Gerdau S.A.

Bom dia a todos e obrigada por aguardarem. Sejam muito bem-vindos à videoconferência de divulgação dos resultados do terceiro trimestre de 2022 da Gerdau. Destaco àqueles que precisarem de tradução simultânea que temos essa ferramenta disponível na plataforma. Para isso, basta clicar no botão Interpretation através do ícone do globo na parte inferior da tela e escolher o seu idioma de preferência, português ou inglês. Para aqueles ouvindo a videoconferência em inglês, há a opção de botar o áudio original em português clicando em New to Original Audio. Informamos que esta videoconferência está sendo gravada e será disponibilizada no site GRI da companhia, onde se encontra disponível o material completo da divulgação de resultados. É possível também fazer o download da apresentação no ícone de chat. Durante a apresentação da companhia, todos os participantes estarão com o microfone desabilitado. Em seguida, daremos início à sessão de perguntas e respostas. To ask questions, click on the icon that ENEM on the bottom of your screen, write your question to enter the queue and if you wish, also indicate that you would like to ask the question through the video that we will open the cameras. When announced, a request to activate your microphone appears on the screen, so you must activate your microphone to ask the questions. We advise that they be done all at once. We highlight that the information contained in this presentation and eventual statements that can be made during the videoconference related to business perspectives, projections and operational and financial goals of Gerdau constitute beliefs and premises of the company's administration, as well as information currently available. Future considerations are not guarantees of performance. They involve risks, uncertainties and premises, as they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors must understand that general economic conditions, market conditions and other operational factors can affect the future performance of Gerdau and lead to results that differ materially from those expressed in such future considerations. We have with us today the CEO of Gerdau, Gustavo Werneck, and the CFO of Relations with Investors and Director of Relations with Investors, Rafael Japur. I will pass the floor to Gustavo Werneck to start the presentation. Please, Werneck.

Renata, thank you very much for the introduction. I would like to wish everyone a good afternoon. I would also like to welcome each one of you to this Gerdau's video conference on the promotion of Gerdau's results. a reference to the third quarter of 2022, hoping that everyone is well and healthy. As Renata mentioned, our CFO, Rafael Japur, who is here with me, participates here with me. And for the two of us, it is always a satisfaction to talk to you about our performance. And in the end, we will debate the points of doubts and be able to clarify those questions that you have and appear throughout the presentation. I'm going to start by talking about the international scenario, about the highlights of the overall results. Then I'm going to take a look at the performance of our business operations, especially in the quarter. I'll jump in to share some information about our financial performance. And at the end, I highlight some relevant points on our agenda and SD. And then we'll move on to the Q&A session that Renata will lead us through. Bom, mas antes de prosseguir, eu gostaria, mais uma vez, como eu tenho feito rotineiramente, fazer um enorme agradecimento às nossas milhares de colaboradoras e colaboradores nos vários países onde a gente tem operação, onde a gente tem negócio, por terem construído, nesses primeiros nove meses de 2022, os nove melhores primeiros meses da história da Gerdau em 121 anos. Last year was a historical record for us in terms of financial results, 2021. But when we compare the first nine months of this year, 2022, with last year, we are better. The next level, a little below, we will be at the result of last year. It will now depend on the results of the fourth quarter, which has already started. So there is this very special thanks to our collaborators for their performance and for everything they delivered over the nine months. I'm going to skip to episode 2, to start this video conference talking about the macroenvironment that Gerdau is in. And then I put some highlights, and I start by saying that we continue to closely monitor the uncertainties in relation to the growth of the global economy, the impacts that the inflationary scenario, especially here in Brazil and the United States, They may have a high demand in our markets. We also continue to monitor this possible deceleration of the Chinese market, especially due to restrictions caused by the COVID-0 policy implemented by the Chinese government. In addition, we closely monitor the impacts of the conflict between Russia and Ukraine, these impacts on the global market, especially with regard to our case, the pressure of production costs and, in particular, the cost of energy. Let's jump to the next slide. In these next two slides, I briefly bring some highlights that reflect the performance recorded by Gerdão in the third quarter, without wanting to go ahead of Japur, who, in his presentation, will detail our financial performance a little more. We ended the third quarter of 2022 with an adjusted EBITDA of R$ 5.4 billion. an adjusted margin of 25.4, which is the second highest historical value for the period between July and September. This result, as you will see in the sequence, was influenced by high demand levels for steel in the construction and industrial sectors, as well as by record results in North America, which we will talk about in more detail soon. Our liquid profit amounted to R$ 3 billion in the third quarter of this year, while the liquid revenue reached R$ 21.2 billion. The physical steel sales, in turn, totaled 2.9 million tons in this period. Outside of the result reported by Guernon this quarter, he contributed to the registration, as I commented in my introduction, in the first nine months of 2022, the best EBITDA adjusted in the history of the company, adding R$ 17.9 billion. And this performance reflects the company's resilience in the face of the uncertainties of the macroeconomic scenarios, but it is also the result, I would say, of the consolidation of the transformations that we have been experiencing in recent years and that have made Gerdau a more agile, simpler, more innovative organization and generating more and more value for our stakeholders. Here I highlight, especially, our shareholders and our clients. I'll go to the next slide to highlight, in addition to the financial results, the approval by the Council of Economic Defense Administration, called CADE, in our joint venture between Gerdau and the companies of Sandom, for the service of truck rental, semi-revox and other transport-related products, reinforcing Gerdau Next's strategy to develop new businesses, thinking about the future of mobility. 20 years of experience in logistics and allocation.

