Gerdau S.A.

Good afternoon, everyone. Welcome to Gerdau's earnings release call for the fourth quarter of 2023. My name is Renata, Head of Investor Relations, and participating in our video conference today are CEO of Gerdau, Gustavo Wernick, and CFO, Rafael Japor. We would like to inform you that this video conference is being recorded and will be available on the company's IR website, where the complete material of the earnings release is available. You can also download the presentation using the chat icon. We would like to remind you that the broadcast of this video conference is being done with simultaneous translation through the tool available in the platform. To access the feature, just click on the interpretation button via the globe icon at the bottom of the screen and choose your preferred language. Portuguese or English. For those listening to the video conference in English, there is an option to mute the original audio in Portuguese by clicking on Mute Original Audio. 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 can send their questions in advance via chat and can also open their camera if they prefer. during the Q&A session. We wish to emphasize that the information contained in this presentation and any other statements that may be made during the video conference concerning Gurdjieff's business prospects, projections in operating and financial goals are based on the beliefs and assumptions of the company's management as well as 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 your DAO's future performance and lead to results that differ substantially from those expressed in such forward-looking statements. I will now turn the floor to Gustavo Werneck to initiate the presentation. Gustavo, you may proceed. Hello, everyone. I hope you're well, and thank you for the opportunity to meet on this video conference to announce Gerdau's results for the fourth quarter of 2023. I am joined by our CFO, Raphael Jappour. And for both of us, it's always a pleasure to talk to you about our performance and also to clarify any issues that may arise during our presentation. I will start by talking about the macro business environment, the highlights of the overall results. And right after that, I will detail the performance of our business operations in the quarter. Next, Jaipur will then share some information about our financial performance. Finally, I will highlight some points from our sustainability agenda, and we will then move on to our Q&A session. On this second slide, I would like to highlight that we ended 2023 with an injuries frequency rate of 0.70, which is the lowest rate ever recorded in our historical annual series, reinforcing our commitment to people's health and safety. At Gerdau, safety always comes first, since no result is more important than people's lives. Looking at the next three slides, we'll highlight the growth in steel exports from China as the main factor impacting our business in the markets where we operate. China is currently going through a period of profound transformation in the pillars that have sustained its high economic growth in recent decades, especially the weakening of the infrastructure and residential construction sectors, which accounted for more than half of the country's GDP growth in that period. These two factors, very strong consumers of steel, have lost relevance as levers of the Chinese economy, causing a deep and structural imbalance between steel supply and demand in the Chinese domestic market. With a policy of maintaining jobs, the Chinese government has subsidized surplus steel production, exporting these volumes at prices below production costs to countries that have not yet taking trade defense measures against unfair trade practices, such as Brazil. Trade defense measures against predatory practices are legal and supported by the World Trade Organization. Not surprisingly, countries like the United States, Mexico, Turkey, and the other 27 countries in the European bloc have in recent months adopted relevant measures to combat the entry of subsidized Chinese steel at their borders, strengthening their economies, their industries, and also their jobs. The chart on slide 4 shows the shocking increase in the penetration of imported steel in Brazil over the course of 2023, a phenomenon still prevailing in the first months of 2024. The Brazilian government's procrastination in following the aforementioned countries in implementing trade defense measures is already having a significant impact on the Brazilian steel producing sector and Gerdau's operation in Brazil, with the shutdown of production capacities and the dismissal of hundreds of workers who have had their jobs in Brazil taken away in exchange for jobs in China. In the last week alone, as has been widely reported in the press, 100 people were laid off at our Pindamonhangaba plant. Those were highly trained and skilled people who could not continue their careers with us because we had to shut down more production lines in Brazil. I will end by reinforcing that I personally and other Gerdau leaders have been saying for many years that we believe in open and free trade, that even