Gerdau S.A.

My name is Renata Oliva Batiferro, responsible for Gerdau's IR department. It is a pleasure to speak with you in this video conference call to discuss the results of the second quarter of 2022. I inform that those of you who need simultaneous interpreting, we have this tool available on the platform. To do this, simply click on the interpretation button. the globe icon at the bottom of the screen and choose your preferred language, Portuguese or English. For those listening to the video conference in English, there is an option to mute the original audio in Portuguese by clicking on Mute Original Audio. We inform that this video conference is being recorded and will be made available on the company's IR website, ri.cordao.com, where the complete earnings release is available. You can also download the presentation on the chat icon. During the company's presentation, all participants will have their microphones muted. We will then start the question and answer session. To ask questions, click on the Q&A icon at the bottom of your screen and type your question to get in the queue. When you are announced, a prompt to activate your microphone will appear on the screen and then You should enable your microphone to ask questions. We recommend that you ask all of your questions at once. We'd like to emphasize that any forward-looking statements that might be made during this conference call related to Gerdau's business outlook, projections and financial and operating goals are mere assumptions and beliefs based on the management's expectations related to the future of the company as well as on information currently available. Forth-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors may also affect Gridau's future performance and lead to results that differ materially from those expressed in such forward-looking statements. Here with us today are Gridau's CEO, Gustavo Werneck, and Gridau's CFO and IRO, Rafael Shapur. I'll now turn the floor to Gustavo Werneck to start the presentation. Well, good day to everyone. I want to start by welcoming each of you to the video conference call to discuss Gerdau's results for the second quarter of 2022. I hope you're all well and healthy. I also want to welcome Renata, who recently joined Gerdau as our new IR manager. Renata, while she's sitting next to me, I wish you a very successful and happy journey with us at Gerdau. Also participating in this presentation is our CFO, Rafael Jopor. And for the three of us, it is always a pleasure to talk to you about our performance and clarify possible doubts and questions that might arise during our presentation. I'll start by talking about the international scenario. I'll mention the highlights of the overall results of the company. And then I will detail the performance of our business operations in Q2. Then Jopor will share some information about our financial performance. Lastly, I will be back to highlight some points about our ESG agenda. At the end, we'll all be available to talk with you about any points that you would like us to elaborate in more detail. However, before I go any further, allow me to give a very special thank you to our thousands of employees in the countries where we operate. for having built the best half year ever in the 121 year history of Gerdau. We remain confident that with the enormous dedication of our entire team and more and more focused on delivering value to our customers, we can make 2022 an even better year than 2021 was. I'll start this video conference by talking about the macro environment in which Gridal as a company is inserted. We saw as positive the measures announced by the Chinese government to stimulate the economy and to restrict the supply of steel in the country, which should contribute to sustaining profitability and prices in the short and medium term. In turn, we closely monitor the effects that the slowdown in China's economic growth, whose GDP rose 0.4% in Q2 in the year-on-year comparison, may have on the international scenario. The impacts of the conflict between Russia and Ukraine on the global market continue to be monitored, especially in relation to pressure on production costs due to changing prices of raw materials and energy items in general, as you have seen. I stress that our operations were not affected by restrictions in the supply of raw materials and inputs, because we always work with safety inventories and diversification of our supply base. We're also following closely the uncertainties regarding the growth of the global economy and the impacts that the inflation-prone scenario in Brazil and in the world may have on the demand for steel. In the next two slides, I briefly bring you some highlights that reflect the solid performance recorded by Gridal in the second quarter. Later on, Jaipur will detail our financial performance. We ended Q2 2022. with adjusted EBITDA of 6.7 billion BRLs and