Gerdau S.A. (GGBR4) Earnings Call Transcript & Summary

Good morning. I'm Rodrigo Mala, Investor Relations Officers of Gerdau. So welcome to Gerdau's APIMEC 2021. And congratulations to APIMEC, which celebrated its 50th anniversary and Gerdau's 120th anniversary. Here with us, we have Gustavo Werneck, CFO (sic) [ CEO ] of Gerdau; CFO, Harley Scardoelli; and Vice President, Marcos Faraco, who will be the presenters today. Investors and analysts can send us questions using the Q&A option at the platform of Zoom or through the chat, you can open your camera if you so wish to do. So the presentation in Portuguese will be available on the chat option and can be downloaded in your computers. I would like to emphasize that any forward-looking statement that may be made during this conference call related to Gerdau's outlook, financial and operating targets are just mere assumptions based on the management's assumptions 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 should affect this evaluation. Now I would like to turn the floor to Lucy Sousa, President of APIMEC Brazil. Next, we will proceed with the presentation from Gustavo Werneck.

Good morning, everyone, associate members of APIMEC Brazil, investors. And I'm very pleased to say that APIMEC Brazil, represented by me Lucy Sousa, is here with us for another meeting between APIMEC and Gerdau. This is our 26th Annual Meeting. I would like to congratulate the officers of the company, Gustavo Werneck, Harley Scardoelli and Marcos Faraco.

So morning to one and all. I would like to start by welcoming each one of you to APIMEC's 2021 meeting. I hope you are still well and healthy. I wish I had the opportunity to be with you in person, but we still need to follow local health protocols so that the COVID-19 pandemic can be eradicated as soon as possible. Therefore, like we did last year, we decided to continue with this event in a virtual format in partnership with APIMEC so that we can share with you relevant information about Gerdau without having to wait for the next opportunity to be together. Also joining me today is our CFO, Harley Scardoelli; and Marcos Faraco, Vice President of Gerdau and also responsible for our long and flat steel operations in Brazil, Argentina and Uruguay. For us, it's always a great pleasure to talk to you about our performance, our future plans and also to clarify possible questions and also answer any questions that may arise during the presentation. I will start by talking about the year 2021, which is very special for our history and also comment about our special steels operation in Brazil and in the United States and long steel in North America. But before, handling the floor to Faraco, who will comment on our long and flat steel operations in Brazil and South America. Then Scardoelli well will comment on our financial results. And afterwards, I will return to give you more details about our strategic focus, the next steps in our ESG journey and also the plans for Gerdau Next. And at the end, we will have a Q&A session when we will also be available to talk to you about any point that you would like to elaborate further. As I mentioned, 2021 is a very special year for us because it is the year in which we celebrate 120 years of history. We were established in 1901 as a small mail factory, and we became the largest Brazilian steel producer and also the largest recycler of ferrous scrap in Latin America present in 10 countries in the Americas. We also celebrated another important milestone in our centennial trajectory prepared for a new cycle of sustainable growth. In recent years, we have reinvented ourselves as a company. We have become an organization even more focused on people, more digital, innovative, diverse and inclusive, while maintaining a very sound financial performance. Also in 2021, we posted record financial results in our historical series as a result of this very important internal transformation work towards the company's next 120 years. As we look towards the future, we will move forward in an accelerated manner in 2 major challenges, which you will see more details during this presentation. We want to generate more value to our customers located in our main markets, especially in the Americas. And also, we will become an even more sustainable company in all of its dimensions. Moving to Slide 5. Here, I talk about our business operations. starting with our special steel division. The special steel market in Brazil has been affected by the lack of chips, which has led the global automotive industry to lose between 7 million to 9 million vehicles produced in 2021, returning to levels of 2020. But the heavy vehicle scenario in the country remains promising, encouraged by the strong performance of the construction sector, agri business and machinery and equipment sectors. According to the national association of vehicles manufacturers, ANFAVEA, the production of heavy vehicles should rise 60% in 2021 year-on-year. It is also important to note that a heavy vehicle consumes 10x more special steel than a light vehicle, for instance. The wind power segment also continues to show good prospects. The most recent data from the Brazilian Ministry of Mines and Energy show that the country has reached 20 gigawatts of installed capacity in wind power generation, capable of supplying the demand of more than 20 million. More than 750 wind farms are in operation in Brazil with more than 10,000 wind towers. The expectation is that wind power generation will reach the 25 gigawatt mark in the next 2 years according to the ministry. Now speaking about our special steel operations in the United States. There is an expectation of recovery of the local automotive industry, which has also been impacted by the lack of semiconductors. It is estimated that approximately 3 million units will no longer be produced in the country due to that instability. But just like in Brazil, the production of trucks should grow about 25% in 2021 in a year-on-year comparison according to the country's automotive association. In turn, the oil and gas sector continues its gradual recovery with the so-called rig counts reaching an average of 559 over 2021 when compared to 535 in 2020. Moving to the next slide. I would like to point out that we are investing over BRL 2.3 billion to modernize and expand our special steel operations in Brazil over the next 5 years, in line with the outlook for an upturn in the automotive and industrial sectors. A good part of this amount will be allocated to the Pindamonhangaba unit, where we will start a new continuous casting plant in August 2022. I would also like to highlight the resumption already this half year of wire rod production in the Charqueadas plant to serve the [ passenger ] market. Now on Slide 7, I'll give you a bit more details about our investments in Pindamonhangaba. I'm talking about the new continuous casting machine. This will allow Gerdau to have a more automated process with better yield, 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 increasing use of clean steel, a steel of superior quality and greater cleaning. This investment is aligned with the prospects of increasing production of hybrid and electric vehicles. In Brazil, hybrid cars should account for 9% and electric cars 3% of the light vehicle market in 2030, according to the consulting firm IHS Markit. Now moving to the next slide. Here, I comment on the important completion of the modernization and technological upgrade of our Monroe plant in the U.S. State of Michigan. This will allow us to deliver increasing volumes of special steels with higher value added to North American consumers from a more profitable and productive operation. The investment is in line with the expectations of a growth in the local automotive market, which is making great strides towards the demand of hybrid and electric vehicles. The production of electric vehicles is expected to surpass 1 million units per year in 2023 and represents 25% of the market in the U.S. by 2028 according to IHS consulting firm. Slide 9. Here I talk about the highlights of our North America business operation. And the outlook here is very positive, given the maintenance of the demand for steel from various segments at high levels, which contributes to the local capacity utilization level being above 90%. I also emphasize that we continue to be optimistic with the projections that the infrastructure investment package estimated at USD 1.2 trillion would generate an additional demand for steel of up to 5 million tons a year in the North American market over a period of 5 to 8 years according to local consultants. With this backdrop, we continue to invest in improving the productivity and profitability of our production capacities in the United States and in the expansion of our mix of products offered to our customers, especially new solutions in commercial and structural profiles in order to meet the growing demand for steel in North America. I would also like to point out that we remain committed to making renewable forms of energy production feasible, advancing in the sustainable management of natural resources. We recently started the construction of a solar farm adjacent to our Midlothian Texas mill in partnership with 174 Power Global and TotalEnergies. Scheduled to start up in 2022, the farm will have 230,000 solar panels, and we'll allow the plants to run on solar power. Moving to the next slide, I would like to mention that our optimism with the North American market in the medium and long term is justified by the good performance of the local economy. The Institute for Supply Management Index, which monitors the performance of the manufacturing sector, reached in October 60.8 points, representing an upward trend for the 17th consecutive month. The Architectural Billing Index, which measures the activity of the nonresidential construction sector in the country, reached 54.3 points in October, maintaining a sound and strong trajectory above the 50-point level throughout 2021. As you can see on Slide 11, our ambition for the coming years in the North America business operation is to further strengthen the elements of our cultural transformation translated into a company that is increasingly more agile with quick decision-making and focus on people and sustainability initiatives. We will also strengthen our position in the market for products such as structural and commercial profiles by investing in core industrial plants for our operation, as you will see in the next slide. We have recently concluded the modernization and technological upgrade of the structural steel and profile rolling mills at the Petersburg and Cartersville facilities in the states of Virginia and Georgia, respectively, which will enable us to expand the product mix offered to the market, and we offer also higher value-added steels. In addition, we are moving forward with the expansion and technological updating project of the Whitby melt shop in Canada. All of these investments total more than USD 130 million. They will ensure that we can raise our production levels and meet the different needs of our customers over the coming months. Well, now I'll turn the floor to Faraco, who will detail the scenario for our operations, both in Brazil and South America. And Scardoelli will comment on our financial performance.