in the face of difficulties of doing business in the country due to the high Brazil cost, we have been able to compete on an equal footing with any steel producer in the world. However, there is no chance of competing with the steel coming from countries in which governments support and subsidize illegal and predatory global trade practices. At a time when Gerdau is celebrating 123 years of history, maintaining annual investments in the order of 6 billion BRLs, we once again appeal to the Brazilian federal government to quickly analyze this issue, thus preventing an industrial sector as relevant and strategic for the country as the steel sector is from being harshly penalized to the point of losing its future competitiveness. Moving on to slide six, I will talk about the highlights of each of our business operations and the outlook for the coming months. Now, moving to the next slide, the start of the first quarter of 2024 in the North American market has been marked by healthy levels of demand, with our backlog stable at a high level of 60 days. This scenario reflects the resilience of the US economy, with US GDP growing by 3.3% in the fourth quarter of 2023, when compared to the previous quarter, above previously published expectations. As a result, the country's actual GDP is projected to have grown by 2.5% last year, compared to an increase of 1.9% in 2022. The U.S. market at the start of 2024 continues to reflect the measures taken by the local government, such as the Inflation Reduction Act, IRA, the reshoring movement, and the maintenance of Section 232. I would also like to point out that we continue to invest in improving the operating efficiency of our North American BD units with an emphasis on the plants in Midlothian in Texas and Jackson in Tennessee, ensuring that we offer a portfolio of steel products and services to our customers in the region and continuously generate value for our stakeholders. In Midlothian, the solar plant, which we inaugurated in mid-2023, is operating at full capacity, bringing benefits to the operation as planned. Now, moving to the next slide, I will now talk about our special steel BD. The automotive market in the US continues to recover gradually. with the production of light and heavy vehicles projected to be above 16 million units in 2024, with normalized inventory levels. There is still room, however, for a more intense recovery in the coming years, returning to pre-pandemic levels. In turn, The outlook for the special steel market in Brazil continues to be influenced by the uncertainties linked to access to credit lines and the acceleration in the reduction of interest rates, which continue to be high, contributing to a restriction in the demand for vehicles, as well by this scenario of excessive entry of imported vehicles. Now, going to the next slide, I will now talk about the long and flat steel scenario in Brazil, whose performance in the fourth quarter and for the whole of 2023 reflects a slowdown in our steel shipments on the domestic market, mainly due to the excessive entry of imports into the country as a result of predatory trade practices, as I mentioned earlier. Last year, steel imports increased by 50% compared to 2022, totaling 5 million tons. reaching a record volume in the annual historical series, according to the Brazil Steel Institute. I would also like to point out that in December, the penetration rate in Brazil was over 25%. The steel sector in Brazil employs 3 million people, including direct, indirect, and induced jobs. And a significant portion of these jobs remain at imminent risk in the face of this challenging short-term scenario. If prolonged for several more months, this situation will also contribute to the acceleration of the country's deindustrialization process, which is already underway and poses a threat to the investments planned for the steel industry for the coming years. Now, moving to the next slide, we will talk about the South America BD. I will start by saying that in order to focus on our asset optimization strategy and long-term growth, In January, we sowed our operations in Colombia and the Dominican Republic. This divestment is in line with Gerdau's capital allocation strategy, focusing on the growth and competitiveness of our assets with the greatest potential for generating value in the long term. In Argentina, for instance, inflationary pressure, import restrictions and the first measures taken by the new government, such as the devaluation of the Argentine pizzeria, remains points of attention for the performance of the local market over the next few quarters. Uruguay's scenario remains positive, reflecting good levels of steel consumption, particularly in the agribusiness sector, and public and private investments. In Peru, GDP rose slightly again in November after seven months of decline, driven by the mining and fishing sectors. Construction activity remained stable, still impacted by delays in public works resulting from the climate events experienced by the country throughout the year. I will now hand over to Jaipur, and afterwards I'll be back to talk about our ESG journey and also answer your questions.

