle. Danielle. We will look for higher profitability, but we are in a very unique position in Brazil because we have a flexible production operation that will allow us to seek for additional flexibility in costs. There will still be volatility in scrap prices, not only abroad but also in Brazil, but we have this very unique capacity to navigate through markets this universe and seek for additional opportunities. We do not believe in a consistent reduction in demand globally, but export offerings are being reduced, both in China and Russia. And another relevant aspect when it comes to scrap is that people are constantly seeking for further reductions in GHG emissions. And A fast way to reduce GAG emissions in steel production is by replacing ore by scrap. Therefore, scrap will continue to experience a high demand globally. So with higher scrap demands, prices will be sustained. I would say that the name of the game to look for further profitability in the second half is in a good cost management. And we find ourselves in a very unique position because of our business models and the way we collect scrap in our flexible quotas. And this will certainly allow us to lead in terms of profitability and opportunities to reduce costs even further. Excellent. Thank you. Thank you, Daniel. Our next question. It's from Leonardo Correa from BTG Pactual. Thank you, Leonardo. How are you? Good afternoon. Hi, Leo. Good afternoon, Leo. My first question relates to Gerdau Metallurgica. Sometimes we are asked about your cash position, which has been stagnated for a few months. I don't know whether you have anything new to add. What is your priority? What is the number? This is the question that we are getting more frequently in these past weeks. My second point is also related to a question we've been getting related to a potential energy crisis or any possible risk of power rationing. I don't know what your Tao is doing to get prepared to face that energy scarcity or whether that involves any preparation to face a possible rationale of energy. Okay, so I'll start with I will start and then you start and then I'll talk about energy. In terms of our cash position, well, the cash is there, is invested in daily liquidity instruments with no risk. So we will continue to keep that investment. We do not have any specific destination for that cash. Well, and also, we do not anticipate any investments that deviate from the company's investment, which is the holding in Gerdau's controller. But for the moment, we will keep the cash as it is with liquidity. Leo, in terms of energy, in terms of the demand, we are not very exposed. We have our south generation, which is 80% of our generation. We have self-generation through our hydroelectric power plant in Dona Francisca in the south of the country. That's why this power plant will supply energy to our recently reopened units. And we did our homework because we increased our inventory in order to fully supply the market. Then I would say that we are very well prepared to face any possible energy risk. Now, in terms of costs, we are well protected. We have long-term contracts. And with our self-generation, the only thing that remains is the new capacities, like at Cozigua, that in the short term relies on the spot market. But in terms of energy, we are well prepared to face whatever scenario comes along in this next period of water crisis. Okay, thank you. Thank you, Leo. Our next question is from Rafael Barcelos from Santander. Rafael, you may proceed. Good afternoon, everyone, and congratulations for your results. My first question is a follow-up on that first question about demand. What is the share of civil construction in the portfolio of your Brazil operation. It was at 1.13 and then 2.3. So what is the position now? And also I want to learn more about your inventory position. My second question is about capital allocation. When you look at the company's financial policy, I think their first metric would be net debt over EBITDA between one and one and a half times. And I think that In this regard, the company is very comfortable, but then you have gross debt versus, I mean, the actual number, which is 15. So, this is the level that the company pursues even before you talk about capital allocation or you think there is any need to update that amount. And also, I want to learn about your capital allocation in the company. Thank you, Raphael. Let me start with demand and inventory. Retail has an important share in our business of approximately 60%. We are pursuing a more silent strategy, and I think I've already talked to you about that, because more and more we want to serve the end consumers. which are the construction material stores. We've been doing that in the past five years, and I would say that we are putting more emphasis on that in the last two years. Therefore, our capacity to serve that end consumer has increased. Brazil has 150,000 construction material stores. In the past, we had penetration in 5,000, but very soon we will be able to serve 30,000 of these stores. And when we look at the profitability of that in Brazil, not only do we have to look at the demand, but also we have to look at our capacity to seek for further margins through our strategy and our Juntos Somos Mais movement. This is a very strategic move, and we can constantly talk about