Gerdau S.A. (GGB) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon, everyone. I'm Rodrigo Maia, Gerdau's IR. Welcome to Gerdau's conference call to discuss the results of the first quarter 2022. Here with us today are Gerdau's CEO, Gustavo Werneck; and Gerdau's CFO, Rafael Japur, who will be presenting to you today. [Operator Instructions] We would like to stress 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 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. Now I would like to give the floor to Gustavo Werneck. Gustavo, please, you may start the presentation.

Thank you. Thank you, Rodrigo, and good afternoon, everyone. I would like to start by welcoming each one of you to this video conference call to announce Gerdau's results for the first quarter of 2022. I hope that you are all well and in good health. As Rodrigo was saying, also joining me today is our CFO, Rafael Japur, and for both of us, it's always a pleasure to talk to you about our performance and also answer your questions and issues that may arise during our presentation. I will start by talking about the international scenario, the highlights of the overall results. And right after that, I'll give you more details about the performance of our business operations in this first quarter of 2022. Next, Japur will share some information about our financial performance. And finally, I will come back to highlight a few points about our ESG agenda. At the end, both of us will be available to talk to you about any points that you may want us to elaborate further. Now let's move to the next slide. Here, I will start talking about Gerdau's macro environment. The effects of the conflict between Russia and Ukraine and the international scenario began to be experienced more intensively in mid-March. There was a strong increase in spot prices of raw materials, such as coal and alloys and on the energy sector, especially natural gas, which resulted in greater pressure on production costs, as you can see, if you look at the charts on the slide. In addition, the rearrangement of the international markets amid scenario with supply constraints and rising input prices had an impact on global steel prices, which went up all over the world. We'll continue to monitor the issue closely. But I would like to inform you that our operations were not affected by any kind of disruptions in the supply of raw materials and inputs since we always work with some safety stocks, and we have a very diversified base of supply. Furthermore, I would like to mention that the uncertainties generated during the first quarter around the advent of new variants of COVID-19, especially in the countries in the Americas where we are present, had an impact on consumer behavior. In Brazil, for instance, retail performance was affected at the beginning of the year. But all of the other concerns about the variance anticipated over the months, ensuring the return of end consumers to the market in early February and March. On the same note, we continue to monitor the possible effect that were brought about by the recent lockdowns imposed by the Chinese government. These effects may have perhaps a more intense impact on the performance of the world economy in the short and medium term. Now let's turn to the next slide. Here, I would like to briefly comment on the highlights of our first quarter results. Later on, Japur will give you more details about our financial performance. We ended the first quarter of 2022 with an adjusted EBITDA of BRL 5.8 billion, and an adjusted EBITDA margin of 28.7%, both are record highs for the first quarter. The result, as you will see below, was mostly influenced by high levels of demand for steel coming from the construction and industrial sectors in North America. Now Gerdau's net income totaled BRL 2.9 billion in the first quarter of this year, which represents an increase of 19% year-on-year. In turn, net sales reached BRL 2.30 billion between January and March, which represents an increase of 24% over the same period of the previous year, with shipments of steel totaling 3.1 million tonnes. All of these significant results posted by Gerdau this quarter show the company's solid presence in the markets where we operate, which reflects -- it's a reflection of the new geographic positioning, focus on the Americas and the business and cultural transformations that we have been experiencing in recent years. In this next slide, I will talk about the highlights of each one of our business operations. And also, I'll give you an outlook for the market where Gerdau operates. Now jumping to the next slide, and I will start with North America. Here, I will say that adjusted EBITDA of our North America business operation tripled between January and March and the annual comparison, reaching a record value for the quarter with BRL 2.7 billion, with a record adjusted EBITDA margin of 33%. I would also like to say that the metal spread remains at a high level, close to all-time historical levels. Shipments remained at high levels in the first quarter as a result of strong demand from the nonresidential construction and manufacturing sectors. The outlook for the second quarter which already began remains very positive, since our backlog of orders in the United States continues to be above historical levels and above the levels seen at the beginning of 2022, equivalent to about 80 days of purchases. Given this scenario, we continue to operate our plants in the region with capacity utilization levels above 90%. We remain optimistic with the demand for steel in North America, especially when you look at the midterm, especially coming from the construction industry. Examples that reinforce this positive outlook is the Architectural Billing Index, which is a very important indicator that measures the activity of the nonresidential construction sector in the country and another indicator that we also monitor is the Institute for Supply Management Index, which monitors the performance of the manufacturing sector. Both remained above 50 points between March and April, indicating the continuation of the very sound and strong trajectory recorded over the last few months. I would also like to say that labor shortage, the inflation rate and all of the logistical challenges that have affected many North American companies remain a point of attention on our part. We also see as positive the recent orientation of the U.S. government to require the projects in the USD 1 trillion infrastructure package used materials produced locally in the country, including steel. With this backdrop, we will continue to invest in improving the productivity and profitability of our capabilities in North America in order to deliver even more value to our customers. For this year of 2022, I emphasize an investment of about BRL 30 million for the modernization of our melt shop in Whitby in Canada, which will allow us to increase the annual capacity of the plant by 200,000 tonnes, mainly focusing on the production of structural profiles. Now moving forward to the next slide. I would like to highlight that in light of the record results posted in the first quarter, I think I would like to recall the journey of cultural management transformation that our North American business operation has been going through in recent years. This has ensured us to achieve a better level of productivity and operating excellence of our units. And by the same token, we are able to expand our portfolio of products offered to Canadian and North American customers, especially in the construction, manufacturing and distribution sectors. We have also designed our production and commercial strategy focused on serving our customers, generating more value for the entire chain in which we are present. All this transformation is also reflected in the scale of shipments through the digital channels. In this first quarter, we continue to focus on our digital efforts taking advantage of our commercial network and our data-driven culture to improve even more our customers' journey in North America and also contributing to the