Gerdau S.A.

Good afternoon, everyone. Thank you for waiting. Welcome to the video conference for the release of Gerdau's Q4 23 results. With us here, we have Gustavo Werneck, COO, and Rafael Jafur, CFO. This video conference has been recorded and will be available on the company's IR website, where the complete material for the earnings release is available. You can also download the presentation using the chat This video conference has simultaneous interpretation and this platform. So you have just to click on the interpretation button and the bottom part of your screen in the globe and you can choose Portuguese or English. For those of you listening to the video conference in English, there is an option to mute the original audio in Portuguese. by clicking on Mute original audio. During the company's presentation, all participants will have their microphones disabled. Following the presentation, we will begin the Q&A session. Analysts and investors may send their questions previously via chat, and they might open their cameras in the Q&A session if they wish to do so. We wish to emphasize that the information contained in this presentation and any other statements that might be made during the video conference concerning Girdal's business prospects, projections, operating financial goals, are based on the beliefs and assumptions of the company's management as well as on information currently available. Forward-looking statements are no 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 affect Gerdao's future performance and lead to results that differ substantially from those expressed in such forelooking statements. So now I turn the floor to Gustavo Werneck to start the presentation. Please, Gustavo. Thank you, Renata. And good afternoon, everyone. I would like to start by welcoming each one of you to the video conference call to announce Gerdau's results for the fourth quarter of 2022 and the year-end closing. I hope all of you are doing well. And as Renata mentioned, also participating in this presentation, our CFO, Rafael Japor. And for both of us, it is always a pleasure to talk to you about our performance and answer questions that may come up during our presentation. I will start by talking about the international scenario and the highlights of the overall results, and then I will detail the performance of our business operation in the quarter. Next, Jaipur will come in to share some information about our financial performance. And finally, I will highlight some points on our ESG agenda. At the end, the two of us will be available to talk to you about any points you might want to explore in more details. Before I continue, I would like to once again give a very special thanks to our employees and the countries where we operate for having contributed to another extraordinary year in the history of Gerdau, a 122-year history. So I will start talking about the macroenvironment in which Gerdau is a part of. Throughout 2022, we were able to test Gerdau's resilience against a challenging macroeconomic scenario. Gerdau is today an agile, modern, and flexible company, the result of a profound cultural and digital transformation carried out in recent years, which enabled us, even in a complex scenario, to have a historic era with exceptional results. We closely followed the unfolding of logistical and geopolitical challenges resulting from the continuing COVID-19 pandemic and the conflict between Russia and Ukraine, which brought uncertainties to the global economic and inflationary One example of this impact was the pressure on production costs, especially energy costs. I emphasize, however, that even in the midst of this challenging scenario, Gerdau continued to perform very well as a result of its business model, geographic diversification in the Americas, and an innovative mindset focused on the challenges and needs of our customers. Now, turning to the next slides, the two next slides, I would like to briefly bring to you some highlights that reflect the solid performance posted by Gerdau in the fourth quarter. Later on, as I mentioned, Jaipur will give details of our financial performance. We ended the year with the highest net sales in Gerdau's history, totaling 82.4 billion reals. Also last year, we recorded the company's second-best adjusted EBITDA, 21.5 billion reals, with an EBITDA margin of 26.1%. When we analyze our history, as you will see in this presentation, today, Gerdau is at a new level of financial and operating results. This performance demonstrates Gerdau's capacity to transform itself and continue sharing value with its customers and other stakeholders. offering the market even more innovative and sustainable products and services. Today, the company stands out for its delivery not only of solid financial results to our stakeholders, but of a transparent business strategy based on strong discipline in cost management and continuous improvement in assets competitiveness. A good example of that is the level of our sales general and administrative expenses, the SG&A, which has remained at levels well below of those our peers have. I also emphasize the performance of the North America business operation throughout 2022, which posted an adjusted EBITDA of 10 billion reais with an EBITDA margin of 32%, both historical annual records. This result reflects the consolidation of our strategy and the positioning in the North American market and the management efforts deployed in recent years to advance the competitive levels of our operations in the region and generate even more value for our customers. In addition to the financial highlights, I would like to mention the establishment through Gerdau NEXT, our new business unit, complementary to STIHL-Ubidata, a joint venture with Space Time Labs. The new company specializes in high technology and the development of platforms that integrate with everyday industrial life by means of artificial intelligence, autonomous systems and robotic operations. Uberiton is yet another chapter in the journey of business transformation via digital that Gerdau has embraced in recent years, reinforcing the company's ability to adapt, innovate, and transform itself over its 122-year history. So let's turn to the next slides. I will give more details on the highlights of each of our business operations and the outlook for the markets where Gerdau operates. On slide number six, as I mentioned earlier, and now talking about our North America business operation, we have delivered record results in 2022, and the outlook for 2023 remains positive. Steel shipments to the local market in January were at the highest since 2015, and our order backlog in the United States remains at high levels around 60 days. The steel demand has been positively influenced by the level of activity in the construction sector, which is expected to grow by more than 6% this year. In particular, the infrastructure segment should advance 16% by 2023, driven by projects linked to the infrastructure investment package, the results of which are beginning to be received. This package should generate additional steel demand by the next year as states advance in these projects. So this can already be seen, though, in January. The North American government has announced, as an example, funds of $2.1 billion to revitalize bridges in the country. In addition to that, I should stress the reassuring that has contributed to the consumption of domestic steel in the region. And also, we'll have also additional demands coming in the future from the Given this scenario, we continue to operate our mills in the region with capacity utilization levels above 90%. We will continue to invest in improving the profitability and productivity of our North American units, aiming to share even more value with our customers. I would highlight now the investments in the Whitby Mill in Canada whose new mill shop will start operating this half of the year. And also an investment in the electric furnace in Midlothian, Texas plant seeking greater productivity and efficiency of the equipment. This last investment is part of a continuous investment plan directed at the Midlothian plant focused on the modernization and expansion of the product portfolio manufactured at the plant to meet the needs of local customers and consumers. I would like to say that our operation that has with the production of rebar and a state-of-the-art plant, has right now its best historical moment in terms of production, sales, and financial results. It is benefited by the local market, but also by the commercial agreements with the United States and Canada, and also for ensuring finance. Now turning to the next slide to talk about our specialty steel operation as a financial highlight. Our adjusted EBITDA in 2022 was 40% higher than the previous year, driven by the current levels of profitability. In the United States, I emphasize that the CHIPS Act, approved by the American government, will contribute to increasing the number of the semiconductor plants in the country over the next few years, solving the ship shortage problem in the vehicle market, which has impacted the demand for specialty seals in recent years. There are around 30 projects, including expansions and greenfield units, estimated in $200 billion. In terms of market, the production of light vehicles in the United States should recover and stay above 15 million units. On the other hand, the estimate for the heavy vehicle sector remains positive, with a forecasted increase of 5% in 2023, reaching more than 300,000 units. There is an additional investment of 200 million rials in Monroe, Michigan is moving on as expected with this new investment. Monroe will be an SBQ producer, the most technological in the global market to cater to the future needs of our clients and continue searching for solutions for hybrid and electric cars segments. Now, the perspectives here in Brazil are influenced by the lack of semiconductors and also uncertainties related to access to credit lines and high interest rates. In any case, the production of light vehicles should grow 4% in 2023 compared to 2022, according to the National Association of Vehicle Manufacturers, ANFAVIA. The production of heavy vehicles, in turn, accelerated at the end of 2022, to the change in truck technology to Euro 6 standards. At the beginning of January, a new emission rule for heavy vehicles came into force. The agricultural machinery sector should maintain a favorable scenario with the modernization of the fleet amid good harvest levels. I also would like to reinforce that industry that consumes specialty steels, especially auto parts, have proven to be very competitive in the global market, generating export opportunities. I would like to highlight that we continue to advance with the new continuous casting of blooms and billets at Pindamonha Gaba Plant in São Paulo, whose products are in the certification phase with our customers. The equipment with state-of-the-art technology allows a specialty steel unit to have a more automated process with better yield. resulting in the delivery of differentiated products and much higher quality catered to the demanding markets. Moving on to the next slide, I will talk about the long and flat steel scenario in Brazil, whose performance in the fourth quarter reflects an accommodation of the demand for steel in the different sectors in which we operate. After a period of two years, 2020 and 2021, when we did not have the seasonality of December, which is typical, 2022 once again behaved at similar standards of this month, bringing as additional elements to a higher drop in the demand, the World Cup, and expectations about the new elected government. We seized this period to have a longer stoppage planned a downtime to recover the life of our assets after a period of two years that we needed to have shorter stops. About 2023, we see a recovery in demand after the second part of January in the different areas in which we work. Our order book since then, since January 15, added to the expectation of future consumption of steel by our clients, make us confirm our initial projections that we will have a steel demand in 2023 in Brazil in line to the one that we had in 2022. The steel consumption in residential and commercial construction sectors is still high. And despite of the current concerns of the market regarding the number of new launchings and also the level of inventories in some cities, the number of construction sites active in Brazil, for instance, has reached a historical record in February, over 10,000 construction sites up 3% in the annual comparison. According to the last survey in the construction industry, the GDP of construction should increase 2.5% vis-à-vis the prior year. The sector can also benefit from the reforms in the housing programs aimed at the low-income segment over the next few quarters. Retail sales remain at good levels, but slower, but they can be positively impacted by new aid measures implemented by the government. I would like to point out that Gerdau's current business model has made the company less dependent on retail, allowing it to capture various market opportunities. In addition, I anticipate the resumption of large public investment in infrastructure works, thus acting as a driver of the country's growth. BNDS disbursements in this segment are estimated at more than 31 billion reais for this year. In addition, I would like to highlight the demand for steel from the industrial sector. It has settled at a high level, reflecting the good performance of the agribusiness, capital goods, machinery and equipment, yellow line and energy segments. The growth of centralized generation, for instance, should reach 10.3 gigawatts in 2023, the highest ever recorded in the country. Solar and wind power plants should account for more than 92% of this expansion. Now, moving on to the next slide, talking about the South America, I start by Argentina, where the demand for steel from construction, agribusiness, energy, and mining sectors remains strong, which has stimulated sales in the local market. The Argentinian construction sector should repeat in 2023 the good performance posted in 2022 when the level of activity was up by 3.5%. The same scenario is repeated in the Uruguayan steel market. In Peru, in turn, despite the local political uncertainties the demand for steel continues at good levels boosted by the construction industry which resulted in an increase of nine percent in shipments to the local market in the fourth quarter vis-a-vis the previous quarters so our outlook for this business operation remains positive in south america and this initial part i now turn the floor to japur to go into the details about our financial performance, and then I come back to talk about our ESG agenda, and later we'll have our Q&A session. Japor, the floor is yours.

