Gerdau S.A. (GGB) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Gerdau's conference call to discuss the results of the Third Quarter of 2016. At this time, all participants will be on a listen-only mode during the company's presentation. And after the company's remarks we will initiate the Q&A session. [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. Andre Gerdau Johannpeter, Director, President, and CEO; and Harley Scardoelli, Executive Finance Vice President. With no further ado, I would like to give the floor to Mr. Johannpeter. You may proceed, sir.

Thank you. Good afternoon everyone, and welcome to this conference call to discuss Gerdau's results. We will start our analysis with an overview of the world steel industry, and next we will comment on Gerdau's performance in the third quarter of the year, followed by more details on our investment in the period. It is important to mention that we will analyze the performance of the consolidated figures in the third quarter of 2016 in relation to the same period of the year before. After my remarks, Harley Scardoelli will elaborate on Gerdau's financial performance. And finally, we will both be available to take your questions. For those of you following us online, we are on page two, and then I will talk about the general overview of steel. Last October, the World Steel Association published an update of the forecast for apparent fuel consumption for 2016, and the following year. It is anticipated that 2016 will end with a 0.2% increase of global demand for steel after going through a drop of 3% in 2015. Excluding China, the outlook points to a 1% growth in demand, reaching 1.5 billion tons, for 2017 we should expect a 0.5% increase in global demand for steel raising by enlarging and developing economies. That, excluding China, should experience a 4% increase in demand. However China should experience a 2% drop in demand for 2017, and that is due to the lower pace of their economy. Besides our modest predictions for the consumption of global steel, the industry still faces the same difficulties and challenges that we encountered this year will maybe met next year due to unfair competition coming from some countries in the international space. In addition to that, the economic recession in Brazil led to lower steel demand. In 2016, steel consumption should be down by 14% in Brazil, probably the lowest level ever recorded in the last decade. The Brazilian economy shows signs that maybe the worst moment is already over, but it's worth mentioning that recovery will be slow and gradual. We've taken some important measures in order to arrive at a better tax balance just as the current debate around the proposal for constitution [indiscernible] that limit actual increases in public spending in additional to the proposal reform of the welfare system which is gradually moving forward. And with all of that the central bank will be able to reduce interest rates and [indiscernible] boost investments. For 2017, we anticipate an increase of 3.8% in steel demand in Brazil according to Instituto Aco Gerdau. Now, if we look at North America, the steel industry, as most downstream industries, have been posting a decrease in demand since 2016, moreover, we follow with some concern the recent increase in imports of rebars. That's why the local rebar producers submitted an investigation request to find out why there have been an increase in imports coming from Turkey, Japan, and Taiwan. In addition, there is low demand in the industry and also it's a moment of caution due to the presidential election which we just heard this morning that the President elect is now Mr. Donald Trump. On the other hand, we see that steel growth construction industry is recovering, and this has been built into the financial crisis, particularly in the non-residential segment, which now shows signs of a gradual and steady evolution. There is also a significant infrastructure deficit in the U.S., which represents a good opportunity for the industry in the region in the next coming years. Now, for 2017, we anticipate an increase of 3% in steel consumption in the United States according to the World Steel Association. Now we will look at South America. We must highlight the good outlook for 2017 in countries like Peru, which should experience a GDP growth of 4.1%, and Columbia 2.7%, as well as in Argentina with a 2.7% growth. As for specialty steel, the Brazilian automotive industry has felt some significant reduction in the last three years, and as of 2017, we expect to see some recovery in demand even though [indiscernible]. In the U.S. the market for light vehicles should still remain at a good level -- a record level. However in other relevant markets, such as heavy vehicles, that should continue to boast a weak demand. In India, the automotive industry is still performing well, and is supposed to grow further. Now on slide three, I will talk about the current landscape of Gerdau starting with consolidated shipments. We consolidated 3.7 million tons, shipments were down by 21% vis-à-vis the third quarter of 2015, and that was due to lower volume sold in all of our business operations. Now referring to net sales, it was BRL8.7 billion, down by 27% vis-à-vis the same period of the year before. Now profit before interest, taxes, depreciation, and amortization known by adjusted EBITDA totaled BRL1.2 billion, down by 7% vis-à-vis the same period of the year before, reflecting the lower performance of the North America operation, partially offset by the improved performance of the other operations. Now when comparing to the second quarter of this year, EBITDA was stable especially due to the improved performance of the Brazil operation and reduction with SG&A in the period. Now, referring to net income, it was BRL95 million, down by 51% when compared to the third quarter of 2015 due to lower EBITDA generation in the period. Now, in the first nine years of the year -- to date net income was BRL292 million. I would also like to refer to free cash flow on the priorities of our financial management at Gerdau, which totaled BRL1 billion in the first nine months of this year. Slide four we will talk about investments. And in the third quarter investments totaled BRL286 million [indiscernible] core CapEx. The highest disbursement occurred in the Brazil with almost 50% of CapEx. And that was mainly to fund the investment at the heavy plate rolling mill installed at the Ouro Branco plant in Minas Gerais and the startup of this operation was in July. As announced before, at year-end Gerdau should have a CapEx disbursement of around BRL1.5 billion, 35% below that of 2015. For 2017, the forecast for use of CapEx should amount to BRL1.4 billion focusing on the improvement of productivity and maintenance. Now I'd like to give the floor to Harley Scardoelli who will elaborate more on the results for the third quarter of 2016.