So now in the next slides. We'll talk a little bit more about the highlights of each one of our business operations and the outlook for the markets in which Gerdau operates so that later on we can talk more about it during the Q&A. On slide six, I would like to begin by talking about North America. I would like to highlight that the adjusted beta of our North American business operation totaled 2.6 billion reals with an adjusted margin of 32.9%, both historical records for a third quarter and above the margins achieved by our local competitors, confirming that our strategy and positioning in North America has been successful over the last few years. when the bulk, well, I think you remember that you had margins that were single-digit margins. I also highlight that the metallic spread remains at a historically high level, and that's the trend for the coming months. Volumes remained at high levels in the third quarter, reflecting strong demand from the non-residential and manufacturing and energy sectors. the outlook for the fourth quarter remains very positive, even despite seasonality of the period, since our order backlog remains at normal levels and very positive. Considering this scenario, we will continue to operate our mills in the region at capacity utilization levels above 90%. We also remain optimistic about the demand for steel in North America, especially from the construction sector. We follow some indicators like the Architectural Billing 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, remain accommodated at positive levels above the 50-point line. Data from the U.S. Census Bureau show that the total spending on domestic non-residential construction reached a record high of almost $80 billion in August this year. I would also stress the reassuring phenomenon that has continually brought in new customer orders. and also infrastructure investment package valued at $1 to $2 trillion, which should begin to generate additional steel demand of up to 5 million tons in the U.S. market through 2023 as states move forward with their projects. In this context, we continue investing in digital transformation and improving the productivity and profitability of our units in North America, making our steel even more competitive and generating more value to our customers. For the next cycle, I'd like to highlight investment in the Whitby Mill in Canada, whose new melt shop will start operating the first half of next year and the expansion of the product mix offer in our Jackson unit in Tennessee, meeting the new needs of our local customers. Other points of attention that Japuri is monitoring very closely in North America, they include labor shortages, which is still an issue for us, and inflation and interest rates, energy costs, the pace of the economy in general, and the logistical challenges of global value chains, which have impacted not only Gerdau, but many other companies and organizations in the region.

I'll jump to now slide number seven to talk about our special steel operations, and I would like by highlighting the financial aspects. We reported third quarter adjusted EBITDA 17% higher than the same period of last year, driven by current profitability levels. Well, in North America, the impact of ship shortage in the light vehicle market has been decreasing. Biological challenges and labor shortages have affected local light vehicles production. Anyway, light vehicles in the country should reach 14.4 million units, a volume much higher than the figures recorded in the last two years. For 2023, the expectation is that production should be above 15 million units, confirming the recovery of the light vehicles market when compared to historical levels. With the recent approval by the American Congress of the so-called CHIPS Act, there will be a significant localization in the United States over the next few years of the manufacture of semiconductors, definitely solving this problem that has been impacting the production of vehicles in recent years. Now, in regards to heavy vehicles, the market remains positive, with truck production expected to total about 300,000 units this year, or more than 320,000 units by 2023. The oil and gas sector, in turn, continues to expect growth influenced by fuel prices in the international market. And the rig pounds, for example, should reach an average of 901 units this year when compared to 603 last year. I would also like to highlight the approval of an additional investment of around 200 million BRLs in our specialty steel mill in Monroe, Michigan, for the modernization and technological upgrade of the rolling mill as part of an investment plan of approximately 2 billion BRLs aimed at making our special steel operations in the U.S., especially in Monroe, one of the most modern plants in the world. With this new investment, Monro will become one of the most technological SBQ bar producing plants, one of the most technological ones in the global market, with a goal to continue meeting the future needs of our customers and also to pursue solutions for the potential demand of the electric and hybrid car segment. Well, the special steel market in Brazil continues to be affected by the lack of semiconductors and other inputs. But anyway, there has been a recovery in the light vehicles market in this third quarter, whose production volume rose 34% year-on-year, according to Anfavia. For 2022, the production of light vehicles should grow around 4.4%, according to the same association. Meanwhile, the heavy vehicle market remains positive, with a 16% increase in production between July and September on a year-on-year comparison, especially in the bus segment. The agricultural machinery sector should advance 4% this year when compared to 2021 to reach approximately 100,000 units, reflecting the expectation of a record harvest in Brazil, according to Amfavia. I would also like to emphasize that the sectors that consume special steels, especially auto parts, have shown to be very competitive in the global market, also generating good export opportunities starting in Brazil. I would like to point out something very important because we have recently started the operations of the new continuous casting of blooms and billets in the Pindamonhangaba Mule in Sao Paulo. This equipment will allow the special steel unit in PINDA to have a much more automated process with better yield, producing cleaner steels, and also resulting in the delivery of differentiated products and in an even higher level of quality to suit the needs of our demanding clients. Also, the technological updating of the unit in PINDA Moyangaba is more aligned with the future prospects for a growing number of electric and hybrid vehicles in Brazil. Well, now I'll move to slide number eight, and here I will talk about the long and flat steel landscape in Brazil. And in the third quarter, the performance reflects an accommodation of the man forest steel from the different sectors in which we operate, with shipments of steel from our Brazil BD growing 2% between July and September when compared to the second quarter of this year. And I see that this is the most important comparison to be made. The steel consumption in the industry remains high, which is reflected in the number of active construction sites in Brazil that once again reached a historical record in October. I also mention here some other points that make us confident about the future of the sector. For instance, the FGV, Civil Construction Confidence Index, reached its highest value in the last six years in September with 101.7 points. Furthermore, I would like to highlight that the analysis of the civil construction GDP for the second quarter of 2022, when compared to the same period of 2021, shows a strong performance in the sector, growing 9.9% according to the latest survey conducted by the Brazilian industry. This reflects an increase of 3% of construction GDP in in 2022. Now, speaking about retail, sales are flat, impacted by inflation, the decline in Brazilians' average household income. And so I think by 2022, that consumer confidence index should reach 2.8% increase. And this shows higher investments in infrastructure and investments are supposed to be over 151 billion barrels by 2022, according to BMDS. In addition, there is a demand for steel coming from the industrial sector that remains at high levels. This reflects the good performance coming from agribusiness, capital goods, machinery and equipment, and especially yellow line and the energy segments. Still talking about energy, I think it's important to mention what has been recently announced that Brazil The installed capacity exceeded 20 gigawatts from solar sources. This is an increase of 44% between January and October 2022, placing photovoltaic energy as the third power source in the Brazilian electricity matrix. In addition, I would like to emphasize the launching of our new business platform called Gerdau Mais. This solution is an important milestone in our digital transformation journey since it allows our customers to follow their entire journey of their relationship with Gerdao through the platform, which will bring us deeper insights that will allow us to offer more personalized services. And this is what we've been doing in the past few years, trying to serve our clients even better. Now, moving to the next slide, I will talk about South America, starting with Argentina. In Argentina, the demand for steel from the construction, agribusiness, energy, and mining sectors remains strong, which has boosted sales in the local market. The Argentinian construction sector grew 6.4% between January and August in a year-on-year comparison, according to the latest data from INTECH. For 2022, the forecast is quite positive as well. And this is the same scenario that is repeated in the Uruguayan steel market. In Peru, the demand for steel continues at good levels, driven by the construction industry, which continues to evolve. resulting in a 6% increase in sales in the local market in the third quarter when compared to the previous year. I mean, according to the central bank's estimate, this is in line with the estimate from the central bank of that country, and the GDP should grow by 2% in 2022. Now I'll give the floor to Shapur, and... We will discuss those items further on. So, Japur will now talk about our financial performance. So, Japur, the floor is yours.