Thank you, Gustavo. Hello, everyone. It is always a great pleasure to be here with you once again for Gerdau's earnings release presentation. We ended the fourth quarter of 2023 with EBITDA of 2 billion, 39 million BRLs and net sales of 14.7 billion BRLs and a 14% margin. In addition to the typical seasonality of the period in our shipments, both indicators, both EBITDA and net sales, were impacted by the maxi devaluation of the Argentine peso, which explains respectively 40% reduction in EBITDA and 54% reduction in our net sales. Now moving to slide 13, please. Let's talk about our working capital. By the end of December, our working capital stood at 14.2 billion BRLs, down 10% quarter on quarter. We saw improvements in all lines, with growth in accounts payable and reductions in both accounts receivable and inventories. Even with these significant savings in working capital, cash conversion cycle increased to 87 days due to the 14% drop in net sales, which we showed on the previous slide. With regard to free cash flow, Gerdau generated 1,285,000,000 BRLs in Q4. Based on our EBITDA of 2 billion BRLs, we had A relevant working capital release of 1,279,000,000 BRLs, the largest release in the last 16 quarters. Regarding our CAPEX, between October and December, we spent 1,540,000,000 BRLs in CAPEX. Year to date, we generated free cash flow of 7 billion BRLs, equivalent to half the EBITDA for the period. Let's now move to the next slide to talk about liquidity and our debt position. We ended the year with gross debt of 10,892,000,000 BRLs. We still have an excellent level of leverage with a net debt over EBITDA ratio of 0.40 times. In the chart on the right hand side of the page, we detail our liquidity. In our debt amortization schedule, we ended Q4 with a robust available liquidity of $9.5 billion, considering the cash position of $5.3 billion and the $875 million of our revolving credit facility, or RCF, which is fully available and unused. Moving on to slide 15, let's talk about the return to our shareholders. Gerdau S.A. and Metallurgica Gerdau will pay dividends on March 12 and 13, respectively. Gerdau S.A. will pay 10 cents of real per share, while Metallurgica Gerdau S.A. will pay 5 cents per share. In both cases, shareholding positions as of March 1, 2024, will be taken into account. As a result, Gredal SA will have paid out in 2023 more than 2.6 billion BRLs, equivalent to 37% of our free cash flow or 44% of our accounting net income for the year, well above the 30% set forth in our bylaws. Moving to the chart on the right side of the slide, we detail total return to our shareholders between 2018 and 2023. Taking into account dividends paid out, buyback programs and share appreciation of Gerdau, we had a return of well over 100% in the period, reaffirming our commitment to consistently creating value for our shareholders. Now moving on to slide 16. Our CAPEX investment closed at approximately 5,700,000,000 BRLs in 2023. This figure includes investments in both maintenance and competitiveness. Of this total, 1.6 billion BRLs were earmarked for improving our environmental practices and improving the safety of our people in our operations. In 2024, according to the material fact we released, we plan to invest 6 billion BRLs in CAPEX. around half of which in maintenance and the other half in competitiveness. On the right-hand side of the slide, we have highlighted five projects that will be our focus over the next few quarters. These are initiatives that we have already communicated to you on other occasions, which aim to guarantee our long-term competitiveness, focusing on the assets with the greatest potential for creating value. With regard to Gerdau Next, we invested 524 million BRLs in 2023, mainly in the joint ventures New Wave Energia and Adiante. For 2024, we currently have planned investments of between 100 and 200 million BRLs. Closing the CAPEX section, on slide 17, we provide an update on the progress of Gredau's strategic CAPEX. Of the 11.9 billion BRLs to be invested by 2026, 36% has already been executed. In North America, we highlight the advances in rolling mills in Jackson and Petersburg, as well as the completion of the Whitby melt shop. In Brazil, the expansion of the coiled, hot rolled strips in the Ouro Branco mill is well underway and is expected to start operating in the fourth quarter of 2024. Finally, I would like to point out that we have a solid and robust balance sheet with low leverage built up over the last few years through strict discipline in capital allocation. It is more than enough to support our investment plan. Even so, we are attentive to the future scenario and the context of our business. And if necessary, we will revise our strategic investment plan according to these variables. Once again, thank you very much for your attention. And I'll turn the floor back to Gustavo. I'll come back at the end for the Q&A session. Thank you, Shapur. In the following slide, I'll detail how we've made progress in our sustainability journey. Firstly, I'd like to highlight the fact that Gerdau has just achieved an A-grade for the first time in the climate change module of the 2023 cycle of CDP, an organization that is a global benchmark for evaluating sustainable actions. With this evolution, we have achieved leadership status in the subject, surpassing the global average and that of the metals and metallurgy sector, reinforcing our commitment to transparency and to reducing greenhouse gas emissions. The learning journey provided by the CDP assessment is crucial for making decisions related to climate change. For Gerdau, achieving the leadership status in this module is proof that our strategy and our initiatives are progressing in line with our long-term planning. Still on this topic and reinforcing the evolution of our sustainability journey, I would like to mention that Gerdau was selected for the third time to join the B3 Carbon Efficient Index . The index brings together publicly traded companies committed to efficiency and transparency in the management of greenhouse gases. Lastly, I would like to highlight the laying of the cornerstone at the beginning of February for the Arenos solar farm in Minas Gerais as part of our commitment to expanding the generation of clean and renewable energy in our operations in Brazil. The Solar Mega Plant is an initiative of New Wave Energia, a renewable energy platform in which Gridau holds a 33.33% stake through our new business division called Gridau Next. With an estimated total investment of around 1.5 billion BRLs, the project is expected to be completed by the end of 2024 and will create approximately 4,000 direct and indirect jobs, which will contribute to local income and development for decades to come. well then thank you everyone ladies and gentlemen for listening to our presentation and from now on we'll be available to answer questions and perhaps drill down those points of interest to you thank you very much