improvement of their business results. We are also enjoying productivity improvements in our operations as our digital initiatives streamline our business processes and also with that, we're able to make faster decisions in our everyday operation. We have been striving to empower our teams to identify opportunities and remove potential obstacles in all our operating processes in order to add value to all of our stakeholders, both internal and external. Now I'll just jump to our next slide, and I will talk about our special steel operation. Well, I would like to highlight our financial results. We, in the first quarter of this year, our EBITDA was higher than the EBITDA of the fourth quarter of last year and also higher than the first quarter of 2021. In the United States, the light vehicles market continues to be impacted by the chip shortage, the regularization of the supply of components previously expected for this year should only occur in 2023 due to the impact of the most recent lockdowns imposed by the Chinese government. In any case, for 2022, the production of light vehicles in the U.S. should rise about 14.7%, reaching 15.2 million units. The outlook for the heavy vehicle market is more positive, with the production of trucks expected to total 300,000 units this year when compared to 259,000 units of last year. The oil and gas sector should also accelerate its pace of recovery with rig counts reaching an average of 874 in 2021 -- well, 2022 when compared to 603 last year. The special steel market in Brazil has also been impacted by the lack of semiconductors and the low volume of inventories at the OMEs, and as a result, the production of light vehicles in the country dropped 17% in the first quarter. In a year-on-year comparison, according to data from the National Association of Vehicle Manufacturers, ANFAVEA. The forecast for 2022, however, is for a 9% growth in the volume produced according to that same association. Now speaking about heavy vehicles, the production remained strong with an expected increase of 8% in production. A positive aspects that corroborates with this scenario is the recent signals given by the Brazilian government regarding the implementation of the fleet renewal program, which will encourage the replacement of trucks that are more than 30 years old. The Agriculture Machinery segment, driven by the expectation of record harvest this year, once again, should also see its production volume reach near historic levels, totaling about 100,000 units in 2022. Moreover, we continue to notice that the consumption of special steels have been influenced by a higher export volume of auto parts and also light vehicles. Those producers have benefited from opportunities in the global supply chain, which has made their products more competitive in foreign markets. Finally, I would like to point out that the new continuous casting unit at Pindamonhangaba, which is our new continuous casting unit, will be scheduled to start up after a total investment of around BRL 700 million. This equipment will allow Gerdau to have a more automated process with better yields resulting in the delivery of differentiated products and an even higher level of quality to the demanding markets. The technological upgrade of the unit is also aligned with the future prospects of the increasing use of the -- of what the market calls clean steel, which is a still higher quality with greater inclusion cleanliness. I'll move now to our next slide. And here, I will talk about the long and flat steel scenario in Brazil, whose performance in the first quarter reflects a period of transition and accommodation of steel demand in the different sectors in which we operate. However, this accommodation is at very healthy levels when we look at the past years. Also, excluding the effects of replacement and inventory building that we saw throughout 2021, the real demand for 2022 is similar to the volumes that we experienced in the second half of last year and about 25% higher than the average that we had in 2019 and 2020. Therefore, we anticipate up to 4% year-on-year growth in actual demand in 2022. Demand for steel from the construction sector remains at a high level. And I'll elaborate more about this subject during the Q&A session. The inventory of real estate is a normalized level for approximately 11 months according to Secovi, São Paulo, and the forecast is that 2022 will be the second best historical year in property launching according to the Brazilian Association of Real Estate Credit and Savings. Another example that makes us confident is the number of active construction sites in Brazil, which continues to grow. And in April, it reached its highest number in the past 15 years. Retail sales have stabilized at high levels after the uncertainties experienced at the beginning of the year due to the new COVID-19 variants, as I said at the beginning. These concerns have been dissipated over the past 2 months. In this regard, we continue to strengthen our sales channels, increasingly focus on providing the best possible experience to our customers. In this first quarter of 2022, there was a record number of customers placing order using our digital channels with an increase of 7 percentage points when compared to the same period of 2021. In addition, we recorded a high level of adoption with more than 80% of our customers using at least one of our digital channels. I also stress the gradual resumption of investments in infrastructure. There is a robust active calendar of highway projects and auctions. In April alone, 3 state projects were announced, involving investments of around BRL 11 billion. Also positive is the progress of the federal government called Pro-Trilhos, which foresees investments of over BRL 200 billion for the construction of 19,000 kilometers of new railroads in 10 years. Also, we see high demand for steel from the industrial sector, driven by agri business, capital goods, machinery and equipment, road implements and energy as well. The oil and gas sector, for instance, should invest more than BRL 13 billion in 2022 and another BRL 20 billion in 2023, according to IBP, which is a Brazilian Institute of Oil and Gas. Furthermore, I would like to point out that we are moving forward with the already announced investment of about BRL 1 billion for the expansion of the coiled hot-rolled strips capacity in the Ouro Branco unit in Minas Gerais. And as of 2024, the annual coil production in Ouro Branco will be increased by 250,000 tonnes which will allow us to deliver steel with increasingly higher added value to our customers, reinforcing our performance in the flat steel market in the country. Now I'll move to our next slide when I will briefly talk about South America. In Argentina, demand for steel coming from the construction and agri business sectors remain strong, which have boosted sales in the local market. The Argentine construction sector grew almost 31% in 2021 year-on-year according to numbers recently disclosed by INDEC, the Statistics Institute of Argentina. For 2022, the outlook indicates that the construction activity will remain at a high level, the same scenario, very similar to the one in Uruguay. In Peru, Demand for steel continues at good levels, boosted by the construction industry, despite the impact of the recent logistics strike and also political uncertainties that are still in place in Peru for quite some time. Therefore, we continue to have a positive outlook for this business operation. And more recently, we just announced an investment for the expansion of the rolling mill capacity for the production of pipes in the unit in Peru, and the estimate of the Central Bank of that country estimates that GDP will grow at about 2% in 2022. Well, this is just a general overview of our operations. And certainly, we can get into more details during our Q&A session. Now I'll turn the floor over to Japur, who is just sitting next to me, and he will -- and then after his presentation, I will talk about ESG strategy, and then we will go to the Q&A session. So Japur, the floor is yours.