adjusted EBITDA margin of 29.1%. Both record figures for the period between April and June. The result, as you will see in a moment, was influenced by high levels of demand for steel from the construction and industrial sectors and record results in North America. Gerdau's net income totaled 4 billion 300 million BRLs in the second quarter of 2022, also an all-time record for the period, representing a year-on-year increase of 27%. In turn, net sales reached 23 billion Bureaus between April and June, up 28% over the same period of the previous year, with shipments of steel totalling 3.2 million tonnes. These significant results posted by Gredau this quarter show the company's solid presence in the markets where we operate, in the Americas, and are also the result of the transformations experienced by the company in recent years. As a reflection of a company with businesses that are more focused, more agile, simpler and more innovative, Gredau has proven to be resilient in facing macroeconomic uncertainties. generating better results and even more value for our stakeholders, such as our customers and shareholders. Well, now, in the next slides, I will talk about the highlights of each one of our business operations and the outlooks for the markets in which Gridau operates. Initially, I highlight that the adjusted EBITDA of our North America business operation doubled between April and June in a year-on-year comparison, reaching a record number for a quarter of 2.8 billion BRLs, with a record adjusted EBITDA margin of 33.1%. I would also comment that the metal spread remains at a historically high level. Shipments remained at high levels in the second quarter, reflecting strong demand from the non-residential construction and manufacturing sectors. The outlook for Q3 remains positive, as our order backlog in the United States continues to be above 70 days of purchases. Given this scenario, we continue to operate our plants in the region at capacity utilization levels above 90%. We are optimistic about the demand for steel in North America, especially from the construction industry. One example that reinforces this positive view is the Architectural Building Index, which measures the activity of the non-residential construction sector in the country, and the Institute for Supply Management Index, which monitors the performance of the manufacturing sector. Both remained above 50 points in June, indicating a continuation of the sound and strong trajectory recorded since February of 2021. In addition, I would like to point out that the infrastructure investment package valued at 1 trillion and 200 billion dollars should begin to generate, starting in Q4 2022 and early 2023, an additional demand for steel of up to 5 million tons per year in the domestic market over a period of up to 8 years. In this context, we continue to invest in improving the productivity and profitability of our capabilities in North America, delivering even more value to our customers. For the next cycle, I highlight the investment of about 300 million BRLs to expand the capacity of the Midlothian steel mill in Texas, our largest operation in the United States, to 2 million tons. Another point of attention on our end for North America is the labor shortage, the inflation rate and the logistics challenges, which have impacted a number of companies in the region. Moving on to the next slide, I will talk now about our special steel operation. As a financial highlight, we recorded in the second quarter an EBITDA 87% higher than the same period last year, driven by the current levels of profitability that we were able to achieve in this quarter. In the United States, the light vehicle market continues to be impacted by the shortage of chips. A regular supply of components previously expected for this year should only occur in 2023. In any case, for 2022, the production of light vehicles in the United States should reach about 14,500,000 units, a volume below expected for the year, but still much higher than the numbers recorded in the last two years. The outlook for the heavy vehicle market is more positive, with the production of trucks expected to total 300,000 units in 2022, up 15.8% year-on-year. The oil and gas sector, in turn, continues to expect growth for the coming months, influenced by fuel prices in the international market, as you have been following. I would also like to highlight that with the completion of the modernization and technological upgrade of our mill in Monroe, Michigan, we are now able to deliver increasing volumes of special steel with higher added value to our North American customers through a more profitable and productive operation. As a next step, We will initiate a new cycle of investments to modernize the rolling operation of this mill in the coming years with the goal of making Monroe one of the most modern mills in the world and continuing to meet our