Now we will initiate the Q&A session. As a reminder, for questions, you must click in the Q&A icon in the bottom of your screen and write down your question as your name is announced. you will get a pop-up to activate your mic. And it's then that you have to enable your microphone to ask your questions. In case you want to open your cameras, just let us know so that we can enable camera viewing. The first question from Daniel Sassoon. He's in the queue. He's a cell site analyst from Itaú. Please open the camera. Open Daniel's camera, please. Hello, Renata, Gustavo and Jopur, good afternoon and thank you for taking my question. Well, thank you for that further discussion about the peso devaluation in Argentina. I just want to make sure that I'm not missing anything. That effect of 520 million of EBITDA would be the effect for the whole year that you already recognize as it was done through that quarter. Is that understanding correct? Maybe you could give me some further clarification in terms of what we could think in terms of recurring results or even discounting some of the JVs of Colombia, I mean, the divestments of Colombia in In the Dominican Republic, maybe we just we might have missed something because the depreciation started in December, so the average exchange rate in Argentina it's not yet $800 on the official exchange rate, so if you can. chat some more light in the subject, I would appreciate it. And Vernak, my second question, and I think you clearly explained the concerns of the industry regarding the competition with imported goods that predatory competition you mentioned from china more recently we heard the government saying that they will revisit the tariffs but i think that it's not yet in accordance with what the industry expected like the increase of tariff so that we would be closer to mexico because mexico imposed a 25 tariff if you could please elaborate a bit more about these these debates and whether the industry really wants to prove the government that that china is practicing dumping and you know what are the other partners in marcos who was doing to prevent that predatory influence from china and whether you anticipate any increase in prices in the domestic market. Thank you. That's my question. Can you hear us, Daniel? OK. Let me start giving you a more general answer about tariffs in Brazil, and then I will Turn the floor over to Jaapur that can give you more facts about Argentina and Colombia. We've been debating with the federal government for several months now, and we've been talking about the need to impose a 25% tariff. I mean, Brazil has been importing still for many years. We've never been against any kind of commercial opening or trade opening. even despite all of the difficulties involving Brazil costs and other things that get in the way of our competitiveness. Throughout the years, we've been able to search for other alternatives and to compete on equal footing with any other producer in the world. But once you have Chinese steel landing in Brazil and in other countries, countries that are still open to receiving things at lower costs, even lower than production costs. It's impossible to compete. Even though we try to reduce our costs, it's impossible to compete like this. And we believe that this is not something that is going to be solved in the short term, because after all, what's happening in China is a decision by the Chinese government to maintain their jobs because there will be no more investments in infrastructure and the real estate market is going through short-term difficulties. By the time China could boost internal consumption and green economy, the export phenomenon is something that will prevail for quite some time still. And having said that, some countries are being very quick in terms of implementing some trade defense measures. And this is the case of Mexico, the US, I mean, 27 countries in the European bloc, and Turkey. a major exporter, they also implemented some safeguard measures against China. We are trying to show to the Brazilian government that it's important to do the same thing, but discussions are taking very long. We thought that the government would expedite measures and would be quicker in implementing shorter measures. They haven't done anything. The debate is still ongoing and we have to constantly provide more and more details, but we believe that with time something has to be done. This tariff recomposition does not help us at all and even any possibility for us to increase our profitability in Brazil. This is not going to happen because this tariff will not help us. Therefore, we see the need maybe to have maybe quotas or to increase the tariff so that the subject could be solved. Daniel, I mean, we waited up to a limit. We cannot wait anymore. So we are now starting a very strong process to readjust our structure in Brazil because this is a new reality and we think that this will go on for longer. We cannot wait. afford to operate in Brazil with many units in a small volume. It's not even feasible or intelligent. Therefore, we are now revisiting our capacity. We are dismissing more people. And a more recent event was the fact that we laid off another 100 people from