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

Good morning, and welcome to Gerdau's second quarter 2026 results presentation. I am Ariana Pereira, Investor Relations Specialist. And joining us on this conference call are our CEO, Gustavo Werneck; and CFO, Rafael Japur. Please note that, this call is being simultaneously translated into English, and you can choose your preferred language by clicking on the globe icon at the bottom of your screen. [Operator Instructions] It is worth noting that, the forward-looking statements contained herein are based on the company's beliefs and assumptions based on information currently available. Forward-looking statements are not guarantees of future performance and are subject to circumstances that may or may not occur. I will now turn the floor to Gustavo to initiate the presentation.

Thank you, Ari. Good morning. And in fact, good afternoon, all of you. I hope you're doing well, and I really appreciate the opportunity to join you for another earnings release presentation. We will briefly discuss the highlights of the second quarter of 2026. I will also talk about the outlook for our operations, and then we will move on to the Q&A session. In the second quarter, we recorded growth in shipments, both quarter-over-quarter and year-over-year with a 7% increase in volumes in North America when compared to the same period last year. Resilient demand in the key sectors where we operate led to a 15% increase in adjusted EBITDA in North America in the second quarter compared to the first 3 months of this year, 2026. This strong result also reflects solid operating performance from our plants in the region. Meanwhile, we posted a slight improvement in the results of our Brazilian operations in the second quarter, reflecting a series of initiatives focused on increasing the profitability and productivity of our operations in the country. This gradual improvement in results occurred a at continued pressure from imports, which despite having slowed down during the period, remain at high levels year-to-date. In this context, we await the overcome -- the outcome of the antidumping investigations into long and flat steel products, which are expected to be updated in the second half of the year. Finally, I would like to highlight the increase in our ownership stake in Dona Francisca Energetica, which has raised our self-generated energy to more than 50% of Gerdau's consumption in Brazil. This move helps boost the competitiveness of our operations in Brazil and is in line with our previously announced decarbonization strategy. I will now turn the floor over to Japur, who will detail the financial highlights and the impact of the current environment on our results. And I will come back to you after that. Japur, over to you.

All right. Thank you, Gustavo. Good afternoon, everyone. And I'd like to extend a good morning to those of you who haven't yet had lunch. So good day to everyone. Let's start talking about our operating results. Our adjusted EBITDA consolidated was BRL 3.4 billion in this quarter, posting growth compared to both the previous quarter and the same period last year. And with this, we are getting to our very best consolidated EBITDA since Q3 '23. Gerdau's adjusted net income also posted a substantial increase of 45% quarter-on-quarter, reaching BRL 1.5 billion, reinforcing the company's ability to translate operating gains of our business into returns for our shareholders. Therefore, based on these results, Gerdau S.A. will distribute dividends of BRL 0.23 per share, while Metalurgica Gerdau will distribute BRL 0.11 per share. We also continue to make progress on our share buyback program of Gerdau S.A., which is now 31% complete now at the closing of Q2. Now speaking a little about our financial discipline. It is important to highlight and stress that our financial discipline remains a priority. We ended the quarter maintaining a very solid balance sheet position, with low leverage with debt over EBITDA ratio of 0.69x in the last 12 months. This quarter, we maintained a positive free cash flow of BRL 237 million. You might claim that it was just too little a timid generation, but we have to put this free cash flow generation into context, considering the typical seasonality of our business. If we compare the first half of 2026 and how much free cash flow we generated comparing with the same period last year, first half of 2025. In 2026, we generated an additional BRL 2.3 billion in cash flow. And this was mainly driven by both the growth in EBITDA driven by the North American operation, as Gustavo mentioned earlier, and the reduction in our CapEx investments in accordance with the guidance that we released and communicated last year. Talking about CapEx. From a strategic perspective, we are nearing the start of operations for major projects that will enhance Gerdau's structural competitiveness, particularly in our Brazilian operation. Regarding the mining expansion at Miguel Burnier, we continue to make progress in line with the updated schedule that we released in our last earnings call with the start of operations expected in the third quarter. We are running a lot of equipment tests, and we should start producing ore. We remain confident that we will realize the projected operational and financial benefits of the project in the range of BRL 1 billion and BRL 100 million per year when we are in full ramp-up. In addition to investments made in energy mentioned by Gustavo, we are about to open our new recycling center in Pindamonhangaba. This will increase our competitiveness and reduce our exposure to volatility of this raw material in the long term. With this, I would like to conclude by reaffirming our culture of always striving for operational and financial discipline, while simultaneously strengthening our competitiveness and allocating capital to initiatives and projects that will shape our future. We understand that we continue to grow, creating value in a sustainable way to our shareholders. I will wrap up here and join you all and Gustavo for the Q&A session.