Thank you, Gustavo. Good afternoon to all and everyone. It is a great pleasure to be here with you once again in our earnings conference call. I hope everybody is fine and healthy and safe. So, let us talk about our financial performance for the quarter. Now we have the best first nine months of our track record, like Gustavo said, very well during the highlights of the period. So let us talk about cash flow and working capital. Like Gustavo said, this quarter was generated an EBITDA of 5.4 billion BRL. This is the second best EBITDA for a third quarter in our history and confirms the resilience of our performance in different scenarios. We invested in this first part around 1 million reals in working capital, very much in line with what we said in the previous quarter, and we invested 1.1 billion reals in capital disbursement. Let me give you more color on the investments that we made and that we are assessing and performing, and I'll be detailing this later on in the presentation. What about operating cash flow, taking into account what we had in costs and obligations for our debt and income tax paid? We have free cash flow of 3.1 billion reals this quarter. equivalent to nearly 60% of EBITDA or 15% of our net revenue for the period, transformed into free cash flow. During this quarter, if we take into account this R1.2 billion that we paid, In the third quarter, related to dividends paid in the second quarter, plus R600 million that we invested in share buyback of GGR4, we have nearly 60% of our free cash flow of the quarter invested in return to shareholders. Moving on to the chart below, Now focusing more on working capital, we can see that basically we didn't have a lot of working capital used this quarter. It remained flat at a level very close that we had in the previous period. With the cash conversion cycle, which is measured as a function of revenues for each quarter, because we had a drop of 8%, like Gustavo said early in the presentation, we had an increase in the number of days, 64 to 70 days, but within a very comfortable level and taking into account the seasonality that we naturally have for the year in normal levels according to the company's track record. Now, moving on to our investments and how we've been allocating capital in our capex. Like we said in the previous slide, this quarter we had a disbursement of R$1.1 billion capex. Of this amount, R$400 million were invested in competitiveness projects, trying to increase our capacity to generate results over in this cash conversion cycle in the long run. For 2022, we follow the same projection of capex disbursement of 4.5 billion reais. And the chart below, we would like to take this opportunity of being with our investors and the markets in general to bring more color on the main initiatives that we've been performing. and which have already been approved by our board of directors, or which are being studied in-house. Naturally, they are in different stages of maturity. As you can see, the major focus behind these projects are in three categories. First, assure competitiveness access to raw materials in the long run, improve our production capacity or to cater to our customers' needs, and add increasingly more products or added value in our portfolio to our customers. In the earnings conference call of the fourth quarter, of 2022, which will be in early 2023, we're going to go deeper into these initiatives and we'll give you an update on the forecast of CapEx disbursement for year 2023. Now on slide number 13, let us address our cash position and indebtedness. This quarter, we reached the lowest level of net debt over EBITDA in our history at 0.16 times. This stems from the deleverage process achieved in previous years and also the strong result generated within the first nine months of year 2022, like Gustavo highlighted. We closed the third quarter with a cash position that is very robust of 8.6 billion reals, very close to what we had a year before, around 2% higher than the same period last year. We closed the third quarter with a gross debt of R12.9 billion. This increase of around R500 million is mostly explained by foreign exchange variation of 3.2%, taking into account a significant portion of our debt, which is denominated in dollars due to the bonds that we issued in the capital markets. It's important to highlight that the company continues pursuing this level of gross debt below R$12 billion, but not only maintaining, but also to reduce the portion of our debt which is effectively denominated in dollars. So, considering this, we would like to remind you that in the coming days, now on November 21st, we're going to have the maturity of the 15th. issuance of our debenture from 2019 with a principal amount of 1.5 billion reais. So with that, we basically go back to a level below 12 billion reais of gross debt. The lower chart shows our debt profile with an average maturity term of 18 years and distributed with amortization over time. and with a long-term profile. I also highlight that in this third quarter, we made use of the strong results that we've been posting and our solid cash position to renew our global credit line. It used to be $800 million and now is $875 million. which further increases our resilience, our financial flexibility, and we make the most of this moment to extend the term. This line would be due in October 2024, and now it will be due in October 2027. We would like to thank our partners, our banks that allowed us to extend this term. I highlight that in the closing of this quarter, this line is absolutely operational and fully available and not withdrawn by Gerdau or by any of its subsidiaries. Moving now to slide number 14, let us talk about return to our shareholders. owing to the significant cash generation in the first nine months of the year, accruing more than R9 billion, and taking into account the solid financial position, the board of directors of the company has a dividend payout and interest on capital of approximately R3.6 billion. Or, just to round it up, 2 reals and 15 cents per share to be paid to our shareholders on the 14th of 2022. At Metallurgica Gerdau we're also going to have interest on capital and dividends amounting to approximately 517 million reals or 50 cents per share. The payment of proceeds in Metallurgica will happen on December 15, and both for Gerdau SA and Metallurgica, we will consider the position of these shares held now on December 2022. With that, we highlight the payment of proceeds and accrued for the first nine months of The year, we declare almost R$ 5.8 billion as dividends at Gerdau, equivalent to more than 60% of the free cash flow generated over this period. Moving from dividends... into our share buyback program, which was launched this May. In Gerdau SA, we have 81% of the program performed, or more than 45 million share buyback for R24.08, taking into account not only in the first quarter, but also up to the beginning of the quiet period on October 24th. With that, over the year, over year 2022, we have nearly 1.1 billion reals invested in share buyback. As for Metallurgica Gerdau, we performed nearly 70% of the program announced. As a reminder, at Metallurgica, it is greater than Gerdau SA, accounting for 5% of preferred shares, and Metallurgica has 10% of free flow of preferred shares at Metallurgica. So, until the closing, before the quiet... period, almost 70% of Metallurgica was performed or nearly 47 million shares of Goal 4, which were bought for an average price of R$ 10.36. As already announced in a material fact early on, the Board of Directors of Gerdau SA decided to cancel all GGBR4 shares in the share buyback and a lot of 1.7 million common stock which were already in the company, in the program. As for Metallurgica Gerdau, it will also cancel all the shares in the share buyback program and also an additional lot of 6 million preferred stock which were also at the company's treasure before the program started. So, taking into account share buyback and dividends, we go to the upper chart and we come for the last two months. If we put together everything we did when it comes to return to shareholders, we come to a level that is very significant of 7 billion reals returned to our shareholders. Taking into account adjusted profit for the period, a payout of nearly 55% in our results, way above the 30% that were stated by our bylaws. In the lower part of the slide, there is a chart that we always like to show. showing how the combination of better results and ongoing reduction in indebtedness in recent years allowed us to have a very positive impact on the dividend yield growth for our securities, moving from 3.6% dividend yield in 2018 to 14.1% for the last 12 months. So thank you again for your attention. And now I turn the floor back to Gustavo, who will make comments on our ESG initiatives for the quarter. And I'll come back in the Q&A session.

