Gerdau S.A. (GGB) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Gerdau's conference call about the results for the first quarter of 2013. [Operator Instructions] We would like to emphasize that any forward-looking statement 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 the management's expectations related to the future of the company. Even though Gerdau believes that these 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 of the company; and André Pires Dias, Vice President and IR Director. With no further ado, I would like now to give the floor to Mr. Gerdau Johannpeter. You may proceed. André Bier Gerdau Johannpeter: Thank you. Good afternoon, and welcome to our conference call about the results for the first quarter of 2013. We will begin our analysis by looking at the steel market worldwide and later we will refer to Gerdau's performance during the first 3 months of the year, and we will also talk about the outlook in the regions where we operate. Afterwards, André Pires will give you more details on the company's financial performance and after that, we will be available to take your questions. It is important to highlight that in this presentation, we will evaluate the performance of the first quarter of 2013, drawing a comparison with the same period of the year before. Now I would like to give you more details on the world steel market. The main regions of the world Europe, North and South America, the Middle East and Africa, experienced a reduction in their output levels during the first quarter, with the exception of Asia and particularly China. World steel production is 389 million tonnes in the first quarter of 2013, up 2% when compared to the first 3 months of last year. Excluding China, the world's production was 197 million tonnes, which was 4% lower vis-à-vis the third [ph] quarter. In Brazil, it was down by 5%, reaching 8.3 million tonnes. Now steel production in Latin America, without considering Brazil, was 6.4 million tonnes, 18% less when compared to the first quarter of 2012. The steel production in the United States, reached 21 million tonnes, down 8% when compared to the same period of last year. Now talking about the outlook estimates from the International Monetary Fund, point to a 3.3% growth of global GDP in 2013. The World Steel Association also shares the positive view, while steel consumption this year should be up 3% vis-à-vis 2012, reaching 1.45 billion tonnes mainly after the second half of the year. This is a movement led by the emerging countries. However, this growth rate is still below historical levels. And moreover, it is not enough to reduce the excessive installed capacity in the world today. To give you an idea, in 2013, 27% of the installed capacity of the available in the world will not be used. The historical average is approximately 17%. Now looking at Gerdau's performance in the first quarter. Net income was BRL 9.2 billion, in keeping with the same period of 2012, mainly due to an increase in shipments of long steel in the Brazilian domestic market. However, Gerdau's performance was influenced by lower demand in Europe and North America, as well as by an increase of steel imports in Latin America and in the U.S. In addition, we had some one-off situations during the period, such as the start up of the plant in India and the deployment of the management in software in North America and some maintenance stoppages. These factors impacted shipments. And as a consequence, we experienced a reduction in the dilution of our fixed costs which, in turn, affected our margins. In terms of operation -- operating cash generation or EBITDA was BRL 805 million, down 20% when compared to the same period last year. Now net income was also impacted this period with BRL 116 million when compared to BRL 397 million in the first quarter of 2012. When compared to the fourth quarter of 2012, consolidated shipments were up 6%, net revenue grew 2% and net income, 12%. This shows that despite the reduction in margins during the period, there is a trend towards recovering Gerdau's performance along 2013. Investment in the quarter totaled BRL 571 million, mainly investments to increase the production capacity of iron ore and the installation of the coil hot rolled strips rolling mill in the order [indiscernible]. And as announced before for the period of 2013, 2017, the company will invest BRL 8.5 billion in its steel and mining industrial plants. Now I would like to talk about the performance in the quarter and the outlook for the Brazil plants. This does not include the specialty steel plants in the country. In the first quarter, we experienced 12% growth in sales of the domestic market. The industrial sector and important market for Gerdau showed recovery, especially in the areas of energy and agricultural machinery and equipment. In terms of the improving economic outlook, the focus report indicates a 3% growth in GDP in 2013. As a consequence, steel consumption is estimated by Instituto Aço Brasil should reach 26.2 million tonnes, up 4% when compared to last year. In terms of the main factor service by Gerdau in the Brazil operation, and we are talking now about civil construction, an estimate in the market points to a 1.8% growth in the industry GDP in 2013, which should bring about increases in sales of structural shapes and rebars. Now looking in the segment, infrastructure projects are happening without delays in the construction schedules. There are highlights in this segment are the urban mobility projects. So urban mobility projects for the 2014 World Cup and other projects related to the Rio Olympics in 2016. So the construction industry is working at a good pace, also the shopping mall segment continues to grow with residential projects currently experience a lower base with potential for growth in the near future. Industrial GDP, however, should increase by 3% in 2013 according to estimates. In terms of the agribusiness, they should experience 6.5% increase in 2013. In the midrange, one of the challenges of this industry in Brazil is to increase the per capita steel consumption currently at 128 kilograms per inhabitant. And when we compare it to China, it goes over 400 kilograms per capita. And in Russia, it's approximately 250 kilograms per capita. Now I would like to talk about North America. On Slide 5, for those of you are following us on the web. In the first quarter, in Gerdau Canada and in the U.S. were impacted by a more rigorous winter, when compared to before by imports of steel in the region and the deployment of the management, looks very good and in the near [ph] term will become an important asset in many of our business. In the periods of analysis, the market did not post any seasonal improvements in terms of ongoing [ph] prices, which impacted our results. It's also important to say that the U.S. continues to present a gradual recovery of its economy. According to the Purchasing Managers Index and the Institute for Supply Management, there was -- the good indicator reaching 51.3 points in March considering that