Thank you, Andre, and good afternoon everyone. On slide six, I will talk about the results and the performance of each of our business operations in the third quarter of this year, and then I will give you some more details about our consolidated results. Starting with the Brazil operations, in relation to the second quarter of 2016, sales to the domestic market were down due to the lower pace of the activity in the construction industry and industry in general, in addition to accumulated inventory from clients in the second quarter of 2016, anticipating price increases. Exports were down, especially in September, however in the third quarter of 2016 they showed better margins. Now looking at the EBITA for the third quarter of this year, the absolute value increased vis-à-vis the second quarter of the same year due to higher net sales per ton in the domestic market and abroad. In addition to benefit from lower SG&A expenses. These factors combined allowed the EBITDA margin to go from 13.2% in the second quarter of 2016, to 19.7% in the third quarter. Despite the good performance in the third quarter, the level of the economic activity in Brazil remains low, and we noted a reduction in the performance of exports, giving us a more challenging landscape for the next months, in addition to the seasonality in the period. In North America, shipments were down by 17.5% when we compare to the third quarter of this year with the second quarter of the same year due to strong competition from imported goods in the region, and the lower pace of the industrial activity in addition to a certain caution because of the political landscape. EBITDA in the third quarter of 2016 was lower vis-à-vis the second quarter due to lower volumes sold as a consequence of the lower dilution of fixed cost. With that, EBITDA margin went from 9.5% in the second quarter to 7.9% in the third quarter of the same year. Now in terms of the third quarter of 2015, in addition to lower volumes sold and the lower net revenue or net sales per ton also impacted the reduction of EBITDA margin in the third quarter of 2016. The continuity of the strong competition of imported goods in the region associated through lower economic activity should result in the continuity of this landscape, which was very challenging for the operation in the months to come. In South America, we experienced a slight reduction in shipments in the third quarter of 2016 when compared to the second quarter in almost all countries in the region where Gerdau operates. The EBITDA and the EBITDA margin in the third quarter of 2016 posted a reduction when compared to the second quarter of 2016 due to lower prices in the international market but still remains at good level. It's important to mention that profitability should remain good due to cost reduction efforts in all units of this operation. Now referring to specialty steel shipments in the third quarter of 2016, we are down by 26.6% vis-à-vis the second quarter of the same year mainly due to the sale of the units in Spain. The improved EBITDA margin in the third quarter of 2016 when compared to the second quarter occurred due to the sale of the unit in addition to higher profitability coming from the units in the United States. Now moving to slide 7, I refer to the consolidated figures of Gerdau. Adjusted EBITDA was BRL1.2 billion in the third quarter of '16, 7% lower when compared to the same period of the year before. If we look at the bridged chart at the upper part of the slide we will notice that the reduction in adjusted EBITDA occurred due to lower shipments and lower net sales, partially offset by the optimization of cost and operating expenses mainly SG&A. In the other bridged chart in the lower part of the slide, you can notice that we have informed an adjusted net income of BRL193 million in the third quarter of 2015 to an adjusted net income of 95 within the third quarter of 2016 due to lower EBITDA. It's important to mention that EBITDA stability in the third quarter of 2016 vis-à-vis the second quarter in absolute terms an improvement in the margin to 13.8% against 11.7% was due to the best performance of the Brazil operation compensating for the poor performance of the other business operations. Now speaking about dividends, based on results obtained in the third quarter of 2016, the company will pay out dividends of BRL34.2 million to shareholders of Gerdau S.A. which is equivalent to $0.02 per share. These proceeds will be paid on December 1 based on the positions of November 21. Now on slide eight, we will talk about indebtedness and liquidity of the company. Closed on September 30, 2016 was BRL21.1 billion up by 2.1% vis-à-vis June of the same year due to cash considerations to fund working capital in addition to exchange variations in the period. The weighted average cost of the debt was 7.4% a year with an average amortization tenure of 5.5 years. On September 30, 2016, only 10.4% of gross debt was short-term, mostly in the form of working capital. From the total of this debt 14.1 billion refers to the issuance of bonus in the capital markets. It is also important to mention that in terms of maturity of 3.7 billion scheduled for 2017, 2.6 billion out of that amount referred to bonds maturing of October of next year. The available cash in credit line of the company is more than enough to honor the commitment. Moreover the company has the alternative to refinance the total debt or part of that debt. Cash generation allowed for relative stability of net debt compensating for the lower EBITDA of the last 12 months resulting in a stable net debt over EBITDA ratio of 3.6 ton. Now I would like to refer to the capital structure of the holding Metalurgica Gerdau S.A. in November 2015 the company entered the public offering of BRL900 million with the purpose of reducing its debt position. Additionally, in August of this year 2016, the company issued exchangeable and convertible debentures amounting to BRL4500 million as a second step to optimize its capital structure. To that end, yesterday at the end of the day the Board of Metalurgica Gerdau up-grouped the sale of preferred shares of Gerdau S.A. up to 14 million shares with a purpose of paying short and mixed term debt of Metalurgica Gerdau. With the strategy the company understands that the capital of the holding will be in keeping with the expected cash flow for the next coming years. Now I will go to slide nine, and we will talk about working capital. In December 2016, the cash conversion cycle was higher vis-à-vis June of 2016 due to a reduction of 15.1% of our net sales and increase or 4.9% of working capital. Working capital increase occurred due to inventory increases due to a strong reduction in sales at the end of the third quarter mainly in the Brazil O.B. For the fourth quarter of 2016, we expect to see a reduction in working capital. I would like to emphasize that in the first nine months of the year we were able to reduce working capital by BRL1.3 billion and the company still remains with very firm focus on the management of the KPI. And finally going to slide number 10, I complete my presentation talking about our free cash flow. As can be noted in the chart, it's a good level of EBITDA associated to a firm discipline of CapEx resulted in free cash flow of BRL230 million in the third quarter of 2016 and BRL1 billion was the cumulative results in the first nine months of 2016. This CapEx discipline in efforts towards the best management of working capital will continue to be an important element of our free cash flow generation 2016. And I will give the floor to Andre for the final remarks.