Thank you, Japur. I would just like to say that in North America, we continue to see steel demand at high levels with a strong order backlog driven by solid consumption in segments such as renewable energy and data centers. One point of attention is the review of the formal review of the USMCA, which is the commercial agreement between the U.S., Canada and Mexico. In Brazil, we are seeing signs of more moderate growth in some consumer sectors such as construction and manufacturing, while still facing an excessive influx of imported steel in the local market. This unfair scenario of imports continues to affect the profitability of our operations in the country. And in this regard, we continue to invest in initiatives that strengthen the competitiveness and profitability of our assets. Well, I'll now turn the floor over to Ariana, and Japur and I will be available from now on to answer your questions.

Thank you, Gustavo and Japur. We will now initiate the Q&A session. Our first session comes from Rafael Barcellos with Bradesco.

My first question is about a very hot topic with investors, which is the outlook for the next quarter in the U.S. You mentioned margin maintenance, whereas most of the market expected additional expansion, given all of the price increases we've seen in the U.S. market. Having said that, could you please give us an idea of cycles in the U.S.? How are you seeing the cycles operating in the U.S. market? On our side, we see that the beginning of structure still in the U.S., that's something that is coming quite strong. I mean, that draws our attention towards being more stable. I just want to know whether there is something that is nonrecurring. I know that, you had the maintenance shutdown in Midlothian. I just want to know how relevant that is or whether that can explain this most moderate outlook. And if you allow me a second question, we are also looking at the Mexican market and that market is very strong, especially in the last few months. I remember that in the past, you mentioned a potential investment in the Mexican market. Could you please let us know whether it would make sense to revisit that plan or not? That will be great.

Well, Rafael, this is what I mean cutting to the chase. No, going straight to the point. I mean, this is a discussion that Japur, Wang and I have had in the past few days. But let me give you a more qualitative view. Japur, the guy that deals with the numbers, he can probably add some additional information to what I'm about to say. When you look at all of the elements in a very practical way, Rafael, what we see going forward, I mean, the next quarter and also taking into account the last price increases, we see a trend of margins going upward. There is no new element or any new risk that we could anticipate that is not well mapped out by you guys. I think that we are just being more conservative on the macro side. I mean, is there really enough room to expand the margins? Will prices continue to escalate indefinitely? Or maybe we're being just more conservative or realistic, whatever name you want to give it. But there will be a time when this will hit a ceiling. We can't just think about indefinite margin expansion. I think there should be a sustainable level. When you put everything on the table, you put price, you put our spread, cost equation, international scrap prices. If you look at the numbers, the raw numbers, you see that, that leads to margin expansion. But we are being more conservative, more down the earth. But I will allow Japur to come up with his own comments. We will have a maintenance shutdown at the Midlothian plant, but it will be in the melting part. We have a very good billet inventory. So when it comes to shipments delivered and dispatch and the way we serve the market, everything is according to plan. So we do not anticipate any drop in shipments. But before I turn the floor to Japur, the Mexican market and USMCA negotiations are moving forward more on the technical side, but nothing close to approaching a final agreement. And our teams, especially the team in Mexico, they have been talking to the people at the Ministry of Industry and the federal government in Mexico. Topics related to steel and automobiles are going on now. I don't see the expansion of Chinese products that enter the U.S. market via Mexico. Therefore, when it comes to local steel production in Mexico and the insurance of automobile production in Mexico, all of these topics have led the discussion rounds. So there is nothing that would be a cause of concern. But when I look at USMCA and the way going forward, I don't see any additional risk coming our way. I think that the way things are going will lead us to see more positive news rather than negative. But as you said it yourself, earlier this morning, we talked about that Wang and Japur and myself have been talking a lot about it. But now I think I'll give the floor to Japur to elaborate further.