that, but it has been a very assertive move. One of the most assertive moves we had in the past year is retail has a very important participation in the scheme of things, and the market of self-construction remains very strong, and it still demands many of the products that we developed to serve this market, like, you know, meshes and materials for self-construction, because this has become an important market to us. Now, as for... As in the case of inventories, the inventories are recovering. They are close to historic levels. But what we see right now is that there is a trend in the segment of reinforced concrete. This trend has increased lately. We saw... a one-off reduction of inventories in the chains. That's why we are adding 360,000 tons from Cozigua to this line of products, because there has been an increased demand of this product, and we want to fully serve the market. So, Scarlueli, now you can answer the second part of Rafael's question. Good afternoon, Rafael. In terms of our leverage... which is one of the indicators of our financial policy in addition to our growth, that in terms of our leverage level, we are much lower than the initial level set up by our board. But you have to put things into the right context. That range was when our leverage was close to three. It was at once four, and then – It was down to three, and then we set up that financial policy. Well, we reached that level, and now we find ourselves below that level, which is very adequate. We are comfortable with that level because we know that this is a cyclical business. You know, the steel business is cyclical. And in these past six months alone, we had 10 million BRLs of EBITDA. If the EBITDA was 5 million BRLs, even then this level of leverage would be adequate. Therefore, we like to maintain this leverage at around 1 to 1.5. Now, in terms of the other indicator of maximum gross debt, I mean, that continues to be our objective. If we look at the gross debt in the quarter, it went from 17.8 to 15.8. billion barrels. We were able to reduce it by 2 billion barrels. So the FX effect, but that amortization as well. And we will continue to pursue this objective. This is something prudent and also adequate to our industry. It is important that we strike a healthy balance that will allow us to continue to grow and to meet the market demands and also to grasp opportunities and to capture organic opportunities. That's a very strong balance that is allowed through our financial policy. Thank you. Thank you, Raphael. Our next question from Kaio Hibeda from Credit Suisse. You may proceed, Kaio. Thank you. Good afternoon. My first question. It's about the mix on the external market vis-à-vis the domestic market. I know that you're increasing your shipments to the domestic market. But could you tell me whether this trend will continue going forward or if you still see some room to increase your shipments to the domestic market? And how do you see opportunities changing? of exports vis-a-vis your domestic, you know, the domestic market, and whether you believe that you can also add a buyback policy to increment your dividend policy. Thank you, Caio. So I'll answer the first part of the question, and then Scarlueli can take the second part. Caio, we will continue to prioritize the domestic market. The profitability levels are higher. And also, we can sustain, help sustain the development of the country and help to grow the Brazilian GDP. Exports are dropping. They were 30% in 2019, and then they came down to 15% in 2020. They were 4% in the first quarter of 2021. going up a little bit to 8% in the second quarter of 2021 because we had to also serve the Argentinian market, something that will not happen in the third quarter because our melt shop resumed operations. Therefore, we are totally focused on the domestic market. Well, if we find other opportunities in in the coming months to export with high margins with some strategic partners, we will certainly look at that opportunity. But right now, our focus is in fully serving our Brazilian customers. Now, Scarduelli, you can answer the other question about the buyback. Good afternoon, Caio. The buyback is used to hedge our options program. It used to be options and now is share, which is our long-term incentives given to the executives. This was used just for that hedging, and our hedge position is very comfortable. In terms of a more aggressive buyback program, of course, this is also present in the menu of options. We could look at it further on, but today the focus is on reducing our gross debt. Our growth program is also demanding some capex for this year. So I would say that this is what is in our short-term horizon. We don't have anything in terms of buyback, but again, this is part of our menu of options. And probably... I would say that if you start thinking, but when will that time be? Well, today we are possibly looking at our current market cap and our net debt, which continues to come down. But looking at market expectations and in view of reports from the analysts, our multiple is between three to five. four times, which for this industry sounds like a low multiple, historically speaking. Thank you. Thank you, Carl and Gustavo. Thank you, Kyle. Our next question is from Tiago Losiego from Bradesco. You may proceed. Thank you. Thank you, Rodrigo. Good