Thank you, Gustavo. Good morning, all. Good afternoon. It's a huge pleasure to be here with you once again in our earnings conference call. Well, I'll start with slide 11, focusing on our cash flow and working capital. In 2022, like Gustavo said, we had a strong EBITDA of 21 billion and 500 million reals. Like we saw before, it is the second best annual EBITDA in our history, confirming the resilience of our business model. Our investment in CAPEX over 2022 amounted to R$ 4,3 billion, very much in line with the guidance that we shared in early February this year. The big difference that we can see in terms of operating cash flow in 2022 was the working capital. In 2022, we invested 2 billion and 700 million reals in working capital, almost 4 billion reals less than the business required or invested in 2021. As you know, in this year we had a big expansion of our revenues and sales, therefore requiring more working capital investment compared to 2022. Thanks to the reduction of our general debt throughout the year, we had interest expenses that were lower compared to previous years. despite this global scenario of high interest rates. Therefore, we ended year 2022 with a record cash flow of 10 billion and 500 million reals, equivalent to almost 50% of EBITDA for the period, and almost 900 million reals above what we generated as cash flow in 2021, which was also an extremely important cash generation year for us. Moving on to the lower chart on the slide, we can see the evolution of working capital on a quarterly basis. We ended the year with working capital level of 16 billion and 200 million BRL and a cash conversion cycle of 81 days, slightly above what we had seen in recent quarters. and this is pretty much due to seasonal adjustments in demand and also the lower level of net sales, like Gustavo said when he dived deeper into the performance of each one of our business operations. Moving on on the CAPEX slide, And now I'll dive deeper into this topic. I'll give you a thorough description of our investment. We ended the year 2022 with an investment of 4 billion and 300 million BRL, like we said before on the free cash flow slide. These amounts include both investment in maintenance, which we can see in the grey upper part of the pie chart, and also investment in expansion projects and technical upgrade. For year 2023, and by the way, we had material information with the guidance showing investment of 5 billion BRL in CAPEX with our steel operations, 50% Of this amount, approximately 50% for maintenance and the other 50% in expansion and technological upgrade of our business. Like Gustavo said, always pretty much focus on pursuing increasing efficiency in cost and competitiveness and also growing in the business lines that we consider able to generate value and provide excellent results on the capital investment. In addition, in this amount of R$ 5 billion, approximately R$ 830 million will also be invested for the benefit of the environment, very much in line with our goals to reduce greenhouse gas emissions. On the right-hand side of the slide, we highlight this quarter two projects. The first project is the expansion of our Whitby Mail Shop in Canada, like Gustavo said during his speech, which is expected to be concluded by the second quarter of 2023. That's what we referred to when we had the earnings presentation for Q1. And the second expansion project is for coyote hot-row strips in Ouro Branco. We had significant growth. in the share of flat steel in our Gerdau product portfolio in the Brazilian operation, and we are still committed to grow this product line. The expectation is that together, these two projects, once they are concluded, they should generate between 300 and 450 million reals additionally as EBITDA per year, naturally, once they are fully operational. I would also like to highlight on this slide that in addition to the R$ 5 billion exclusively related to our steel operations, CAPEX and steel investments, in addition we also have some disbursements related to Gerdau Next initiatives. These initiatives were already disclosed and Gustavo announced them in his speech. We also told as material information to the market last year. So now I would like to give you a projection that for 2023, we expect that disbursements related to these projects at Gerdau Next are in a range between R$ 500 million and R$ 800 million as effective disbursement. Moving on to the next slide, let us talk about our indebtedness and liquidity. We continue with a healthy net debt over EBITDA ratio of 0.33 times. In the fourth quarter of 2022, more specifically, we had a slight increase in our net debt, largely due to record dividend pertaining the third quarter, which we effectively paid in December, so in Q4. total amount of 3 billion and 600 million reals. So this contributed to increase the numbers this quarter. In addition, it's also important to say that we closed the year with a healthy cash position of 5 billion and 400 million reals. We also ended this quarter with our revolver line fully available aligned with several first-class banks and they are worth 875 million dollars which can be withdrawn if necessary So, considering all the aspects shown on this slide, we are very much in line with the parameters that we've been setting in our financial policy. We'd also like to remind you all that in April we will also have the maturity and settlement of our 2023 bond amounting to approximately $119 million, which should support our goal of reducing our debt denominated in dollars. Now, on slide 14, I'll talk about the return to our shareholders. When we think about Q4, a dividend payout of 133 million Reals, we expect to close 2022 with 6 billion and 100 million Reals as dividend payout, a record amount. In addition, it's also important to recall you that we had over the year more than 1 billion rials of share buyback. In other words, if we take into account dividends and buyback, within this year we paid more than 7 billion and 100 million rials, equivalent to nearly two-thirds of the free cash flow of... approximately that we mentioned in the beginning, or almost 70% of payout or the net income for the year, which is more than twice the amount stated in our bylaws. I highlight that we closed the second consecutive year, as we can see at the lower part of the slide, the second consecutive year of dividend yield above 10%. This shows Gerdau's capacity to give return to its shareholders. We keep on having two buyback programs, both at Gerdau SA and Metallurgica Gerdau. They remain open and we strengthen that we have our dividend payout policy unchanged according to our bylaws as 30% of adjusted net income. Now, on the last slide of my presentation today, I would like to share a long-term outlook when Gustavo talks about the difference between our current performance parameter compared to the past. I would like to compare and highlight the period between 2014 and 2018, when we went through an intense process of cultural and digital transformation, and we also performed some divestments, as you all know. This year, 2022, we reached many significant milestones. We reached our lowest net debt over the last 10 years. We also had our lowest average level of leverage in recent years. We also reached the second highest net income and the second best EBITDA in our history and broke our record in free cash flow generation. And this all put together enabled us to return more value to our shareholders than ever before via dividends and buyback. We are confident that the strategic decisions made in recent years, as well as our intense process of cultural transformation, to our discipline in execution and capital allocation will enable us to continue delivering higher results in the longer term. So once again, thank you very much for your attention. And I give the floor back to Gustavo so we can come back together at the Q&A. Thank you, Japur. So very briefly, Let me share some information about our ESG agenda and we open then our Q&A session soon. Sol's Light 16. I would just like to highlight that we concluded in year 2022 an accident frequency rate of 0.76, which is the lowest rate ever recorded in our historic series of 122 years. This performance underscores our commitment to the health and safety of our people. Here at Gerdau, safety always comes first, since no result is more important than people's lives. In this sense, in our digital transformation journey, we have broadly invested in artificial intelligence and