Good morning. I hope you're all well. My name is Marcos Faraco, and I am in charge of Gerdau's operations in Brazil, Argentina and Uruguay. Let me start by talking a little bit about our operation in Brazil. According to the latest figures from the Instituto Aço Brasil, the apparent consumption of flat and longs this year is supposed to grow approximately 24% vis-a-vis 2020, showing the good moment we're experiencing in the industry and also showing the growing demand in 2021. If we look at our historical curve, we are going back to levels only seen in the beginning of the last decade in 2012, 2013, meaning that we are recovering from this loss decade in terms of steel demand in the Brazilian market. And this is very apparent in different sectors, and I will have the opportunity to talk about the construction sector industry. And this is indeed a very positive year, which also indicates that we will have a very positive trend going forward in 2022. When we look at Gerdau's reality, we are operating throughout the year 2021 with the capacity utilization in Brazil of approximately 80%. This historically has been a very good number, and this allows us to seek for operating efficiency, allowing us to operate at very interesting cost levels. When we look at the different business of the company and just giving some light to these numbers, our capacity in terms of coil hot-rolled strips means that we are operating at 100% capacity and are slight -- totally full. When we look at second very important business for us in Brazil, which is the heavy plate rolling mill. And I would just like to remind you that we started that operation at the end of 2016, we are already operating at 75% of the capacity of this important line of products. And then when we look at our longs capacity in Brazil, we are operating at 80%, 85% with an average of 80% in Brazil's operations. The year of 2021 is proving to be a year where our business model has been very successful, our vertical integration through the control of raw materials, our business model with the integrated mills the biomass mills that we have in Mina Gerais, our electric mills together with our participation in downstream through Comercial Gerdau has proven to be a very strong part of our business. Not only we're able to capture the margin from this chain, but this is allowing us to capture all of the opportunities that we see in the market, and we can also pay a very positive contribution to our results in 2021. So in general terms, these are the 3 points that I would like to highlight. And I would just like to give you a little bit more information about all of the segments where we operate in Brazil. Now looking at the civil construction industry. And just as a reminder, construction represents 40% of our demand in Brazil. In 2021, this has been the best year in our history in Brazil. No matter where you look, this has been a very good year for the construction industry. And further on, we will see that this also points out to a very positive trend towards 2022. On the residential side, we see we have a lot of active work sites. When we compare to last year, we have this year 50% more work sites than last year. When we look at shipments in Brazil, we have seen growing in shipments. I mean all of the stock of launches is growing, and the launch portfolio is very robust. We experienced a great growth of these launches. There are many launches this year, and this is a very good indication that 2022 will be another positive year. When we look at the second part of the construction market, which is the retail side, this is something that we've been experiencing since 2017. This is a very resilient market. And despite the worst moments of civil construction, this side of the business has been very resilient, especially because of the government aid during the pandemic. So even if you compare it to a high base in 2021, we already see a good outlook for growth in the -- on the retail side. I mean retail growth is normal, within expectations, but it's very stable, and this is a very important segment for us in terms of the construction industry. And I would like to highlight a third segment within the construction industry, and we've been talking a lot about that, and that is infrastructure. What we've seen in the past few years was shrinking in investments in infrastructure. But in 2021, we see the rebound of investments in infrastructure. And this has been very clear when we look at privatizations in the water segment, energy sector and good investments in the mobility -- on the mobility side. So we are now seeing investments taking place, and this is a very good outlook, especially considering the years looking forward, 2022 and forward. On the industrial side, there are many segments that are part of this market. But I would like to highlight 3 important segments. First, I would like to start with the agricultural sector. From all of the sectors that somehow are part of the agricultural industry, I mean we are seeing a very strong year in 2021. Machineries, tractors, combined machinery, et cetera, everything that is related to agricultural transportation has experienced a 40% increase this year. And therefore, we have a very robust portfolio that is being put together for 2022, which is a very good outlook if we look at the agricultural sector. Another important sector is the yellow machinery sector. This sector is not only benefiting from increased demand in the domestic market, but also what we've been calling the reorganization of the global supply chain. This sector is localizing a lot of the imports from the past. And now we are building in Brazil, a platform to export equipment, bringing the demand of products to our internal market. If you look at 2021, there has been a growth of almost 50% in this sector. And the outlook for 2022 is that we will still maintain a very high level of demand, which is a very positive trend going forward. And the third sector on the industrial industry is energy. This has been a very positive sector, and it is now in a very favorable moment. Solar energy, this year, we have even more than 20 wind farms. The wind farming investments are very relevant and we see a good outlook for 2022 in terms of wind power, and there are many investments coming from the private sector, which shows a clear growing -- growth trend towards 2022. And we believe that this will continue going forward. So this year, the industry sector has been recovery -- has been recovering compared to 2020, and we see good prospects for next year. Now talking about strategy. 2021 has also been an important year for us at Gerdau in Brazil because of the execution of our strategy. If you look at the 3 pillars that we designed for our organization, we made important advances in 2021. As the first pillar of growth, we recently announced the ramp-up of the Phase 2 of the production of coil hot-rolled strips where we will be adding an additional 250,000 tons to our existing capacity in ore. So we went from 800,000 to 1.2 million. So also, we expanded the profiles, which is very important to the industrial sector. In 2021, we were able to totally integrate what we call Gerdau Caucaia, the former Silat, and they are already part of our industrial platform in the Northeast, serving the North and Northeastern region, and this is helping us really well to support that part of the country. And recently, we announced the resumption of the Araucária mill, which was hibernating since 2014. And as of last -- this past November is resuming operation. And I would also like to highlight an investment in regards to competitiveness, which is the expansion of our forest base. I mean we use charcoal in the production of our mills, and we are announcing an investment to increase our forest space by 50,000 hectares to supply to our Minas mills. And also, we are relentless working on this strategy to add margin and value to our business. An important investment from Comercial Gerdau, we want to be closer to consumers in line with a strategy of being independent, but also expanding the role of Comercial Gerdau and benefiting from this capillarity that allows us to reach out to our final consumers. In terms of products, I mean, we don't talk much about it, but if you look at heavy plates that I just talked about, this year, 15% of all of our sales come from products that have been developed in the past 12 months. This just indicates how important research and development is for the company, and this also demonstrates Gerdau's innovative capacity in terms of serving all of the different product portfolio. So 2021 was a very positive year in terms of demand. We were able to capture all of the opportunities that came before us. We had the opportunity to capture opportunities and really position Gerdau in a very distinctive way to be ready for the years ahead. And now speaking about South America, and when we look at our main our main prospects in Peru, Argentina and Uruguay, these operations are more dependent on civil construction. But in these 3 countries, the same similar things happen. Construction -- the construction [ year ] is in high demand in all of the 3 markets. The markets are moving ahead, and the future pipeline of launches is very positive. In these 3 markets, we had important growth, and we see good opportunities in these markets in 2022. So in general, that's what I had today to share with you, and then I'll come back to answer your questions during the Q&A.