Gustavo, thank you very much. Good afternoon to all of you. It's a great pleasure to be here with you in our earnings release call, and I hope that you are all well. Now speaking about our financial highlights in this first quarter, so let's move to the next slide. Here, I will just tag along what Gustavo talked about before. And we will first highlight our EBITDA in this first quarter and our capacity to convert EBITDA into free cash flow. So in the first quarter, based on an EBITDA of BRL 5.8 billion, we invested approximately BRL 2.4 billion in our business, split between working capital and CapEx. Well, after payment of taxes and financial obligations that we had in the quarter, we were able to convert 52% of our EBITDA into free cash flow generation or 15% of our revenue for the period. It's the third consecutive quarter where Gerdau was able to convert over 50% of its EBITDA into free cash flow generation or in the case of this first quarter, it was 15% of our revenues in the period. Now to give you a bit more details and telling you a bit more about our capacity to generate free cash flow. If you look at the chart at the top, these BRL 3 billion in the first quarter, when we look at what we had in the last 12 months, we arrive at BRL 11.4 billion. This is the 8th consecutive quarter in which the company has been able to post positive free cash flow and the seventh with cash generation above BRL 1 billion. This results from our resilience or the resilience of our business model because we have a big capacity to generate cash through the cycle in different business environments, and this is also a result of our consistent process to deleverage our balance sheet. This is something that we've been doing since 2016. Now looking at the bottom of the slide, this quarter, our working capital was BRL 15 billion with a cash conversion cycle of 6 days -- well, 60 days. However, it's important to highlight that this is the second lowest cash conversion cycle for a first quarter in the last 10 years of our historical series. This not only stresses our discipline in terms of capital management, but also our increasing efficiency and quickness in making decisions and the way that we conclude our business in the whole chain, as mentioned by Gustavo, when he talked about each one of our business operations. Now speaking about liquidity and our debt position. This quarter, there was a reduction of BRL 1.3 billion in our gross debt, mainly attributed to the impact of the exchange rate variation on the debt portion of our balance sheet, which is denominated in U.S. dollars. With that, our gross debt totaled BRL 12.8 billion. Considering our cash of BRL 7.6 billion and our net debt was BRL 5.8 billion. With that, we are able to reduce our financial leverage, measured by the net debt over EBITDA ratio to a historical minimum of 0.20x. This is a record level with no precedent in our entire history of 121 years. Our long-term debt, as you can see, if you look at the chart in the bottom, has a very well distributed amortization schedule, and there are no accumulations in terms of maturity days for the next 5 years. Now speaking a bit more about amortizations, I would like to remind you that as previously disclosed on April 11, next week -- we will have the early amortization of our 2024 bond next week with the execution of that clause, and this should generate approximately BRL 800 million, in line with our goal of reducing not only the amount of our gross debt, but also the portion of the debt, which is denominated in U.S. dollars. This increases our capacity to give more returns to our shareholders. And speaking about returns to our shareholders, if you look at the top of the slide, you see the evolution of our net income in the past few years and our capacity of distribution or payout. So better results in our effective discipline in terms of reducing leverage, allowed us to generate dividend yields much higher than those that we had in the past. As we can tell by looking at the bottom part of the slide, we went from 33.6% in 2018 to 11.2% in the last 12 months at closing of the first quarter of 2022. And speaking about dividends, in light of the first quarter results, Gerdau S.A. and Metalurgica Gerdau will pay dividends on May 26 and 27, respectively, of 2022. Gerdau S.A. will pay out BRL 964 million or BRL 0.57 per share on shares held on 26th of March 2022. In the case of Metalurgica Gerdau, we will pay out BRL 314 million or BRL 0.29 per share on the position of shares held on May 16, 2022. In addition to the aforementioned dividends, and according to the material fact released to the market this morning, both Gerdau S.A. and Metalurgica Gerdau approved a share buyback program aimed at acquiring up to BRL 55 million preferred shares from Gerdau S.A. and up to 69 million preferred shares from Metalurgica Gerdau corresponding to 5% and 10% of the free float of that class of shares, respectively. Both programs will have a duration of 18 months. This initiative of this buyback program for both Gerdau S.A. and Metalurgica Gerdau reflects our discipline in capital allocation and also the confidence we have in our capacity to generate or to continue to generate cash over time combined with our very resilient business model and our commitment is to generate even more value to our shareholders. I thank you all for your attention. And now I give the floor to Gustavo, who will comment about our ESG initiatives.