industry 4.0 initiatives to improve the monitoring of critical tasks and prevent accidents. I also highlight that we obtained the certification of our second operation as a B Corp. Cide Peru, the company's steel production operation in Peru, joins Gerdau Summit. Our joint venture with the Japanese company Sumitomo Corporation and Japan Steel Works focus on the supply of rolling mill rows and parts for wind power generation, which now become the first two steel producers in the world to be certified as B Corp. As part of our sustainability agenda, this certification recognizes that Gordel complies with good sustainability practices and that it effectively connects the business with our purpose of empowering people who build the future, leaving a legacy for society. In addition, I also highlight that we recently invested by Gerdau Next on a new platform for renewable energy. In this sense, we are partnering with New Wave Capital, A Brazilian investment managing company focused on the energy sector for the acquisition of a stake in New Wave Energia's capital stock. The deal also includes the acquisition of long-term energy by Gordel and its subsidiaries, corresponding to up to 30% of the energy generated by power generation projects directly or indirectly owned by New Wave Energia. self-production basis. The operation aims to generate greater competitiveness in steel production costs in addition to supply Gerdau's plants in the country with renewable energy as part of the commitment to reduce our greenhouse gas emissions. Finally, I would like to highlight that we are very proud to join the town, Gerando Falcões, and the São Paulo local administration to provide a cross-sectional positive impact on the lives of countless families in vulnerability, reinforcing Gerdau's commitment to be part of the solution for social challenges. Together, we will take the Favela 3D initiative by Gerando Falcões to the Haiti favela in São Paulo. The project comprises a systemic action that proposes solutions for development, income generation and social urban planning. co-created in collaboration with the local population this partnership will make it possible to build a new future through a project that transforms and fosters socioeconomic development for locals so this is what i had thank you all for your attention and for listening to our explanations And from now on, we'll be here to answer questions and even dive deeper into any topics that are of major interest to you. Renata, back to you so you can support in the Q&A session. Thank you, Wernecki. So now we'll begin the Q&A session. As a reminder, if you want to ask questions, please click on the Q&A icon at the bottom of the screen and type your question to enter the queue. On being announced, a request to unmute will appear on the screen. So, at that time, please turn on your microphone to ask your question. If you want to open your cameras, please let us know so we can enable your camera. We kindly request that all questions be asked at once. So let us begin with our first question. Caio Ribeiro, sell-side analyst with Bank of America. He asks, good afternoon and thank you for the opportunity. My first question is about prices of long steel in Brazil. we can see a pressure on these prices in recent months, whereas in the latest weeks, the Turkish rebar is increasing, increasing the discount of rebar in the domestic vis-à-vis the Turkish rebar, double digit, according to our accounts. Do you see an improvement in order to justify increases right now and close discounts vis-a-vis the turkish material or which trigger should happen in your point of view in order to improve the chances of implementing an increase secondly i wonder if you could tell us about your expectations vis-a-vis the fact of the infrastructure investments job Act and Job Inflation Act and the CHIPS Act in the demand for long steel in the US market. And when do you expect this effect to become material? This would be very helpful. Thank you. So now I give you the floor, Japur and Virnecki. Thank you. Caio, thank you for your question. I'll give you an overview for both topics that are mentioned in Japur. Be ready to provide any more details for Caio and other listeners. Caio. Your question about profitability for long steel in Brazil is already happening. This resumption is already taking place. Actually, particularly to low demand that we saw in Brazil in December for the reasons already mentioned like World Cup and expectation with the new administration, profitability went down to a level which is not normal. Since January 15, mid-January, the demand is already recovering in all sectors, some a little bit stronger, others not so strong. And by the way, I said that right now we envisage demand for 2023 in Brazil at the same level as we had in 2022. So February, we're already back to normal in terms of demand. This process of resumption to profitability levels for long steel is already happening as we speak. What about Turkey? It certainly helps. The Turkey thing, well, if we look at the impact on our BO in Brazil, but there's also an impact on US BO. Just to give an explanation about what happened in Turkey right after this tragedy, humanitarian problem this huge earthquake in turkey there was also an early concern of how it would affect the local steel production in turkey remember turkey is the eighth steel producer in the world about 30 million tons and the largest scrap importer about 30 percent of world imports so the following day there was a concern about the assets for local production of steel. At first, there were imports of semi-finished, particularly billets, in order to come back to long steel rolling productions in Turkey with a drop, particularly in the US, for scrap. But after cleaning all the tragedy sites and with the possibility of reconstruction, the Turkish administration, so to speak, reserved 4 million tons of rebar to rebuild the country. And that led to an increase in the price of rebar in the international market and also an increase in scrap in the US, because Turkish is now importing scrap in the US market more strongly. So this process to evolve international prices, I would say it also helped by the resumption of profitability levels for long steel in Brazil after the drop in December. As for the US, The outlook is very positive. Actually, we were even taken by surprise how January was a very strong month for our deliveries. February continues the same way. We are at the top of our capacity in production. I would say that some of the mechanisms to encourage steel production, the infrastructure package, or also the Inflation Reduction Act, the phenomenon of the reshoring, which is already very present in our order book, with new production capacities being built in the US. And macroeconomic indicators that we saw in the coming weeks and job generation and other indexes, they all bring the outlook of another historic year in North America. We are ready to take it. Investments in recent years brought additional capacity of products related to non-residential production put in place. So we expect to see levels not only this quarter, but by year end, very robust. for results in North America. So overall speaking, this is it. Japur, anything to add? Feel free to bring more color. Sure. Thank you, Caio. Thank you, Gustavo. An important thing to mention in addition to short-term outlook, I would also like to think about the RNA package in the mid and long-term vision for our operations in North America. That's quite an ambitious project, a package that has an important share of its resources related to energy transition. more than $350 billion for transition and conversion of clean energy. And the production of clean energy typically takes up to three times more steel compared to other sources, conventional sources of power. So some studies that we follow estimate that this investment announced by RA should be translated from 25 to 35 million tons additionally of steel used to build electric or photovoltaic and wind power plants. A significant share of this deal comes from projects or products which we can provide in the US for these construction sites and these projects. We have facilities in the US for that, particularly in our beams and merchant bars business. This gives not only a short term outlook, but also mid to long term. in terms of keeping levels of capacity in the mills with very value-added products longer in North America. Thank you, Japor. Renata, back to you.