any figure above 50 represents growth. Now in terms of nonresidential construction, we have seen some signs of recovery, even though the recovery is happening at a lower pace than expected. For 2013, the IMS estimates that the GDP of the United States should grow approximately 1.9%, the steel consumption should evolve to 2.7%, reaching close to 100 million tonnes. In Latin America, and this does not include Brazil, there was a reduction of the region mainly due to increases of steel imports into Latin America, which expedited the industrialization process of the entire productive chain. Now during the period and the analysis, the markets were more impacted by imports of steel in Colombia and Chile, and this is where the currency are more appreciated. So there is good outlook for the economies of the region. Considering GDP in some countries should have an increase in their GDP between 4% and 6%, posting mainly mining, civil construction and infrastructure. Our challenge in the region is to increase profitability in this environment of volatility in international prices and also this should impact import prices. Our main investment in the region is the construction of a new producing mill of structural shapes in Mexico, which should add more value to our product mix. This is an important investment that reinstates our trust in the development of Mexico and integration, both will allow us to serve our customers better, to the replacement of imports of structural shapes. For 2013, countries in Latin America should reach steel consumption of 44.5 million tonnes, up 6% when compared to figures from 2012. Slide 6, specialty steels, and I would like to remind you that this includes Brazil, the United States, Europe and India. In the first quarter, with lower demand for steel in Europe and also some one-off adjustments in the inventories in some service centers in the United States caused a reduction in sales volumes for Gerdau. These factors averaged through the start up of the operations in India impacted the margins of this business, mainly working with the automobile industry. In Brazil, the production of vehicles grew 12% in the first 3 months of the year, reaching 828,000 tonnes. The highlight goes to the segment of trucks with 39% and buses flat 57%. The outlook for 2013 is favorable giving the expectation for further growth in the production of automobiles, trucks and agricultural machinery. We will then continue to invest in our capacity in the country with investments in our mills in the further [ph] Sao Paulo. Now in North America, we produced 4 million tonnes here I'm referring to automobiles, light and commercial automobiles, 1% growth vis-à-vis the same period of last year. For the remainder of 2013, the outlook is very positive for the segment involving automobiles, light and heavy vehicles. And we are still investing in North America to cope with this growing demand for specialty steels. In Europe, the landscape is quite different. The registration of vehicles came down by 10% going down to 10 million units and commercial vehicles were down by 11%, going to 402,000 units. In 2013, we still foresee trends towards a reduction in sales volume and a lower activity in the region. In India, the market should continue to grow, but maybe not growing as much as when in comparison to previous year. Currently, we are starting up the blast furnace, power generation plant, centering melt shop and rolling mill in our operation India. Now I'll go to my final remarks, Slide #7. If we look at the world steel industry, the main challenge is to call forth the excess installed capacity that reached 545 million tonnes in 2012, and this year should be close to 590 million tonnes. As I said at the beginning, this is 27% of the total installed capacity. As a consequence, the utilization level of the installed capacity in the world today is 79%. And in Brazil, it is even lower being at 71%. There's unbalance between supply and demand stemming from the excess installed capacity puts more pressure on the margins of the industry as a whole, and adds more volatility to the cost of raw materials. Added to that, we must also consider artificial monetary practices of some countries in an attempt to benefit their respective trade balances, which is reflected in an increase of steel import levels both direct and indirect, particularly, in Latin America and the United States. On the other hand, the World Steel Association anticipates a gradual return on consumption levels, considering a lower systemic growth of the European crisis, the rebound of the U.S. economy despite all of the fiscal issues and the stable growth of China, which is currently at 8% and India, 6%. It is important to say that other countries in Asia will continue to grow in the mid and long run. For Gerdau, the outlook is also positive. If we look at the markets where we operate, they are showing improvement on the demand side, which together, will have a positive impact on our performance in the next quarters. Even considering those very complex and volatile environments, and in the long run, we can say that, once again, we will be able to cope with the challenges and also take opportunities of new investments. We are promoting the very strong integration of raw materials and product sales. We want to reach higher productivity and also to increase our capacity to add value to our customers. The company is highly committed towards reaching our goals. All of these concepts can be translated into our -- new management projects that will bring substantial benefits to the company. The growth of -- we want to increase our own production of iron ore, we will build shipments and also we want have to highlight the startup cost of the operation in India. In conclusion, I would like to state that we will continue to work very hard to increase the operating efficiency of our business, to optimize working capital, to cope with demand levels, and considering the volatility of the market, we will cautiously manage our investment schedule and CapEx approvals. With all of these initiatives, we should go towards recovering the company's margins which, undoubtedly, is our major challenge. With that, I conclude my part of the presentation. I will give the floor to André Pires, and then I will get back to you again to answer your questions. Thank you. André Pires de Oliveira Dias: Thank you, André. Good afternoon to all. For those who are following us on the webcast, we'll start on Slide 8. I will now address the consolidated results for the first quarter of 2013 and then give you details on each business operation. I will end the presentation talking about our capital structure. Turning on Slide 8. Despite a 4% reduction in shipments, net revenues should have relative stability in the first quarter of 2013 vis-a-vis the same quarter of last year. This time, there should be higher net revenue performance in comparison with the first quarter of 2012, net sales revenue RLV was at 2% given the higher volumes sold. Cost of sales grew 2% in the quarter, mainly due to