Thank you, Japur. Finally, in the last part on the next slide, I would like to give you an update on some important points of our Gerdau's ESG agenda by sharing highlights and progress in our journey. I mentioned that we are making progress in the construction of our solar park in Midlothian in the U.S. State of Texas where our largest long steel plant in the country is located. This picture shows this conclusion of the works, and I recently took this photo, and the solar panels are arriving right now. In a short time frame, we want to have all the solar park concluded. The clean energy generated by the park will supply the local unit. And like I said, it is in line with our strategy of reducing greenhouse gas emissions also through investments in renewable energy projects. Our expectation is that once we have these panels, the plant will be up and running by the second half or early second half of this year. In addition, I highlight that Gerdau's audited average greenhouse gas emissions dropped from 0.93 to 0.90 tonnes, which is the number audited in 2021. We had a dramatic reduction. And this new value strengthens our commitment announced earlier this year to reduce our greenhouse gas emissions to 0.83 tonnes of CO2e per tonne of steel by 2031. Now on the next slide, I would like to share that for the first time, we have knowledge through the Inspire Gerdau program aiding partners in our supply chain. Suppliers that stood out by making headway in their demographics with the increase in the percentage of women, ever descendants and people with disabilities in its workforce and with good practices related to the theme of diversity and inclusiveness. The program was created at the end of 2020, and it aims to mobilize and encourage our suppliers to consolidate best practices in diversity and inclusiveness. In the beginning of 2022, we reached the number of 203 micro companies and even large supplier companies that joined the contract. We continue to work to be an increasingly inclusive and diverse steel producer in addition to engaging the entire ecosystem in which we are present. In addition, I would like to mention that we recently completed the renovation of the first house selected by the Reforma Que Transforma program, the largest social project in Gerdau's history, which will contribute to the improvement of more than 13,000 vulnerable homes in Brazil over 10 years. The renovation was carried out at a home of a Gerdau employee in the city of Barao de Cocais, state of Minas Gerais whose home was damaged by heavy rains in the state at the beginning of the year. We reaffirm our commitment to be a part of the solution to the challenges of the stakeholders with whom we interact in our daily activities and the society at large. To conclude, I would like to point out that we remain keen on building the company's future through initiatives to attract talent and retain talents such as G.Future, our training program. In the 2022 edition, we reached a record volume of registrations, exceeding 40,000 applicants and more than 200 hires. They started their careers with us at Gerdau. I'm confident that for this group of trainees, well, they come to join our 30,000 employees, and I'm confident that we are on the right track to build the next 121 years of the company. Thank you very much for your attention. But before we move into the question-and-answer session, our debate session, I would like to give the floor back to Japur, so he can make an announcement. Over to you, Japur.

Thank you, Gustavo. I would just like to take this opportunity to let you know that Rodrigo Maia, our IR Manager, is leaving Gerdau in May for personal projects. For more than 13 years, Rodrigo was an important spokesperson for us at Gerdau. The community that is with us today and with a lot of recognition in his performance with IBrX and Abrasca. Rodrigo, on behalf of Gustavo and the whole Gerdau team and everybody who were touched by you in your time with us, we would really like to thank you and wish you a lot of success in this next step in our journey. And soon, there will be a new IR leader with us. Thank you, Rodrigo.

Thank you, Japur. Thank you for your kind words. I also wish you a lot of success. And I say that our lives is broken down in quarters. So we have more than 50 cycles at Gerdau that is constantly changing the future. It's a great school. I also thank the capital markets community here. We have more than 400 participants in our conference call. And also our internal colleagues, particularly Gustavo Werneck, Rafael, [indiscernible] our IR team, [indiscernible]. So after 18 years in the market, I'll go into data science in Europe, and I'll see you again in the future.

Having said that, let us open up the question-and-answer session. [Operator Instructions] The first question is from Rodolfo Angele with JPMorgan.

What is the outlook for metal spread in the U.S., considering there is shortage of scrap, are prices firm? And the other question, what about cost, in general? We've seen a lot of cost inflation in the industry.