Thank you all very much. Marcio Farid, a sell-side analyst from Goldman, wants to ask a question. I think he wants to do it by video. Hello, everyone. Renata, thank you. Thank you very much for the opportunity. Hello, can you hear me? Yes, we can hear you very well. Good morning or good afternoon. Thank you very much for this opportunity. I have two questions. The first one is about your CAPEX. I don't know if Shapur Orvanek can go into the details for us. This is one of the things that we have seen and observed is an increase in your maintenance capex, not only in the sector, but in different industries, actually. I would like to understand how we should think about the maintenance capex. If the level of 2023, what you already have as guidance, Is this a new recurring one or if you have anything for us looking ahead? And also, one of the black furnaces of Odo Branco, the renovation is already being questioned by investors. We would like to understand what is the magnitude of this capex. One of your competitors has a capex of around 3 billion for a renovation of a similar black furnace. when that should be done, what is the magnitude of cost, and when do we expect that these figures will be reflected on the capex. And also, in Brazil, Wernicke went into the details on the price side. I would like to understand how we can think about costs. Obviously, a lot of the raw material is volatile, has been gone up and down different prices, but scrappy, we have seen a strong correction in the second half of the year. It looks like it has not been translated into the metallic results yet. So how can we think about costs in terms of for the profitability in Brazil business unit when we look ahead? Gustavo, please. Because you already talked about prices. Thank you, Marcel. These are good topics. So, Jaipur, let's do the same thing. I will go over the questions briefly, and then you can add to them anything that you might want to comment on, and I'm sure that's going to enrich the answer. So, Marcel, first, when we talk about CAPEX, we always think about capital allocation. I didn't want to miss this opportunity to say two words that are in my agenda here, which are discipline and predictability. So when we look ahead, we are not going to allocate capital in large green field projects. There are no projects for the future that could in any way surprise those that are in relation with Gerdau. So the capital allocation for CAPEX, that share is going to be related to the maintenance of our plants and the marginal increase of some productive capacity for markets where we have demand or technological improvement so that our assets can be prepared to meet the future challenges. So there are no surprises ahead. And I stress, this word predictability for us is very much present in our daily lives. So specifically talking about Ouro Branco, we are using everything that we can in terms of what we invested in the last few years of investment, technology and everything else. We have good equipment and in addition to that, we have learnings from the renovation of the blast furnace number two. In addition to that, we use specialized consulting services for that type of job so that we could postpone the stoppage of the furnace in Ouro Branco to 2025. That will allow us to reduce capex for Ouro Branco. So this level of 5 billion reais, that will be there for the next few years. So we do not have any piece of equipment faulty or with any problems or anything in terms of capex that's going to be of surprise to the market. So we imagine that the current level of capex will be enough to do all the renovations that needs and not only the blast furnace but also the talk machine and investment in mining so and or area as well so the level that we mentioned here for 2023 is going to be that level of investments for the next few years so we want to make sure that we are comparing apples to apples so When we talk about 5 billion, it's compared to 4.3 from last year. And this is still, because Gerdau Next is something else. So this is a general overview for Ourobranco. So right now, we are at ease because we postponed this stoppage from 2024 to 2025. Now, about costs in Brazil. In a way... they will be similar to costs that we have seen last year in terms of energy. I think this is an advantage, and our competitiveness in buying scrap allows us to mitigate other costs that are not as under our control. So now, really, what we have to see is coal. Yes, it has been very much volatile. It goes down, then it goes up after news coming from Australia. In order to understand where costs will drive us here in Brazil, we have to pay attention to coal. And as I mentioned to Caio, this process of rebuilding between the prices and everything, that is already being taken care of. And that has to do also with imports. I will stop here, Chapori, and you can... um take over uh please a quick follow-up before you turn to japer and that might be relevant if we think about this stoppage in 2025 this money would be spent already in 2024 or closer to 2025. oh excellent question we are already spending this money okay yes because when we talk about normalizing in five, we are considering that different pieces of equipment and components we are already acquiring. So a practical example, if you know the, The blast furnace, some of the parts like crucible, they take two years to be delivered. So we are already working on that so that we can have this downtime in 2025. So nothing is going to happen at the last minute. That's why we are telling you that we are going to have this normalization in the CapEx level, and no one will be surprised with a very high CapEx five years from now or two or three years from now. So, Marcio, just a simple math on the CapEx figures. In this past year, we invested $4.3 billion in CapEx. Out of those, two-thirds rounding up, 2 billion, 6 million rounds was for maintenance and the remaining 1.7 billion in competitiveness and growth projects. Now, this year, 2023, our capex is up to 5 billion rounds. But its proportion is different. If we think about maintenance itself, we are reducing it a little bit. It's more or less in line. We could say it's a flat in terms of general maintenance. But what is in fact increasing is on the competitive projects. We are investing 800 million euros more in 2023 in projects. to grow profit, to provide a profitability, other products, other capacities more than we invested in 2022, aligned to what Gustavo mentioned. When we talk about maintaining our plants efficient, and we are talking also about gaining costs, expanding product lines that we believe that will be generating more value over time. Just agreeing with Gustavo here, our idea is to maintain these levels of disbursement for the next years with no major changes. This is going to be all very well planned. Just to show you, the highest individual disbursement that we have this year is our investment in... the expansion of the coiled hot rolled strip that individually is the project that is taking up more disbursements for this year and the investment and growth and competitiveness this is not investment in maintenance let me tell you a little bit about girdle next yeah about girdle next then the disbursement that we forecast for this year not con The 5 billion that we mentioned is still only, as we said, but it's for Gerdau next, the 500 million reals and 800 million reals. But why this difference, Gustavo? This is a high range because these projects and initiatives are not 100% from Gerdau. Sometimes we are doing partnerships with investments such as Ubiratan, as Gustavo mentioned, or Adianti with Random or with New Wave. These are investments that depend on licenses. If these are companies that work with energy generation or the execution speed vary or these are joint ventures or they have an independent board. So it's not in our total control when we plan a downtime that we know that's going to happen in December. So it's not that clear. uh so that's why we have this open range for gear down next we expect to invest and go down next between 500 and 800 million rounds and i have already seen other questions in the chat about this so where do where are these investments if they are not in capex line and the capex line is exclusive capex that is going to generate uh depreciation in the future but in gear down next we invest in joint ventures or subsidiaries so these are corporate shares that are they are going to come up in the line of investment and not in uh the line the same line as our other capex okay thank you very much so renata back to you