customers' needs. The special steel market in Brazil has also been affected by the lack of chips. According to the National Association of Vehicle Manufacturers , the production of light vehicles in the country should increase by 4.1% in 2022 in the yearly comparison against the previous forecast of a 9% increase. This new estimate reflects not only the issue in the supply of semiconductors, but also the scenario of rising inflation and interest rates in Brazil and restrictions on access to credit. In turn, the heavy vehicle segment remains very positive. although also affected by the shortage of chips. A point that reinforces this optimism is the signal given by the Brazilian government to implement the fleet renewal program, which will encourage replacement of trucks that are more than 30 years old. The agricultural machinery segment is expected to grow 4% this year in comparison with 2021 to about 100,000 units, according to Anfavia, boosted by the expectation of a record harvest. Moving on to the next slide, please. I will now talk about the scenario for long and flat steel in Brazil, whose performance in Q2 reflects a period of continued demand for steel from the different sectors in which we operate at very healthy levels, with shipments of steel from our Brazil business operation up 4% year-on-year between April and June. the demand for steel from the construction sector continues at a high level. And I'd like to bring here some examples that make us confident that the scenario will be maintained this year in 2022. The sales value of real estate property launches recorded in the second quarter of almost 10 billion BRLs represents an increase of 2.4% in the annual comparison, while the number of active construction sites in Brazil continues to grow and reached again its highest number in the 15-year historical series now in July. Another point I would like to comment on is that the growth forecast of the civil construction GDP for 2022 was revised up from 1.6% to 3.8% by the Brazilian Chamber of Construction Industry. Retail sales remain stable, impacted by inflation and the drop in Brazilian's average income. A positive point is that the consumer confidence index went up again in June, gaining 3.5 points over May, reaching 79 points. I would also highlight the gradual resumption of investments in infrastructure, mainly industrial, for the construction of new warehouses and operational units. Investments in infrastructure are expected to total more than 150 billion BRLs in 2022, according to studies by FGV. I also highlight the continued high demand for steel from the industrial sector, a reflection of the high level of activity in the agribusiness, capital goods, machinery and equipment, road equipment and energy segments. ABIMAC, for example, revised its projections for the performance of the machinery and equipment sector, forecasting an increase in the domestic market of 5.8% for 2022 compared to the previous estimate of 3%. In the energy segment, AEB Aeolica foresees investments of 100 billion BRLs in the next five years in wind farms. As for solar energy, the estimate is for investments of around 50 billion BRLs in new units this year alone, according to EPSOLAR. In addition, I highlight that we are moving forward with the already announced investment of about 200 million BRLs in the Rio Grande de Minimil in the state of Rio Grande do Sul. The investments are aimed at modernizing the melt shop facilities, implementing improvements in the digital transformation journey and Industry 4.0, and enhancing environmental and safety conditions in the steel production process. We now move on to the next slide to speak a little about South America. In Argentina, the demand for steel from the construction and every business sectors remains very strong, which has boosted sales in the local market. The Argentine construction sector grew 13.6% in May year on year. according to the latest data released by the country's Statistics Institute INDEC. For 2022, the expectation is that deconstruction activity will remain at a very high level. The same scenario is repeated in the steel market in Uruguay. In Peru, in turn, the demand for steel continues at good levels, stimulated by the construction industry. We continue to have a positive expectation for this business operation, in line with the Peruvian central bank's estimate that the country's GDP will grow by 2% in 2022. Well, this was just a general overview. I'll turn the floor now to Gepur, who's sitting next to me. And after his presentation, I'll be back to talk about our ESG journey. And after that, Japor and myself will be available to answer your questions. Japor, it's up to you. Thank you, Gustavo. Good day to all of you. It is a great pleasure to be here with you once again in our video conference to discuss our results. I take this opportunity to welcome Renata and to wish her great success in this new