afternoon. Gustavo, about your new Coil Hot Rolls Strip Rolling Mule, I think these are new projects. I think you already talked about the Coil Hot Rolls Strip Rolling Mule, and I think it's the same project of Odo Branco. And profiles, where is it, and what is the capex for the profiles? And if you could give me a capex range for next year, this could be very helpful. And my second question, Gustavo, what sector worries you the most on the demand side? Where do you see a lower degree of comfort? Because demand in Brazil remains very good. So where do you see more risk going forward? And In the U.S., metal spreads in the third quarter. Do you think we should expect an expansion of metal spreads as scrap prices are coming down, whereas, you know, steel prices are not coming down? Well, CapEx, we will continue to be very conservative when it comes to approving CapEx. We will invest in core areas for Goodell or areas that can bring us an adequate return. This is something we discuss often. These two investment decisions are very important. These are two lines of products that are very much related to our current and future profitability objectives. This, you know, coiled hot Rolls-Royce rolling mill is in Ouro Branco. And we also have a rolling mill for heavy plates. And we've been very happy with these two rolling mills. We have that coiled hot Rolls-Royce rolling mill operating at full capacity for quite some time. And probably it's the time to expand that production. We have a new strategic arm, which is, you know, Comercial Gerdau. which is capable of distributing that additional production, increasing our profitability. And so this would be phase two of an existing investment. We will increase the total capacity of coiled hot roll strips, rolling you from one to two million a year. And structural profiles, as you know, we are the only producers of this segment in Latin America. and metallic construction is a segment that is growing a lot following the model used in Asia, using metallic items both under and above the soil, the ground, and we will increase our production capacity to 1.1 million gens a year, and that rolling mill will be located in Ouro Branco. It will be side by side with the rolling mill for profiles that is already there. And this amount is already included in the global CapEx disclosed by the company. And at the right time, we will disclose the disbursement flow of CapEx without any commitment. any changes to our overall CAPEX and this is this investment involves about $200 million in terms of the coiled hot roll strips rolling mill and a structure profile rolling mill involves about I think $300 million and with that I answer the first part of Your question. Well, areas where I'm not so optimistic going forward is automotive sector because of the lack of components. We also understand that this market of electronic components will not be solved in the short run globally. And what I said during my presentation is that the market for heavy vehicles, trucks and buses, demands very few electronic components, but this is a segment that we will be monitoring very closely because on the side of longs and flats, everything is moving smoothly. But in terms of the United States, one important highlight is that, I mean, is that, as we said in previous occasions, you should recall our commitment to to have habitat margins in two digits. We did our homework. We reached 10% of habitat margin. And for the first time since 2008, our habitat margins were above 20%. Metallic spreads will grow throughout this half year. So not only we were able to buy scrap in the U.S. in a very competitive way, but also... In the past few years, that operation in terms of cost and customer service and product portfolio has become much more competitive than in the past. So in the U.S., we did our homework, and we did it well. We are in a very comfortable position to serve the market in the short term and capture higher EBITDA margins for MetallicSpread as well. And we're very optimistic in terms of our capacity to serve the market with a very good infrastructure package. And I think in the next few days, the infrastructure package will be approved by the U.S. Congress, and this will be able to meet the demands not only in the short term, but the market will be more competitive. They will demand more steel in the long run. Therefore, we see the U.S. market in a very positive way going forward. Thank you, Gustavo. If you could give me a very quick follow-up on the U.S., do you see any potential pressure on the price of scrap in the U.S.? Even if you're talking about the capacity of price increases for slats, what about metal spread in the next 12 months? How do you see that evolving? The Scrap pressure in the U.S. will continue to exist for prime scrap. Prime scrap is mostly used in our special steel operations. We concluded a very important investment in our Monroe mill so that somehow we'll be able to mitigate that price pressure on prime scrap. Now we have more competitive costs. But we don't see such a pressure anymore. on obsolescent scrap, which is the scrap we use in our lungs operation. We have all the elements necessary to make our operation even more competitive. During this call, we talked about a possible scrap reduction in the U.S., but we are talking about obsolescent scrap, and this