The next question comes from Tiago Lofiego.

Next question, Tiago Lofiego, Cell Site Analyst, Bradesco BBI. He'll open the camera. We have a slight delay, but Tiago is almost there. Good afternoon, Werneck. Good afternoon, Japur. So, let's go for it. My first question is about cost in the U.S. plan, the U.S. bill, better saying. In addition to scrap, what else can you tell us about energy cost, evolution of labor services, considering scrap and steel prices? Well, we can see it very clearly on the screen. and maybe even consider a projection. But what about the other items? They are more challenging to follow. So what should we expect? And as a result, what is the outlook for metal scrap for the coming months? And the second question is about profitability in Brazil. Werneck, you said it's already improving. Just to give us more color, is it improving because the volume is going up and therefore you dilute costs? Or is it improving because costs are actually going down? Or maybe you're working better with prices. So, still considering prices, if we think about import or rebar, vis-à-vis the domestic product, we can see the domestic rebar with a big discount. From the moment demand recovers seasonally, do you think manufacturers in Brazil can make up this margin on prices? Your question about profitability, well, you gave us so many options and multiple questions, so multiple choice questions, all of the above. We are checking all the boxes, all of the above. So this set of actions that you mention are all included. All these actions are taking place at the same time. Well, what about metal spread in the US? Historic levels and it will remain like this. If you ask me what is the range, it is around $800 per ton. All of our expectations, all the guidance, they show us that this is the metal spread to continue over the year. So you put it very well. If you think about scrap metal spread, they are more visible and maybe another smaller but relevant is operational and manufacturing cost. This is under control. Levels are similar to last year. But what is still slightly affecting us is labor. We expected in the last quarters to have a balance in labor, but believe it or not, we still have open seats. vacant position since the beginning of the pandemic. But the labor market in the US is still very intense. We're still facing challenges to bring labor to our units, our plants. So overall speaking, costs will be in line with what we know, metal spread in this level that I mentioned, and the plants are working with a very high production capacity, very high level of use, and we were taken aback in January and February with the deliveries we performed. Not only the deliveries that we managed to perform, but also the backlog over 60 days. We believe this year will be very intense. We could speak about recession, hyperinflation, but even those who are more pessimistic economists in the US, they consider that would be an intense impact, but they already consider this for the end of the year. So, we tend to believe this year will be pretty strong to our operations, Tiago. If I may, I would just like to mention again what I said in my speech about Mexico. Mexico's share is very relevant today. very relevant in our North American bios and our production capacity is fully taken at the limit. You sell everything you manufacture, not only to the domestic Mexican market, but also because Mexico is becoming a platform to support the U.S. in economic and manufacturing industries. So this is it. Japur, anything else you would like to mention? I think these are the most important topics. Naturally, as we check the volumes in the US at healthy levels, then we can also have more dilution of our fixed costs, which are always important there for a leaner operation and absolutely focus on mini mills. In addition, another point is that last year, early in the year, there was some pressure about energy prices in general. And now we begin to see, as a result of the winter in Europe, we can see that natural gas prices and other energy prices are slightly lower compared to other times of the year. So it could also be a driver to help lower our downstream costs in North America. Werner, if I may, could we go back to the multiple choice question? Alternative C, which is working on margins or premium makeup in the domestic market. So just to better understand the rationale, today, at least according to my math, we have a discount about importing rebar or over 15%. Based on your comment, do you think it's fair to assume that you manage, you and the industry in Brazil can make up this premium in the coming months? Yes. Yes. That's the goal. Go back to premium? Yes. And this premium is an amount that is way below what is practiced. Thiago, like I said before, it was influenced by December and the first two weeks of January, but with the resumption of demand, which is one of your multiple choice alternatives, which is already consistent in all segments. So, international prices and other factors that we mentioned, I believe that during this May and early April, we'll see a resumption in profitability. So that's the expectation, working with a negative import premium at the level it is, it's surreal. Perfect. Thank you, Wernecki. Thank you, Japur. Thank you.