our Pindamoyangaba unit. And this number just adds up. And the recovery that we see going forward in terms of our profitability in Brazil will have to go through costs. I don't see that this is an adequate environment to recover margins through prices, maybe through some very specific products. That may be the case. But there will not be any special price movement because the environment is not very good for that. In terms of our capacity, we are taking a very close look at trying to seek for competitiveness through costs that I'm sure this will not happen overnight or just in a single quarter. We still have the carryover of all the decisions made. So we have to pay in advance just to bear the fruits further down the road. But certainly we do have the means to improve our margins, not only in terms of the fourth quarter, because we have to take into account you know, maintenance shut down, seasonality. But we are still insisting with the government that they have to take a stand. We are also accelerating our anti-dumping processes. But that's, you know, long term, at least 18 months, I would say. But there are other processes that somehow we are trying to reactivate, especially in terms of hot coil road strips. We materialize the damage But there is a mechanism that we know in Brazil, we call it JETI. It's a technical group of public interest. I mean, okay, dumping is approved and then that process is despite there is a dumping, we will deploy that because this could also harm other sectors. Inflation could go up and things that are difficult to understand in Brazil. Well, we are doing something, but it's a long-term measure. We cannot expect that through these mechanisms something will happen this year. There should be some more harsh decision by the government. We cannot afford to wait any longer because it's very difficult to go back to what we had before. We are now intensely looking at our structure because we want to improve profitability going forward. focused mostly on cost. Okay, I will stop right here. We can certainly talk more about it later on, but I will turn the floor to Rafael so he can talk to you about Argentina and Latin America. Well, thank you for your question. And this gives us the opportunity to explain something that it's complex because it's not like a routine subject, but it's important that we shed some more light. So we'll do that right now. I will just ask for our team to put on the screen again that slide that talks about Argentina. I think this simplifies the conversation. Argentina. for a few years, I think, and several quarters. I mean, in the IFRS role, they've been treated as an inflationary country. So every quarter, we had to recalculate the results within that given year, looking at previous quarters using the last official exchange rate. So every time the government or the U.S. dollar would fluctuate. I mean, the official fluctuate either up or down. We would do a mark to market looking at inflation and exchange rate in the line of expenses, etc. And as a consequence, then we would have our results. But as in December, right after the election, the Malay administration you know, promoted a very relevant depreciation. So from 360 pesos for a dollar, that amount went up to over 800 pesos per dollar. The mark to market was almost 50% in relation to the official exchange rate we had a day before. So in accounting terms, we have to immediately realize that in the next coming quarter, And then we have to consider all the effects that occurred throughout the entire year, looking at all of the revenues and all the costs within Argentina, adjusted by the less inflation number and the less exchange rate. And because of that, as a result, in this fourth quarter, I mean, we detailed all of the lines. The impact in our revenue was an adjustment of 1.2 billion BRLs. And this was more than half of the drop in revenue we had in the previous quarter, which was a drop of 7 percentage points. And this stemmed from this maxi devaluation. And the impact was also an EBITDA of 526 million BRLs. But this impact will not be repeated going forward every quarter, because this will only happen once we have some significant moves in the official exchange rate, or maybe a slight difference between the the non-official exchange rate vis-a-vis the official exchange rate, and whether there will be this effect of inflating result during the quarters and a sudden drop in a given moment, this will certainly depend on what will happen in Argentina in terms of the performance of inflation and the official and non-official dollar rate performance. I mean, The normal operation in South America, excluding the effect of a maxi devaluation, should be very close to what we reported in the fourth quarter, when we will have a quarter without that effect. Because this quarter, we have the effect not only from the fourth quarter, but everything else that happened throughout the year. Therefore, I believe that the reference for the year of 2023 is a good reference. because it could be a starting point for a modeling that we expect to see in the coming quarters. Now, in terms of the second part of your question related to the divestment, the divestments in Colombia and the Dominican Republic, I mean, throughout 2023, they contributed with approximately 400 million barrels of EBITDA in the results of the South America BD. If you look at the performance numbers, it would be, I mean, for the year 2023, 400 million came from Colombia and the Dominican Republic. Therefore, thinking about a normal year, I mean, if you could say that there is any normal year in the steel milling industry, South America going forward would include the result from the fourth quarter, net from the joint venture participation we had throughout the years. So in 2023, it will be 1.2 million barrels for South America. This is what, in our view, would be the result throughout the net result, net from all of these effects. Perfect, Rafa. Thank you. That's very clear. Thank you, Gustavo. Thank you for your explanation on the tariffs. Thank you, Daniel. All the best.