Gerdau S.A. (GGB) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Gerdau's conference call about the results for the second quarter of 2012. [Operator Instructions] We would like to emphasize that any forward-looking statements that might be made during this conference call related to Gerdau's business outlook, projections and financial and operating goals are mere assumptions based on management's expectations related to the future of the company. Even though Gerdau believes that its comments are based on reasonable assumptions, there is no guarantee that future events will not affect this evaluation. Here today are Mr. André Gerdau Johannpeter, Director, President and CEO; and Osvaldo Schirmer, Vice President and IR Director. With no further ado, I would like to give the floor to Mr. André Gerdau Johannpeter. Please, you may proceed. André Bier Gerdau Johannpeter: Thank you, good afternoon, and welcome to our conference call on Gerdau's results for the second quarter of 2012. We will begin our analysis by conducting an evaluation of the world landscape of the steel market. And after that, we will talk about Gerdau's performance during the second quarter, and the outlook for the regions where we operate. After my presentation, Osvaldo Schirmer will give you more details about the financial performance of Gerdau. And after that, we will be available to take your questions. It is also important to highlight that in our presentation, we will evaluate the performance during the second quarter of 2012 and comparing it with the same period of the year before. In addition, we will present some comparative data comparing to the first quarter of 2012. For those of you who follow us on the Web, on Page 2, we refer to the world steel production. It totaled of 390 million tonnes in the second quarter of 2012 in line with the volume of the same quarter last year. Excluding China, the world production was 207 million tonnes, which is the equivalent of Q2 of 2011 according to the World Steel Association. In Brazil, steel production totaled 8.6 million tonnes, down 7% vis-à-vis the same period of 2011 according to Instituto Aço Brasil. Steel production in the other countries of Latin America, not including Brazil, totaled 8.4 million tonnes, which is similar to what was posted in the same period of 2011. Now referring to steel production in the United States, it was up by 8% vis-à-vis the second quarter of last year, totaling 23 million tonnes. On Page 3, I would like to refer to Gerdau's highlights, pointing out the second quarter of 2012. Gerdau's performance was mainly influenced by higher demand of long steels in the Brazilian market. However, we are still experiencing strong impact coming from higher cost of raw materials within our operations such as iron ore, coal and scrap. Consolidated shipments totaled 4.8 million tonnes, hence which is approximately aligned with the totals of Q2 2011 and Q1 2012. In terms of steel production, we totaled 5 million tonnes, which was a very stable figure when compared to both periods of this analysis. Net sales [indiscernible] a growth of 11% vis-à-vis the second quarter of 2011, totaling BRL 10 billion. When comparing that with figures from the first quarter of the year, net sales was up by 8%. Operating cash generation or EBITDA. There was an increase in the raw material cost [indiscernible] before, and that had an impact in our operating cash generation. And it was down by 5%, reaching BRL 1.2 billion. However, when we compare that with the first quarter of the year, EBITDA grew by 23%. Net income was BRL 549 million in the second quarter, which was up 9% when compared to the same period of the year before, mainly influenced by a nonrecurring financing impact in the second quarter of last year due to early debt payment. When comparing it to the first quarter, the consolidated net income was up by 38%. Dividends that will be paid out to Gerdau S.A. shareholders will be BRL 153.2 million, BRL 0.09 per share. And payouts to shareholders from Metalúrgica Gerdau S.A. is BRL 52.8 million, BRL 0.13 per share. Investments in the second quarter totaled BRL 850 million. And year-to-date, it totaled it BRL 1.5 billion. On Page 4, we have the outlook for 2012. I would like to start by giving you a general overview according to estimates from the IMF for the global GDP, which points out to a growth of 3.5% in 2012. The world steel consumption according to world steel should grow by 3.6% in 2012, reaching 1.4 billion tonnes, which is a lower volume considering that what was forecasted earlier. This reduction in the expectation is mainly associated to the slowdown of the economies of the emerging nations, particularly China and also the crisis in Europe. In Brazil, the Brazilian economy should grow by 1.9% in 2012 according to the focus report and steel consumption according to estimates by Aço Brasil should reach 26.4 million tonnes, which is 5% more than the volumes posted in 2011. Civil construction industry in Brazil. The civil construction GDP should experience growth of 5.2%, mainly influenced by investments in infrastructure related to the World Cup and also more stability in the deliveries to the real estate market. It's also important to mention that during the first quarter of 2012, our sales to the civil construction industry were higher than in the first quarter of 2011. In terms of the industry, the industrial production should not experience any growth in 2012, mainly impacted by the deindustrialization process that the country is experiencing. On Page 5, we have the outlook for North America and Latin America. In North America, and this does not include Mexico and the Specialty Steel mills in the United States, we are forecasting good demand for the energy and industrial segments, also agriculture and a gradual recovery of the nonresidential construction industry. For example, according to the Purchasing Managers Index from the Institute for Supply Management, the main KPI, industrial production in the U.S. reached 52.7%. Everything that is over 50% represents growth. Another important aspect is the nonresidential construction investment, which represented a growth of 68% in the second quarter this year vis-à-vis the same period of 2011, reaching $75 billion. Mainly, this provides