Rodolfo, it's a pleasure to talk to you. Thank you for sending your question. I'd like to begin my answer. And by the way, Japur, feel free to add anything you want to comment on. As for scrap shortage in the U.S., it's not related to prime scrap with a reduction of automotive production. This brings a shortage of scrap in the U.S. market, but also lesser scrap that we use, particularly in our long steel, we have an adequate purchase volume and volatility over the last months, in our point of view, it will continue to be like this. However, the outlook for metal spread over 2022 is quite positive. We understand that with this metal spread at historic high levels and the evolution over the last 4 years, considering also our performance in North America, we have conditions to support the results that we achieved in the first quarter. So they continue over 2022. And moving forward, if we consider demand, I made a point and remind you that we continue to have a very, very strong backlog. This backlog has not been reduced. Quite the opposite, this April it increased a little. So we still don't see any demand effect coming from the infrastructure package. It is possible to be more visible by year-end demand-wise. So wherever we look in our U.S. operations, we are very confident that the result level will be sustainable. The greatest challenge ahead right now in North America has to do with manpower, labor. Recently, we checked the data that was disclosed of unemployment in the U.S. The number is going up, opportunities of 10 million to 11.5 million job opportunities, which is very significant. Almost 4.5 U.S. citizens changed jobs for the last month. So that's a challenge for us. But despite the challenge, this is the best time of our history in terms of industrial and operational performance with a historic level of delivery this May. And we currently, we reached levels of production [indiscernible] mills over 400,000 tonnes, rarely did we see that in the past. And considering this despite the lower number of mills that we have since the divestments, we've been managing to have a performance in the growth level that has been unprecedented in the U.S. market. With regards to the cost, the pressure goes on, volatility also goes on. Although for the greatest challenge ahead are costs related to metallurgical, they have an impact on plant, but costs related to our scrap mills and bioproducer, I would say they are relatively under control as we speak. This inflation rate, to some extent, was already included in the cost that we had in the first quarter. And the challenge is to keep on managing the supply chain in general. Any possible disruption, particularly in logistics that may happen in the coming months, so they don't have an impact on our production capacity, particularly in North America.

Thank you, Gustavo. Next, we open the screen so that Daniel Sasson from Itaú can ask his question. Daniel? We can see you, Daniel, but we don't hear you, which is the most important thing.

Rodrigo, maybe Daniel can send his question via chat.

Perfect. So let's move to the second question, Caio Ribeiro.

My question is about the buyback program. Would it be reasonable to assume that you will keep on using the buyback program as long as the net debt over EBITDA and indebtedness. Was indebtedness close to your goal? And secondly, about the pipeline of infrastructure in the U.S., should we expect to become material in the second half of the year or should we wait until 2023?

Caio, thank you. Japur, maybe you can answer Caio about the buyback program, and then I'll come back about the pipeline of infrastructure. And maybe we can listen to Daniel after that.

Okay, Caio, I hope everything is fine. In our buyback program, both in Gerdau S.A. and Metalurgica, we understand that our stock are underappraised by the market, in general, but consistently over the years, this is why we believe that considering multiple studies that we carried out in our securities [indiscernible] in North America, for instance, considering the ratio of our results in the operation. Just to give an example, this shows that we have an important discount vis-à-vis the price we have in our stocks. That's why opened this program. As to the continuity this was open only for 18 months. And we understand that once that we work on this program, we'll be reassessing this scenario of our leverage, our cash generation capacity, our indebtedness, and we'll consider if it is the case to renew and start a new program. But at first, we are opening this program, considering 5% our free float [indiscernible] S.A. and 10% of free float for PN Metalurgica Gerdau, and we believe it's an important step in terms of improving return to shareholders at [indiscernible] in a very significant manner our commitment to long-term value generation for our shareholders. Now Gustavo is going to answer your question about infrastructure.

Thank you, Japur. Caio, we are working very closely the infrastructure package and the breakdown and details on this project in more specific areas. When it comes to timing, we have advancement in specific projects, and we believe this will only be converted into real demand around November or December this year. It's interesting to say that in addition to this package spending on infrastructure in the U.S. is very strong. Recently, they disclosed the numbers for March. And in the quarter, almost BRL 360 billion invested in the North American construction sector. The backlog is very robust for us. Today, we have more than 1 billion tonnes of steel in our backlog. So we expect to see this package adding to the backlog starting November. Another important thing to say is the U.S. government and administration recently announcing that infrastructure package preferably will use local domestic production in the U.S., which includes steel. So they will only buy steel for these projects should they fail to meet the local demand. This is very good. And it's also a guarantee that the demand is going to continue with a high demand for us also in the midterm.

Thank you, Gustavo. Now Daniel Sasson with Itaú.

Brazil, the improved demand that you expect to see in infrastructure with the maintenance of demand of formal construction, do you think it should or could offset the drop in volume that you expect to see in distribution and auto and construction sectors? As for price, we have a discount of 20% of long steel in Brazil vis-à-vis the parity of imports. This has been on for a while now. Can we comment on any possible difficulties that we might be facing to transfer prices to the local market? As for the U.S., do you believe that a 33% margin in Q1 could be maintained in the second quarter? And what about metal spread in late March vis-à-vis the average for the quarter?