does not happen in prime scrap, because The demand for prime scrap is way above supply in the U.S. Thank you, Tiago. Our next question is from Eduardo Bordalu from Morgan Stanley. Eduardo, you may proceed. Thank you, Rodrigo, and good afternoon. Can you please comment on your CAPEX? for structural profiles. I think the connection was not so good, and I couldn't capture what you said. Could you give me an idea about your additional EBITDA for these two new lines, both coiled hog roll strips rolling new and structural profiles? This would be very helpful. And finally, if you don't see any risk of this new capacity entering the market and whether this could put any additional pressure on prices, So let me tell you a little bit about CAPEX and refresh the figures. Okay, we talked about additional EBITDA and how these capacities can fit in in the long run. I'll refer to CAPEX again and the capacities, and then Scarduelli can talk about additional EBITDA that these capacities could add to our business. So Eduardo. And an order of magnitude of such an investment in structure profiles ranges around $200 million. And as I said before, it's already included in the investments for this year. So there will be no additional disbursement or that. I mean, we've been very careful in terms of the geographies where it will operate. So this does not impact in any additional volatility. This investment is being done in a very adequate moment. We were very fortunate in terms of all of our investments so far. It's been operating for quite some time, and the heavy plate rolling mill will be extraordinary because right after the entry of this rolling mill, I mean, the markets, was around 500,000 tons. But this year, it should reach 1.1 million tons, which means that that was a very strong recovery. We find ourselves in a very privileged position in terms of market share to meet the market demand. That's why we believe that now is the time to give an additional step in terms of flats in the country. And if we had that capacity today, it would be fully distributed in the market through Comercial Girdao. On our side, we understand that this is a way of having a low-risk investment, and this will not really affect our install capacity in Brazil, because when the investment is materialized in 2023 or 2024, Brazil will have a higher demand when compared to what we have to do today. In terms of structural profiles, that was an investment done some years ago that was That's a very relevant product segment, and we see the growth of metallic construction in other geographies, and this will come to Brazil, as is the case in other more mature geographies, and investments is coming to give down next. Our company called G2 Bazi, we are working to offer solutions to our clients for foundations. Therefore, we see a growing demand all over the world. And as we are the only producers in Latin America, I think that once we increase our production to 1.1 million tons, this will strengthen our position and will allow us to offer cleaner solutions, environmentally cleaner solutions to the market. So now I turn the floor to Oscar Doherty, who will talk about additional EBITDA for these new investments. Good afternoon, Eduardo. And then we start, you know, with, well, we should look at the assumptions, different assumptions. What about the new equipment and what about the entry curve in the market, as Gustavo was saying, for coiled hot roll strips? We have the possibility of absorbing that very quickly. griddle and as that happens we could also increase our shipment of coiled hot world strips we are producing to our full capacity of our rolling mill so if we can add 200 000 tons to our capacity we can probably meet the demand i mean this projection is something very hard to do that's why for I mean, I throw that back to you as analysts. If we look at the average EBITDA in this quarter, what we had at the Brazil operation, I'm talking about the average EBITDA considering total shipments without distinguishing the domestic and the foreign market. I mean, if you divide it by dollars, you would reach over $400 per ton. The same operation in the second quarter of last year, EBITDA was slightly above 100 reals per ton. So it's very difficult. So when will that enter in the market? At what moment? Anyway, this is a contribution that it might be very important to our business. And once again, I mean, we also have to consider a strategic aspect. Our product line is very diversified in Brazil. We deliver almost every line of product, and all of that helps us to consolidate the company as a very strong player in the market. I mean, I know that I turned the answer back to you, but you have to take into account some assumptions. I mean, how would the market be when that, you know, starts up? You know, in terms of the coiled hot roll strips rolling mill, they can start up quicker. And in terms of the structural profiles, it's more gradual. Thank you, Eduardo. Our next question is from Andreas Buchenhauser from UBS, and the question is in English. Andreas, you may proceed, please.