more constructions of industrial warehouses and commercial buildings. As a result, the IMF estimates that the U.S. GDP should grow 2% in 2012. Steel consumption should be 94.2 million tonnes or a 6% increase when compared to figures from 2011. In terms of Canada, the GDP growth is supposed to grow 2.1% and steel consumption will also grow 2%, reaching 14.5 million tonnes. In Latin America, preliminary market studies indicates that we will have positive outlook, Colombia 4.6% positive and Mexico a 3.8% positive growth. For 2012, the Latin American countries except for Brazil should reach steel consumption of 41.5 million tonnes, which is 6% growth vis-à-vis 2011. On Page 6, Specialty Steel, Brazil, United States Europe and India. In North America, during the second quarter, 3.8 million light vehicles were produced considering the markets of Canada, the U.S. and Mexico, which accounts for a 23 -- 25% growth over 2011. In the segment of high vehicles, production was 66,000 units. That means that 7% growth over the second quarter of 2011. For 2012, market estimates indicate that should be a growth of 14% in the production of light vehicles and 8% growth for mid-sized and heavy vehicles. Brazil Specialty Steels and vehicle production. We produced 815,000 units in the second quarter, which was down by 8% vis-à-vis the same period of 2011. Now comparing it to the first quarter of 2012, this volume accounts for an increase of 10%. And this is already an impact of the government incentive to boost the acquisition of automobiles, starting with a reduction in interest rates and IPI. According to ANFAVEA, the production of light commercial vehicles in the country should grow by 4% in 2012, reaching 3.2 million units. However, when it comes to heavy vehicles, the estimate is that it should be down by 16% from these production volumes. In Europe, in the second quarter of 2011, vehicle registration experienced a decline of 6% vis-à-vis the same period of the year before which include 2.3 million units. In the other segment of light commercial vehicles, the production was 453,700 tonnes, which is a 12% reduction vis-à-vis the last quarter of 2011. And this is already a reflection of the European crisis. Now we would talk about investments on Page 7. Our investment plan, and despite all of the uncertainties in the world economic market, we are still maintaining our investment plan of BRL 10.3 billion for the period between 2012 and 2016. However, we will be more selective when it comes to evaluating projects and more flexible in our disbursement schedule, taking advantage of the opportunities in the markets where we operate. In Brazil, we will still work in the operation of the coiled hot-rolled strips rolling mill at Açominas Gerdau that should start operations at the end of 2012 with installed capacity of 770,000 tonnes a year. And this equipment is suitable to serve the auto -- the demands coming from oil, naval and civil construction industry, having machinery as well like machinery and input. And we will also serve the plant for having placed rolling mills that should be in operation by 2014. We are still considering that the investments that haven't been announced. To reach self-sufficiency in iron ore, we want to reach 11.5 million tonnes of annual installed capacity by 2014, and we are also moving on with the project for commercial exploration of the surplus output of iron ore. Today, we also are announcing the reinstatement of a project for BRL 1.1 billion for the construction of a new mill in Mexico by means of our joint venture. We will have annual installed capacity of 1 million tonnes of steel and 700,000 tonnes of iron ore. This will help us replace imports and operation should initiate in the second quarter of 2014. In India, our joint venture, Gerdau Kalyani will start in August as the operation of the blast furnace, where the production capacity is 350,000 tonnes. In the same period, we will also initiate the operation of the energy generation plant for 6 megawatts. And in the second phase of the investment, we will also initiate our new rolling mill for Specialty Steels with installed annual capacity of 300,000 tonnes. In addition, we will continue with deployment of a coke plant with an annual capacity of 200,000 tonnes. And integrated to those plants, we will also have an energy generation plant for 15 megawatts. Now my final comments. And I would like by saying that this growth that we experienced in terms of net sales, EBITDA and net income in the second quarter when compared to the first quarter clearly demonstrates that recovery of our financial and operating performance in this past year. And this really reflects an improved demand and improvement in our operation management. As we said before, we also experienced a challenge in increasing prices of the raw materials. Adding to that, we also must consider the deindustrialization in the steel chain in Latin America. And in Brazil, we have other things that affects that so-called Brazil cost with high interest rates, in addition, logistic systems, high cost of energy and a very high tax burden on [indiscernible]. So we still have a lot of challenges ahead. In view of a global landscape of volatility, the slowdown in the economy of emerging countries, Brazil, China and India, and also the European crisis, our challenge is to continue to search for improvements of our operating margins, beginning with the continued improvement of our cost management and in strategic projects, the introduction of the mining product and the trading of products in Brazil and also the development of our joint venture in India. To conclude, I would like to inform, as was recently announced, that Schirmer is retiring his functions as of December 31 of this year. So therefore, I would like to thank Schirmer for his excellent performance during his 26 years at Gerdau for the position of Senior Vice President for Finance and Controllership, currently taken by Schirmer. The company appointed André Pires de Oliveira Dias, the current CFO for Long Steel Operation in North America. He will also join Gerdau's executive committee. Now I conclude my presentation. Now I'll give the floor to Schirmer, who will then proceed with the financial outlook. And after that, we will proceed with Q&A.