Daniel, thank you. Let me use your question to give you an overview, maybe with more detail on the Brazilian market. There was some pessimism customers, strong exaggerated pessimism about demand in the first quarter. And we don't believe this demand is a real demand at the end of the day that will be repeated in the coming quarters. Actually, there were problems in January and February, rainfall in COVID. However, this demand has already been recovered in March and April, we posted very good numbers. We believe that year 2022, in general, the demand Brazil is expected grow around 2% compared to 2021. 2021 was also very strong. If you think about 2020, our deliveries in Brazil, the domestic market, were around 4 million tonnes in 2018 and 2019. In 2021, we delivered 5 million tonnes, an additional 1 million tonnes vis-à-vis 2018 and 2019. We expect this level of demand and delivery in the domestic market to be maintained. So basically, what happened in Q1? The problems we had were mostly related to 2 points. Firstly, in the wire rod segment, there were more imported products in the first month of the year, vessels with imported products last year, and they had a hard time to ship in Brazilian harbors and ports owing to logistics. So these products arrived now. And the trend for the future is that the level of imported steel in Brazil will go back to historic levels. So there was a delay of the arrival of wire rod in Brazil. And the second thing that we had drop in demand was with -- so today, there are some fundamentals, strong fundamentals that allow us to be more bullish in the future. To give an idea, Daniel, I mentioned in my talk that in April, we had a record in 15 years of active construction sites in Brazil, 9,100 open construction sites in Brazil, and they are making use of steel. And also real estate launched in Brazil recently, these sales increased by 36% in the first quarter of this year vis-à-vis the first quarter of last year. So the civil construction sector is using a lot of steel unlike years ago. And you also talked about interest rates and how should we expect to see a drop in demand? We believe this won't happen in the short term. We expect the lower demand for steel for civil construction to have an early 2023. In our vision, this will be mitigated by this increase in fuel use infrastructure. To give you an idea, I just recall that a couple of years ago, the use of rebars, our sales and shipment for infrastructure was 40% of our sales. Today, it's 10% of shipments. So everything we sell about rebar, only 10% is for infrastructure. The historic number is 40, so demand for steel infrastructure is pretty low. So considering all the auctions we have concessions, the trend is that this percentage will come back. If we consider that steel that are used in infrastructure, by and large, they are larger than the grades that are used for other purposes. I would also like to say that steel for industry continues to be very strong, the portfolio is related to agri business and machines, energy, historically, they are very high. So considering as of March, considering April and the outlook for this year in Brazil is to have very consistent demand and with our profitability. I prefer to talk more about profitability than the price. So there was fierce competition already this year, and we took longer than expected to go back to profitability levels. That's why export numbers went down to historically high levels. And this new composition of profitability already occurred in the group. So expectation for the second quarter is to have a level of profitability in Brazil above what we saw in Q1. So our outlook is very positive. And also in the U.S., we understand these margins that we had over 30% will be maintained in the coming quarters, not only because spread will be high, but also because we have a high performance historic level in our mills. Like we said, remember the plan that we mentioned over 2017 and '18 to recover our industrial performance with management, but also the CapEx investment in our main mills. After 4 years, actually, it was consolidated. So our levels now, operational levels are unprecedented in the history of our U.S. operations. So the outlook is very positive out there.

Thank you, Gustavo. The next question is from Thiago Lofiego. Thiago, please feel free to ask the question.

Can you hear me?

We can here clearly, Thiago. Nice to talk to you.

Great to see you all. Congratulations. Rodrigo, thank you for all you've done for us. For the last 13 years, it was a pleasure to work with you, always supporting us and to better understand the company. Congratulations on the job, and good luck on this new phase.

Thank you, Thiago.

So let's go for it. Two questions. [indiscernible] coming back to margins in the U.S., I understand that in the short term or maybe for the coming quarters, margins might be at a very high level. However, what's your mindset about long-term margin in the U.S.? Should we expect to consider a new level for margins? And considering the scenario of a potential new level, do you believe that we should expect to see some announcements for new plants in the U.S., profitability is very high, and it might bring more supply and offers, so what about your mindset about it? Second question is about expansion in Texas. You mentioned this in your presentation. I don't recall having heard about this expansion in previous lines. Could you tell us more about it? 700,000 tonnes, I guess, what about CapEx timing and rationale?

Great, Thiago. Actually, we can see these margins sustain in the short and long term or midterm. Despite these concerns, we have in the U.S. about inflation, et cetera, and recession ahead, we believe that owing to the infrastructure package as well, our steel industry will be less affected. So we have a very positive outlook considering the short and midterm. In long term, considering all volatility, it's very hard to understand what margins will be, but certainly higher than in the past. Back in 2017, like I said, when we were margin is around 6.3%, to be more precise, we had a fairly strong robust plan to recover the margins. There was a significant gap in performance vis-à-vis our main competitors. Part of it was closed over the last 2 or 3 years. It was settled by changing the leadership. And we also were very assertive in our investments in the main mills. In order to provide more flexibility and have a stronger focus to cater to our customers' needs, one-stop-shop, and we also build some technology gaps. So today, we are more prepared than we were in the past. Margins from the past certainly will not be back. We have more conditions internally to deliver high margins than we delivered last year. As for new entrants, we know very well how the dynamic works. In all the margins in flat steel in the U.S. in recent years, this encouraged big investments in flat steel in the U.S., not so much in long steel. So if margins are sustainable, it might be attractive for new investments, not by chance that we are very early on. We keep on investing there, Thiago, to be better prepared. So we recently approved by the Board of Directors, a significant investment in Jackson, Tennessee, mill in order to have more capacity there. It's one of the most productive mills in the world when it comes to long steel. We want to have it prepared to be more competitive cost-wise and obviously in terms of product mix. So we can be in a scenario that might be more difficult in the future. As for Midlothian, like I said, we had investments to produce clean energy. Investments to improve the plant are still being discussed. This is the greatest plant we had in both America, Thiago. We believe this plant will unleash a growth capacity. But so far, we haven't concluded all the details of the investment in this plant.