Thank you. Good morning, everyone. It's a pleasure to be with you. I hope you're all well. It's a pleasure to be with you. So let me start financial results, starting with our EBITDA. The EBITDA and the EBITDA margin for the first 9 months of 2021, reached a record level in the historic series presented. For consolidated Gerdau and each one of our operations, for comparison purposes, the result for the third quarter was close to the level presented for the full year 2020. All our operations had a great performance, reaching production capacity utilization around 80%, the best level since 2018, which was due not only to the favorable moment of the steel industry, but also as a result of the careful allocation of capital in recent years in our operations. These investments have provided us with the agility and efficiency to capture all the profitability that the current scenario offers for the industry. Added to this is also the team's ability to anticipate market opportunities. Now let's move on to Slide 20 to talk about free cash flow and working capital. As we can see in the first graph, we reached a positive free cash flow of BRL 6.2 billion in the first 9 months of 2021. Starting with a historic EBITDA, as explained in the previous slide, which reached BRL 17.2 billion in the first 9 months of 2021. Our liabilities management also contributed to this performance by reducing the exposure of our gross debt to foreign currency and consequently, minimizing the impact of the effect of exchange rate variations on interest on debt. The cash flow confirms our efforts and commitment with the adequate remuneration of the capital invested combined with the company's commitment with its liquidity position. The cash conversion cycle is at 63 days due to the increase in the accounts receivable and inventory items, allowing for an adjustment of the company's working capital and maintenance of the service level to our customers in this moment of increased demand for steel in all our operations. Attention and service to our customers has always been one of Gerdau's top priorities, and the maintenance of optimal working capital levels demonstrates this care and focus on this customer. We also highlight that if we have a historic comparison, 63 days of working capital compared to the numbers that we reached, for instance, in 2012, 97 days, that's an extremely optimized and adequate level to our operations. Moving on to the next slide. I would like to point out that we ended September with a net debt of BRL 8.7 billion, BRL 1.5 billion lower than the net debt reported in June 2021. This is due to our strong cash generation performance in the period, even considering the 9% appreciation of the dollar in the quarter. We currently have 74% or about BRL 12.7 billion of our total gross debt pegged to the dollar. It is worth remembering the strategy of reducing the FX exposure of the debt. Our exposure in reals fell marginally from 26% to about 24% of total debt. This level also keeps us closer to a natural hedge, given that a significant part of our EBITDA is generated in dollars and that a significant portion of our assets and operations are in North America. The result of the financial leverage measured by the net debt over EBITDA ratio reached 0.41x, the lowest level in 14 years at the company. This level of leverage demonstrates for yet another quarter, our commitment to the goal defining our financial policy, approved by the company's Board of Directors, which is to maintain this indicator between 1x and 1.5x max, and we're below this level. I would also like to point out that 98% of the debt is long term. with an average term of 7.5 years and an average nominal cost of 6.13% per year. As you can see at the bottom of the slide, the debt amortization schedule is distributed over the next few years and is more concentrated only after 2027. On the next slide, Slide 22, I would like to show the evolution of the return on capital employed in the company combined with the reduction in the cost of debt. In the last 12 months ended September 2021, the company showed a return well above its cost of capital. In other words, 30.6% versus cost of capital close to 9.5%, which means value creation for our shareholders and investors, which also translates into the appreciation of the price of our shares traded on the stock exchange over time. Now on Slide 23, we show the evolution of our net income and dividends paid out over the last few years, showing that a combination of improved results and the significant reduction in net debt, as we showed before, had a very positive effect on the dividend yield. In other words, the percentage of dividends and interest on equity paid over the closing price of the share at the beginning of each period of this evaluation, increasing from 0.7% in 2017 to more than 12% in the last 9 months of 2021. By maintaining our policy for allocating results over the first quarter and the first 9 months of the year, the amount distributed will exceed the historic [ series ] presented. Now on Slide 24, I highlight our investment over the first 9 months of 2021 of approximately BRL 1.8 billion. The expected CapEx disbursement for year 2021 continues to be estimated at BRL 3.5 billion. This amount includes, as you can see on the chart, the first investments in modernization and capacity expansion in our business operations in Brazil, North America and Specialty Products. The last slide of my presentation, and taking into account the strong cash generation of the last few periods and based on the vision of a continued positive cycle for the sectors in which we operate, the market has been asking us about capital allocation. The funds will be used to prepare the company to fully meet our strategy in the mid to long run. With financial discipline and capital allocation, it was possible, as already demonstrated, to return to our shareholders higher absolute dividends. The reduction of the gross debt in compliance with the financial policy is another use for the resources generated. And we just announced that we had a buyback of bonds of $390 million, which is nearly BRL 2 billion, which also moves in the direction to lower the gross debt. Like I said, we also work to our working capital up to September 2021 or over 2021 in the first 9 months, we added BRL 7.3 billion in working capital, maintaining optimized days of cycle but also bringing the level of service to our clients at very adequate levels. So these are the points that we wanted to talk about capital allocation. I thank you all for joining us today. And now I give the floor to the next part of our presentation. Thank you.