Over to you, Gustavo.

Thank you, Jafur. Well, about the three final slides, I would like to comment on some relevant aspects related to our ESG agenda. Well, starting with some piece of information that has been already disclosed, because in August we received certification for Gerdau Summit, which is our JV with a Japanese Sumitomo Corporation and JSW for the supply of rolling mill rolls and parts for wind power generation as a B company. As a result, Gerdau Summit became the first to manufacture in the world to become a bee corporation. The certification reflects our commitment to the Bee Movement Builders Program and its ambition to certify all of our operations in all of the countries where we operate as a B company by 2025. As part of our sustainability agenda, the certification recognizes that Gerdau follows good sustainability practices and effectively connects our businesses with our purpose of empowering people who build the future, leaving a legacy for society. I should also mention that the certification as a B company is given by an independent international nonprofit organization called B-Lab, represented in Brazil by Sistema B, which was able to verify in a very tangible and measurable way how Gerdau Summit has worked to build an even more sustainable, diverse, and inclusive business environment. Furthermore, I would like to mention that we receive a certification from the World Steel Association for our reporting on greenhouse gases in line with the institutional agenda. Through our participation in the Climate Action Program, we are included among the 15% of companies with the best performance in CO2 intensity, which is the result of our governance and investments in the improvement of environmental practices. We are the largest recycler of steel crap in Latin America, and our greenhouse gas emissions rate is about half of the global average for the steel sector. But, as previously announced, we want to go even further. So this year, we committed to new targets to reach... 8.83 tons per CO2 equivalent of 10 of steels by 2031, and we aim at being carbon neutral by 2050. Finally, I would like to point out that in September this year, we were present at Hawking Hill Brazil 2022, being the official steel supplier of the festival. We supplied 200 tons of 100% recyclable Gerdau steel for the construction of the largest world stage in the history of rock in Rio, bringing the concepts of sustainability, circular economy, and innovation not only to the event, but to the entire Brazilian society. So I would like to conclude by thanking all of you for listening to our remarks, and now we are available to take your questions and elaborate further on any point of greater interest to you. So now, Renata, I'll give the floor to you so you can help us organize this Q&A session.