Okay. Maybe I will repeat some of the points already mentioned by Gustavo, but I will do it like in bullet points. I think we will have to answer this question a lot more during this call. First of all, when we think about the market, shipments and price, we don't see any loss in volume due to the Midlothian stoppage. I mean we will continue to serve our customers. So we are not anticipating any lack of supply to our current customers. Prices, I think we might have been a bit more conservative because there has been some price increases like on Friday and now Monday in North America. We still need to have some more visibility about prices in terms of prices being indeed put into force. And half of our portfolio is earmarked to the distribution market where price changes occur more rapidly, but there are other segments like industrial segment, manufacturing and downstream, the speed of implementing prices is a bit different. The pace is different. Having said that, when we think about the Midlothian maintenance shutdown, I mean, there is an accounting figure. It doesn't have any impact in terms of cash generation. But when you have some equipment in downtime for a few days, there is some idleness in our lines. And then we have to allocate the fixed costs directly to COGS, the results of that year, because we were not producing semifinished or crude still during that period. And at the end, this impacts the margins a bit, but this does not hamper, I mean, the unit economics or the order book perspectives going forward and the stability we see with metallic spread that was expanding and also it doesn't hurt scrap prices. So this quarter, there was an important downtime in our largest unit in North America. And I think we have to think about the glass half full rather than half empty because we are making investments to generate higher volumes in our main plant in our main market. So I think this should be the overall conclusion when we think about this expansion in Midlothian rather than thinking about whether this would be 1% more or less because at the end of the day, what matters is the long-term return from our investment in a market where we have the largest cash generation.

Perfect. If you allow me, 2 other very quick follow-ups. Japur, I understand that when it comes to cost, it was not necessarily Midlothian that impacted the cost, but just natural inflation coming from energy costs that we see in the market in different industries. So Midlothian, it's not so heavy in terms of cost. And then my second follow-up would be to Werneck.

Therefore, I understand in terms of cycle, the sustainability of the cycle is a different story. But when it comes to peak, you probably see it getting close to the potential to increase metallic. Spread and profitability is something else that -- or sustainability is something that, in fact, will happen. But this range is getting close to its potential. But even -- if you go forward to 2027, the cycle can be defined the way we want it. And the main factors that have led us to see such relevant backlog, in our point of view, this will continue to be present because if you look at data centers, for instance, even though we were there in the U.S. when the debate started in Pennsylvania, New York, when they were talking about reducing or holding on the licenses to build new data centers because this will impact energy demand and water supply. This was restricted. And there is no other robust initiative that could stop the construction of new data centers. This is a path of no return. So the backlog for this sector is quite strong, with data center comes energy generation in the U.S. Renewable energy, even though there was a concern whether this would be reduced in the current administration, but that was not the case. So we are still producing steel for renewable energy, and this has been quite strong. And then looking ahead in the next quarters, it doesn't seem to us that there is any imminent risk that could lead to a drastic reduction to our backlog or our shipments. I can even anticipate that. And I don't know whether Japur would have anything else to add.

Well, yes, we -- Rafael, we do see a very one-off impact of that downtime in cost in the first quarter due to idleness because since I have no production in the melt shop for that entire period. All of the electricity costs, take-or-pay gas and employees that work in the melt shop. I mean, I need to transfer that cost to our P&L. And by doing so without having production per se, the cost -- on the cost point of view, it didn't change the cost would be there anyway. But this puts a burden on the cost for that quarter. Once again, this is just a temporary effect, nonrecurring effect. And we believe it will be around BRL 100 million to BRL 150. And maybe we are just being a bit conservative looking at other market aspects as we referred to earlier on. And we are also taking into account the impact of the cost in the overall results of the operation. There were other inflationary impacts throughout the second quarter, like freight on average, there was about 8.5% additional freight expenses in North America when compared to the first quarter. I mean, this happened in the second quarter, mostly due to fuel issues. And this has to do with the conflicts in the Middle East. And we believe that these effects will still remain going forward. But it's not due to other cost inflation, but something very much related to Midlothian and the maintenance downtime.