Thank you, Scardoelli. I will now return to the last part of our presentation with more details about Gerdau's future. On Slide 27, we show the elements of our solid foundation, which has paved our path of transformation as we think about the new future we're building. We benefit from our business model from our geographic plurality and diversification of production routes, including iron ore, scrap and charcoal as well as from our focus on operational excellence. But we're also reaping the fruit of the cultural and digital transformation we have been going through in recent years, which has made the company lighter, simpler and more agile, ready to meet the needs of our customers. As a result of the company's simplification, we are now focusing on the Americas with the completion of BRL 7 billion divestment plan. In addition, selling, general and administrative expenses, SG&A expenses, now account for less than 3% of net revenue compared to 6% 5 years ago, equivalent to savings of about $300 million per year. All of this reflects on our plans for the future, whose routes lie in an ESG strategy that is increasingly present in our day-to-day activities, a focus on operational excellence and opportunities for growth both organically and through mergers and acquisitions as well as the dissemination of the digital mindset and the next steps of Gerdau Next, our new business arm as I will detail further on. Moving to the next slide and looking ahead, our digital vision, which has as its main assumptions to create more value for our customers and increase the performance of our most relevant internal processes such as industrial and supply chain has provided us with real gains of almost $200 million from 2018 to now. In 2021 alone, revenue from steel sales in digital channels more than quadrupled compared to the previous year, while we gained 13,000 new digital customers proving that steel also sells online. This is a movement that should accelerate more and more in all countries where we are present. On the next slide, talking about Gerdau Next, I share an excellent example, which highlights what I have been talking about for some years that Gerdau would be a service company in the future. This is a step that we have already taken through the integration of companies in the Gerdau Next portfolio, such as G2L, G2Base and Brasil ao Cubo, as you can see in this image in the Port of Itaqui in Maranhão. Today, we're able to deliver a complete project to our customers from start to finish from the transportation of the steel from the Gerdau units to the building site through its foundation and construction. Thus, we give more agility and reliability to the projects, reducing the construction time and the generation of residues. Now moving to Slide 30. I also comment on the risks we see for our business in the future scenario. We're following very closely the emergence and performance of new variants of COVID-19 and what effects they may have on people's lives and economic activities even though vaccination is advancing worldwide. Still in the short term, we will be closely following the possible unfolding of the presidential elections in Brazil in October 2022 since the economic scenario usually reflects the political uncertainties surrounding in the country as well as the impact of the cost of inflation on the purchasing power in the economies where we are present. In addition, we understand that the shortage of semiconductors in the global market should be prolonged, negatively affecting the automotive industry and consequently, the supply of specialty steel for the production of light vehicles. In the medium term, we are attentive to the evolution of the balance between supply and demand for steel, especially in Brazil and the United States, impacted by China and the possibility of new production capacities in both countries, particularly in North America. We will also follow closely the increase in demand for iron scrap in the markets where we operate. And we also emphasize uncertainties and challenges linked to the Latin American political scenario in general, which may cause in the medium term impacts on the economy of these countries and the challenge of decarbonization process of the steel sectors on a global scale. Now on Slide 31, I tell you more about our ESG journey. I highlight the approval of the proposal to include ESG indicated performance targets in the long-term incentive plan ILP for the company's senior leadership. Effective as of 2021, the rule provides for that around 20% of the long-term bonus incorporated into the executive's variable remuneration will be conditioned to the achievement of ESG targets. We understand that this is a way to give strategic visibility to sustainability in the organization, a theme that will allow us to take the company into the future. The measurement of this percentage of ESG targets will be calculated based on 2 new indicators, percentage of women in leadership positions and CO2 emissions. In addition, there will be a 40% economic value-added EVA. I would also like to mention that other ESG priorities include our work with diversity and inclusion, the mapping of all the risks that involve the business and Gerdau Next's focus on the search for sustainability solutions. Moving on to the next slide. I also highlight that in the last year, we emitted half of the global average of greenhouse gases of the steel industry. This performance reflects a management approach aligned with the search for solutions to global challenges, such as climate change and a production [ matrix ] that has the recycling of ferrous scrap as the main raw material and the use of charcoal from planted forest, the so-called bio-reducer. Today, Gerdau is the largest recycler in Latin America, processing 11 million metric tons per year. Meanwhile, our planted forest space, which we use for charcoal production occupies an area larger than 250,000 hectares, making us the largest charcoal producer for steel production in the world. I also highlight that Gerdau adopted the MACC, marginal abatement cost curve; and MEAC, marginal energy abatement cost curve, methodology to structure a short-, medium- and long-term emission reduction targets, which should be announced soon. The objective of the study is to get to know the available technologies and those under development, which is pertinent and feasible to the steelmaking process in operation of the company, analyze which ones are eligible, prioritize and plan the initiatives and investments and then announce them publicly over the next few years. Going back to the theme of diversity and inclusion, I comment here on this slide that we had in 2018, 17% women in leadership positions in our operations in Brazil. Now in 2021, we have increased the percentage to 23% through several initiatives to promote gender equity in our operations. seeking to give equal opportunities to all people. The goal is to reach 30% by 2025. I would also like to mention that we recently reached a historic number of more than 1,000 women working in our operations, reaching a record level of more than 7% women professionals working in the operational teams of our units against the historic level of only 3%. We still have a way to go, especially in relation to senior leadership. But we understand that inclusion is a journey. And step-by-step, we will achieve an increasingly diverse and inclusive environment. This brings me to the end of my presentation. I would like to thank everyone for joining us today. Now we will move on to the question-and-answer session.