Thank you, Harley. Now, we are on slide 11 for those of you who are following us, and to conclude the presentation I'd like to say that we were able to in this quarter to reduce the impact of this difficult moment of the steel industry in the world and in Brazil and this reflects all of our efforts in management along with many other activities. Despite the challenging landscape in the industry, we were able to reduce expenses, improve the margins, limit CapEx and maintain stable debt position. I also said that we were able to have a significant free cash flow position. So in terms of Brazil, this slight improvement in the margins, we anticipate the same challenging landscape for the following months but still considering a gradual recovery but lower levels of export. This challenging scenario also applies to the other operations in the Americas. In face of that, we will continue working diligently in all of the different initiatives to generate further value to Gerdau. Some of those efforts are the modernization of our culture, reviewing the potential of the possibilities of our assets, reduction of possible expenses which has resulted in a good generation of free cash flow, restriction to CapEx and also the deployment of several projects in the area of digital innovation which has been translated into efficiency gain and productivity gain in our operations. With that, we conclude our presentation, and we are open to answer your questions.

Ladies and gentlemen, we are now initiating our Q&A session. [Operator Instructions] The first question is from Thiago Lofiego from Bradesco BBI.

Thank you. Good afternoon. Congratulations for your results. I have two questions. The first is whether you can comment on the impact of coal, and if you could talk a little bit about the magnitude of the impact, and how much of that impacted you, and along the same question, and I was thinking about cost, so do you see more room to further cut in costs? Now the second question about the steel demand in Brazil, my question is whether you notice some positive signs of improved demand in the last few months and whether you could also speak about the construction industry dynamics and whether you could refer to some of the most important factors that affect your industry? Thank you.