Next question from Caio Greiner with UBS.

I'd like to have a quick follow-up question to Rafael's before I ask my own. Japur, let me know if I understood you correct. You are not yet considering the implementation of the 2 latest price increase announcements that you had -- that you made last week and this week. Is this correct? So we could expect expansion?

You're correct. Yes, you are correct. We haven't yet fully considered these 2 price increases in special steel and beams that happened last Friday. And we are following our competitors because it's August 5, we already had the month of July, we had a price increase, which is not retroactive. It has a date when it will take effect along the month of August. It will have a not full effect on the portfolio in addition to the different channels, which I referred to earlier. So it's not fully captured in our outlook. So putting it differently, there is an upside risk, which is not negligible in this outlook.

Okay. clear. Now, let me move to my 2 questions. One is about capital allocation and the other one about Miguel Burnier. First, capital allocation, Japur, you drew my attention that point on net debt. Net debt close to BRL 8 billion now in Q2. And we remember your target of having a net debt over EBITDA ratio close to 1x. Your EBITDA for this year 12.5%, 13% for next year 13%, 14%. It seems your net debt is at a very conservative level. So I'd like to understand how you're thinking about capital allocation and indebtedness. If this target ratio of 1x should still make sense to us. And if that is the case, how do you intend to releverage the company to reach that target? That's number one. Second question about Miguel Burnier. You mentioned the start-up starting and you will start a ramp-up process. the iron ore market is more under pressure. The prices have dropped a lot. I'd like to understand the economics of Miguel Burnier for 2027. Do you have any updates on EBITDA generation and whether in 2027, we should see the operations running in full steam or whether the account or the calculation changes?

Okay. Let me try to address this in part. Starting with capital allocation. A slight correction. When we talk about our net debt, our formal policy says that the limit of leverage is 1.5x. But in practice, we feel uncomfortable to be above 1x net debt over EBITDA ratio. So please keep in mind that this is a limit, not a target. So we are not in a hurry. We don't really have a need to say, we are at 0.69. We have to leverage another 0.31 to reach the target. We don't have that mindset. Now, it is true that with the reduction in CapEx disbursement and with EBITDA expansion, we have a free cash flow generation to equity, which is greater than what we had before, and this is translating into more dividend payout, more share buyback for our shareholders and a reduction of the net debt, not just because of the reduction of net debt itself, but the reduction in leverage because of the expansion of EBITDA. So it's the EBITDA factor, not the net debt factor. and that is our preference. As several analysts have highlighted, we have a significant consumption of working capital this quarter, both because of the price increases we had in the United States, and also the price changes we had here, the price increases here in the Brazilian operation at a lower measure, but they happened. And we expect to have free cash flow release in Q3 and Q4, given the typical seasonality we have. Typically, these are the quarters when we release more cash flow and working capital. And also given the downtime at Midlothian, we accumulated an inventory of finished and semi-finished goods. And when we finish selling these inventories, we'll have a release of working capital. So we maintain our preference to continue to remunerate our shareholders via dividend payout or via execution of our share buyback program when we think about capital allocation. That's for Miguel Burnier, when we had our estimates, our latest estimates that we communicated to the market, we always worked with the benchmark iron ore price close to $90 per tonne. And not considering $105, $106, $110 that we saw happening. So there might be some adjustment. I am more concerned about executing the ramp-up well so that we can deliver the cost we proposed in the project when we designed the equipment and size our operation about $30 per tonne of cash cost delivered at the Ouro Branco unit. I think that at this point, we are more focused on the quality of our execution and on our operational discipline rather than on the international price. At this point, in the call with the press, we got some questions whether we have sold the ore, whether we have been selling the ore. And I would like to highlight to the analysts that we have not yet any pull-through or pull forward or sale of ore. Our main focus is the ramp-up. First, we have to ensure competitiveness and the cost of Ouro Branco. And later, we'll sell the surplus. And if everything unfolds according to our current schedule, we should be completing the ramp-up by year-end, start of next year and then enjoy a full benefit for this business over 2027, if we manage to deliver the cost that we proposed.