[Operator Instructions] Our first question already posted during the presentation comes from [ Marco Silva ]. The price of long steel in Brazil has been going down over the recent months today as a discount vis-a-vis imported steel. In parallel, the penetration of imports is above the historic average. What is Gerdau's expectation vis-a-vis prices of imports down the road? Marcos Faraco is going to answer the question. Faraco, over to you, please.

I think we have to look at this point under this angle, [ Marco ]. What we saw late last year and early this year was this great move of cost and international prices, our prices in Brazil follow suit. What we've seen since July is that we reach a plateau. And now we see an accommodation of all these prices and cost of our raw materials. So when we look at recent months, what we can see is an accommodation and stability of all benchmark and reference prices in our sector. And this is no different for product prices. [ Marco ], it is important to see that margins have been sustained because iron ore prices and scrap prices are also adjusted. So the price accommodation we see is also coming with the cost accommodation, allowing therefore, to sustain the margin, which is the most important in this context. So that's what we see right now. When it comes to imports, what we can see right now in imports is a big impact on imports known as penetration of imports around 10%, which is a historic level, 10 or 15, plus or minus, and we can see a downward trend of imports at the end of the year and an outlook for a drop in mid next year. So as we speak, this is not a point of attention to the industry. And the last part of your question, I think, is also food for thought. We've been talking a lot about the outlook for the coming months. And we can see a structural change in the international market today, when it comes to prices. It has to do with China, emissions, capacity regulations. We can see geopolitical things in Europe and the U.S. We believe that we envisage for the following years, a level of price level higher than before. So that's the outlook, and that's how we consider 2022. This is how we look at this structure and outlook over time.

Thank you, Faraco. The next question is also from [ Marco Silva ]. With the removal of import tariffs imposed by the EU, by the U.S., do you believe this might have an impact of operation margins in the region considering that Turkey is a major exporter of long steel? Gustavo is going to answer the question. Thank you, Gustavo.

Thank you for the question, [ Marco ]. I believe you'll make a reference to what happened on October 31, when the U.S. and the European Union concluded an agreement to lower and eliminate tariffs.that were effective for a while. And with this agreement, these tariffs, therefore, no longer exist. And now what we have effective is an agreement based on volume. These volumes if they will grow from a current level of approximately 1 million tons to a level of approximately 4 million based on volumes between 2015 to 2017 and more than 54 product categories, so we don't expect that rebar is, specifically, for instance, the main product to contribute to this growth in volume because this is based on historic numbers, and it also includes flat steel. Our expectation, particularly to our U.S. business, and particularly the segment of big structural profiles and shapes, the impact will be marginal. So we work, starting 2022, with margins somewhat at historic levels, similar to what we had in this last year. So stable margins compared to what we saw in the last quarters.

The next question is from [ José Alves Bento ]. How can persistent high inflation rate affect the expected growth for 2022 in Brazil? Faraco is going to answer the question. Over to you, Faraco.

[ José Alves Bento ], thank you for the question. Like Gustavo said at the end of the presentation, there are some short-term risks in the operation. Naturally, this is not only in Brazil. We can see this in all markets, this big move around inflation and this concern that affects us all. In the short term, we believe this doesn't have an impact. However, our major concern is if it persists over 2022 concerning interest rates and low investments and incentives. In the short term, we don't see that though. This is a point of attention. If it turns out to be persistent, if high inflation rates persist for a while, naturally, there will be an interest impact on our business, affecting supply and demand, and we have to watch for this.

The next question is also from [ José Alves Bento ]. We have seen problems with dams in mining for iron ore. What is Gerdau's status surrounding this? In addition, I would like to know if Gerdau provides problem -- treatment of tailings. And when it comes to ESG, how is Gerdau addressing this problem? Faraco is going to answer the question.

Thank you for the question. Just to recall, that we have our mine in [indiscernible]. Today, 100% of the material produced in [indiscernible] is processed dry. We invested since May last year. We began our processing plant known as [indiscernible] with 100% filtering in dry filling and parting with no use of dams. And today, we have 20% of our [indiscernible] production, which also goes to the dam, which is Alemães dam. And this is upstream. And within our plan set in 2019, we began this year after the approval by authorities, some works to turn this dam into a downstream dam according to the new legislation. Works have just started. They will be over in 2022. And until the end of the term, we will have this dam converted into downstream. In parallel, we also have investments ongoing, so we can have 100% of mining production with dry piling technology also by the end of 2022.. We have a small share and investment costs, the work is already underway. And over 2022, we can see this transition being concluded for dry piling and no longer using dams in Gerdau's operations.

Our next question is from André of Itau. Congratulations for this event. We see a lot of companies around the world suffering from price increases. If you can probably tell us about the short and midterm outlook? And how do you see the performance of margins in your operations? And this question is addressed to Gustavo. Thank you, Gustavo.

André, we just we just celebrated 120 years since our incorporation. And I see that at Gerdau, one of the strengths we had, and we even became stronger in the last few years due to our capacity to absorb and also mitigate costs at times around the world when they become higher as it was the case of the past few years. And I think given the margins that we have been able to deliver in our business operations can really be proof of this capacity. And that was based on our business model, like the one we have in Brazil. It's also based on our production capacity, scrapping routes, integrated routes and the bio-reducer routes as well. As Faraco said at the beginning, we see some instability in our cost of raw material portfolio in the next coming quarters. So what we see is that in 2022, there will be maintenance of all the margins that we experienced in the past quarters. Therefore, I believe that the main risk for the moment is the price of charcoal because for 2022, we are working with the lowering of the levels that we are experiencing so far. So I think that in terms of our margins in 2022 in Brazil, they will be probably affected by prices of charcoal. So in general, we see a scenario of higher instability, and that's what we have in mind for 2022.