Turning to our next question, Daniel Sasson, sell-side analyst from Itaú BBA. He also has a question. Also, please, you can open camera. Good afternoon and thank you very much for this opportunity. Part of my questions have already been answered, but I would like to go back to North America, please. Can you comment on Mexico, Bernanke? Give us more color about what is the percentage now of your EBITDA in North America comes from Mexico. We always focus in the US and it seems to me that there is a limiting factor for Mexico to be more representative, considering that you are at the limit of your capacity there. Am I right? And if you can also talk about the metal spread, compare it. and compare the level that you have now to what you consider to be sustainable. If you see 2023 as a year of transition between very good years, this peak of cycle may be in the US to a more sustainable level of margin and meta spread. And if you see any risk of Section 232 to be rediscussed in the US, because at the end of the day, with all these projects, infrastructure, related to energy the united states seem that they don't don't have um domestic capacity of production to meet all this demand so if actively with section 232 the u.s seem to be importing inflation is this a concern that you have do you think it is more reasonable to imagine that um To eliminate protectionist barriers might be something that will gain traction. Japor, do your math. And I'll start answering to Daniel's question. Daniel, Mexico. Well, as I mentioned, we produce rebar, commercial rebar. and lights merchant bars. And we have a plant that is state-of-the-art also manufacturing structural merchant bars. So we have an additional capacity as we move forward in our operating performance. we can add more capacity there. But in these three types of products, in our three plants, we have full capacity. The segment of rebar in Mexico, it has a mismatch between supply and demand. But even then, we see a need of rebar in Mexico. This is occupying our productive capacity and also the market in general. marginally we can grow a little bit our capacity in mexico especially structural merchant powers and i can add with more information later but the metal spread danielle in north america will continue at that level when you compare the last five six ten years that is a level historical high But it's important to understand that Gerdau is a totally different company and the market has changed a lot. So sometimes we think that this is an outlier and that we are going to go back to historical levels. I think this is a mind model that we need to change. Also, our operations in the US, Daniel, and I remember we have been debating that for a few years, five years, six years ago, there was a difference in operation performance of $25 per ton. When compared to our competitors, we have captured fully these $25. We are looking for additional opportunities to improve our manufacturing costs. So I see a huge competitiveness of our plants Nowadays, they are operating very well. And the level of metal spread, because of everything that we have already mentioned here, I don't think this is going to go down. And let us not forget that differently from what happens now in the US, there are no major additional capacity directed to long steel. So it seems that over the next few years, with all this demand that we see coming from these incentives, our productive capacity will be fully used about two three two it affects rebars a lot, but not directly our products. It was not by chance that we divested in rebar in the U.S., and we are very happy about this decision. When we compare the last quarters, the EBITDA margins that we reached and the EBITDA margins that the traditional rebar producers reached, we can clearly see that we made the right decision. I see a positive scenario from all sides. Japor, can you add to that? And then let's see if Daniel wants to add anything else. Hello, Daniel, how are you? Yes, good. Well, just to add, and look, Mexico in 2022, for example, went through a transformational journey, the ramp up of the investment of the plant that Gustavo mentioned. And then now, in 2022, it represented between 6% and 7% of our grow our business with margins that were similar to the gross margins that we have in our operation in the U.S. there are no major discrepancies between these operations. So it did have an important growth between 21 and 22. So this is an operation that, as Gustavo mentioned, is working within its capacity, a great performance, diluting fixed costs and increasing the level of competitiveness and efficiency. We are very happy about this investment. Perfect. Bernanke, just to confirm, you talk about $800 per ton of metal spread in the U.S., is that correct? Yes, this is the current level of metal spread. Okay, thank you.