Thank you, André, very much for your kind words, and good afternoon to all. I would like to start by our consolidated results, and then I will talk about our business operations, and finally about our capital structure. So please take Slide #9, which shows our comps in a comparative of the second quarter of 2011 in the first column and the second of '11 in the second column, and then it's the half yearly numbers, as you can see. The consolidated sales revenue in the second quarter of '12 was BRL 10 billion, BRL 965 million more than in the second quarter of 2011, that's 11% of positive variation, as you can see in the second bar of the EBITDA. The increase in the net sales is due because of the global net revenue per tonne sold in all these business operations, which is very impressive. The cost of sales in the second quarter 2012 was BRL 944 million. The third bar of the chart showing an increase of 12% vis-à-vis the second quarter of 2011. The largest cost of sales was a reflection of the higher cost for raw materials and is inclusive for [indiscernible] of the growth of the net sales, bringing about a reduction of the gross margin. Now if you look at this second quarter compared to last year's, it was very important difference. Regarding the expenses, it was general and administrative expenses, even with a slight increase of the absolute value, which is the fourth bar of the graph -- of the chart, the share regarding the net sales shows a reduction in the second quarter when compared to the second quarter of 2011 due to the greater growth of the net revenue in the period. And in the last quarter, it has been about 6% of the net sales. The EBITDA in the second semester -- or in the second quarter was BRL 1.2 billion, a drop of 5% vis-à-vis last year's EBITDA. Lower EBITDA 12% against 15% in second quarter 2011. And this reflects the increase of the raw materials cost. And on the other hand, in the second quarter of 2012 compared to the first, EBITDA increased 23%. So a negative financial result in the second quarter. Negative when compared to the second quarter of 2011, particularly because the exchange rates variation, BRL 157 million, BRL 800 million of the debt taken in Brazil. And it is important also to mention that we have mentioned that we have a nonrecurring debt of BRL 70 million when we have to bring forth our interest rate swaps, and we canceled then the swap. And this brings about this difference between the 2 quarters. The consolidated net income of 2012 shows the improvement vis-à-vis the second of 2011 because of utilization of the exchange rate variation, which I have already referred, about the debt taken in foreign exchange, as I have mentioned, which did not occur before. And year-to-year, in the second quarter, it has increased 9%. If we look at the second quarter this year and compare it to the first, we show a good recovery, growing 38% in net income. Now Slide 10. We have the business operations. First of all, the Brazil business operations. The sales volume in the second quarter reached 1.9 million tonnes, a drop of 2% over the second quarter of 2011, of which 74% or about 11.4 million tonnes come from the domestic market as you could see on the chart to the left. Performance in the internal market increased 10% vis-à-vis the second quarter 2011, a result of a good demand of long steel for civil construction. The net sales first reached BRL 3.7 billion in the second quarter 2012. As you could see in the chart to the right, at this moment, the increase of the domestic market was the main factor, which led to the growth of net sales. And this business operation contributed with 36% of the consolidated net sales for the second quarter and EBITDA, which was BRL 589 million in the second quarter 2012. And if you compare this with the first quarter, it was a growth of 43% and a margin going up from 13% to 16%. North America, Slide #11. America results, there was a reduction of 5% in the volumes sold into the second quarter 2012 compared to the second quarter of 2011. The drop in the sale of long steels was a reflection of the early demand of the first quarter 2012 because of the seasonal variations and early demand. The winter was much more mild. And the first quarter 2012 showed a greater volume of sales since the beginning of the crisis in the United States, as we have already said. And excluding this seasonal factor, we continue to deliver continual good demand of the industrial sector and energy and the gradual recovery of the nonresidential sector. And so as numbers growth, the net sales in the second quarter 2012 reached BRL 3.2 billion, 18% higher than last year. As you can see on the right chart to the right, the growth was result of growth of net sales per tonne sold. And this business operation contributed with 31% of the consolidated net sales for the quarter. EBITDA in the second quarter '12 were BRL 328 million, slightly below than to the second quarter 2011 because of higher cost, more general and administrative expenditures and less equity income. So the EBITDA margin was 10% in the second quarter compared to 13% in the second quarter of 2011. Slide #12 in Latin America. Sales reached 685,000 tonnes. And you could see on the chart to the left that 6% above the sales in 2011, especially for Peru and Chile, which reflects strong demand from the construction sector in these countries. The net sales were BRL 1.3 billion compared to BRL 958 million in the second quarter of '11. As you can see in the chart to the right, showing a growth of 33% due to the better net sales per tonne. And that's the price and that's the volume. This business operations accounted for 13% from the consolidated net sales of the quarter. Cash generation was BRL 70 million less than last year due to higher costs, more general and administrative costs and less equity income. The EBITDA margin, on the other hand showed a drop, going from 13% in the second quarter of '11 to 5% in the second quarter of 2012. Specialty Steels, Slide #13. In this business operation, a drop of 8% in the current volume in the second quarter. When compared to the second quarter of '11, a drop of 8%, that's all, because of a lower demand in the Brazil and Spain units. In Brazil, we still have the effect on the earlier demand of heavy vehicles production at the end of 2011 because of a new regulation called Euro 5 for diesel engines, which came into force in January of 2012. Spain, on the other hand, has lower sales because of the effects of the European crisis. Now in a comparison with the first quarter of 2012, the sales in Specialty Steels, as [indiscernible], show a growth, in part by the recovery of demand because of the government incentives given to the automobile sector. And the first quarter compared to -- the second quarter of 2012 compared to the first quarter or the second quarter in 2012 shows our growth. Net sales shows a growth of 2% or BRL 2.1 billion, as you can see on the chart to the right, because of the greater net sales per tonne sales, which offsets the reduction of the sales volume. This [indiscernible] accounted for 20% for the consolidated net revenue in the quarter. The EBITDA 2012 was BRL 362 million, practically equal to the second quarter of '11 and EBITDA margin, 17%. And compared to the first quarter, the margin goes from 14% to 17%. And the absolute value of cash generation grew 13% quarter-to-quarter. Some considerations about the country's liquidity and indebtedness. Slide 14. Net debt from December to June increased 29%. Gross debt reached 19.9%. We have BRL 3.2 billion in cash. We had a net debt of BRL 11.7 million in the comparison, which is a consequence of cash reduction and also an increase of the gross debt. Cash reduction occurred particularly because of the payment of debt, which includes in the first quarter of 2012 a need for more working capital because of greater activities in the period and also because of the greater CapEx. From this cash, 27% was held by Gerdau companies abroad, particularly in American dollars. And the gross debt compared to the June 2012 was broken down into 20% in reais, 48% in foreign currencies contracted by companies in Brazil and 32% in different currencies contracted by subsidiaries abroad. From the total of the debt, only 20% was short-term and 80%, long-term. Gross debt when compared to 31st of December 2011 shows an increase of 9% particularly because of the exchange rate effects, which occurred in the second quarter of 2012. 59% of the gross debt originally for the capital market debentures and bonds. The weighted nominal average cost of our gross debt on the 30th of June of 2012 was 6%, 5.9% to be more specific. And of this, 7.3% was for the amount taken, denominated in reals, 5.7% plus exchange variation for the total denominated in dollars in Brazil, and 5.6% was the amount taken by subsidiaries abroad. The debt payment schedule, as you can see on the upper chart to the right, shows a comfortable situation for the next year vis-à-vis available cash and the prospects of cash generation for the company. At the end of June, the average term for debt payment will be 6 years -- or was 6 years. The financial cycle, which is working capital divided by the daily net sales of the quarter in June 2012 showed an increase of 4 days vis-à-vis March 2012. This increases stem from the growth of 13% more of working capital because of the effect of exchange variation on inventory and receivables abroad compared to the increase of 8% in the net sales in the second quarter of 2012 compared to the first quarter of 2012. I'd like to conclude saying that Gerdau has done everything to keep its capital structure in the best shape possible vis-à-vis the world economic scenario. And we will continue to work to improve our cost management, and we'll be very selective in our strategies, always trying to improve our operating margins, as André has already mentioned. So we believe that Gerdau will continue to stand out among its peers in the market and receive the attention of our investors. So now we will go on to our Q&A session. Thank you very much.