Good afternoon, Thiago. This is Harley. For the first part of the question, I think there are two important aspects to talk about when we speak about coal. Our production activity that is affected by coal refers to 5% of consolidated shipments which is, but in consolidated terms our position, I mean we have a percentage with scrap and 25% integrated with coal. We also have many contracts with fixed prices and there are short term contracts. This impact may occur maybe next year but this will be mitigated by our mix between mini mills and the integrated mills. The second part of your question referring to cost, we continue to be very diligent in our efforts. We were able to capture good coot reductions especially net G&A but I would say that it was, few have some room to achieve further improvements and we will still see some positive impact to that end to us the next coming months.

Thiago, this is Andre. Now referring to demand in Brazil, we haven't seen yet in practical terms any increases in demands or increase in orders but what we see is a change in the general mood and trust level. We have seen some improvements like lower interest rates, it was very significant but if it's in the right direction we also see the possibility of further investments in infrastructure. Therefore the landscape change, but in practical terms we aren't experiencing it yet but we believe that we will still have to go through difficult six or eight months and things will begin to improve in the second half of next year. I would also like to mention two other things, if we compare the domestic market in Brazil comparing it year on year there was an 18% drop but if you compare the previous half of the year to this one the drop was 8%. I mean those are both significant reductions but things are getting better. So we gradually see signs of improvement, therefore I believe that the rebound will occur still. The recovery will come, it will come, it's just hard to tell when and in what magnitude.

In your last call you said that you were beginning to see some signs of improvement on the consumer side. Are you talking about that there is small [ph] and spread around market?

This market is small market. It doesn't interpret that much but it's been now impacted by unemployment, by the job in household income. So there are some aspects that lead to reductions in consumptions and we don't see any particular recovery. And the outlook is good but things have not materialized yet. Thank you.

Next question from Marcos Assumpcao from Itau BBA.

Good afternoon everyone. My first question is about your partnership with GE digital. This is still an infant project but do you believe that this will be able to reduce your maintenance CapEx in the long run and the second question is whether you could tell us about Brazil's EBITDA in September particularly? Thank you.

Hi, Marcus, this is Andre. About GE, just to elaborate a bit more on that project, this is a pioneer project and it involves the partnership between Gerdau and GE. This includes an important investment in centers. We will put more than 1000 machines to have a much better preventive maintenance operations to sensors can measure vibration, machine temperature, vibration, rotations etc. And once you monitor all that, you prevent waste and outage and set up time. Therefore we have important gains in maintenance and equipment use and equipment life and this is, and so we can reduce CapEx because the machines will not require of maintenance and the machines will probably have an extended lifespan and this as a result should lead to reduction in CapEx. I cannot precise you how much but there would be some. The second question was about Brazil's EBITDA in September.

Harley. We will not refer specifically to the month of September. We can only refer to the quarter.

Okay. So, let me ask you something else. We have seen the [indiscernible] to industry, starting negotiations with the automotive industry and they were also able to post some parts increases on the distribution side and the crisis were a bit far from the automotive prices. Do you see any expectation for higher pricing increases doing negotiations with the automotive industry which is maybe in addition to that mismatch of prices demanded very much elastic? Do you also see the same trend in the area of specialty field? Do you see any relevant changes in the short run?

Good afternoon, Marcus, this is Harley. This pricing dynamics in the specialty steel industry, it's not yet finalized. We haven't reached the final of our new agreement. The outlook and how this will behave is something hard to predict now but what we said is that we believe that there should be some gradual recovery throughout 2017 and this can certainly help because this coupled with some elasticity can be good but it's too soon to make any comment about crisis in that margin.

Right. Thank you very much.

Thanks.

Next question from Kyle Hibader from BTG Pactual.

Good morning. I have two questions. The first question is about working capital. There was an increase in the quarter very much related to accumulated inventory or increase in inventory. How do you see this line going forward? In the first half of the year there was a significant reduction in working capital, so do you think that the current level, as some say, that is closer to in normal level or this is the, I mean in the third quarter this is closer to the normal level? And secondly in relation to the metal spread in the U.S., could you please tell us a bit about how do you see the evolution of metal spread vis-à-vis the previous quarter and what is your expectation looking forward into the next quarter? Thank you very much.