Thank you, Werneck. So now we'll begin the question and answer session. As a reminder to ask questions, please click on the Q&A icon at the bottom of the screen and write a question to enter the queue. If you want to ask using the video feature, please click on the Q&A icon so you can open your screen. Upon being announced, a request to unmute will appear on the screen. Please turn on your microphone to ask your question. We kindly request that all questions be asked at once. Let us begin. We already have a couple of questions via chat. We have Leo Correa, analyst with BTG Pactual. Good afternoon, everyone. I have two questions with regards to dividends at Goal. We notice a dividend payout which is lower at Goal vis-à-vis GGBR. I would like to understand the rationale behind this difference. There is a second question, also from Correa. about trends of profitability in Brazil. He says, we've come to a level that is lower this call in terms of EBITDA margin around 18%. I would like to learn more about profitability trends for the coming quarters considering the drop of raw materials prices and one-off adjustments of price in the domestic market. Thank you, Renata. Leo, thank you for the questions. Let me answer in the sequence. First, about Gerdau Metallurgica as a dividend, okay? Hello, Leo. Excellent question. It gives me the chance to bring an important clarification about this recurring topic. There are many questions by analysts. So, some reminders. We opened the share buyback program because we strongly believe our shares are depreciated vis-a-vis the intrinsic. and we keep on working on the SHAR buyback both at Gerdau SA and Metallurgica, which is larger at Metallurgica compared to Gerdau SA. Considering the cash at Metallurgica, if we do the math, we reasonably have today funds enough in Metallurgica to conclude the buyback program, which is already open at Metallurgica Gerdau. When we started the share buyback program, we started from historical levels of the intrinsical level of Metallurgica vis-à-vis Gerdau SA. So from 24% to 26%. And even though we perform a program which is twice the size of Metallurgica vis-à-vis Gerdau SA, we keep on having a discount which is very significant, around 20%, and the company's management doesn't consider it to be adequate, considering the nature of Metallurgica Gerdau, which is a holding company, carries a single asset, which is Gerdau SA. So the increased value of the participation of Metallurgica and Gerdau SA is not a reason to have such a significant discount, considering that Metallurgica... has very low costs, very little expenses, basically no carryover costs to take this portion at Gerdau SA. So to summarize, if we take into account the level of price, we continue to consider adequate as a long-term investment to shareholders to allocate value to keep on having share buyback at Gerdau SA, and it makes more sense to keep on buying back shares. shares from Metallurgica Gerdau. So part of the dividends that will be received at Metallurgica from what is proposed by Gerdau S.A. to all its shareholders, this will be used over the coming quarters to follow the share buyback program of shares issued by Metallurgica Gerdau. I know it's a long answer, but I just wanted to make it very clear. and I hope I've answered Leo's question. Gustavo, let's talk about profitability. Thank you, Japor. Leo, about Brazil. Let us focus on the main points of the business, addressing Q3 onwards. Think about demand. Demand is very solid. It remains solid in the third quarter, and will keep on being solid, in our opinion, over 2023. The second man that has more difficulties now with a slight drop in our portfolio is retail, very much affected by the level of indebtedness of the family, family and household, and income generation. And there is some growth in infrastructure. Sanitation is an example of progress in Brazil. converted into demands for us right now. Demand from the industrial segment or agribusiness and also from construction in general. Demand is very resilient. I also mentioned in my opening remarks one important indicator, which is the level of construction sites active in Brazil. And once again, a record in October. I keep on showing this indicator in our calls as something very relevant for us, for the resilience of this sector. So, demand in general in the domestic market is okay. and who keep on being at this level, I would say, positive in the future. What about profitability level in the domestic market? They are also adequate. It's not by chance our import premium increased a lot. Prices in Brazil do not follow the drop in prices in the international market. I would say that when it comes to profitability, this is okay, pretty okay, and will remain as such in the future. And now I come with the main points which explain the margins in Q3. These will be important drivers if we consider margins for the future. The first highlight is what just happened in Q3 about coal. So, coal... increase a lot in the first and second quarters this year. This is purchase and transport to Brazil, and the costs happen in the third quarter. So when it comes to the rising costs, this is happening owing to the coal. Coal prices remain very volatile in the world. In the latest weeks, we had a rising call. We cannot tell exactly how the price will behave over 2023, but that's a driver that might explain higher margins or lower margins next year. A second highlight happened in the second quarter, which is a maintenance shutdown in Ouro Branco. Ouro Branco, unlike other mills, we have phase 2. In EAF and scrap, life cycle is shorter and some pieces of equipment are being in maintenance. And we keep on going under maintenance over the next five years. So we had maintenance of blast furnace number two with results in the second quarter. Blast furnace is now up and running again. and maybe a factor that should bring more attention. It had an impact and it may on keeping impacting positively these margins in Brazil. I'm referring to exports. Margins in the domestic market, like I said, remain very solid. However, exports are driving down, driving margins down. As we speak, We are preparing the operation for the coming quarters, including 2023, so we can keep on exporting despite lower margins. So we don't intend to have any demobilization of our capacity. It's not clear yet whether prices and international margins will remain at these levels. So in the short term, there is an impact. We slightly reduced our export levels in the third quarter, around 22%, which is our traditional number. to 9% now. We keep on exporting a little, particularly for our sister companies, in order to have an operation level that will bring opportunities for exports in the future. So these are the drivers behind the margins achieved in the current quarter, and to some extent are the factors that will guide general margins of our operations in Brazil in the coming quarters. But just highlighting that in the domestic market only, margins remain pretty solid. We believe they'll keep on being solid because the main factors that contribute to these margins remain stable. they will continue to be solid down the road. So, overall speaking, Leo, these are our answers to your questions. I give you the floor back, Renata.