a reduction in volumes sold with a resulting lower dilution of fixed costs. The results of the gross margin was 10% based on a 2 percentage points reduction in the quarter. Sales, general and administrative expenses, SG&A, increased by BRL 35 million in the quarter, within the range of approximately 7% of net revenue turning to a relative stability. EBITDA was down 20% in the first quarter of 2013, compared to the same period of 2012. Looking at the bottom chart on Slide 8, we can see that the main factor leading to a net book value reduction was an increase in the cost of sales also contributing, at a lesser extent, are the slight drop in net revenue and the SG&A expense increased. But this is negative financial results. On one hand, from a lower interest income, primarily due to the lower cash level plus low interest rate. And on the other hand, from higher interest expenses resulting from an increase in gross debt. Less net income on 3Q, totaling BRL 160 million in the quarter compared to the first quarter of 2012, however, net income increased by 12%. Moving onto Slide 9. Let's talk about the performance of each business operation starting with Brazil. 7% increase in net revenue with -- given the 5% increase in the net revenue as a consequence of higher growth. Internal market showed a 12% increase. Domestic sales were highly [indiscernible], which are traditionally exported. The domestic market posted a 12% growth in shipments and 2% growth in net sales revenue per tonne, where there was up 22% drop in shipments to the external market. This change in the semifinished goods combined with the less favorable external market resulted in a reduction in exports. A superior operating performance led to a 24% EBITDA increase in the first quarter of 2013 compared to the same quarter of the previous year. We get the margin extending from 13% to 15%. Compared to the first quarter of 2012, the lower EBITDA and EBITDA margin resulted from maintenance stoppages added to a less favorable product mix. In other words, higher sales or semifinished goods in the domestic market. Moving on to Slide 10. We are going to talk about our operations in North America. Shipments were off 13%, which resulted in a reduction in net sales revenue of 7%, compared to the same quarter of 2012. As mentioned before, the lower volume of deliveries stemmed primarily from a more rigorous winter in the first quarter of 2013 vis-a-vis the first quarter of 2012, as well as planned deployment of the management software and higher imports. Let's go on to the EBITDA, which tripled BRL 148 million in the quarter, influenced by reduced volumes and the resulting lower dilution of fixed costs. However, comparing to the first quarter of 2012, that EBITDA increased from BRL 59 million to BRL 148 million, and the EBITDA margin increased from 2% to 5%, stemming from higher volumes sold, which showed signs of demand recovery compared to the first quarter of 2012. The information from economic indicators, such as sales of new homes and ABI continue to signal the rally in the residential construction sector in the coming months. Moving on to Slide 11, we're going to talk about Latin America. And I'd like to remind you that we exclude Brazil. Shipments were down 4% in the first quarter of 2013 compared to the same quarter of 2012, primarily due to the operations in Colombia and Chile, where inputs increased. Net revenue in the quarter was stable. When a higher net revenue puts on [indiscernible] reduction in sales. The reduction in EBITDA in the first quarter of 2013, which was BRL 53 million, resulted from lower volumes sold and the consequence lower dilution of fixed cost. Compared to the fourth quarter of 2012, EBITDA grew from BRL 21 million to BRL 53 million where the EBITDA margin grew from 2% to 5%. It is worth highlighting that in this quarter, there was no impact of extraordinary and nonrecurring items as is the case of the first quarter of 2012, which partially explains the performance. Moving on to Slide 12. I'm going to talk about the specialty steel business operation, otherwise a 4% reduction in shipments in the first quarter of 2013 compared to the same period of last year and a 2% drop in net revenue. Shipments were impacted by lower activities in Europe and the United States due to inventory adjustments in the production chain of the automotive industry. This further reduction was partially offset by higher net revenue per tonne sold. EBITDA reduction in the first quarter of 2013 which amounted to BRL 165 million is also from lower volume sold with lower dilution of fixed costs and from the consolidation in India, which less Europe was -- equivalent to the equity income. On Slide 13, we're going to talk about net debt and liquidity. Net debt on March 31, 2013, was BRL 14.9 billion, of which 18% are denominated in Brazilian reals, 47% are denominated in foreign currency from Brazil and 35% in foreign currency from subsidiaries overseas. The average weighted cost of the debt ended the quarter at 5.9% with an average amortization period of 4.6 years. Cash reduction seen from December 2012 to March 2013 was due mainly to the service of debt, higher working capital requirements, and investments made during the first quarter of this year. The 8% increase in the net debt minus cash on March 31, 2013 when compared to March 31, 2012, resulted from the co-option emphasized on the 40% stake of Sidenor in Spain and from the higher working capital requirement in the period. Talking about working capital, working capital posted a 3% increase compared to December of 2012, while net revenue increased 2%. As a consequence, the cash conversion cycle posted a 1 day increase relative to December of 2012. However, is important to highlight, about working capital, that this increase was due to an increase of accounts receivable from clients because the controls were reduced. And the average time was reduced by 6 days. Growth led to our EBITDA ratio and net debt to EBITDA ratio increased over December of 2012. The company expects these ratios to come down in the coming quarters, given the expectation that better operating results were investments to be made if compared to previous years, as well as a reduction in the cash conversion cycle. Finally, I would like to point out that on April 8, 2013, Gerdau issued a bond with a 10-year maturity aiming to extend the average payments term of the debt. The amount issued was BRL 750 million, carrying a 4.75% per year coupon. Whether these firms have already [indiscernible] short-term borrowing and for the advanced payment of working capital credit facilities. As mentioned before, many times, we did not want to increase our gross debt. Finally, to conclude in terms of dividends of BRL 8 million, referring to the dividends of the first quarter -- BRL 8 million worth of dividends will go to the shareholders of Metalurgica Gerdau S.A. referring the performance of the first quarter, and BRL 34 million will go to the shareholders of Gerdau S.A. And we end this presentation, and now move on to the Q&A.