Thank you very much. I hope you're all well and safe. Just a quick question on scrap. Just wanted to follow up with one question. Obviously, there's been a lot of talk about scrap tightness. You obviously mentioned prime scrap getting tight in the US. Some people believe that obsolete scrap will get tight as well. Obviously, we're seeing anybody anywhere in the world adding capacity, which is EAF capacity, consuming more scrap. So it does definitely look like a tighter scrap market going forward. Do you have any plans on how to kind of alleviate that tightness? Are you thinking about vertically integrating down the supply chain to secure more scrap through buying scrap yards? Are you able to reduce your prime scrap usage, you know, via DRI or HPI or another metallic? So that's basically the question, you know, what is your overall metallic outlook on raw materials?

Thank you, Andreas. And I was asking what is your down strategy for the current scrap market as We may expect some reduction in this market in the US or even globally and How How does how does the company intends to operate in this market and whether you intend to acquire a part of scrap or use some similar strategy to face this more restricted scrap market that we anticipate for the next coming years. Thank you, Andreas, and thank you, Rodrigo. This is a relevant question. It's a very significant question because we've been noticing some structural changes in the steel universe. So how will be the performance of the companies in the next 10 years? Well, certainly we have to consider all of the significant changes that are occurring once we compare the current moment to the past 10 years, the few industry in general, and particularly in the case of Gradao due to our strategic position. In the next 10 years, we will probably have higher performance profitability when compared to the past 10 years. Well, if you look at China, China reduced its productive capacity, and now they're focusing on their domestic market. They reduce exports, and they're also focusing on reducing GHG gases. Well, we know because all the numbers are public numbers, GAG emissions from an electric furnace can sometimes be 10 times lower than the GHG per ton of an integrated plant. Therefore, certainly, we should expect to see a search for other alternatives to reduce the GHG emissions, and the search for EAF will increase. We understand that scrap all over the world in the next coming years will continue to be under pressure with high prices, and this can be translated into certainly higher price of products. In our opinion, this is something that did not happen now. I recall previous conversations from two years ago when You know, we went to China and we looked more closely to what was happening. So even in those days, we saw this happening. We are already adopting strategies to be more captive in terms of acquiring scrap. And this is something we've been doing for the past few years. In Brazil, we matured our scrap purchases. We are also... pursuing the same strategy in the U.S. Part of our results that we delivered in the last few quarters is related to a more competitive purchase of scrap by movements related to scrap yards and, you know, the dismantle of vehicles and wagons. But right now, we are not planning anything. any major investments like DRI or anything of that sort, we understand that the strengthening of our scrap strategy is already in motion, and we will continue to strengthen that going forward. Thank you, Andreas. Our next question is from the web, and I would like to take this opportunity to thank all of the more than 400 participants. The first question is from Itrio Neto from Valor Cíclico Casa de Investimentos. With the demand from the capital goods industry, and in particular the renewable energy, oil, gas, and sanitation, how do you see this market in Brazil and in the U.S.? ? What is the strategy of the company for that energy market and also sanitation? Thank you for your question. We are very optimistic. In the U.S., in the U.S. market, in the short run and even before the approval of the Biden's infrastructure package, the demand for steel is already very strong. In the U.S., you know, renewable energy segments, Amazon warehouses, that has increased substantially. So, in the short run, we are already experiencing demand growth coming from these segments. And certainly, demand will continue to grow, especially after the final approval of the infrastructure package. And the same thing goes for Brazil, because when we compare the history of infrastructure investments and It has already reached 200 million BRLs a year in a given moment. Now it's down to 100 million. So there is still a big gap in infrastructure investments in Brazil, and this will come. I don't know when, but it will come. Sanitation, the sanitation area indicates that Brazil has to invest more in infrastructure, and we are well positioned to serve this market. And to speak about renewable energy, I think we can look at it in three different ways. One is the fact that we are very well prepared to supply steel for solar energy and wind farms. We can provide rebars for the generators and the rings that go in the main part of the blades. So we can provide steel for the entire industry. We could also look at the steel supply and renewable and wind energy can also be seen in terms of Gerdau's sustainability and the self-generation of power in the next few years. We will... increase our self-sufficiency by producing and generating our own energy through our own plants, and this is part of our commitment to sustainability. We