What about timing and potential [indiscernible]

Well, our intention is to have investment approved by the Board for Midlothian by the end of 2022. We are looking for alternatives that allow to have this investment. The best way possible when it comes to cost and timing. It's always complex to invest in such a great plan, so we want to prevent scheduled maintenance. Engineering is very sophisticated, and we want to have the least impact possible. So in future quarters, we expect to give you more detail on this investment because this plan is very relevant for us in our U.S. portfolio. Thank you.

Just adding to Thiago -- Thiago, just adding to what he said. It's very important to highlight what Gustavo showed on those slide about our history from 2016 onwards. It's important to highlight that our past portfolio was more related to wire rod and rebars in the U.S. when we went with a margin lower 1-digit. Traditionally, this segment is more exposed to exports. Today, we have the hedge of [indiscernible] in the U.S. market with some concessions that are country by country, by the U.S. government. But traditionally, the segment, our profiles merchant bars is less exposed to imports compared to wire rod and rebar. There is an important process to reposition our assets in North America. And today, we have a franchise for long premium product pretty much related to structural products and profiles. We understand this to be a market sector in the U.S. for long steel far more resilient considering the margin we had in the past. It's important to make it clear when we work on the storytelling of our investment in the U.S. from 2017 for 2022 and long steel in the U.S.

Thank you very much. Our next question is from Leonardo Correa from BTG Pactual.

Congratulations for the quarter. Capital allocation, given that your indebtedness goal has been delivered in BRL 12 billion of the gross debt, what should we expect going forward, a new dividend policy? Second question profitability over your business in Brazil, given all the price increases expected by the second quarter, could we just say that Q1 '22 was like a low profitability in cash generation for the year?

Well, thank you very much. I'll probably be very objective because I think I already told you that -- well, yes, the first quarter is low because in March we already experienced a significant recovery of profitability in the [indiscernible] market and also considering our exports [indiscernible] cost of price, especially in regards to [indiscernible] Ouro Branco, we will now see extra margins growing more substantially between April and May.

Can you help me with the [indiscernible]

Now speaking about Brazil. When we ran an analysis and we looked at our special steel in South America and Brazil [indiscernible] North America in the last 12 months -- well, sorry, in the last 8 quarters, every quarter, we made an increased EBITDA on a quarterly basis. In the last 12 months, the cumulative figure was over BRL 8 billion of EBITDA. Once you apply the multiples of the industry looking at our peers in the U.S., in our specialty operation in the U.S. in North American Brazil, I mean look at Brazil, therefore, believe that this was an adequate attitude in terms of buyback for home because this has been getting with our objective to pursue disciplined capital allocation. And we would also continue for brands and the increase in payout, we understand that given the presentation of the size we had for you, we've been paying out dividends above 20% and 30%. Therefore, if not necessarily, but we could change the dividend payout policy, with the policy going beyond what has been already set up in our bylaws. I mean we set up that minimum, therefore, we understand that our dividend policy today gives us enough profitability to in moments like in the third quarter last year when we had a large cash, we are able to increase the dividend payout. We had to set at this combination of 30% dividend payout. And with the program that we just initiated of share buyback, it's a very robust way to keep remunerating our shareholders well.

Thank you, Japur. Our next question is from Carlos De Alba from Morgan Stanley.

We noted an increase in working capital, what can we expect going forward in related to working capital? The share buyback program also focused on GDPR3 or GDPR4? How would you price the buyback of the shares from Metalurgica S.A.?

I hope you are very proud. In terms of our working capital, this quarter, we had an investment of BRL 1.9 billion in working capital. So once you look at historical service, we see that on the first quarter, where traditionally, we do have some maintenance for North American Brazil. So the [indiscernible] is low if you can look at our overall cycle. So this is the second lowest in the last 10 years. So in 2021, when the U.S. also in low levels, we were going through a phase but we were replenishing the inventories in all the chain, but this was all across the board. For the next quarter, we believe that with -- I mean we still believe in the growth of our shipment in North America also taking into account Gustavo's previous answer saying that we are expecting to increase profitability of our Brazil operations. So it is natural that we will still keep some investments in working capital. I don't know if Gustavo wants to add anything about working capital?

No. I think it's fine. I think we can just go to this next point, which refers to buyback program. In terms of the buyback program for Gerdau S.A., we are only focusing our preferred shares. And there's a very small fleet of original shares. So we understand that due to the amount of shares, it would make sense right now to also include common shares. Now in terms of funding for the buyback, today in the first quarter, Metalurgica Gerdau just with BRL 80 million of net cash. And if you look at our 12 months it acquired 109 million preferred shares, if we were to take this cash divide it by 69 million, we will have about a price of BRL 1.60 per share, which is close what we are trading our shares. We understand that cash with the Metalurgica has today we're not considering financial revenues that this cash will improve from now to 2023. When the program is concluded, it's more enough to fund the buyback of the 69 million shares.

Thank you, Japur. Our next question is from [indiscernible] Investment.

Congratulations for your excellent results. My question relates to price and costs in North America for the remaining of the year. At what level, you can anticipate metal spreads to be for the remainder of the year? The other question is at what level of your cash conversion cycle could we expect a higher consumption of working capital?

