Gerdau S.A.

Good afternoon, everyone.

I'm Rodrigo Maia, Gerdau's IR. Welcome to Gerdau's conference call to discuss the results of the first quarter 2022. Here with us today are Gerdau's CEO, Gustavo Werneck, and Gerdau's CFO, Raphael Jappour, who will be presenting to you today. Analysts and investors can send their questions beforehand through the option Q&A. We would like to stress that any forward-looking statement that might be made during this conference call related to Gerdau's business outlook, projections of financial and operating goals are mere assumptions based on 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. Now I would like to give the floor to Gustavo Werneck. Gustavo, please, you may start the presentation. Thank you. Thank you. Thank you, Rodrigo. And good afternoon, everyone. I would like to start by welcoming each one of you to this video conference call to announce Goodell's results for the first quarter of 2022. I hope that you are all well and in good health. As Rodrigo was saying, also joining me today is our CFO, Rafael Japor. And for both of us, it's always a pleasure to talk to you about our performance and also answer questions and issues that may arise during our presentation. I will start by talking about the international scenario, the highlights of the overall results. And right after that, I'll give you more details about the performance of our business operations in this first quarter of 2022. Next, Shapur will share some information about our financial performance. And finally, I will come back to highlight a few points about our ESG agenda. At the end, both of us will be available to talk to you about any points that you may want us to elaborate further. Well, let's move to the next slide. Here, I will start talking about Gerdau's macroenvironment. The effects of the conflict between Russia and Ukraine on the international scenario began to be experienced more intensively in mid-March. There was a strong increase in spot prices of raw materials, such as coal and alloys, and on the energy sector, especially natural gas, which resulted in greater pressure on production costs, as you can see if you look at the charts on the slide. In addition, the rearrangement of the international markets A scenario with supply constraints and rising input prices had an impact on global steel prices, which went up all over the world. We'll continue to monitor the issue closely, but I would like to inform you that our operations were not affected by any kind of disruptions in the supply of raw materials and inputs, since we always work with some safety stocks and we have a very diversified base of supply. Furthermore, I would like to mention that the uncertainties generated during the first quarter around the advent of new variants of COVID-19, especially in the countries in the Americas where we are present, had an impact on consumer behavior. In Brazil, for instance, retail performance was affected at the beginning of the year. But all of the other concerns about the variants dissipated over the months, ensuring the return of end consumers to the market in early February and March. On the same note, we continue to monitor the possible effects that were brought about by the recent lockdowns imposed by the Chinese government. These effects may have perhaps a more intense impact on the performance of the world economy in the short and medium term. Now let's turn to the next slide. Here, I would like to briefly comment on the highlights of our first quarter results. Later on, Jean-Paul will give you more details about our financial performance. We ended the first quarter of 2022 with an adjusted EBITDA of 5.8 billion BRLs and an adjusted EBITDA margin of 28.7%. are record highs for the first quarter. The result, as you will see below, was mostly influenced by high levels of demand for steel coming from the construction and industrial sectors in North America. Now, Gerdau's net income totaled 2.9 billion BRLs in the first quarter of this year, which represents an increase of 19% year-on-year. In turn, net sales reached 20 billion and 30 million BRLs between January and March, which represents an increase of 24% over the same period of the previous year, with shipments of steel totaling 3.1 million tons. All of these significant results posted by Gerdau this quarter show the company's solid presence in the markets where we operate, which reflects, it's a reflection of the new geographic positioning focus on the Americas and the business and culture transformations that we have been experiencing in recent years. In this next slide, I will talk about the highlights of each one of our business operations, and also I'll give you an outlook for the markets where Gadao operates. Now, jumping to the next slide, and I will start with North America. Here, I would say that adjusted EBITDA of our North America business operation tripled between January and March in the annual comparison, reaching a record value for the quarter with 2.7 billion BRLs, with a record adjusted EBITDA margin of 33%. I would also like to say that the metal spread remains at a high level, close to all-time historical levels. Shipments remained at high levels in the first quarter as a result of strong demand from the non-residential construction and manufacturing sectors. The outlook for the second quarter, which already began, remains very positive, since our backlog of orders in the United States continues to be above historical levels and above the level seen at the beginning of 2022, equivalent to about 80 days of purchases. Given this scenario, we continue to operate our plants in the region with capacity utilization levels above 90%. We remain optimistic. with the demand for steel in North America, especially when you look at the meat term, especially coming from the construction industry. Examples that reinforce this positive outlook is the Architectural Building Index, which is a very important indicator that measures the activity of the non-residential construction