Thank you, Daniel.

Next on the questions, the next question is from Carlos de Alba from Morgan Stanley. He sent us a couple of questions. I'll ask them all at once so you can answer them. The first question is the following. Can you give us more detail on the CAPEX budget of 5 billion for 2023 and discuss what are the investments or cash out by Gerdau Next which are not included in these 5 billion? Second question. Working capital days have significantly increased in Q4 of 2022. What do you expect to see in the first quarter of 2023? Third question, why is it prices of rebar are going down in Brazil? And the fourth question, how can we tell the very strong benefit of higher prices in 2021 and 2022 from specific initiatives by the company in good results in these two years? I give the floor back to the company's management. Okay. Hi, Carlos. Let us begin again. So, Carlos, when you think about performance, how can we tell things from another? We can check the performance, the evolution of margins and results that we achieved for 24 months compared to other operations and other business. We understand we had a significant improvement, considering not only absolute numbers but also percentage-wise in our margins. Today we understand there was substantial progress, which was not only exclusively coming from the market, but also stemming from what we do in our effort. I think this relative comparison can help to show this. About CAPEX, I think I also mentioned in a previous question by a colleague, The R$ 5 billion are absolutely and exclusively investment in steel, our core business, out of which 50% maintenance and 50% growth and competitiveness projects with specific returns. These R$ 5 billion do not include whatsoever the investments foreseen for Gerdau Next. We gave a range. And why is it a range? We don't have the total control because these are partnerships or joint ventures, investments with other companies. And in most cases, we are minority holders. These investments range between 500 million BRL and 800 million BRL for year 2023. All investments that we mentioned before, they were already announced. and they're following their natural course over time, and they are reflected in our cash flow. In our investment line, when we invest in a company that is not 100% Gerdau-owned, we follow, and capex is in our PP&E, and later will be depreciation, and when we have share in new companies, they get into the cash flow and investment line, and consequently in the balance sheet. Can I just say something about Rebar and then we go back to working capital? Right. In Brazil, Rebar had this very negative import premium because it was 45 days very active, it was very seasonal since early December with the World Cup. And then expectations, particularly by distribution clients, they had expectations about the policies with the new administration. On our side, we stopped all production plants because we needed longer maintenance in our scrap base plants. And post-pandemic in 2021 and 2022, there was a growing demand. We felt the need to cater to the market needs and we increased exports. So we had shorter maintenance downtimes in December 2021. And if you put it all together, I would say it led to this abnormal episode, which is import premiums for rebar below what we usually have. So overall speaking, that's for rebar. And I highlight what I said before, saying that right now this is being recovered. We are confident that over the coming weeks we'll see a change. I think there is still a topic about working capital, right, Shapur? Carlos, working capital, well, we needed to go up because it means we are selling more steel for better prices. Jokes aside, we ended the cash conversion cycle higher than we usually see, 81 days, owing to the shrunk we had, particularly in the Brazilian market, which has a big operation with high volumes. Like Gustavo mentioned, In this introduction, we've seen since day 15, January 15, a resumption in the sales volume in Brazil. And with that, we expect that the volumes of sales shipments over 2023 be in line with what we said over 2022. So possibly over this first quarter, we expect to see a slight reduction in the cash conversion cycle and working capital days. However, because we still expect to see a new volume or different shipment mix in our BOs like U.S. and Brazil, we expect to see this change in working capital. Back to you, Renata.

Carlos de Alba sent a final question.