[Operator Instructions] Our first question comes from Renato Antunes from Brasil Plural.

My first question has to do with the steel units in Brazil. If you could perhaps help us understand when we look at the net revenue per tonne, the domestic market, there was a decrease in the first quarter of 2013. You mentioned that one of the effects was the product mix. If this really the only driver for this decrease? Or was there anything else, perhaps a price discount? And I know sometimes your comp is close or the same, but what kind of mix and what kind of price could we expect for 2013? That's my first question. And the second question has to do with leverage and you mentioned in last slide about the prospect of reducing the debt level giving you better EBITDA and cash generation? Could you perhaps elaborate and help us quantify 2 main lines, CapEx, there was a market decrease in this quarter. Perhaps you could tell us what you expect to invest in 2013 for the year, that would be interesting, and also the working capital. You mentioned accounts receivable and the low inventories. Is there any room to improve the current level? Could you help us understand how to quantify this? André Pires de Oliveira Dias: Hello, Renato, this is André Pires. Thank you for the question. And for your first question about net revenue. Indeed, in the first quarter of 2013 comparing to the first quarter of 2012, the main impact in terms of the mix, which is somewhat different is the higher sales of semi-finished goods. We see a higher share of semi-finished goods in the domestic markets. With that, net revenue was impacted. Again, I think that this was a little bit out of the curve that we are normally used to seeing in Brazil. And so your second question, about the debt level, indeed, we have a number of leverages -- a number of approaches to try to reduce our debt. And we're working on it. You talked about CapEx. Indeed, CapEx outlay in 2012 was $1.6 billion. For this year, we are working with a CapEx of about $1 billion. So that alone, can, with cash generation, around $600 million, will impact our leverage. There's also work ongoing about future investments that will be made according to the demand and availability. And as for working capital -- I quickly mentioned working capital in the presentation. Although working capital requirements increased in the quarter, we see a higher increase in the client's account while inventories were reduced. So we have to adjust the working capital to the level of demand. We believe that will be the impact on the working capital.