sector in the country. And another indicator that we also monitor is the Institute for Supply Management Index, which monitors the performance of the manufacturing sector. Both remained above 50 points between March and April, indicating the continuation of the very sound and strong trajectory recorded over the last few months. I would also like to say that labor shortage, the inflation rate, and all of the logistical challenges that have affected many North American companies remain a point of attention on our part. We also see as positive the recent orientation of the U.S. government to require the projects in the $1 trillion U.S. infrastructure package use materials produced locally in the country, including steel. With this backdrop, we will continue to invest in improving the productivity and profitability of our capabilities in North America in order to deliver even more value to our customers. For this year of 2022, I emphasize an investment of about 300 million rales for the modernization of our melt shop in Whitby in Canada, which will allow us to increase the annual capacity of the plant by 200,000 tons. mainly focusing on the production of structural profiles. Now, moving forward to the next slide, I would like to highlight that in light of the record results posted in the first quarter, I think I'd like to recall the journey of culture and management transformation that our North American business operation has been going through in recent years. This has ensured us to achieve a better level of productivity and operating excellence of our units. And by the same token, we were able to expand our portfolio products offered to Canadian and North American customers, especially in the construction, manufacturing and distribution sectors. We have also designed a production and commercial strategy focused on serving our customers, generating more value for the entire chain in which we are present. All this transformation is also reflected in the steel shipments through the digital channels. In this first quarter, we continue to focus on our digital efforts. taking advantage of our commercial network and our data-driven culture to improve even more our customers' journey in North America and also contributing to the improvement of their business results. We are also enjoying productivity improvements in our operations as our digital initiatives streamline our business processes and also with that we're able to to make faster decisions in our everyday operation. We have been striving to empower our teams to identify opportunities and remove potential obstacles in all our operating processes in order to add value to all of our stakeholders, both internal and external. Now I'll just jump to our next slide and now I'll talk about our special steel operation. Well, I would like to highlight our financial results. In the first quarter of this year, our EBITDA was higher than the EBITDA of the fourth quarter of last year and also higher than the first quarter of 2021. In the United States, the light vehicles market continues to be impacted by The chip shortage, the regularization of the supply of components previously expected for this year should only occur in 2023 due to the impact of the most recent lockdowns imposed by the Chinese government. In any case, for 2022, the production of light vehicles in the U.S. should rise about 14.7%, reaching 15.2 million units. The outlook for the heavy vehicle market is more positive, with the production of trucks expected to total 300,000 units this year when compared to 259,000 units of last year. The oil and gas sector should also accelerate its pace of recovery, with rig counts reaching an average of 874 in 2021, well, 2022 when compared to 603 last year. The special steel market in Brazil has also been impacted by the lack of semiconductors and the low volume of inventories at the OEMs. And as a result, the production of live vehicles in the country dropped 17% in the first quarter. in a year-on-year comparison, according to data from the National Association of Vehicle Manufacturers on Favia. The forecast for 2022, however, is for a 9% growth in the volume produced, according to that same association. Now, speaking about heavy vehicles, The production remains strong with an expected increase of 8% in production. A positive aspect that corroborates with this scenario is the recent signals given by the Brazilian government regarding the implementation of the fleet renewal program, which will encourage the replacement of trucks that are more than 30 years old. The agriculture machinery segment, driven by the expectation of record harvest this year once again, should also see its production volume reach near historic levels, totaling about 100,000 units in 2022. Moreover, we continue to notice that the consumption of special steels have been influenced by a higher export volume of auto parts and also light vehicles, whose producers have benefited from opportunities in the global supply chain, which has made their products more competitive in foreign markets. Finally, I would like to point out that the new continuous casting unit at Pindamoyangaba, which is our new continuous casting unit, will be scheduled to start up after a total investment of around 700 million BRLs. This equipment will allow Godal to have a more automated process with better yields resulting in the delivery of differentiated products and an even higher level of quality to the demanding markets. The technological upgrade of the unit is also aligned with the future prospects of the increasing use of what the market calls clean steel, which is a steel of higher quality with greater inclusion cleanliness. I'll move now to our next slide, and here I will talk about the long and flat steel scenario in Brazil, whose performance in the first quarter reflects the period of transition and accommodation of steel demand in the different sectors in which we operate. However, this accommodation is at very healthy levels when we look at the past years. Also, excluding