Good afternoon, Kyle, this is Harley. Well, about working capital the drop in sales that occur particularly at the end of the third quarter, especially if you look at it due to the days of the [indiscernible] and there were some factors that had impacted it but the drop in sales is that we still need some time to react but have to look at working capital in a more continued way. And our opinion is that in the fourth quarter we will be able to revert that trend. New levels of working capital is something that is difficult for us to say anything to you in the short run especially if you look at the trend in the last two quarters, it was not so low I mean as in the second and not as high as in the third but the focus is still very firm in that area especially in North America when it comes to the fourth quarter. This is abou6 working capital. Now speaking about metal spread, there are some particular elements we were at probably the lowest level ever in the last few years due to series of things. We talked about the U.S. environment, a lot imports. There was a lot of volatility in the political landscape because of the elections that now have been defined. What we see is pressure coming from raw material. And this usually reflects an improvement in the metal spread. But it's just soon to make any prediction but we believe that historically speaking, we are at very low level, so this should grow. Thank you very much.

Next question is from Thiago Ojea from Citibank.

Good afternoon, and thank for allowing us to ask questions. My first -- my question has to do with your U.S. business. I know that things are too very recent, but given the new outlook coming from the Trump government with more infrastructure investments, do you -- can you anticipate any idea about demand for 2017? You have any idea of quantity? And also in terms of iron ore, the prices are going up in the international market. Do you believe that you will be to resume exports? Or whether it will be worthwhile to resume exports of iron ore or not?

Thiago, this is Andre. I will talk about the United States. As you said, Trump was just elected, but within monitoring and even both candidates had a very strong government plan when it comes to investments in infrastructure. So, our expectation is with the new president elect in the next few years, we believe that there should be more investments in infrastructure. The United States really needs investments in infrastructure. And this has been the case for many years. And this has an impact in the economy because this generates job, consumption, and growth. Infrastructure brings about many benefits to the local for economy. Therefore, we believe that they should resume investments in infrastructure once the new president takes over. In terms of numbers, it's hard to make any prediction. But we do believe that there will be investments in infrastructure.

Good afternoon, Thiago, this is Harley. Now about the second part of your question, even with losses in international pricing, our focus remains in the supply of our own operations. And therefore, we are much more focused on supplying to our own operations at competitive cost. Rather than selling abroad or exporting, our focus remains in the local supply. There maybe some opportunities in the stock markets, and if they come about, we will look at it. But again, the main focus is on cost, and we want to deliver at competitive cost.

Fair enough. How much non-residential represents today in your sales mix, just to conclude? Thank you.

Approximately 40%, Thiago.

Thank you.

Next question from [indiscernible].

Good afternoon, everyone. I would just like to get more information on the production front from the blast furnace in the Brazil unit. What is the status of that today? And when would you consider exchanging the operation and whether you are already doing something at Gerdau? And the second question is on South America. The margins -- even though there was a slight drop in the quarter, the margins are still quite high. What should we expect looking forward? Should we -- do you expect the same margin in the future? Thank you.

Good afternoon, Rena [ph]. In terms of stopping production between the integrated operation and that one, we do not focus directly on that because these operations are dedicated to several segments in different markets. And we understand that both operations have a very good cost structure. Therefore, we are not contemplating anything in terms of stopping production. And I imagine that this has something to do with mineralogical scrap and in a consolidated way in terms of mini mills and integrated mills, production is half-in-half and especially due to the Oura that we have access to, our cost structure is very good and we are not contemplating that as something necessary for the moment. So there will be no [indiscernible] mini mills and integrated ones. Now South America, the margin levels that we attained if we look historically, we have reached level above 10%. This has been the case since the second half of 2015. We are doing a lot of efforts to reduce cost, and in South America, the operations have been open to international prices for quite some time, especially Peru and Chile. So, we are making strong adjustments on the cost side. And we see some good outlook for Colombia and Peru. And we see good performance in volume growth and that's why for all of these reasons we were able to achieve very good margins in the region. South America in the short term is also affected by seasonal element. Usually this part of the year is weaker, but in the long run we believe that the margins we will above 10%. Thank you.

Next question from Victor [indiscernible] from Bank of Brazil.

Good afternoon, everyone. My question has to do with the maturity of bonds in 2017. Given the landscape for next half of the year if that is worth and expected and you generate large cash, are you looking at other alternatives in terms of maturities of debt? Or so in general what I want to learn is what are your funding alternatives?

Good afternoon, Victor. Speaking about the bonds that mature in October of 2017, well, first of all that involves about $800 million or less. In [indiscernible] liquidity, in addition to having more than BRL1.5 billion in cash and most of it in U.S., we also have good working capital that is fully committed. It's available to the company and the amount is higher than $1 billion. So we have approximately $2 billion to pay for that disbursement if need be in October 2017. We can also have the alternative to engage in a total or partial financing of the debt. So there will be available credit lines in the market. And because of our investments rating, we have access to credit and we will continue evaluating the possibilities in the long run. So everything has to do with our liquidity position and our view that if we believe that we have to engage in additional financing they would be available. Now about divestments, we have already talked about it before and this is part of our portfolio reassessment that started last we are still looking at other possibilities like joint ventures and other investments or there is nothing yet decided, we just have to look into what the opportunities will be. Now in terms of 2017, we do not necessarily need for anything of that to happen in order to fulfill our commitment. Thank you very much.