Our next question is from Marcos Assumpção from Itaú BBA. Marcos Assumpção - Itaú Corretora de Valores S.A., Research Division: My first question refers to the maintenance or the prolonged maintenance stoppage that you experienced in the first half of the year, and how much that impacted your results in the first quarter so that we could have an idea of what the result will be for the second quarter, excluding that effect. And then the second question refers to the product mix. I just try -- I'm just trying to understand your strategy, that strategy of pursuing more sales of the semi-finished in Brazil should continue for a longer period of time? And can you tell me, to whom you sold these products, please? André Bier Gerdau Johannpeter: Well, about maintenance stops, it's difficult to quantify the impact that I think that we must say that part of the reduction of the EBITDA margin in Brazil was due to maintenance stoppages. And the other part was due to cost of sales, and in -- that happened in 2012 and in early 2013. And I think the impact will not be so severe the next quarter. But in terms of the sales mix, the main reason for this reduction is that looking at the prices -- in the international prices, it's better to sell domestically rather than export. But we -- the fact that we are selling in the domestic market means that we are selling at a good margin. This is a strategy whereby we will try to avoid exporting at very depressed prices in the international market. So the demand already existed in the domestic market and we were not able to service all these customers or it's a new demand. Well, it's a recent demand.

Our next question is from Ivano Westin from Crédit Suisse. Ivano Westin - Crédit Suisse AG, Research Division: I would like you to elaborate more on your sales and margins for North America. You showed some changes in shipments in the first quarter, but the margins are still low. Do you expect any recovery, and at what level? And also, I would like you to comment on the sales of BRL 117 million of assets. André Pires de Oliveira Dias: This is André Pires. Well, North America, in fact, we could feel a slight recovery in our margins in the first quarter. But however, if you draw a comparison with the first quarter of last year, and I'm sure you are monitoring that closely, scrap is the main reference for prices in the U.S., and the performance is low and it's dropping further, that's why the possibility of price conversion is lower. We are experiencing some improvement, but there is no greater possibility to expand margins further, but we are also looking at some KPIs or indicators that point to a demand recovery, but this is taking some time to materialize. The fact is that the EBITDA margin is improving and we do believe that the trend is for the EBITDA margin to continue on the improvement path. In terms of your second question, I didn't understand it quite well because the connection was bad, but I think you were talking about selling of our stake or assets. I think you were referring to the sale of Gerdau's stake in a pine -- or a timed plant. And the gains were of approximately BRL 30 million from this operation alone. The planting of trees or pine trees, and that's what we sold. Thank you.