the effects of replacement and inventory building that we saw throughout 2021, the real demand for 2022 is similar to the volumes that we experienced in the second half of last year and about 25% higher than the average that we had in 2019 and 2020. Therefore, we... anticipate up to 4% year-on-year growth in actual demand in 2022. Demand for steel from the construction sector remains at a high level. And I'll elaborate more about this subject during the Q&A session. The inventory of real estate is a normalized level for approximately 11 months, according to Secovi São Paulo. And the forecast is that 2022 will be the second best historical year in property launching, according to the Brazilian Association of Real Estate Credit and Savings. Another example that makes us confident is the number of active construction sites in Brazil, which continues to grow. And in April, it reached its highest number in the past 15 years. Retail sales have stabilized at high levels after the uncertainties experienced at the beginning of the year due to the new COVID-19 variants, as I said at the beginning. These concerns have been dissipated over the past two months. In this regard, we continue to strengthen our sales channels, increasingly focus on providing the best possible experience to our customers. In this first quarter of 2022, there was a record number of customers placing order using our digital channels with an increase of seven percentage points when compared to the same period of 2021. In addition, We recorded a high level of adoption with more than 80% of our customers using at least one of our digital channels. I also stressed the gradual resumption of investments in infrastructure. There is a robust active calendar of highway projects and auctions. In April alone, three state projects were announced involving investments of around 11 billion BRLs. Also positive is the progress of the federal government called ProTrilhos, which foresees investments of over 200 billion BRLs for the construction of 19,000 kilometers of new railroads in 10 years. Also, we see high demand for steel from the industrial sector, driven by agribusiness, capital goods, machinery and equipment, road implements and energy as well. The oil and gas sector, for instance, should invest more than 13 billion barrels in 2022 and another 20 billion barrels in 2023, according to IBP, which is the Brazilian Institute of Oil and Gas. Furthermore, I would like to point out that we are moving forward with the already announced investment of about 1 billion BRLs for the expansion of the coiled hot world strips capacity in the Ouro Branco unit in Minas Gerais. And as of 2024, the annual coil production in Ouro Branco will be increased by 250,000 tons, which will allow us to deliver steel with increasingly higher added value to our customers, reinforcing our performance in the flat steel market in the country. Now I'll move to our next slide, when I will briefly talk about South America. In Argentina, demand for steel coming from the construction and agribusiness sectors remains strong, which have boosted sales in the local market. The Argentine construction sector grew almost 31% in 2021, year on year, according to numbers recently disclosed by Inditec, the Statistics Institute of Argentina. For 2022, the outlook indicates that the construction activity will remain at a high level, the same scenario very similar to the one in Uruguay. In Peru, demand for steel continues at good levels, boosted by the construction industry. Despite the impacts of the recent logistics strike and also political uncertainties, that are still in place in Peru for quite some time. Therefore, we continue to have a positive outlook for this business operation. And more recently, we just announced an investment for the expansion of the rolling mill capacity for the production of pipes in the unit in Peru. And the estimate of the central bank of that country estimates the GDP will grow at about 2% in 2022. Well, this is just a general overview of our operations, and certainly we can get into more details during our Q&A session. Now I'll turn the floor over to Japor, who is just sitting next to me. And he will... And then after his presentation, I will talk about ESG strategy, and then we will go to the Q&A session. So, Jaipur, the floor is yours. Gustavo, thank you very much. Good afternoon to all of you. It's a great pleasure to be here with you in our earnings release call, and I hope that you are all well. Now, speaking about our financial highlights in this first quarter, so let's move to the next slide. Here, I will... you know, just tag along what Gustavo talked about before, and we'll first highlight our EBITDA in this first quarter and our capacity to convert EBITDA into free cash flow. So in the first quarter, based on an EBITDA of 5.8 billion reals, we invested approximately 2.4 billion BRLs in our business, split between working capital and CapEx. Well, After payment of taxes and financial obligations that we had in the quarter, we were able to convert 52% of our EBITDA into free cash flow generation, or 15% of our revenue for the period. It's the third consecutive quarter where GERDAL was able to convert over 50% of its EBITDA into free cash flow generation, or in the case of this first quarter, it was 15% of our revenues in the period. Now, to give you a bit more details and telling you a bit more about our capacity to generate free cash flow, if you look at the chart at the top, these 3 billion reals in the first quarter, when we look at what we had in the last 12 months, we arrived at 11.4 billion BRLs. This is the eighth consecutive quarter in which the company has been able to post positive free cash flow and the seventh with cash generation above one billion reals. This results from our resilience or the resilience of our business model because we have the capacity to generate cash through the cycle in different business environments. And this is also a result of our consistent process to deleverage our balance