challenge. Well, speaking a little about the performance and the highlights, over our financial performance in the quarter. On slide 11, let's start talking a little about our operating cash flow. As Gustavo mentioned, in this quarter, we had an EBITDA of 6.7 billion BRLs. In addition, we invested 1 billion BRLs in capex, in line with the forecast we disclosed at the beginning of the year, and another 800 million BRLs in working capital, given higher sales and higher revenues in the period. After payment of taxes and our net financial expenses, we apologize, but we are having a sound cut. Please hold. Okay. We generated a free cash flow of 3,215,000,000 bureaus in the quarter, equivalent to about 48% of the EBITDA and 14% of net sales for the period. On the next slide, I'll detail our cash flow and working capital. As we can see on the top part, When we look at the last four quarters, we had a free cash generation of 13 billion, 485 million BRLs. This is a reflection of the resilience of our business model and our ability to generate cash along the cycle in different scenarios, as well as the consistent process of the leveraging our balance sheet. In the 12 month period, if we analyze how we invested our free cash, even with the when even none of the effects of exchange rate variations and stock holdings in our joint ventures we returned to our shareholders 43 percent of our free cash flow as dividend payouts and share buybacks and invested another 41 percent of this cash flow in reducing our net debt as we will see in more detail in a minute moving to the bottom graph The graph on working capital this quarter, working capital totaled 16.3 billion BRLs. As the working capital rose 9%, In other words, proportionally less than our net sales, which grew 13% in the quarter, our cash conversion cycle was reduced to 64 days. This is the second lowest cash conversion cycle for a second quarter in the last 10 years in our historical series, showing the practical results of our culture. We are at the same time. more and more disciplined in capital allocation, and we are more and more agile in our decision making by our frontline team. Turning to the next slide, let's speak a little about our liquidity and indebtedness. We had a reduction of more than 300 million BRLs in our gross debt in the quarter, despite the significant appreciation of the dollar against the Brazilian real, 11%, which affects the portion of our debt denominated in dollars. With this, we ended the period with a gross debt of 12 billion 445 million BRLs. We ended the first half of the year with a robust cash position of 7,755,000,000 BRLs. With this, we reached a net debt of 4.7 billion BRLs. Our financial leverage measured by the net debt over EBITDA ratio for the last 12 months reached the level of 0.18 times. Our debt profile has an average term of 8 years, well extended and with an amortization schedule well distributed and harmoniously distributed over the next years as shown in the graph below. The company continues with the goal of not only reducing the amount of our gross debt to below 12 billion bureaus, but also reducing the proportion of our debt that is issued in foreign currency, in dollars. As an example, in this quarter, in line with this goal, we reduced our dollar-denominated debt by 220 million dollars. Last but not least, let's speak about shareholders' return. As we can see on the top of the slide, slide number 14, we can see the evolution of net income and dividend payout in recent years. In the last 12 months, we distributed almost 40% of our adjusted net income. At the bottom of the slide, the chart shows how the combination of better results with a significant reduction in our debt has had a positive effect on dividend yield. In 2018, we were at 3.6%, now to almost 12% in the last 12 months. Now, on the right of the slide, let's speak a little about our share buyback program, which was launched in May of this year. Until July 18th, before the quiet period of the company, we had executed 32% of the buyback program, acquiring 17.8 million GGBR4 shares at an average price of 23 reals and 88 cents of a real. With regard to Metallurgica Gradao's buyback program, we carried out 24% of it, acquiring 16.9 million GOAU4 shares at an average price of R$ 10.06. Lastly, let's speak about dividend distribution relative to the second quarter. Gerdau S.A. and Metallurgica Gerdau S.A. will pay dividends respectively on August 25th and 26th of August. At Gerdau S.A., 1 billion and 200 million bureaus will be paid, in other words, 71 cents per share. While at Metalúrgica Gordal, 383 million birals will be distributed, or 36 cents per share. In both cases, the position of shares held on August 15th, 2022, will be considered. Well, with that, thank you very much for your attention. And I now turn the floor back to Gustavo, who will comment on some of our ESG initiatives. Gustavo, over to you.