will do that through renewable energy. Our partnership with Shell in Aquarii Park in Minas Gerais involves 50% Shell, 50% Gerdau, and 80% of the energy from our mill will come from that. solar park. In terms of renewable energy as well, we have Gerdau Next, which is Gerdau's arm for new businesses. We want to grow our share in renewable energy to a point that we will become a trader of renewable energy in Brazil. So, in general, all of these are very positive points that will lead to growth increased demand, and we have been preparing the company to be a leader, not only in Brazil, but elsewhere, as we have been in the past 20 years. Thank you, Gustavo. Next question from Rafael Shakur from SFA Investments. First of all, congratulations on your results. In regards to retail sales in the Brazil BD, how much of that How much that represents of your total volume? What is the strategy of Juntos Somos Mais as part of that retail strategy? Thank you, Rafael. Thank you for your question. Civil construction retail in Brazil is very relevant, as I was saying. It is over 50%. And we intend to increase our penetration in this market. There are two main pillars of our strategy. One is through Comercial Gerdau, and the other pillar is Juntos Somos Mais. Juntos Somos Mais, together we are more, posted a significant growth, and it is already the largest marketplace of civil construction in Brazil. At first, Juntos Somos Mais operated as a loyalty platform to serve 150,000 stores of construction material in Brazil. But not only we want to be the largest marketplace, we understand that Juntos Somos Mais is in the next few years, will become the largest solution provider to consumers in regards to civil construction. In the future, if consumers want to refurbish their entire house, they can be fully served by Juntos Somos Mais, not only in terms of products, but also services. The plans are very aggressive. And Juntos Somos Mais is a very interesting channel because it allows us to reach the final consumer. Brazil has 150,000 stores of construction materials. And before Juntos Somos Mais, we would only sell to 5,000 of these stores because there was a step before that that was the intermediary. But now, with Juntos Somos Mais, we are penetrating technology. we are being closer to the end users. So from 5,000 stores very soon, we will reach 30,000 stores of construction materials. So in addition to the demand, I'll see that this is directly related to our strategies to strengthen the part of scratch, as I said before, but also we will have a greater capacity to serve the market. In addition to that, we want to be a main provider of solutions to end users. Thank you, Gustavus. Our last question comes from Victor from For Sale Cat. What are you doing in the segment of structural profiles? Could you explain how is Gerdau approaching this market in Brazil? Thank you. Well, other questions that will come will be answered by our IR department after this conference call. Thank you for the question. In summary, I'll say that innovation comes in two pillars. First, innovation in the product per se. We have a leading-edge technology in our Oro Branco Mule. These are profiles that are more resistant to corrosion. They can take more load, profiles that can be used in extreme situations like activities in high sea. So the quality of the product has increased, and we have added a lot of innovation, not only in the segment of the structural profiles, but also in And we also have innovation in our business model. A few years ago, we used to sell our structural profiles for the foundation of their construction. And through the introduction of a new company called G2 Bazzi, now we can offer a complete solution to our customers. So instead of just selling the profile, we sell an entire solution. So a client can acquire an entire solution from Goodow. This is a win-win situation because it adds value to both parties. And on our side, we can add service to the profitability of our business. And on the client's side, to a winning history of 120 years of a Goodell, they can acquire an entire solution. And this is translated into cost reductions, reduction in delivery times. Therefore, innovation is part of our everyday work, not only in our structural profiles, but it's present in everything we do. Goodell is going through significant changes. We are becoming an increased modern company. We are expanding. We are becoming more and more modern. We want to continuously deliver innovation to our clients. And thank you for your question. Thank you, Gustavo. And now we conclude the Q&A session. I would like to thank all of our investors who joined us today. And now I would like to turn the floor back to Gustavo for his final remarks. Thank you. Would you like to add anything else or you think I can conclude? Yes, I would just like to thank everyone for joining us today. Well, once again, I would like to thank you all for joining us today. And as always, it's been a pleasure to talk to you. We remain available to answer any further questions that you may have. and Rodrigo is available to answer your additional questions. And I take this opportunity to invite you to join us once again during our next earnings release call related to the third quarter of 2021 to be held on October 27th. Thank you all very much, and please take care.