Thank you. Our next question from Daniel Sassin, sell-side analyst from Itaú BBA. Daniel asks for his video to be enabled. So, Daniel, you can accept the authorization to go live on video. Hello, how are you? Can you hear me? Great. Thank you, Renata. Thank you, Shapur and Vernac, for the presentation. My first question in terms of capital allocation is whether you could give me a little bit more detail about the way you arrived at that extraordinary dividend to be distributed. Now, you said that you don't want to change the rule of 30% also because you want to have more flexibility throughout the cycles. But what was behind that view? I mean, do you have any view about gross debt for the end of this year or the end of next year that could probably put a ceiling in terms of a leverage target? Because, you know, in addition to that $12 billion of gross debt, your leverage would be 1.1, 1.2 times the debt over EBITDA. So if you could please... you know give me a little bit more color and now my second question relates to the u.s market you had a quarter where shipments were not as strong but prices were strong is this just a temporary dynamic because lower demand at the end or was it something more deliberate when you look at your policy of value per volume so that looking forward you would really it will really be okay to lose a little bit more so that you could still remain posting high profitability levels. Well, thank you, Daniel. Hi, hi. How are you, Daniel? Well, let's start with our capital structure. It's important that we make a distinction because we didn't do any extraordinary dividends because we didn't move forward on the reserves of the company. In 2022, we have more than 10 billion BRLs of net profit. So when we look at net profit in our base, we are not advancing towards our reserves. So we are not using that to pay our dividends or even to execute our buyback program that is coming around the corner. I mean, our philosophy or mindset is pretty much in keeping with what I said earlier on, which is to maintain the net debt over EBITDA level, close to, you know, 8 million barrels. And our cash, also considering the different countries where we operate different businesses and the need to be flexible. And also considering our financial soundness, this would be around 6 billion BRLs as well. Therefore, at the moment, we do not anticipate any structural change in our capital structure. This is not in the radar. I think we missed a little bit of the beginning of your question, so if I fail to answer your question completely, please let me know. And now I turn the floor over to Gustavo to talk about the North America part of your question. Well, Daniel, in terms of volumes in the U.S., we had some maintenance downtime, and we had to use some windows of opportunities to take advantage, you know, making some investments. We had to make some maintenance downtime to invest and invest in our profitability. Demand remains very sound. The backlog today is lower when compared to 2021, but even though it's a very healthy backlog. And so right now, and even looking towards 2023, we can operate at our full capacity, but probably our bottleneck in terms of operating with our productive capacity in our rolling meals, auto utilization over 95%. So the problem is labor. There was a slight improvement in July and August, but now we still suffer with scarcity of labor. We have to deal with that difficulty, even though we did not stop our productive capacity due to lack of people. done that yet. But if we look at the threats market in the U.S., I mean, in Brazil, these are two different things. If we look at, you know, longer periods, 10, 15, even 20 years, and if you look at the loans market in the U.S., the margins are higher, and it's more stable in general, and it has less volatility when compared to the flats market. In addition, another thing that we should take into account, and then longs does not have capacity deliveries. I mean, there are three well-established suppliers. Each one of us have one-third of the market. There is no new entries of capacity. There are things that we are noticing in the short run and things that we anticipate that will probably happen in the mid-range. So this reshoring is something that is already happening and an important period for us. There is just one example that I mentioned during your presentation, but there are other things happening, the approval by the U.S. Congress of the CHIP Act. that will increase the production, productive capacity of ships in the U.S., and they are already demanding long-steels, the infrastructure investment of $1.3 trillion. This has not yet been translated into demand. We haven't seen anything coming from that new act. But I would say that, in general, this is still in the executive space in different U.S. states, and this... could probably be materializing to stronger demand maybe in the first half of next year so all in all the longs market is much better prepared to deal with this inflationary scenario when compared to other markets in north america as well the level metallic spread remains very consistent scrap right now is at lower prices and transportation due to that extreme drought in the Mississippi River. I mean, we do not rely too much on the Mississippi River to transport our scrap and products because we do that from our mill in Jackson, Tennessee. But there are some logistic pressures that have an impact on the price of scrap. But even with lower scrap prices, the maintenance of long prices, the spreads are still at very high levels. Therefore, all in all, Our operation is very healthy in the U.S., not only if you look at the market, but everything that has been happening in the past five years in terms of our transformation. I remember that five years ago when I talked to you about that, when our margins were below the gap that we had in terms of operating costs and also in terms of updating our mails. I mean, the gap has been closed. So in general, speaking about the North American market, what I could tell you, it was just that. Okay? Okay.

Thank you.

Thank you, Werneck in Japur. Next question, Gabriel Simões, sell side analyst with Goldman Sachs. He has a couple of questions. First question, we saw a very significant acceleration in dividends announced this quarter in addition to fast performance of the buyback program. I would like to understand how you see the leverage of the company down the road. You often speak of the target of 12 billion BRL as gross debt, and investors had in mind a target close to 5 billion for net debt. Does it make sense to continue in the debt in these terms, or are you working with an optimum leverage level expected by year-end? What is the best way to consider this? Japor, Wernecki, would you like to answer? There are other questions from Gabriel, and then I can ask you later. Maybe that's easier. Okay, great. Hi, Gabriel. Well, we don't see major changes when it comes to our philosophy about our balance sheet or our capital structure. The same applies to 12 billion reais as gross debt, something around these numbers. We wouldn't like to have it downwards or upwards. And we also have some tactics about debt rollover over time. As for dividends, they are a result of our capacity to generate profit and cash over time in a resilient basis. So this is why we accelerated this quarter, because we have more visibility in our cash generation capacity until the end of the year, more than R9 billion as free cash flow. With regards to the leverage, We are not piloting the balance sheet to come to a position A or B when it comes to the year-end position. We have some obligations and payments to be made. There are some questions in the Q&A. So we have debenture maturity. that we're going to fully pay in April next year. We also have 2023 with a maturity, and the idea is to have it now. And owing to the high volatility of markets, of bonds, it doesn't seem the most adequate moment for a new issuance. Maybe we can have a short-term operation with a commercial bank. Our debt ratio today is pretty much concentrated in capital markets with a lot of room with commercial banks with slightly shorter lines, taking into account that the average term today is around eight years, which is way above the six years, which is the minimum for our target of our debt maturity term. So I'll try to answer your question and also questions from other analysts. So, Renata, back to you. Perfect. Gabriel has some questions here. I'll pull all the questions. So, he says that the US operation delivered increasingly strong numbers this quarter. With a very strong margin, I think it would be cool for you to give us more color on the outlook for this segment. We used to speak of a margin, stable margin, close to 10 or 20 or 12 percent for this business front. Does this level still make sense considering a normal level? If the answer is yes, when do you expect to see this normal phenomenon? And then he also made comments on, well, he'd like to understand how we think about investments in orders and expectations about the timeline for these investments to flow in the company's earnings results. I give the floor back to you. I think this is what I answered to Daniel earlier. If we think about the expression normalization in a world that is no normal anymore, it makes no sense. So many things that will keep on happening in the world. I don't think it makes sense to talk about normalizing. I think it makes more sense to say that we are absolutely prepared as a company to grab all opportunities that are brought to us from the market. This is the transformation that we've been going through seven years. It didn't start yesterday. The company is very light, very agile. As G&A, our revenues with historical levels this year, this is evident. So I don't know exactly what will happen over 2023 or what the world will bring us in terms of surprises. But if you focus on what we can see now in the short term or what we envisage, about the margins for 10 or 12%. Today, they are not on our radar. We expect to work with higher margins. Like I said, we have demand backlog and possibilities, new orders in terms of new production capacities in the US. our customers, the infrastructure package, and also the transformations performed in our plants. So we strongly believe that we'll be working with margins that are way above this level in the coming quarters. There will be seasonality at the end of the year, not only in the US, but also in Brazil. Seasonality has been different after the pandemic, but considering this, Well, then we may go back to normal by year-end with collective or blanket vacations or maintenance, shutdown, vacations, holidays, and this year more specifically the World Cup, which affects some markets. So we have lower seasonality in December. And I'd like to say that December, whatever happens when it comes to seasonality, this will be a decisive month. How close will we be to the historical level we achieved next or last year? We closed the first nine months of the year above historical year last year. So let's see in November and December how close we will get to the results achieved in 2021. So overall speaking, when we consider North America overall, maybe the resilience and optimism, this is what drives us now. And that's how we are getting ready to be on 2023. Back to you, Renata.