sheet. This is something that we've been doing since 2016. Now, looking at the bottom of the slide, this quarter, our working capital was 15 billion Reais with a cash conversion cycle of of 60 days. However, it's important to highlight that this is the second lowest cash conversion cycle for a first quarter in the last 10 years of our historical series. This not only stresses our discipline in terms of capital manage, but also our increasing efficiency and quickness in making decisions and the way that we conclude our business in the whole chain, as mentioned by Gustavo when he talked about each one of our business operations. Now, speaking about liquidity and our debt position, this quarter there was a reduction of 1.3 billion BRLs in our gross debt, mainly attributed to the impact of the exchange rate variation on the debt portion of our balance sheet, which is denominated in US dollars. With that, our gross debt total 12.8 billion BRLs. Considering our cash up, 7.6 billion BRLs, and our net debt was 5.8 billion BRLs. With that, we're able to reduce our financial leverage measured by the net debt over EBITDA ratio to a historical minimum of 0.20 times. This is a record level with no precedent in our entire history of 121 years. Our long-term debt, as you can see, if you look at the chart in the bottom, has a very well distributed amortization schedule. And there are no accumulations in terms of maturity days for the next five years. Now, speaking a bit more about amortizations, I would like to remind you that as previously disclosed on April 11th, next week, we will have the early amortization of our 2024 bond next week with the execution of that clause, and this should generate approximately 800 million reais in line with our goal of reducing not only the amount of our gross debt, but also the portion of the debt which is denominated in US dollars. This increases our capacity to give more returns to our shareholders. And speaking about returns to our shareholders, if you look at the top of the slide, you see the evolution of our net income in the past few years and our capacity of distribution or payout. So better results in our effective discipline in terms of reducing leverage allowed us to generate dividend yields much higher than those that we had in the past. As we can tell by looking at the bottom part of the slide, we went from 3.6% in a in 2018 to 11.2% in the last 12 months at closing of the first quarter of 2022. And speaking about dividends in light of the first quarter results, Gerdau SCA and Metallurgica Gerdau will pay dividends on May 26 and 27 respectively of 2022. Gerdau SCA will pay out or 57 cents per share on shares held on 26th of March, 2022. In the case of Metalúrgica Gerdau, we will pay out 314 million rials or 29 cents per share on the position of shares held on May 16th, 2022. In addition to the aforementioned dividends, And according to the material fact released to the market this morning, both Gerdau S.A. and Metallurgica Gerdau approved a share buyback program aimed at acquiring up to 55 million preferred shares from Gerdau S.A. and up to 69 million preferred shares from Metallurgica Gerdau, corresponding to 5% and 10% of the free float of that class of shares, respectively. Both programs will have a duration of 18 months. This initiative of this buyback program for both Gerdau SIA and Metalúrgica Gerdau reflects our discipline in capital allocation and also the confidence we have in our capacity to generate or to continue to generate cash over time. combined with our very resilient business model and our commitment to generate even more value to our shareholders. I thank you all for your attention, and now I give the floor to Gustavo, who will comment about our ESG initiatives.

Thank you, Shapur. Finally, in the last part, on the next slide, I would like to give you an update on some important points of our Gerdau's ESG agenda by sharing highlights and progress in our journey. I mentioned that we are making progress in the construction of our solar park in Midlothian, in the US state of Texas, where our largest long steel plant in the country is located. This picture shows this conclusion of the works, and I recently took this photo, and the solar panels are arriving right now. In a short time frame, want to have all this solar park concluded. The clean energy generated by the park will supply the local unit, and like I said, it is in line with our strategy of reducing greenhouse gas emissions also through investments in renewable energy projects. Our expectation is that once we have these panels, the plant will be up and running by the second half or early second half of this year. In addition, I highlight that Goodell's audited average greenhouse gas emissions drop from 0.93 to 0.90 tons, which is the number audited in 2021. We had a dramatic reduction and this new value strengthens our commitment announced earlier this year to reduce our greenhouse gas emissions to 0.83 tons of CO2e per ton of steel by 2031. Now, on the next slide, I would like to share that for the first time, we acknowledge through the Inspire Goodell program 18 partners in our supply chain. suppliers that stood out by making headway in their demographics, with the increase in the percentage of women, Afro-descendants, and people with disabilities in its workforce, and with good practices related to the theme of diversity and inclusiveness. The program was created at the end of 2020, and it aims to mobilize and encourage our suppliers to consolidate best practices in diversity and inclusiveness. In the beginning of 2022, we reached the number of 203 micro companies and even large supplier companies that joined the Compact. We continue to work to be an increasingly inclusive and diverse steel producer, in addition to engaging the entire ecosystem in which we are present. In addition, I would like to mention that we recently completed the renovation of the first house selected by the Reforma que Transforma program, the largest social project in Gredau's