Thank you, Japor. So now just give you an update on some important points of Gerdau's ESG agenda, pointing out the highlights and advances of our journey. So we've been addressing ESG differently for many years now, but the journey since the origins So I would like to stress on this slide that as part of our diversity and inclusion journey, there was an increase in women in leadership positions from 17% in 2019 to 23.6% in 2021. in line with our commitment to reach the level of 30% by 2025. I also highlight that at the end of last year, we reached 5% women working as operators at Gerdau for the first time in 121 years. There are more than a thousand women today working directly in production. This data is among the dozens of indicators that we publish in our annual report, where we disclose the social, environmental, and financial highlights of our journey in 2021, and which for the first time went through an external audit process, showing our evolution in the transparency and balance of Gerdau's communication with society. Our evolution in our commitment to climate change was also highlighted in this document. Gerdau's audited average greenhouse gas emissions dropped to 0.90 tons of CO2 equivalent per ton of steel in 2021 compared to 0.93 tons that we had in the previous year. This new figure reaffirms our commitment. announced at the beginning of the year to reduce our greenhouse gas emissions to 0.83 tons of CO2 equivalent per ton of steel by 2031, helping to shape the future of such an essential sector as steel in an increasingly sustainable way. In addition, and moving now to the next slide, I would like to talk about the 15% increase of Gerdau in our new business, Gerdau Next, two years of performance last month. We have a US start-up company that works with prefabricated and smart homes. This move strengthens our performance with more sustainable performance and adding solutions in search of improved productivity of the industry and construction. Lastly, I would like to say that in June, Gerdau was announced in June by Merco as the best B2B company and the first in the mining and steelmaking industry. We are the only steelmaking among the 100 Brazilian companies with the best reputation, a reflection of the work and efforts of our more than 30,000 employees. Also as a sign of the progress of our ESG journey, Gerdau was recognized as standing out in the mining, metallurgy and steelmaking category of the 2022 edition of the best ESG awards promoted by Izumi Magazine. Well, then, I thank you all for your attention in listening to our explanations. And from now on, Japur and myself will be available to answer any questions you may have. So back to you, Renata, and we count on your support for the session. Thank you, Virnaki. So now we'll start the Q&A session. As a reminder, if you want to ask questions, click on the Q&A icon at the bottom of the screen and type your question to get in the queue. When you are announced, a prompt to activate your microphone will appear on the screen. At this time, enable your microphone to ask your question. We kindly request that you ask your questions all at once. So we already have questions coming in via chat box. Rodolfo from JP Morgan. He asks Vernecki, with regards to the outlook for the third quarter by business, and especially US and Brazil, I would like to learn more about it. Since that's important piece of information for the market, since we are fearing global recession, he also wants to know about an update on spreads in the US. Rodolfo, happy to have your question. Thank you. I guess your question allows us to give a general explanation on our US business and also in Brazil, our BOs. I'd like to begin by highlighting that last year we had the best year in the history of Gerdau, as you all know. And the first half of this year, the first six months were even stronger compared to the first six months of last year. As you've seen before, when it comes to EBITDA, we had 22% above in BRL in the first half of the year, year over year. And the outlook for the coming two quarters allow us to say right now, as we speak, that we are very confident in terms of having general results for 2022, pretty similar to the earnings achieved in 2021. So this is also going to be another historical year, just as 2022. We're not going to have a stronger Q3 as we had in the third quarter of last year. This quarter was really history. However, we're going to have Q3 and Q4, which added to the record results that we posted in the first quarter. By the end of December, we will get very similar results. Overall speaking, our USBOs remain very strong and very resilient. Naturally, we have a concern in four corners of the world when it comes to super recession, high inflation rates, and based on the signs that we've been reading and the fundamentals of our business, and also considering the infrastructure package that has not come true yet, and the demand for products, considering all that, we believe that the coming quarters will be very strong. And from what we've seen so far, signs of change, like you mentioned, these fears. So, this is very small. When it comes to practice, what we can see is a reduction in our order backlog, a small reduction. We had a very strong level in the past, something unprecedented in previous years. of entry and backlog of orders. There was a reduction. However, the backlog remains at pretty sustainable and strong levels. Like I said, over 70 days and also highlighting that no signs of entry of orders related to the infrastructure package. Another sign that we also see, particularly now in June and July, was higher