Next question, Tiago Luciego, Radesco BBI.

He would like to use the camera. So, Tiago, please accept the camera enablement. Can you hear me? Well, thank you. Thank you, Renata. I would like you to elaborate a bit more on the Brazil BD and looking at the market dynamic going forward. On the demand side, you already said, Renata, that there is some seasonality. It's a natural seasonality of the business in the fourth quarter. I would just like to understand whether this drop in potential volumes in the fourth quarter, is it within that normality or that seasonality thing, or you understand that it could be at a bit different than the normal trend. And also, second question is whether you could tell me something about how costs will evolve in Brazil. We see that prices of scrap were down substantially in the past few months. On the other hand, the coal prices in the market are going up. So how do you factor in the pricing dynamics? And my other question is, now looking at the company as a whole, not only Brazil. Is there any maintenance capex that is unusual, probably out of your radar, that could be relevant, you know, coming forward in the next two, three years? I'm saying that because we saw some of your competitors announcing unexpected capex, not only in the steel milling industry, but we've seen also in other industries, companies, you know, re-evaluating their maintenance capex. Is this a possibility that you see at Gerdau as well? Not only in Brazil, but also in your other BDs outside Brazil. Okay, Tiago, thank you very much for all your important points. Seasonality is just normal, as we all know for many, many years, with the exception of the specialty steel markets, because probably, there will be more inventory throughout the chain. With all of these downtimes from car manufacturers throughout the past few years, it was difficult to maintain a continuous flow throughout the chain. And this has its impact, so I understand that this industry will rather work with a more stable flow in terms of working capital, I mean, higher working capital requirements. So for specialty sales, we won't have so many downtimes as we usually have just to get prepared for the recovery in the market, especially in regards to, you know, heavy trucks and buses. These are things that we've been talking about with our customers. So I think seasonality will not apply to this particular case. But it depends on how you look at it. You know, if you look at demand as being something positive. The cost of the mini meals have been quite stable. And somehow we were able to maintain profitability. Of course, there are issues like increased energy prices and a decline in scrap prices. I mean, the cost of mini-mills are very flat. There is nothing out of the radar. The only thing is coal. And this, you know, is not something that we can control. So the expectation now is, you know, how prices of coal will perform going forward. There is some coal that we bought at lower prices that will have an impact in the next coming months. And this peak that occurred in the past few weeks, we are not sure how that price will behave going forward. So I think what will impact us at the Ouro Branco Mill is the coal issue. In terms of CAPEX, there are no surprises. I mean, I understand your comments. because you were probably talking about maybe some larger greenfield plant. We do not have similar cap mixes when compared to what you've been seeing in the market in general. What we have is the need to invest more in Ouro Branco, but that won't happen in only one year. This will cover a period of five, six, seven years. We have to refurbish the blast furnace one, so there may be some, you know, capex spending, but this is pretty much in line with our cash position. But now in terms of new large capacities or maybe some very serious maintenance issue, none of that is in our radar. Well, great. Thank you. I just have a very quick follow-up related to cost. So in the fourth quarter, maybe we should consider that what is part of your cost, I mean, you will not... have any large cost pressure, especially coming from coal, and scrap prices are coming down. So the net of your production costs, I mean, when you look at COGS in the fourth quarter, whether you anticipate something better or it's still flat. I mean, it's still very flat because the coal that we acquired is still being used in this quarter, and there will be still some seasonality and downtime. So more specifically referring to coal, we will see lower costs impacting this throughout. But this is more in terms of costs. Oh, Shapur wants to add something. I mean, when you look at the demand dynamics and downtime, I mean, we have some expectation that it may not be materialized, and this relates to a higher or lower decline of fixed costs. So the fourth quarter, I mean, this change in the level of operation may be something important if you think in terms of BRLs per ton. Now, referring to CapEx, I would just like to say the opposite of what I said when I was presenting it. In the third quarter, $1.1 billion that we spent in CAPEX, I mean, $400 million was invested in competitiveness and growth, and 70% of that amount was dedicated for maintenance, still very much concentrated in some of our operations in Brazil, like Ouro Branco. It's not something that will happen, that will change overnight, but as Gustavo was saying, It will take a few years. I mean, we will continue doing what we started doing last year when we increased significantly our CapEx investments in 2022 when compared to 2021. Perfect. Thank you, Chaput, and thank you, Ronek. Thank you.