history, which will contribute to the improvement of more than 13,000 vulnerable homes in Brazil over 10 years. The renovation was carried out at the home of a Gerdau employee in the city of Barão de Cocaes, state of Minas Gerais, whose home was damaged by heavy rains in the state at the beginning of the year. We reaffirm our commitment to being part of the solution to the challenges of the stakeholders with whom we interact in our daily activities and the society at large. To conclude, I would like to point out that we remain keen on building the company's future. through initiatives to attract talents and retain talents, such as G-Future, our trainee program. In the 2022 edition, we reached a record volume of registrations, exceeding 40,000 applicants and more than 200 hires. They started their careers with us at Gerdau. I'm confident that for this group of trainees, Well, they come to join our 30,000 employees. And I'm confident that we are on the right track to build the next 121 years of the company. Thank you very much for your attention. But before we move into the question and answer session, our debate session, I would like to give the floor back to Japor so he can make an announcement. Over to you, Japor. Thank you, Gustavo. I would just like to take this opportunity to let you know that Rodrigo Maia, our IR manager, is leaving Gerdau in May for personal projects. For more than 13 years, Rodrigo was an important spokesperson for us at Gerdau, the community that is with us today, and with a lot of recognition in his performance with IBRI and Abrasca. Rodrigo, on behalf of Gustavo and the whole Gerdau team and everybody who were touched by you in your time with us, we would really like to thank you and wish you a lot of success in this next step in your journey. And soon there will be a new IR leader with us. Thank you, Rodrigo. Thank you, Japor. Thank you for your kind words. I also wish you a lot of success. And I say that our lives is broken down in quarters, so I have more than 50 cycles at Gerdau that is constantly changing the future. It's a great school. I also thank the capital markets community here. We have more than 400 participants in our conference call. And also our internal colleagues, particularly Gustavo Wernecki, Rafael, Mangoni, our IR team, Sergio. So after 18 years in the market, I'll go into data science in Europe and I'll see you again in the future. Having said that, Let us open now the question and answer session. We kindly ask you to ask two questions maximum per participant. If you want to ask questions, you can use the raise hand feature at the bottom of the screen, or we can also, well, we already have some questions via Q&A, the Q&A button, so feel free to send your questions. Let us begin with the Q&A button, and as you raise your hand, I'll also give the floor to you. The first question is from Rodolfo Angeli with JP Morgan. What is the outlook for metal spread in the US? Considering there is shortage of scrap, are prices firm? And the other question, what about cost in general? We've seen a lot of cost inflation in the industry. Thank you. Rodolfo, it's a pleasure to talk to you. Thank you for sending your question. I would like to begin my answer and, by the way, Japur, feel free to add anything you want to comment on. As for scrap shortage in the US, this is more related to prime scrap. With the reduction of automotive production, This brings shortage of scrap in the US market, but obsolescent scrap that we use. Particularly in our long steel mill, they have an adequate purchase volume and volatility over the last months. In our point of view, it will continue to be like this. However, the outlook for metal spread over 2022 is quite positive. We understand that with this metal spread at historic high levels and with evolution over the last four years, considering also our performance in North America, we have conditions to support the results that we achieved in the first quarter. So they continue over 2022. And moving forward, if we consider demand, I make a point in reminding you that we continue to have a very, very strong backlog. This backlog has not been reduced. Quite the opposite, this April it increased a little. So, we still don't see any demand effect coming from the infrastructure package. It is possible to be more visible by year-end. demand-wise. So, wherever we look in our U.S. operation, we are very confident that the result level will be sustainable. The greatest challenge ahead, Rodolfo, right now in North America has to do with manpower, labor. Recently, we checked the data that was disclosed about unemployment in the U.S. The number is going up opportunities of 10 to 11.5 million job opportunities, which is very significant. Almost 4.5 million US citizens change jobs for the last month. So that's a challenge for us. But despite the challenge, this is the best time of our history in terms of industrial and operational performance. We had a historic level of delivery this May. and recurrently we reach levels of production-era mills over 400,000 tons. Rarely did we see that in the past. And considering this, despite the lower number of mills that we had since the divestments, we've been managing to have a performance industrial level that is unprecedented in the U.S. market. With regards to cost, the pressure goes on. Volatility also goes on, although for the greatest challenge ahead are costs related to metal large coal, they have an impact on Ouro Branco Plan, but costs more related to our scrap mills and bioreducer, I would say they are relatively under control as we speak. This inflation rate, to some extent, was already included in the costs that we had in the first quarter, and the challenge is to keep on managing the supply chain in general. any possible disruption particularly logistics that may happen in the coming months so they don't have an impact on our production capacity particularly in north america thank you gustavo next we'll open the screen so daniel sason from itaú can ask his question