supply of labor to the industrial sector. For the last 18 months, we had very open positions. We've been having a hard time. to have these people in our mills. We made an effort in order not to stop any production line for the last 18 months, and we realized in June and July that we've been managing to have more positions now, more jobs, which is a sign of an upturn, a sign of recovery of labor, particularly in our industry. the industrial sector and a third move which happened in recent months was a deeper drop in scrap price and it had to be followed up by a reduction in product prices because the spread would come to a level in our opinion that would be not sustainable if it came to a higher level so we followed it up and metal spreads are maintained and will be maintained for the coming quarters, and we are very confident that the results for 2022 in North America will continue very strong and with a good outlook for 2023. Here in Brazil, when we compare figures or numbers of delivery for the first six months of this year, more specifically this quarter compared year over year, we see a drop, but this drop is very much related to inventory makeup that we had over year 2021 rather than a real demand problem. Demand remains very resilient. In several segments where we operate, There are some cases of more accommodation or in some cases we managed to deliver more material. I would say that what was more accommodated was retail in construction, self-construction, renovations, expansion. very much related to interest rates and also purchasing power in Brazil. So there has been some accommodation and I remind you that the share of our steel delivery in this segment is small. On the other hand, the construction sector is very resilient. I understand your concerns. when it comes to the resilience of this sector, considering interest rates are going up and all the old discussion. Anyway, this is not being reflected and won't be reflected in a lower demand in the short term. It's not by chance that our capillarity is very high when you consider digital transformation, fast readings of what's going on. Today we have a very deep knowledge of all the construction sites, work sites open in Brazil, be it for licenses, permits, any signs that shows the solidity of open working sites. This July in our historical 15 year serious. This is a month where we had more construction sites open in Brazil. So demand in the construction industry remains very strong. And we also see ongoing growth of steel demand for infrastructure, partnerships with the private sector, the energy sector, and also machinery and equipment, which considers or continues to be strong. So when it comes to demand, this is very stable in Brazil and it should remain as such. I would say that today where we have a stronger fight is for rebar. And in rebar, this is more related to distribution. If we imagine that, I'm not speaking of ready of cut and bend product, but rebar in our delivery today is around 18%. Out of the 18, 50% of this overall numbers go to distribution. So what is affecting us more strongly in our daily operations for more challenging markets is not even 10%. Other sectors are very strong and resilient. So when it comes to that, when it comes to demand, all the signs that we read now is that 2022 will continue to have a very strong demand. I would say that the striking difference that we see in the third quarter vis-à-vis the second quarter has to do with costs of coal, which were purchased in previous month and going through our costs. unlike scrap, which is in Brazil, it's easier for us to work on purchase and cost. And the coal order that were in close to $600 per ton in past months, now they're going and coming through ships and in the ocean. So particularly when it comes to coal, there's going to be a higher impact on cost. But for Q4, These costs for coal from $600 for orders that are placed around $190, they have a positive cost impact in Q4. So overall speaking, things are very solid. We're very confident for a robust Q3 and Q4. And added to what we delivered now in the first half of the year, This will allow us to be by the end of 2022 with a result pretty much in line with 2021. So overall speaking, Rodolfo, answering your first question, it also gives us the chance to go deeper into other points that are mentioned in this presentation. Thank you, Werneck. Concluding the questions by Rodolfo JP Morgan, Address do Japur, he also would like to have an update on investment projects and expected returns. Hello, Rodolfo. How are you? About our projects, I would like to say that we are very diligent when it comes to the approval process. of our projects in line with our robust capital allocation. So we have the management involved, the team, Gustavo, myself, and all the team. And before we actually start any of the projects, we have everything in line. We take into account interest rates, increase in cost of capital. Sometimes it is more challenging to approve projects, but what we have in the portfolio, all the projects were carefully studied, thoroughly studied, and we believe they are resilient under different scenarios. both generating more revenue, improving our product portfolio, but also supporting and leveraging our competitiveness in different scenarios of the economic cycle, cash conversion cycle, be in moments where we are right now or even in more challenging times. Thank you, Japur. The next question comes from Rafael Barcelos Santander. Please unmute so we can revisit your question. And if you want, you can also open your camera.

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