Our next question comes [indiscernible] from Goldman Sachs.

Good afternoon, everyone and thank you. I would like to focus on the Brazil business operation and whether you could help us get a better modeling of the business and help us understand what would be the contribution coming from iron ore to that margin of 19.7 of EBITDA? And what would be the EBITDA level that the third party or they're running at because this would help us to get a better understanding of the steel business and run the model for the future?

Good afternoon. This is Harley. Speaking about the margins of this quarter in Brazil, this is something more related to the alignment of some factors that we mentioned during this call. But notably prices in Brazil, the prices had a positive impact in our figures for the quarter in exports material-wise especially in the early part of the quarter we've good profitability and we also benefited from that large export toward cost reduction including SG&A. The combination of all the factors is what let us to this good alignment of prices and therefore the result is that we had a good performance in Brazil. I'm referring specifically to ore it's important to say that our mining operation is consolidated and this has indicated for several quarters. So in terms of the price aspect, I mean the price is not affecting these results because these have been already contemplated before. I think you should remove that from your analysis and I reinstate that is all due to a combination of factors, good prices in Brazil, good profitability coming from exports and also a great efforts towards cost reduction especially in SG&A that more than offset the situation.

Thank you. Could you also say something about volumes and third parties because the iron ore did positive run this quarter and in an annual basis.

This number varies from quarter to quarter, and this number is published in our quarterly report that one third goes to third parties and sometimes some through export, and I once again repeat that our focus is to supply to [indiscernible] rather than sales to the foreign market. So between 25% to 33% or 35% is what that represents.

Thank you.

Next question from Nielson Sullivan [ph] [indiscernible].

Good afternoon. I have two questions and both questions are follow-up of Rebecca's [ph] question. I'd like to get a better understanding of export prices in Brazil. This quarter we noticed that there was significant prices difference quarter-on-quarter and Harley said that this operation occurred mostly in the early part of the quarter. So what is their price of the product today given the volatility experienced in the last few months, whether possibility is better or worse and what could be expected in terms of prices in the foreign market from now on? And it's on the Brazil operation, my question refer to other revenue. So let me see if I understood this ore is the ore that you sell to yourself to Ouro Branco, but there is also or third parties it's a volume from third parties. And in a foot note you mentioned that the Brazil revenue also includes sales of coke and coal for iron ore. Could you please elaborate more on the impact coming from other revenues and whether they are allocated in the domestic market or foreign market? Thank you.

Good afternoon, Nielsen [ph]. This is Harley. To elaborate on this subject when we talked about export pricing the dynamic of the business changed a positive aspect in the third quarter refers to sale in the last of the quarter which were accounted for later on and then it was due to the business environment of exports at at the end of their second quarter reflected in the figures of the third quarter. So at the end of quarter the landscape is much more complicated. So as we speak and looking towards the future the export market are giving signs of recovery with a better iron ore price better price for reverse [ph] and these are opportunities that may come up, but it's too sensitive whether this will impact us in the short [indiscernible] positive in the third quarter is reflection of what happened at the end of the second quarter that have implication that had result in the third quarter. Now speaking about sales of ore or coal that impact affects the domestic -- sales of the domestic market, but they are not relevant and not when you analyze the entire period it's not something that will impact your analysis that much. We do not get into lot of details because as we said sales volumes is very volatile and it varies quarter-on-quarter therefore our focus is mostly related to supply to our own operations. And if we look at our indicators you'll see that sales per quarter varies, but on average for the year it will be between 25% to 35%.

Thank you.

We now conclude the Q&A session. I'd like to give the floor back to Mr. Andre Gerdau Johannpeter for his final remarks.

Thank you all very much for participating in this conference call and your interest. And on behalf of Harley and myself if you still have any questions, please refer to our Investor Relations department. I would like to take this opportunity to invite you also participate in our next call in February 22 or 27 to discuss the results of the fourth quarter of 2016. Thank you very much and have a good day.

Gerdau's conference call is now concluded. We would like thank you all for participating and have a good afternoon.