[Operator Instructions] Our first question comes from Ivano Westin from Credit Suisse. Ivano Westin - Crédit Suisse AG, Research Division: Congratulations for the results, particularly the Brazil operations. Would you talk a little bit, please, about your market position, the demand scenario and compared it to the United States, especially in the second half of the year? And with these price increases, which were announced for July, will this be for all clients in Brazil? And what do you expect from the government, any incentives for the rest of the year? Second question is about monetization. And can you give us guidance as when you will announce this to the market? And if there is no agreement about evaluation with possible strategic partners, do you -- will you develop the project without the participation of these strategic partners? André Bier Gerdau Johannpeter: André. Well, about the scenario, what we can see -- I'll talk first about Brazil. For long steels and civil construction, generally speaking, whether residential or commercial buildings, lots of good growth. We will have many -- a lot of construction for the World Cup, this is already help occurring. But in other fields, we will not have so much growth. And this is being affected by the Brazil cost and competitiveness and deindustrialization. So Brazil will develop into construction, but not so much in the industrial sector. And there might even be a slight drop according to the data which is being published. If we take -- were you asking about government incentives? The government has been taking some steps. The automobile sector has had a reduction of the IPI. The government has said that other incentives might come along. And the energy sectors might be favored, and we don't see this favorably the steel sector, the oil and steel chain. It would help if we were more competitive, so we have nothing specific as yet. But there are some prospects [indiscernible]. And regarding price, I will not say anything specific. Price would occur in different regions. It depends on plants and regions. But I don't have any specific point that I'd like to discuss. We'll see when the world pressures in the stock markets regarding raw materials. But [indiscernible] from operations or markets, which produces -- sometimes we see questions where the margins -- or places where the margins are very tight indeed. Rodolfo? Sorry, it wasn't Rodolfo, it's Ivano. Regarding the mining, we talked to press about it this morning. We are at the second phase of what [indiscernible] was to interview candidates or companies in Brazil, in United States and Europe and Asia. So [indiscernible] which you will see will be proposals on line and we are now in the second phase of the due diligence, management presentations. And now we're in the second phase, we're in this phase. From now on, as [indiscernible] binding offers will come in. And you also ask, well, what if the proposals received are not acceptable according to company's expectations? We will carry on with the project on our own. It's difficult to answer that question. There is a lack of interest. There is a unanimous recognition by all those interested or those working on the project with the quality of our mines, it's above the average of the market. And we are considering going alone. But let us see what is going to happen.