Next question, Carlos de Alba, sell-side analyst with Morgan Stanley. Your comments in the press release made relatively optimistic on coming quarters in 2023, yet your shipments have declined quarter over quarter and global demand, including US and Brazil, with a slight slowdown. and probably Brazil will also have a slowdown. How can we reconcile this? What do you expect in terms of working capital in the coming months? Is it correct to assume that only the investment in Whitby will add net steel volumes to Gerdau with all other only improving product mix? Thank you, Carlos. Let's break this question down, Japur and myself. Okay, so we're very comfortable when it comes to demand, Carlos, not only in Brazil, but also in the U.S. Wherever we look, all the signs we read, all the clients we talk to, all the investments made, all the deals already closed, we keep on being very optimistic demand-wise for 2023. As we speak, we cannot precisely predict, however, we try to get prepared. Think about costs we don't manage. We don't know the impact on our production. Maybe a clear example is coal and, to some extent, energy costs as well. So, to some extent, this is how we look at this. I don't consider demand, specifically in our case, for geographies where we are or our product mix in the US and the way how we set our operations in Brazil, I don't think it should be a problem. Maybe the most important issue about volume or shipment is how much we will export from Brazil. As you speak, we are not dismantling any production capacity. We're not demobilizing any mill. We believe today there are possibilities, concrete possibilities, early next year to see some recovery or resumption, and maybe we can have a more positive export margin favoring the average margin in Brazil. So, in terms of production capacity, And shipment, this is what we see. Chaput, anything to add? Hi, Carlos, how are you? Just adding the second part of the question about working capital. Considering maintenance, shutdown, and our normal operations, As usual, we expect over Q4, I'm not guaranteed, but that's what we expect to see a cash release coming from working capital. a reduction in inventory and finished goods, so we have maintenance shutdown and we consider to start selling again. When it comes to investment capex, maybe we could consider the list on the slide, Carlos, about the proceeds and the expansion capacity that I mentioned. I would Well, not only would be that we understand to add capacity because some of our operations, for example, Michigan and Monroe, we have investment to expand the casting operation. Today, we don't sell billets or blooms from this operation. So, there is some lack of balance between the rolling capacity and the melt shop. So when we increase the rolling capacity, we have an addition, an effective addition in the volume to the market, because maybe today we don't have a market in North America which is relevant for billets or rounded billets coming from the Monroe operation. So if you check the list of projects, I would say that The Ouro Branco coiled hot roll strips is more related to a change in mix rather than added capacity, because in Ouro Branco we'll eventually bring more value to shareholders, but top of mind, There are other projects, nearly all of them, to a greater or lesser extent, will bring an increase in shipment by the company. Gustavo, anything to add? Overall speaking, in North America, more specifically, we don't focus mainly on shipping. Shipment growth in our plants. Maybe Midlothian is an exception. There will be a slight growth. But the focus on North America is competitiveness and catering to our customers' needs by expanding the product mix and becoming a one-stop shop in most of our mills. Maybe the most important example of investments is Jackson in Tennessee. We are expanding this important mill we have there in Tennessee to be very much focused on meeting all our customers' needs. So putting it simply, I would say that this is how we intend to make progress in our investments in North America. Back to you, Renata.

Thank you. Our next question from Guilherme Rosito, a sell-side analyst from Bank of America. Well, he would like you to give him an outlook about volumes for the second quarter in 2023, for the second half in 2023 in Brazil, and as well as regarding prices. And how is competition with imported volumes in Brazil?

Okay.

Guilherme, imports in Brazil, it's quite flat. It has an 11% historical level. It was up a little bit in 2020 during the pandemic of 2021, and it reached 15%. This year, it should be around 13%, and next year, it should go back to historical levels of 11%. So, still, imports in Brazil, that's not a problem. Our outlook for volumes for this next quarter is slightly lower due to seasonality, you know, the holidays, and the World Cup. But in January, we should resume to regular demand levels that we have experienced throughout the year. So for us, and still to reinstate the comment for 2023, This will be a year where demand is not the main issue that we should manage. Profitability levels in the Brazilian domestic market are very stable and flat, I would say. We don't see major, I mean, large possibilities of growing profitability because of price issues, but we don't see any pressure right now for further reductions of our profitability level. So, in general, this is what I can tell you.

Thank you.

Next question, Alejandra Andrade, Sales Site Analyst with J.P. Morgan. You discuss the payment of 2022 debentures. What are the plans for US dollar bonds maturing in 2023? Alejandra, how are you? We talked about debentures. the previous question but at first we don't see a very we don't think it's a timely or a good moment for new bonds we're interested in lowering our dollar denominated debt close to 1.5 billion dollars today we are around 1 billion So with maturity in 2023, in April next year, so getting to the level of debt that we want to see denominated in dollars to fully pay with cash and settle this issue. Thank you for your question.

Thank you, Jopur. Thank you, Ronek. Thank you. Well, in case you have still any more questions, please send them to the Q&A icon of the platform. As there are no further questions that were posted through the platform, in case you have any other questions or if you would like us to answer anything else, please send us your questions. in writing or give us a call, and then we will get back to you because it will be a pleasure for us to get back to you. So now I turn the floor back to Renee. Thank you, Renata. I just have a few final remarks because we are constantly trying to increase the relationship we have with the market in general. So any points that probably was missed during this conference call, please let us know because all of us, we will always be available to you because our intention is to be fully transparent and to give you all of the details about our operations. Thank you so much for joining us today. It's always a pleasure to talk to you. And I would like to take this opportunity to invite you to join us again in our next earnings release call for the fourth quarter and end of year of 2022, which will take place March 1st, 2023. Thank you all very much. Please take care and have a great holiday season. Thank you very much.