Thank you, Gustavo. Our next question is anonymous. What is the compensation percentage of the officers that depend on ROCE in the future, return of capital employed The question is addressed to Scardoelli. Scardoelli, please you have the floor.

Thank you, Rodrigo very much. Well, this is a very interesting and also very important question. In terms of the variable compensation of our officers, we have a short-term portion, which is the annual bonus, which is aligned to our short-term goals. And in terms of our long-term goals and our variable compensation is also related to the alignment of the goals of the executives and the company. So 40% of this compensation is [ pegged ] to the return on the capital employed. I mean it is [ pegged ] to what we call EVA. I mean EVA is the added economic value. I mean, ROCE, which is higher than our cost of capital. So it's not only related to ROCE, but it's what surpasses cost of capital of the company. So 40% of our long-term goals are related to -- indirectly to the return on capital employed.

Thank you. Next question comes from [indiscernible]. I Would like to know about the company's vision for next year, particularly when it comes to domestic steel demand, owing to growth projections for the year that has negative levels. In addition, how does the company envisage a possible return of China production with no impact on global prices and possible return of the penetration of important products in Brazil? Faraco is going to answer the question.

Thank you so much. By and large, we have to look at this when we consider year 2021 and 2022. In 2021, we have strong demand for long and flat steel, around 24% to 25% compared to 2020. And if we think about 2022, this is a scenario to maintain stability for demand levels at a very high level if we consider the history of the last 15 years. So [ in a check growth ] percentage, we at Gerdau, we are working with sales percentage to the domestic market between 4% to 6%, depending on the product line. This is for next year. The second point, like I said before, we can see a drop in the volumes of imports. So we believe imports are being reduced, but we believe that over 2022, these imports will also be like that. So that's the scenario of apparent demand for next year. When it comes to China, we don't believe there will be a structural change in China's policies. We believe there will be a prioritization of the domestic market. A very strong job to adequate the industrial park with gas emission commitments, posing a restriction, a cap on imports availability in China. So what we saw in 2017 to 2019 with Chinese import levels, which are very high, we don't believe this is going to come back. We didn't see that in 2020 nor in 2021, and we believe this trend of Chinese restriction, there will be an organization in the international market of flat and long steel.

Thank you. Our next question is from [ Rafael Shakur ] from SFA Investment. Could you clarify more about CapEx in North America? This question is for Gustavo.

Let me answer about CapEx in North America. Going back 3 years ago, I recall that the margins in North America operation were below 2 digits. And I mentioned at the time, a plan that we performed in order to increase the margins and go over 2 digits. This plan came from a gap. We identify opportunities of $30 per ton in our Gerdau operation in Brazil vis-a-vis our competitors. Out of the $30, we thought that $15 will go through performance related to OpEx management and another $15 would be recovered with CapEx investment in our plans over a 5-year time frame. So these $15 of cost performance have already been recovered. Actually, we delivered a little bit more than we imagined. And these $15, we have recovered with the arrival of CapEx investment that we've made to our plants in North America. These CapEx are directly related to technology in our plants. So we are modernizing technology in our main plants with the most modern equipment, automation, for the industry and also the expansion of our product mix in some of our plants, so we can have a more sophisticated mix and fully meet the needs of our customers. So I would say that this is organic CapEx to close the gap on performance and to expand the product mix. There is no major investment on greenfield, no other investment expected different from the update and the recovery of performance and the expansion in our product mix.

Thank you, Gustavo. Our next question from Leonardo Neratika from Bank of America. What is the outlook for prices and metallic spreads in North America for the next coming months? In your view, do you believe that we should see stabilization of prices in the long run at levels higher than historical levels? The question is for Gustavo.

Yes, in North America in the last few months, we've reached historical levels of spread. We have never experienced such high amounts. So we do not believe that these picks will remain throughout the year of 2022, but certainly, in the next quarters, considering everything that is going on in the U.S. economy and more recently, with the approval of the infrastructure package of $1.3 trillion, the spreads will continue to be high in the next coming quarters. Therefore, we remain very optimistic with the results of our operations in North America. We believe due to everything we've seen in the past quarters that things will remain and continue to perform well in the next quarters and remain at high levels.

Our next question from [ Marco Silva ]. There are many updating and ramp-up projects, as you explained during the presentation. Could you possibly clarify what could be the main changes in terms of margins or volumes in view of all of these projects? The question is for Scardoelli.

Thank you, [ Marco ]. Well, in fact, we do have a lot of projects as we demonstrated in the CapEx slide, projects of innovation and technological modernization, not all of them are for the near future, but we have projects for structural profiles in Brazil also mechanical bars and profiles in North America. And there, we say that the EBITDA per ton in terms of these new investments there is between $230, $240, and even EBITDA of over $400 per ton. And this gives you an idea of the profitability levels that we are anticipating for these projects. And if you look at the CapEx numbers, part of the CapEx is just for maintenance of the equipment that we already have. But also, it will be earmarked for capacity expansion and modernization of our plants. And everything -- every time we talk about CapEx, it's usually above our equal or above our cost of capital. So the idea is to keep it high. We are very, very stringent and always thinking about our cost of capital with a minimum amount of returns.

Thank you. [indiscernible] has the next question. Thank you for investing in Gerdau for such a long time. What should we expect about the automotive sector for 2022 and beyond? Gustavo is going to answer.