Our next question comes from Rodolfo De Angele from JPMorgan. Rodolfo R. De Angele - JP Morgan Chase & Co, Research Division: André, this is Rodolfo speaking. I would like to ask you would if you could say a little bit more about the project on the Mexican mill and a little bit about the technological routes that you've chosen. Have you chosen something along the lines of -- what line can be taken? And also, as for [indiscernible]. And in the second quarter last year was [indiscernible]. But could you just elaborate on that, please? André Bier Gerdau Johannpeter: Rodolfo, this is André. About Mexico, this is a joint venture with our local partner, 50/50, and the route is the electric furnace that sends it 10,000 tons of [indiscernible] and 700 million tons of steel. So that's the Mexican project. And now Schirmer will take over.

You asked whether the ruling affected the steel sector in the [indiscernible]. Did it, for us, caught or did it continue to affect the region in the second quarter? Well, at the beginning of the second quarter, we feel bad. The impact of the rain, which we'll have in the beginning of the year but we'll not actually recover our production level. It did reflect the new costs but this was not long-lasting.

[Operator Instructions] Our next question comes from Mr. Carlos de Alba from Morgan Stanley.

My questions are regarding the India project. Could you tell us how much the CapEx capital was and the timing for that? And second also on the gross volumes, it seems that you are now more flexible in terms of [indiscernible] you may be going ahead, as well as the timing of those projects. So if you could prioritize for us what projects will be more [indiscernible]. I think will even in terms of go ahead or not go ahead, also in terms of timing. [Technical Difficulty]

[Operator Instructions]

Sure. The question is regarding the Indian project. How much is the CapEx for a stage 2 when you're going to put there the rolling mill? [indiscernible] And second question is regarding the flexibility that you highlighted in terms of your CapEx plans. What projects would be a priority for Gerdau and where will those take place in case you need to reduce the total amount of CapEx when you first plan for the next few years?

First of all, I would like to ask the gentleman to repeat the question because I think the question was around few issues. One referring to our CapEx schedule and what are the priorities, and I think he wants to know a little bit more about the second stage of our CapEx in India. And I would say that vis-a-vis our CapEx program, we will stick to BRL 10.3 million, which has been scheduled for the next few years, which is 1.7 billion a year and there is a very selective evaluation schedule of our investments. Or in terms of the Açominas rolling mill or coil hot roll strip rolling mills should be concluded at the end of this year and rolling mill for 4 heavy trays will be ready by 2014. So these are the priorities. And as announced before by André, we have Mexico with structural shapes rolling mill for 70,000 tons. So these are the priorities. Now in terms of a more a specific CapEx in the second stage of the plans in India, we have to give you that number later on because we don't have that available for 300,000 tons a year, as the market already knows, and followed by investment in the rolling mill. But we can resume, we can go back to that question later on.

[Operator Instructions] Our next question is from Renato Girdeau Antonis [ph] from Flow Cord Theater [ph].