Our next question is from Thiago from Merrill Lynch.

I have 2 questions. One about the specialty steels. The average price has been somewhat weaker quarter-on-quarter. You talked about the Spain effect, perhaps you could mention a little bit more about possible discounts in the domestic market? And what we can expect looking forward from this business unit? My second question has to do with your current production of ore. What can we expect from now on in terms of growth? Could you give us an update, please? André Pires de Oliveira Dias: This is André Pires. In the specialty steels, the 2 main effects here were lower activity in Europe, our operation in Spain. And there was also an effect, Thiago, of some inventory reductions in North America. We believe that this is a onetime off effect, because it will look, the manufacturing of vehicles continues to be very strong in the U.S., 1.5 million units are expected for this year. But like I said before, with the reduction of the scrap, that pushes down the numbers a little, but these are from nonrecurring events. And there's a third factor, which is the consolidation in India. India, end of last year, it was to be posted as equity income. We had a pre-operating activity, pre-startup, and that obviously impacts the activity of specialty steels. As for your second question, we have no strategy whatsoever for discounts in the domestic market. I will give the floor to André to answer your question about mining. André Bier Gerdau Johannpeter: Hello, this is André about mining. We should produce 6.5 million, 7 million tonnes to supply the domestic market, an increase by 1.5 million tonnes, that is our forecast. And we expect the production to increase year-on-year. We have 2 shipments already for the second quarter of iron ore.

And a follow-up to my last question. What is the volume that you expect for 2014 to export iron ore? And what about the logistics for exports? André Bier Gerdau Johannpeter: Well, we will have the capacity in the middle of the year of 11.5 million per year. With the start up of a new plant. This capacity in the second half and beginning of next year should be achieved. There would be 6.5 million, 7 million production. And 4.5 million of the book would be exploited. As for the logistics solution, we are negotiating with the existing parts. We're negotiating solutions for the short and medium term. We have the executive support. We're working on basic engineering, conceptual engineering, so that we can have a more mid-term solution. For the short term, we will line investments to be made by colleagues [ph] and we expect more longer-term contracts to be resolved.

[Operator Instructions] Our next question comes from Mr. Renato Antunes from Brasil Plural.

I have 2 quick questions. If you could talk about the scrap market in Brazil, how do you see the scrap market in Brazil? Can you move to increase exports if this is concerning further it out where you don't have capital scrap? And the second question is, could you give us an update for the rolling mill? What is your expectation in terms of volume of this rolling mill? André Bier Gerdau Johannpeter: About the scrap, there's a big debate about this. If I have enough scrap to manufacture steel, we have -- or we have been following the trend, and we use scrap according to price and availability in the region. And so exports have been growing, not markedly, but exports have been growing. So we are financing this against our strategy. Because to deal with our captive scrap, because we cannot have a shortage of scrap. And sometimes we have to use the scrap to have a balanced situation. This is where -- like the situation that we see in the market. That's why colored hot rolled strips rolling mill. We are now completing the test. Since the beginning of the year, we've been testing it. So we are doing now installation, deploying the software to do the cold test and then the hot tests until we have the startup most probably by mid-June. And so sales starting in the end of July, and we expect to deliver 200,000 tonnes. Most of the deliveries will probably go to the domestic market. Thank you.