Thank you for the question about the automotive industry. We recently had discussions that annually happen about the sector in Chicago, Detroit. The expectation is that year 2022 is still very challenging. When it comes to chips, semiconductors, there is no expectation as we speak to have over 2022 a broad recovery, a full recovery in electronic circuits, allowing the automotive industry to deliver volumes that we saw in recent years. So this year will also be complex when it comes to light vehicle production, I would say, similar to 2021. To some extent, here in Brazil, this challenge is being mitigated by the growth in the heavy vehicle sector, which accounts for more than 50% of our deliveries and specialty steels in Brazil. So a high demand for trucks. The OEMs work in absolutely full capacity, trying to deliver trucks for after May and June next year. So for our results in specialty products, we believe the results will be similar to 2021, and that is an upside. We had challenges in our operations in the U.S. in the second quarter this year, with the shutdown of Monroe plant, which is our largest specialty steel operations in the U.S., we had a long shutdown in order to conclude an important investment cycle and turn this plant in one of the most modern specialty steel units in the U.S. So we had a hard time to have it back in the performance levels that we imagine for the melt shop, but it's already under production, already reaching the levels in November and October, similar to the last 2 years. So we believe that over 2022, we have a positive performance, positive cost in our Monroe plant. And this might add results above our results in 2021. In the long term, particularly in the U.S. we see growth in electric and hybrid vehicle production. So for recent years, we are getting ready not only in the U.S. but also in Brazil. There is a difference, though, Brazil is not going to produce the same level of electric and hybrid vehicles as the U.S. in the short term. But that's already a reality. We already have a demand by our customers. So we are investing, particularly in our Pindamonhangaba plant in Brazil, and we'll start up, possibly, in August next year, a new continuous rolling mill with investments in a production of clean steel, which are important steels to meet the needs of this hybrid and electric vehicle industry. We're very optimistic. It has proven to be historically significant for us. But over 2022, we don't see an upturn, a resumption of results as we had in recent years owing to this difficulty in the light vehicle segment.

Thank you. Our next question is from 2 investors [indiscernible]. Considering the good numbers reported by Gerdau, should I expect to see robust dividends as we had in last years for the future years? That's for Scardoelli.

Thank you. That's truly a very common question in recent times. Gerdau has a dividend payout policy defined as 30% minimum. We have adjusted naturally the payments to our results. And with the result and the earnings posted, we are also having record dividend payouts. This year in the first 9 months, we already paid BRL 5 billion as dividend, reflecting this very strong earning. So if results are maintained and maintain what we've been showing in outlook that we continue to have strong Brazilian markets, the outlook is to maintain dividends also strong and consistent in this market environment.

Thank you, Scardoelli. Our next question comes from Isabella Vasconcelos from Bradesco Bank. It's an audio question. So Isabella, you may proceed.

I have 2 questions on my side. The first question, just thinking about your capital allocation strategy and mainly in regards to growth, you already talked about some specific projects. But if I'm not mistaken, during the presentation, you also talked about M&A potential. So maybe if you could exploit a little bit more about your strategy, what are the specific products, markets, criteria, et cetera. This will be very interesting. And my second question refers to the Brazilian demand for next year. I also believe that -- I mean, even during your third quarter call, you talked about 4% to 6% forecast. And this would also include further stability in the retail and construction segments. So I just want you to elaborate a bit more about retail, how strong has been this increase in demand and how confident you are in relation to further stability, given the raise in interest rates and the lower outlook for the growth of the economy.

Isabella, well, thank you for your 2 questions. I will share the first response together with Scardoelli in terms of capital allocation and growth. And then I will give the floor to Faraco, who will give you a bit more -- a little bit more details about Brazil. Well, about M&A, historically, this has been one of our growth avenues. We continue to look at all the possibilities given all of our conditions that we set up for ourselves, especially after all of our divestments of around BRL 7 billion. We will continue to remain in the Americas. This is something that I've been telling you for quite some time. So we don't intend to do any M&A without -- outside the Americas. In the Americas, we are carefully looking at segments that have some synergy or some niche segments. So in the next few years, we do not anticipate going over the financial policies of the company in terms of M&A. So we will continue to look at everything very carefully. The same thing happens with other avenues of growth, maybe Silat [indiscernible] is an example of a good M&A and a good opportunity. And just like that, we will continue to look at others like it. But in fact, in terms of growth and how we intend to grow our business in the coming years, this has been the subject of intense debate in the company. So now I'll give the floor to Scardoelli, and then Faraco can talk about retail.

In fact, I'd just like to add just one more point because Gustavo already mentioned many important points. We've been very rigorous. And the example of Silat is a perfect example because it had a perfect synergy with our operations in Brazil. And it fits very well into our cash flow. And in terms of capital allocation, and I've already said that in previous meetings, this is a year where we were able to build our working capital, putting it at very adequate levels, providing excellent service to our customers. We are also doing the CapEx that we anticipated this year at BRL 13.5 million is much larger than the ones from previous years. We already accommodated growth and profitability in the future. We also paid record dividends throughout the year. And we were also able to lower our gross debt. In November, we just -- we bought back our bonus almost BRL 12 million, amounting to almost BRL 12 million, and that led us to reduce our gross debt. So in terms of capital allocation, this year, we were able to -- are working all the fronts that we had anticipated before.

Now Isabella, giving some color to retail and demand, when we put this outlook between 4% to 6%, and we are talking about the industry sector, the industry sector is very much driven by agriculture. Everything is related to agriculture, machinery, inputs and equipment. When we look at the yellow line, it is performing quite well as well. And also when we look at the infrastructure sector, and we also see a very good outlook. When we navigate through the construction industry and we look at the member of active work sites, in 2022, we enter the year with a very strong volume of work. So the industry is going through a very good moment. But now we have to follow the volume of sales in 2022. But right now, the outlook for the next 6 months is that these levels will become stable, and this is due to the growth trends that I talked about before. More specifically about retail, 2020 was very robust and 2021 as well, especially at the beginning of the year, mostly driven by restocking activities. And in August, the whole sector has full inventory, and they're making small adjustments. And we look at our retail performance on a day-by-day basis. And we've seen further stability in the past few months due to demand and billings and invoices. So it's very similar to the levels we had in the beginning of the year. When we remove the stock formation factors, demand remains strong and robust. So we still see the continuation of this performance in the coming months. So that's why we said that it will range between 4% and 6%.

Thank you, Faraco. Our next question comes from Eduardo [indiscernible] What's Gerdau opinion about the tax reform? What kind of outcome this would have in terms of Gerdau's dividend payout?

Well, thank you, [ Gasperini ], for your question. Well, the tax reform is still not totally clear, and this will not affect our dividend policy because this is really related to our capital structure. So we are -- we've been working every quarter in our dividend payout policy. This year, we paid dividends because of all of the performance we had. So we have just to look in the next quarters to see how this dividend policy will evolve in terms of the tax reform. Nothing has been defined yet, and as soon as we have something more concrete, we can get back to you.