The first question is concerning specialty steel figures for the second half of the year. In Brazil, how do you see the demand landscape currently? And we've heard that there will be lower production of heavy vehicles. What is your expectation in terms of the volume for Specialty Steels in Brazil in the second half of the year when compared to the first half of the year? And the second question relates to a possible expansion of your iron ore plant and logistics. I think you also said it here there are several alternatives about that. And I would just like to understand it better because I know that Gerdau has been very careful in terms of controlling all the links of this chain in terms of [indiscernible]. And logistics for iron ore and certainly that is depending on contract terms. Should we see Gerdau adopting the use of outsourced ports to ship your goods?

Ladies and gentlemen, please remain on the line.

I do apologize, there was a problem with the connection. It was in mute and I was not aware of it. The question related to the mining process and you also asked us about the logistics system and I was saying that logistics accounts for road transportation. Gerdau is already negotiating things with MRF Logistics. We anticipated to them what is the expected volume and this is absolutely under control. The second part of this issue refers to the port. In our project, we already contemplated the construction of a port. We already received a license for that construction and there's also the alternative to use existing port facilities. So we are working with these 2 alternatives. André Bier Gerdau Johannpeter: It's André now. The question was about Brazil and the outlook for the country. I would like to begin by referring to civil construction, which is a segment but still presents increasing demand. In the civil construction industry, we are still building lot of infrastructure projects, highways and ports, and we see some DPT in the port authority area. All of the stadium for the soccer cup are being built and rebuilt. So in general, the landscape is very positive and it's a landscape of growth. So commercial construction, and mine construction is still growing as well. Looking to the inventory side, things are not so good, especially in terms of imports and machinery. The competitive environment is increasing so growth should be 0 or close to 0. In terms of vehicles, what are we seeing more particularly? There was a moving trend of trucks because of Euro 5. The industry experienced a significant decrease but we see some recovery coming for the second half of next year and we will see the pickup of sales of trucks. Inputs, there was a reduction in consumption, increases in inventories in the third quarter, and the government came up with some tax incentives and we are now experiencing the results. July experienced one of the best sales of light vehicles and this will certainly help the industry to clear their inventory and according to future projections, sales of vehicle should grow still by 4% not only due to a government incentive but also economic roads and increases in family household or household income. There was a reduction in the projections for GDP. Once we incurred 3, now 1.9. But depending on the industry, will we be able to see different growth levels and this is the case of the construction and steel.

Our next question comes from Leonardo Correa from Barclays.

The first question has to do with costs. Could you quantify or at least give us an idea of the price of scrap? We once seen scrap prices drop, for example, in the United States and here in Brazil, there were some signs saying that the price of scarp dropped in the last 3 weeks. So I'd like to know if you have felt this as well. And it would be interesting if you could do that as well, first question. Second, the investment in Açominas in the hot rolling mill. Could you elaborate on this investment and maybe somebody could tell us what the cost of transformation is. The mix of the company will obviously improve in the next few months and also through 2013. So maybe you could tell us what will improve or give us a parameter to transformation costs, that would be interesting. André Bier Gerdau Johannpeter: This is André speaking. Regarding scrap, ever since the beginning of the year, there has been a tendency to a reduction of the price of scrap in the global market and also of coal and of ore and this is in Europe and reflects in the United States, largest exporter in the world. And this includes its other markets. However, what we do see is -- and we will see in the second half of the year. There might not be a rebound. There might be an increase for these prices in some markets because mostly this is due to some scrap volume and the buying of the scrap. And apparently, it has reached a price where probably there will be a recovery now in August, and so coming up again. What is more important for us is to keep the spreads, not telling whether the scrap going up or down but to maintain our spreads in North America, we have managed to do that, and that's important. And also for other markets. And you have asked about hot rolling mills and that cost and CapEx. In CapEx we have already published it several times. The project of the rolling mill and the heavy plate rolling mill is BRL 2.4 billion. You asked about the operating cost of the -- transformation cost. But generally, we don't talk about our cost, but could tell you that our equipment makes us very confident that it's extremely competitive and it is a very modern technology so our indicators show that it will be competitive in this section.

Could you tell us, André, what the current level of the scrap is and in the United States as well? André Bier Gerdau Johannpeter: About 450, 460 level.

[Operator Instructions] Our next question comes from Mr. Jon Brandt from HSBC.