He's asking us, what is the historical backlog in North American operations vis-à-vis Of the current one. Well, and in general, Carlos, we could say that historical backlog. It would go from around 500,000 tons. In our case, it has reached. And the best demand moments are post pandemic. It went over 1,000,000 tons. And right now it is over 700,000 tons and it is still a posting growth. Thank you, Vernecki. We have a question from Mary, sell side analyst from Banco do Brasil. She has two questions. Thank you for this opportunity. And I have two questions. First, could you share how is the market in the U.S. based on these two first months of 2023, and if you expect to continue operating close to the installed capacity limit in North America business operation. And second question is about the investments. Can we expect a higher level of capex in the next years when compared to the prior years? I turn the floor back to you. OK, Mari, thank you very much. I have already touched on these two topics, but I will stress what we already said. January and February have been months that were very good, above our expectation. This backlog started strong in the beginning of the year, so it is higher than our expectations. But we are very prudent and cautious, and also considering our 122-year experience, we imagined that this could happen. We turned the year with a little bit more of inventory better prepared to cater it to an increased demand if it were to happen, which it did happen. And so we were prepared to have higher delivery in January and February, and we expect that the demand will continue to be high. We hear people saying that the economy might change, that there might be a recession, but this is being moved ahead. So as far as investments are concerned, the 5 billion, I also mentioned we are trying to normalize that level we already consider are considering the downtime in oro branco and 2025 so that we don't have surprises over the years and we do not expect a higher capex so i would say this is the level that we will be seeing in the next few years and remember we are already including in that amount the needs of the stoppage for the blessed furnace one and other needs of oro branco Thank you, Wernecki. We received a question from Eldonardo Belmonte, Southside analyst. Thank you. And congratulations on the results. Gerdau is generating a lot of good results. And the Brazilian microeconomic scenario in Brazil is difficult. And the strategy for the results is important to generate value to shareholders. Do you consider to maximize the distribution interest on equity and dividends? not the buyback, considering that the company has greater fiscal benefits and shareholders can buy back shares if shareholders want.

In 2022, we had a lot of dividends paid out. If we think about the amount paid to our shareholders between buyback and dividends, Predominantly, we invested to return to shareholders via dividends. Could we have done it with more buyback? Yes, but we didn't. We decided to favor effective liquidity to our shareholders. And even if we purge from the payout all buyback and consider only the 6 billion reals, 6.1 billion reals as dividends, This was way above the 30% set by our policy, buyer bylaws, articles of association. So we think it is important to continue returning to our shareholders. However, buybacks are also good. when our active prices are discounted vis-a-vis what we believe makes sense in the longer term. So it's an efficient way to allocate value to shareholders without having to declare dividends, extraordinary dividends, out of quarters. So we can return value to shareholders away from the periodic earnings release windows. As an exception, Gerdau already adopts this practice of paying dividends on a quarterly basis. This is a liberal action by the company vis-à-vis what's set by the corporate law. He talked about IOC strategy, right, Japur? Yes, as for IOC, We always go to the limit of what brings financial expense efficiency. We have some limits in terms of availability for the account of IOC in our holding company structure and subsidiaries, operational subsidiaries that sometimes pay IOC to Gerdau SA. So we always keep an eye in terms of tax savings and try to take into account the levels of profitability of our subsidiaries and obligation levels and effects and deductible expenses at Gerdau SA. Renata, back to you.

We have a question from Victor. What can we expect for exports for the business unit of Brazil in 2023? And how are the margins? Good question, Victor. It's good for us to comment on that. Well, in general, we should be in Brazil with the operation at a level of 13% of exports. So this is a level that historically is lower, We did have moments at 18, 17, 19, where we would support 28% of our productive capacity. But since the pandemic, we are bringing down these numbers to lower than 20. So I believe that is going to be around 13%. We held exports now in December and January because international prices were not very good for exports. But with the recovery, of international prices. We closed good deals with interest margins to deliver from April on. So in the second quarter of this year, we'll see a growth in exports and higher margins. But in the consolidated in the area, we believe that we should be around 13% in our exports.

Luiz Espinola has a question. wants to know about capex allocation in the future north american bio considering the excellent moment and excellent outlook shouldn't it deserve more investments compared to the total expected by the company for 2023 north america has been fully receiving funds and resources to meet the needs and CAPEX possibilities. That's for the last five years. And for the coming years, it will remain as such. So these are investments earmarked to improve production capacity, particularly in those mills when we have the chance to expand our asset portfolio and meet the needs of local markets. We invested massively in our Brazil mill in Georgia, investments in Jackson. in West Tennessee, and right now we are investing in Whitby Mill in Canada, investing in Midlothian, Texas, important investments. So this is the adequate level, in my opinion. We don't lack funds and resources to invest in North America and also to benefit from these investments and return that these investments can bring us considering the current market and what we expect to see in the market very strongly in the coming years.

We are coming to an end to our call, but we still have many questions, but we have time to one last question, David. Think from Contrarian asks us, out of the 830 million of CAPEX for the environment, is that included in the 2.5 billion maintenance CAPEX, or is that considered as expansion CAPEX? Japor, do you want to answer that? Hello, David. Nice to see you again here. Well, these investments have a mix between competitiveness and maintenance. Sometimes investment in maintenance, they revert to the environment because we switch a machine. Sometimes the simple maintenance, but we switch that machine by a more efficient one. with better energy efficiency or with a better level of emissions so that also allows us to provide benefits to the environment and sometimes we have investments in competitiveness and expansion that also generate benefits to the environment this year we are investing in a better vegetable formation of our forests that we use in Minas Gerais state for the bioreduction of the steel. Steel with very low CO2 emission, one of the most efficient routes possible in terms of aqua friendliness. And this is an investment that we configure as maintenance, but it does generate an environmental benefit. under this line of investments that are good for the environment, we can have expansion and maintenance projects there. Thank you, Japur.

Thank you, Japur. We're getting to the end of our earnings conference call, and now we give the floor back to Gustavo Vernecki with the final remarks. So just very briefly on behalf of myself, Giappone Renate, and our investor relations team, would like to thank you all for joining us today. It's always a huge pleasure to talk to you. And if you have any further questions or a point that was not... clarified your team is fully available for you. And I would also like to invite you to join our next earnings release conference call regarding the first quarter of 2023 and which will take place on May 3rd. Thank you very much. All the best and take care. See you soon.