Our next question comes from Mr. Rodolfo from JPMorgan. Rodolfo R. De Angele - JP Morgan Chase & Co, Research Division: I only have one question. And I think it's a question that will answer the questions of others. The other -- the previous quarters underperformed when compared to the historical results of the company. How comfortable are you in terms of the second quarter? Looking at the figures, do you believe that there will be an upwards trend? So this is my main question. André Pires de Oliveira Dias: Rodolfo, here is André Pires. Our expectation in the second quarter is that this second quarter will be better. We are working towards that end. We are managing the company bearing that in mind. In -- no, March was significantly better when compared to February. In March, we also have some seasonal impact. But we experienced a significant improvement, therefore, we do believe that we will see a better landscape next quarter. Demand is quite sound and we have more stability in the market. So our expectation for the second quarter, not only for the second quarter but also for the remaining months of the year, is that we will have better results, especially comparing this quarter with the previous quarter of the year before.

Our next question comes from Marcelo Aguiar from Goldman Sachs.

Could you please tell me more about the semi-finished product? Because -- and did that impact your March modeling, given that custom price are way below your sales numbers? Can you please tell me how many tonnes or thousands tonnes were lost in terms of slabs? Just so that I can have a more precise model for the future and learn more about the domestic market. And the second point has to do with your comment related to the coil hot rolled strips rolling mill. Do you believe that also considering the situation for Brazil for specialty steel, when do you expect the start-up of the new plants to begin? André Pires de Oliveira Dias: Marcelo, this is André Pires. In terms of semi-finished, we you do not have any specific strategy and we do not reveal numbers related to volumes, we also -- we try to take opportunity -- we try to benefit from the market opportunities as we have been doing. And we see better opportunities to operate now in the domestic market rather than export. So therefore, this is a very momentary situation. André Bier Gerdau Johannpeter: This is André. On Slide 4, when we look at Santa Cruz mill, that should start up in August of 2014. In green -- the green line of specialty steel from the mill in São Paulo in 2013, hot rolled strips should start up in June of this year, and these are some of the main events. I don't know whether I left anything behind, but, no.

No, no. You just answered it correctly. I just want a further clarification on André Pires' response. So what about your other Minas capacity? I think you are operating below your capacity. I just want to understand your strategy to transfer your operations from the external to the domestic market. So you were operating below your capacity, is that right? André Bier Gerdau Johannpeter: In fact, we are operating slightly below, but there was some slack. And so there were -- there was the opportunity to sell to the domestic market, so we took advantage of it. There are 2 factors here. Well, there are better margins in the domestic market, and also we had some opportunity to expand our domestic penetration. Thank you.

Our next question comes from Thiago from Citibank (sic) [Merrill Lynch].

I have one follow-up question about the situation in India. When do you expect the ramp up to happen? Do you still expect an impact of the start-up costs for the second quarter? And my second question has to do with specialty steel. How do you see the price performance in the coming quarters? André Bier Gerdau Johannpeter: Well, in India, all equipment is operational. And that sort of we can see everything is working, and now we have the learning curve. So in the first quarter, we had a minimum production, and the ramp up should happen throughout the year. But first results that will only become stronger next year when we have a higher production speed next year. We should be producing about 150,000 tonnes around that. And that's when we're going to start breaking even and generating cash. It's difficult to give you a deadline, but this is what we expect. This is what we envision that will happen. Your second question, Thiago, was about specialty steels. Could you ask the question again? Were you referring to a specific region?

Well, not really. I was just wondering about the situation in Brazil. The flat steels industry has considered a price increase for the automotive industry. So how do you see the market outlook for specialty steels in the automotive industry in particular? Do you expect a price increase? André Pires de Oliveira Dias: This is André Pires. As you know, Thiago, we don't talk about prices. But what we can tell you is that the demand in the industry remains overheated. André, in the presentation, talked about an increase in the truck, bus and agricultural machinery segments. In the first quarter of 2012, we had a record vehicle manufacturing. So this is what everybody sees anyway. You agree that there is a demand increase, but we never comment on prices. Thank you.

I would like now to turn the floor over to Mr. Johannpeter for his final remarks. André Bier Gerdau Johannpeter: On my behalf and on behalf of André Pires, I would like to thank you for your interest and for your questions. And if there are pending questions, our Investor Relations department remains available to all of you, as always. And I'll take this opportunity to invite you for our next conference call on August 1 to talk about the second quarter of 2013. Thank you. Have a good day.

This concludes today's Gerdau's conference call. We thank you for your participation. Have a good day.