Two questions. First is related to the previous question just on the spreads. Would the expectation that scrap prices in the U.S. are set to rise, as you said, in the second half. With demand being a little bit weaker than what you would have expected in the second quarter. Do you think demand will rebound sufficiently enough for you to increase your volumes and keep those spreads and see some margin expansion in the third and fourth quarter? Or do you continue to see margin pressure, maybe around the 9%, 10% level for the rest of the year. And secondly you mentioned in the press release that you're still looking to take advantage of opportunities that emerge in the marketplace. I read that to mean M&A, is there anything at the moment that seems interesting to you? And I'm thinking specifically about CSA in Brazil or Sparrows Point in the U.S. Those are my 2 questions. André Bier Gerdau Johannpeter: Well to answer the question about scrap, whether there'll be a rise or not in the third quarter, and if this happens, what will happen to the margins. We have seen sometimes that it might go up. But very difficult to be specific to know what the prices of scrap will do. But as the world market has been dropping in the last few months and many buyers have stopped or reduced their inventories. There's a possibility of a rebound of the prices as we could use as come back to purchase. But this is speculation in the market and we can -- have no certainty. The important thing for us is to keep our margins. So we will maintain our margin for the second half of the year in general. And then there was a second question which Schirmer will answer.

Whether we group all the M&As, we will be interested in [indiscernible]. This question [indiscernible] where we still talk about market opportunities. So CSA [indiscernible] company that I've previously mentioned. And we will not just -- none of these 2 projects are official, neither [indiscernible] own CFC. And finally, you talked about market opportunities to direct our investment and prioritize our next investments to take the best opportunities in the market.

[Operator Instructions] Our next question comes from Thiago Lofiego from Merrill Lynch.

My question has to deal with CapEx. And could you give us an idea of how much you have spent regarding this project? And you talked about BRL 2.2 billion from its IC, and what is your expectation in terms of plans for the next few years? Will you -- and what about the sales mix for the project, will it be for Mexico there 1 of the distributors, or will it probably be for your local export? That's my first question. André Bier Gerdau Johannpeter: The BRL 2.4 billion of CapEx total, we are not breaking down this number in equipment. But the spreads also are important. It's difficult to separate this number. The projects we will be concluding are hot running mills, and [indiscernible]. Heavy plate is being booked. It's difficult to estimate. We don't have the exact number here, but about 60% have already been spent. But we can get back to you on that. About the mix of the project system, it's important to understand. We also have [indiscernible] particularly on the first part of the year. And the [indiscernible] reached its peak in the second year. We will focus on the domestic market and domestic according to opportunities and further on, in the second year we're on, we will focus more on the domestic market as soon as we have new gaps and supplying the domestic market. However, in our project, there will be good export percentage because we have markets in Latin America. We have the opportunity to sell also outside Brazil. So first of all, export to the domestic market is [indiscernible] to export to Latin American countries. We have [indiscernible] which resulted in 2.4 billion tons of ore yes, more on ore.

My second question complements the first one on when I asked a question about mining. Do you have the timing regarding the boundary markets [indiscernible] in the next 3 to 6 months? André Bier Gerdau Johannpeter: [indiscernible] I will answer it. We are in the second phase of due diligence. Now it's been present growth too, et cetera. [indiscernible] of potential investors, which is important for the United States and Europe others in Brazil. There you have some [indiscernible]. This is difficult to certify. To date, each will be [indiscernible]. [indiscernible] schedule with the knowledge that we are within our schedule. It is very difficult to specify the date of [indiscernible].

Our next question is from Marcos Assumpção from Itau BBA. Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division: I have 2 questions. The first related to the pricing landscape in 2013 in the domestic market. Could you tell me something about new price increases early next year due to the end of the government incentive to Chile's exports and whether you could draw a parallel between longs and flat steels, which market vis-a-vis there will be further possibility to increase prices? And the second question relates to the Brazilian operation. It was clearly -- it is clear to me that you had a recovery in your margins and there should be further recoveries when certainly demand in Mexico of those takes up. Could you please give me your outlook for margins in the long run for the long market? André Bier Gerdau Johannpeter: It's André. In terms of pricing and forecast, considering that we have a mix of different products so on and so forth. I mean there's expectation according to Resolution 72 that terminates all of the incentives for the ports, must help in the competitive landscape of the industry but it also depends on the Mexican market, foreign exchange. There are many aspects that influence pricing not, only that resolution. That's why at the moment it's very difficult to do any kind of forecast and I am mostly referring to longs. Well, flat steel is still too early to say. We will start rolling at the end of the year, so it's still too soon to talk about flat steel. And the second question, I will give it to Schirmer.

Marcos, your question about the pricing landscape and margin recovery in 2013 or even through the end of this year. Considering EBITDA margins, et cetera, we do not give out guidance, as you well know. We just talk about what will we produce. We are working very hard to decrease and optimize our working capital. As we mentioned before, we have growing volumes of suppliers of iron ore in this [indiscernible] to our efficiency performance. We're self-sufficient. We are also working hard to replace coal export, bringing more coal from Colombia to Acominas. We always invested except for that particular year 2010. There is a guideline from the company that is very clear to management that we must improve costs and at the same time improve efficiency. It's difficult to anticipate any pricing scenario but whatever we can do internally, we will do. And we believe that we will continue in that effort to increase margins but I do not want to say anything about on that matter.