Thank you for your question. And before I give the floor to Rafael Japur, the U.S. or North America, it's pretty much along the lines that they were before. We understand that we have reached a very stable level, price and cost in spread. Certainly, there will always be volatility along the way. I believe that one of the strengths we have as the company [indiscernible] capacity to quickly adjust [indiscernible] because we responded quickly. These are times when we can really extract the best one within the company. So we believe that margins will be maintained, especially considering the numbers we posted for the first quarter. Now referring to that cycle in working capital, I'll give the floor to Japur because he'll be able to give you more details.

All right, as we mentioned before, also when we answered the others question, we believe it was our public outlook is funding for the Brazil and ordinary operations. We believe that we should have some investments in working capital taking into account our historical cash conversation cycles, which fluctuate between 60 and 90 days, there are some [indiscernible] this is pretty much a range. I am also taking into account price adjustments that occurred in Brazil and the current dynamics of the American market, but before we leave that in the second quarter, we will still have some adjustments in the meantime.

Thank you, Japur. Our next question from Jonathan Brandt from HSBC.

My question is about the North American steel market. While given the high interest rates in the U.S. and high inflation, what is the outlook because [indiscernible]. Do you have any concerns about the potential [indiscernible] So my second question is on the share buyback. What type of decision we announced today? And what will be the final destination of the share? Do they remain in treasury or do you think they will be canceled?

It's a pleasure to talk to you, Jonathan. Well, I'll start from the last question. In Brazil, we have [indiscernible] to be held in treasury, which is up to 10% of the free floating of the preferred shares, I mean this is the top [indiscernible] a company could hold in treasury. Well, once we actively buyback program, we will then evaluate the destination of the proceeds. But mainly, this is for capital allocation and return to shareholders. So it's just natural to assume that there will be cancelation of the shares if the program is conducted. In terms of long-term sectors for North America, I think it is important to highlight here despite the volatile macroeconomic environment with the recent decision from the fact to adjust figures, we've seen the business change and our order portfolio being very robust. However, we haven't yet seen the firm entry of new steel volumes or steel orders related to the package recently approved by the Biden administration. Gustavo mentioned that when we were talking about our different [indiscernible], therefore we believe that in case of a possible slowdown of the activity due to inflation and interest rate, the infrastructure program that represents an important increase in demand could be [indiscernible] buffered to monetize some reduction in demand in the second half of 2022 and in early 2023. If Gustavo wants to add anything, please feel free.

Well, I think we already talked about it enough. Now I'll turn the floor back to Rodrigo for the next question.

Next question from Rafael Barcellos from Santander.

Would you tell us a bit more about the scrap business in Brazil? And what about the inventories in the steel chain?

Thank you, Rafael. Well, the scrap operation in Brazil follows what happens elsewhere in the world. But the way we buy scrap in Brazil that is probably one of our major strengths, something that we initiated throughout our -- more than [indiscernible]. We -- our purchase is very spread around and it puts us in a very distinguished in terms of production cost. The market remains healthy. Just like in the U.S., we have more difficulty in terms of purchasing premium scrap, but we are acquiring these scrap by type of so in terms of price historical levels for scrap. This is one of our concerns going forward as yesterday before.

Thank you. Our last question is from [indiscernible].

Are you expecting any improvement in the margins for special steel for the next quarters? And how do you think the future margins in South America should behave?

Well, yes, we do expect the recovery of special steel margins in core, which is something appeared in the first quarter of this year. This was our best quarter in the past few years. And demand is too far from being in a healthy level. These margins -- the margins that we delivered in the first quarter of this year are very much related to our capacity to manage our [indiscernible] well. And it's also related to the profitability the way we [indiscernible]. And if you look at Chile the margins could be expanded. In Brazil, we have an advantage because more than half of our deliveries are related to heavy vehicles. Heavy vehicle industry is less impacted. [indiscernible] semiconductors. Shipments are still very healthy. When it comes to [indiscernible] in Brazil, impacted by a record crop season and other demands coming from consumers of heavy vehicles. And we still see good eyes this new program from the Brazilian government that intends to remove [indiscernible] from the market. And so as this demand remains healthy and once that evolves, once all the raw material problems are solved, we believe the margins will continue to outperform further. In terms of management costs, everything is going well. The demand in the construction market remained where it is. But there are, I mean, in Peru, there are also problems with the defects. In March, we had several days when we had difficulties to deliver our products because there was a problem with the delivery by truck. So South America, in the next quarters, will -- should be delivering results very similar to those that we saw in this first quarter of this year.

Thank you, Gustavo. Now we will conclude the Q&A session. The questions that by any chance have not been answered, can be then submitted to our IR team, and we'll get in touch with you to provide the necessary answers. Now I'll turn the floor back to Gustavo Werneck for final remarks.

Thank you, Rodrigo. Once again, thank you so much for your decision not at least more than 15 years at you all. And I'd also like to thank all of you who join us today. I hope you have a good day. Thank you, Japur. And Rodrigo, I really wish you the best and great success in your new journey. And again, I would like to thank all of you who will join us today. It's always a pleasure to talk to you. And I would like to take the opportunity to invite you to join us again for our next earnings release call on August 3rd for our second quarter results. Thank you very much, and please take care.