Next question from Caio Ribeiro with Bank of America.

My first question would go back to capital allocation. I'd like to explore with you the analysis of new projects. And what is your priority order today? What is the timing for the approval of new projects? And how should we think about the CapEx trend looking forward, particularly comparing maintenance CapEx and expansion CapEx? Secondly, looking at the behavior of lead times in the U.S., they continue at very high levels despite price increases of long steel that you have been announcing and other competitors as well. This suggests that the demand is becoming more inelastic. So I'd like to explore with you how significant is this data center component for you, both directly and indirectly, considering related investments. What is the growth that you expect in the future? And whether the order backlog should change if you see there is a risk of metal spread contraction given increased imports, given that the price spread in the U.S. domestic market versus the external market has been increasing. These are my questions.

Thank you for the questions. They are great questions. Capital allocation, I'll pass that to Japur for a full answer, adding to what he has mentioned about this before. But I -- the way I see capital allocation, we have to think about CapEx. If there is no significant change in what we're expecting in the future and considering what we have been saying before, we will continue to invest over time at a CapEx level that we consider to be healthy and sound, most likely the current levels of CapEx. So what are the big themes coming? The maintenance of the blast furnace 1 in Ouro Branco and the coking perhaps we wouldn't need to have a CapEx peak to deal with that. Good news is we have had some technological and technical alternatives for us to increase the lifespan of the coke plants and the blast furnace. So we have been postponing the date of the downtime. So we have been acquiring a level of knowledge of operation of an integrated mill that we didn't have before. The history of Gerdau was very much based on scrap. We master scrap. But blast furnaces, a more long-term operation considering a longer lifespan of the equipment, I think that we have evolved a lot in our knowledge and also learning from JFE in Japan and other parties. Eventually, we'll have to stop Ouro Branco. We'll have to have an inventory of billets, so we won't impact the market. But I think that the postponement of downtime of these 2 important assets for us will allow us to dilute CapEx in the future. United States, I would say that what we are facing in Brazil -- we faced 8, 9 years ago when we debated EBITDA margin of around 6%, 7%. We had a significant transformational process with divestiture of assets with the right investments in the right places, broadening the portfolio of our products in that concept of a one-stop shop. So I think that we're now reaping the fruits of important work that we did in recent years. Of course, the current administration has created the right opportunities, but had we not prepared, we will not be able to enjoy these opportunities. And now with the Midlothian downtime, I think we'll end a relevant cycle for us. And now we'll have to analyze calmly what the next steps will be in the United States. But -- we are not consolidating anything at this point. But in Brazil, we'll continue to go through a transformation kind of similar to what we had in the states. The need for CapEx, they need to build new plants to have more significant transformations or reforms. I think that this will come in the coming years, but diluted over a time frame that will not give us an unexpected peak of CapEx needed that we will not be prepared for. We will not leverage the company more to have more CapEx because we don't want to create difficulties. And also, there's another point about this. When you want to do a lot of CapEx, you start entailing civil works, electromechanical assemblies, that investment that we mentioned earlier at Miguel Burnier, that was the maximum CapEx management. What was the problem? What was the delay reason, electromechanical assembly and civil works. So that's how difficult it is to make this kind of investment in Brazil. Now, I'll turn the floor to Japur to say anything else about capital allocation. And Japur can start talking about the lead times, and I can add to that later.