Thank you, Scardoelli. Next question by Daniel Sasson, Itaú Bank. Thank you, Daniel. Gustavo, could you give us an update about the long-term expectations of result generation on Next initiatives? How do you compare the evolution of initiatives vis-a-vis what you expected to see in the beginning of Gerdau Next? Gustavo, over to you.

Daniel, let me share a broader overview about Gerdau Next. About the digital transformation system, I can see that more and more these questions have been discussed in the market in general, not only at Gerdau, but also in companies of the industrial manufacturing sector which are resorting to this journey as a means to generate more results along the journey. For those that I had a chance to have a thorough discussion, maybe you know better my spirit of continuously pursuing or trying to eliminate inefficiencies in all dimensions at Gerdau. So that's an intense part of my day. Everything we do at Gerdau, every process, every area, we're constantly trying to find a way to make things more efficiently, so we can really reduce inefficiencies and convert them into financial results and sometimes even nonfinancial as well. So this is part of the history of Gerdau since the '80s. We began to use increasingly more and more the management methodologies, particularly those developed in Japan, so we could improve our performance. For many years, we eliminated gaps in performance. A gap is -- well, refers to each one of the levels compared to the benchmark. It doesn't matter where they are, but we'll be shortening the gaps and the possibility to reduce inefficiencies. So a couple of years ago, with the digital transformation and the possibilities brought by digital transformation, this gap increased again, reaching a point to which 4 years ago, I said that if you are able, at that time, to eliminate all inefficiencies that we identified, we could be generating another 20% of EBITDA to Gerdau. Over the last 3 years, particularly, we've been following a very robust plan to eliminate inefficiencies, and part of the results achieved, particularly over 2021, are related to the capture of digital transformation in our daily operations. Faraco told you slightly about customers, and also our increase in proximity with digital sales for the industry has proved to be a big factor for us in order to work on this gap. So this relentless search trying to handle inefficiencies has been translated into very important gains in our daily operations. One example is the reduction in SG&A. In 2021, we have more robust results. We are not increasing everything -- anything in our expenses. We are still very diligent. It's not by chance that annually, we've been capturing in our results around $100 million, maintaining ESG at levels that are unknown. I don't -- I haven't heard of any other competitors or other industry players which have -- we are so competitive in terms of ESG, SG&A and performance, and it's faster. When you consider, for instance, the capture of market share that we had in Brazil this year, naturally, this is related to a more agile company, more into the market, more efficient in the decision-making process. So this search to improve efficiency has never been so present, constant and robust as it is today. At the same time and in parallel to that, we identified in recent years the possibility to generate additional sales to Gerdau on top of better efficiency that I said before, with business that somehow were closer to Gerdau's existing business. We began to work on a traditional manner, but growing, and we decided to create a new business operation known as Gerdau Next. And we are fortunate enough to bring Juliano Prado, our Vice President of Gerdau Next, 18 months ago, and Juliano and his team have been very structured to give relevance to Gerdau Next in the coming years. I also mentioned before some opportunities that our objective, in 10 years, we expect to have 20% additional sales of traditional Gerdau coming from new business. So recently, we celebrated the first year of Gerdau Next. We managed to structure business faster than we imagined. And right now, at Gerdau Next, this business will become so relevant that we can already begin starting next year to give more detail, another disclosure to the market about the practical results of Gerdau Next financially speaking. But when it comes to business, I shared the slide with some comments on how we've managed by synergies of business we created to bring these new revenue sources. Just to give an example, that I showed on the slide, we have this big work in port in Maranhão. And at the same time, we have our foundation company, G2Base with our logistics G2L together with Brasil ao Cubo, which we have a work in interest. We can have a big industrial work at record terms. We are not aware of other ventures in Brazil that can be as efficient and so fast. So that's an example of Gerdau business, Gerdau Next, that are beginning to be converted into important sales and revenues. Our dream has never been so alive and so fast. And this search for the coming years to have these additional revenues at Gerdau Next. So we are very happy with what we've done so far. Daniel, I believe, that as is structured, starting next year, we can share more detail and disclose more things in the financial highlights about the perspectives that are open starting the first year at Gerdau Next, which was very positive.

Thank you, Gustavo. The next and last question comes from [ Francisco Alves ] from [ Brazil Mineral ]. A question to Gustavo. What is the long-term outlook of Gerdau in mining? Do you expect to grow, maintain or leave? Thank you, Gustavo.

A very to the point answer: We expect to maintain mining. Mining is absolutely relevant to us when it comes to generation of our own iron ore to our Ouro Branco operation. So we have to keep on investing in mining not only to be a world benchmark in terms of sustainability, like Faraco said about the tailing dams and other relators -- related to mining, but also investments that will allow us to stick to the competitive level of iron ore production and consequently, steel cost in Ouro Branco. We don't want to be a relevant player to sell iron ore. We don't believe this is going to be an adequate path for us, but certainly using mining as a unique business to generate value, particularly for Ouro Branco plant. This will continue to be more and more present in our daily operations. To summarize, we will maintain it.

Thank you, Gustavo. And I would like to thank also more than 200 participants who joined us today in this event. So APIMEC is asking you kindly to answer the questionnaire that is available to you through the chat box. And questions that, for some reason, could not be answered, will certainly be answered through our Investor Relations team. They will get in touch with you. Now I'll turn the floor back to Lucy Sousa. And after her remarks, I'll turn the floor to Gustavo for his final remarks.

Now I would like to deliver the [indiscernible] that corresponds to 26 years, continuous 26 years of this alliance between APIMEC and Gerdau. We are very thankful for your participation. And also, I must add that I want to thank you for your collaboration -- or all your collaboration to our recently launched book on the 50th anniversary of APIMEC. And we also would like to congratulate you for celebrating your 120 years since the company was founded. Thank you very much.

Well, Lucy, thank you so much for your kind words and for this very long partnership certainly throughout the next many, many years. We will reinstate our participation. Also, I would like to thank all of you for joining us today. I would like to thank you for your partnership with us. And I would like to say that we are always available to answer your questions any time because we want to be close to you and give a lot of visibility of our business and our outlook. Also, I would like to take this opportunity to thank thousands, all of the thousands of our employees, who really contributed to the achievement of our results in 2021. So I wish you all the best. Please take care of yourselves and take care of your health. Your health must be #1. So all the best to you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]