Our next question is from Humberto Mairal [ph], he's from Goldman Sachs.

Now going to my question. Most of my questions were previously answered but in terms of Cosigua, I think -- I don't know whether I understood it quite well, whether you're -- whether it's a position of Cosigua and how is that project moving along and what about the start up in CapEx. The other thing is whether you could -- I know that you don't give 5-year CapEx, but I think you already have a budget for next year, so what will be the annual CapEx and when do you expect the rolling mills to operate? Would it be by the end of 2013, early 2014? André Bier Gerdau Johannpeter: This is André. Okay, let me answer the first part of your question. CapEx, your first 2 priorities that maybe we didn't mention Cosigua. Our CapEx plan is maintained and is in the way. Deuter is adding value for it is Cosigua's rolling mill in real. The other 1 for Specialty Steel in São Paulo, the flat rolling mills. So with the use of due capacity to add value and start rolling. So when we say that we will be more selective in terms of where we will use investments, so what we will use it for these projects. And these are the projects that will get our focus. In terms of the annual CapEx, we do not disclose these numbers but maybe you can take the 5-year figure and divide it in 5 years. So I think it's BRL 1 billion a year. When there is more in Açominas, it goes up a little less in Açominas, it goes down. No, we have the slight rolling mills in Açominas. And for the second part of the question, Schirmer will answer that.

In fact, the question referred to the utilization of the coil hot rolled strip rolling mill and whether it reaches 100%. You know that there is a around a process, a learning curve that has to be followed and we do believe that in the first year, maybe 50% to 60% of the rolling capacity of that rolling mill will be the case going towards 100% in a year or 1.5 years. I think this is our internal expectation.

On the second question related to government incentives and the decreasing your payroll, I know that Gerdau is working in discussing that issue with the government. Could you please mention what impacted is expected in terms of the government measures?

It's difficult to specify, but in general, maybe I am now speaking as a representative of the entire steel industry. We are working with the government towards reducing the tax burden so that we could be more competitive. And whenever we talk about lowering the tax burden or lowering the impact of the tax burden on the payroll, half of the cost comes from taxes. These are issues that the entire steel industry is arguing or debating it with the government. We are trying to lower the tax burden because once tax burden is lower, we could be more competitive. And then we will be able to invest more in logistics, infrastructure, interest rates are still very high in Brazil and exchange rate, despite the fact that it's around 2 something in our view, it's relatively low. It could be higher than that to help the industry to be more competitive. So we are working towards lowering the tax burden. Because at the end what we want is to boost demand for steel in Brazil because it is still very low when compared to the consumption of other countries, which should be around 400,000 kilograms.

Our next question is from Raphael Biderman from Bradesco BBI. Raphael Biderman Camargo - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division: Now I have a question about the LPT rolling mill and whether when it starts to operate, you will continue to export to [indiscernible] finished. Could you give me a guidance about the percentage of products or whether you will export than the internal markets and what are the export of BQ in the beginning, in the first few years? And if you mentioned a technical characteristic that maybe you could bring any commercial advantage?

He's referring to BBC.

Now in terms of your very specific question about the BQ rolling mills and how much we will be able to post it in the domestic market and how much we will have to export, this is -- I must say that we will still have products to be exported as semi finished. We are talking about a 800,000 ton-a-year rolling mill on year 1. There will not be a ramp-up, there will be a learning rolling curve skew in profits maybe in the first year. We may reach 50% of output. We have a very good distribution capacity in Brazil, which is assuring that we will place part of the production in the domestic market and part of the throughput in the foreign market. As we get more productivity, we'll try to increase the output to the domestic market in terms of the steel volume that will still be geared towards the other rolling mills. We will still have to export semi-finished products. In terms of volume, it's difficult to say anything at the moment. We have an idea of how much at what level we want to operate in. We will operate with a few markets, the surplus of steel and semi-finished. But when you have your heavy plate, you will not have semi-finished anymore, right? Well there will still be some materials. There will still be some steel left that would be sold one way or another.

Due to our time, we will now close our Q&A session. I would like to ask Mr. André Gerdau Johannpeter to make his final remarks. André Bier Gerdau Johannpeter: I would like to thank you all for your attention and your interest, to thank all the analysts and all who tuned in, and we hope to meet you at the next quarter call. And thank you for all those who wished Schirmer good wishes.

Thank you very much for your participation and we with Investor Relations are always available to answer your questions and complement your questions if we were not clear. André Bier Gerdau Johannpeter: And Schirmer would still be with us at the next call in the 1st of November and I would like to invite you all for the third quarter results. Thank you very much and thank you for tuning in.

Gerdau's call is now completed. Thank you very much for your participation and have a good afternoon.