All right, Caio. We had our guidance of about BRL 4.7 billion. We have a pace of disbursement, which is slightly below the guidance. And everything leads us to believe, as Gustavo mentioned, that given the focus we now have on the Brazilian operations, focus on our more competitive assets and to seek some optimizations. And given the extension of the lifespan of our assets in Ouro Branco, we understand that we might have room actually to reduce the maintenance CapEx guidance of around BRL 3 billion per annum from now on. Now having said that, we understand that an eventual reduction of the guidance of BRL 3 billion per annum for maintenance CapEx, a possible reduction of that yearly amount. If that reduction happens, the difference will not be used to reduce our net debt or remuneration of our shareholders. We understand that, we will have minor maintenances and the right path would be to continue to reinforce the competitiveness of our operations here in Brazil, in Latin America and in North America. So if we think about the total CapEx disbursement guidance between BRL 4.7 billion consider reduction to close to BRL 4 billion in the coming years. These possible reductions, we expect that we will have to spend less in maintenance. So we will invest more to be competitive and to transform our business in the long term. So I think that overall, that's the philosophy we're having right now. We understand that an investment of this order of magnitude is capable of bringing us good investments with excellent long-term returns. As regards to the United States, I think it's hard to say that demand is inelastic. And you think that there is an important component of time to execute. And in that regard, metal construction is a solution which is much superior than other constructive models. And this is seen in the U.S. is greater demand for metal construction. So if you want to build a data center in 2 years or in 6 months, and that's totally different in terms of speed for a rollout of new models on account of these hyperscalers that provide service to AI companies. So I wouldn't say that, demand is inelastic in that regard, but I would say that, we're at a moment, which is unprecedented or we would have to go back in time a lot to see such a robust and resilient demand for metal construction in North America. Gustavo, anything to add?

Well, what I can add is the issue of imported goods in the 2 main segments where we operate in the U.S., structural beams, merchant bars and beams. -- for beans, penetration of imports is marginal, very small. It's hard for these large merchant bars to be imported in different gates. So there are no imported. Now we have the merchants, structural profiles, commercial profiles, they are lighter weight, and those are the ones being imported. Now in talking with our customers, they're in such a hurry to execute things over there that they get worried to import goods and have to clear customs and delay chips. The risk of imports is not creating a lot of momentum. Let's get a practical example. Let's get Texas. The need to build transmission towers in Texas is creating a sense of urgency. People are getting almost desperate to get steel to build these transmission towers. So the customers in the very, very short term, they want to buy the steel that is ready to be delivered and shipped. So the speed of this kind of business is not really encouraging a lot of imports. So the system, I believe, is well controlled. And please keep in mind that before this boom of energy and data centers, we already had a strong backlog. We already had margins, which historically were high and boosted by what we talked about the structural bill finally is translating into new projects of infrastructure. We see this happening in the United States. Other U.S. federal government decisions like the CHIPS Act, construction of new semiconductor plants have about -- there are about 40 plants that we are supplying to. So there's strong demand, more sustainable demand in the process of reindustrialization over there. And all of this gives us some peace of mind that our backlog is solid. But not everything is positive. So there's a concern in the automotive industry because of affordability, there's a delay in the renewal of the U.S. fleet. The U.S. fleet is aging a bit. So that business is facing a little bit more difficult to take off compared to the other ones I mentioned. But this will not last forever. Penetration of Chinese imported vehicles is almost nonexistent in the United States. So I think that eventually, we're going to have a higher demand for special steels because cars don't last forever. The fleet needs to be renewed. So of the segments where we operate in the United States, this is what we are seeing. And that's where we see a little more difficulty. But my expectation is that over the next quarters, the business will ramp up again. And lastly, to your question, Caio, understand that if we continue to see overheated demand for our products and if we have any kind of slowdown of industrial production, there might be an upside risk of scrap by year-end because there's always a seasonality involved. There is less industrial production and then we might have some difficulty in the scrap yards. Because of the individuals, they find it harder in winter time to go and deliver scrap. So that's something to be monitored. We've seen some stability in a good part of the year regarding scrap price, but this is a time of the year when typically we see some seasonality because of the weather.