A – Renata Oliva Battiferro: Now we will initiate the Q&A session. As a reminder for questions, you must click in the Q&A icon in the bottom of your screen and write down your question. As your name is announced you will get a pop up to activate your mic and it’s then that you have to enable your microphone to ask your questions. In case you want to open your cameras, just let us know so that we can enable camera viewing. The first question from Daniel Sasson, he’s a sell-side analyst from Itaú. Please open the camera. Open Daniel’s camera please.
Daniel Sasson: Hello Renata, Gustavo and Japur. Good afternoon and thank you for taking my question. Well, thank you for that further discussion about the peso devaluation in Argentina. I just want to make sure that I’m not missing anything. That effect of R$520 million of EBITDA would be the effect for the whole year that you already recognized as it was done through that quarter. Is that understanding correct? Maybe you could give me some further clarification in terms of what we could think in terms of recurring results or even discounting some of the JVs of Colombia, I mean, the divestments of Colombia and the Dominican Republic. Maybe we might have missed something because the depreciation started in December. So the average exchange rate in Argentina, it’s not yet R$800 on the official exchange rate.
So if you can shed some more light in the subject, I would appreciate it. And Werneck, my second question, and I think you clearly explained the concerns of the industry regarding the competition with imported goods, that predatory competition you mentioned from China. More recently, we heard the government saying that they will revisit the tariffs, but I think that it’s not yet in accordance with what the industry expected, like the increase of tariff so that we would be closer to Mexico because Mexico imposed 25% tariff. If you could please elaborate a bit more about these debates and whether the industry really wants to prove the government that China is practicing dumping? And what are the other partners in Americas still was doing to prevent that predatory influence from China and whether you anticipate any increase in prices in the domestic market?
Thank you. That’s my question.
Gustavo Werneck: Can you hear us, Daniel? Okay, let me start giving you a more general answer about tariffs in Brazil, and then I will turn the floor over to Japur, he can give you more facts about Argentina and Colombia. We’ve been debating with the federal government for several months now, and we’ve been talking about the need to impose a 25% tariff. I mean, Brazil has been importing steel for many years. We’ve never been against any kind of commercial opening or trade opening. Even despite all of the difficulties involving Brazil costs and other things that get in the way of our competitiveness, throughout the years, we’ve been able to search for other alternatives and to compete on equal footing with any other producer in the world.
But once you have Chinese steel landing in Brazil and in other countries that are still open to receiving things at lower costs, even lower than production costs, it’s impossible to compete. Even though we try to reduce our costs, it’s impossible to compete like this. And we believe that this is not something that is going to be solved in the short-term. Because after all, what’s happening in China is a decision by the Chinese government to maintain their jobs because there will be no more investments in infrastructure and the real estate market is going through short-term difficulties. And by the time China could boost internal consumption and green economy, the export phenomenon is something that will prevail for quite some time still. And having said that, some countries are being very quick in terms of implementing some trade defense measures and this is the case of Mexico, the U.S. I mean, 27 countries in the European Bloc.
And Turkey, a major exporter they also implemented some safeguard measures against China. We are trying to show to the Brazilian government that it’s important to do the same thing, but the discussions are taking very long. We thought that the government would expedite measures and would be quicker in implementing short-term measures. They haven’t done anything. The debate is still ongoing, and we have to constantly provide more and more details, but we believe that with time, something has to be done. This tariff re-composition does not help us at all, and even any possibility for us to increase our profitability in Brazil. This is not going to happen because this tariff will not help us. Therefore, we see the need maybe to have maybe quotas or to increase the tariff so that the subject could be solved.
Daniel, I mean, we waited up to a limit. We cannot wait anymore. So we are now starting a very strong process to readjust our structure in Brazil, because this is a new reality and we think that this will go on for longer. We cannot afford to operate in Brazil with many units in a small volume. It’s not even feasible or intelligent. Therefore, we are now revisiting our capacity. We are dismissing more people. And a more recent event was the fact that we laid off another 100 people from our Pindamonhangaba unit. And this number just adds up. And the recovery that we see going forward in terms of our profitability in Brazil will have to go through costs. I don’t see that this is an adequate environment to recover margins through prices, maybe through some very specific products.
That may be the case, but there will not be any special price movement because the environment is not very good for them. In terms of our capacity, we are taking a very close look at it, trying to seek for competitiveness through costs that I’m sure this will not happen overnight or just in a single quarter. We still have the carryover of all the decisions made, so we have to pay in advance just to bear the fruits further down the road. But certainly we do have the means to improve our margins, not only in terms of the fourth quarter, because we have to take into account maintenance shutdown, seasonality. But we are still insisting with the government that they have to take a stand. We are also accelerating our anti-dumping processes, but that’s long-term, at least 18 months, I would say.
But there are other processes that somehow we are trying to reactivate, especially in terms of hot coil rod strips. We materialize the damage. But there is a mechanism that we know in Brazil, we call it [indiscernible] it’s a technical group of public interest. Okay, dumping is approved and then that process is despite there is a dumping, we will deploy that because this could also harm other sectors. Inflation could go up and things that are difficult to understand in Brazil. Well, we are doing something, but it’s a long-term measure. We cannot expect that through these mechanisms something will happen this year. There should be some more harsh decision by the government. I mean, we cannot afford to wait any longer because it’s very difficult to go back to what we had before.
We are now intensely looking at our structure because we want to improve profitability going forward. Focus mostly on cost. Okay, I will stop right here. We can certainly talk more about it later on. But I will turn the floor to Rafael so he can talk to you about Argentina and Latin America.
Rafael Japur: Well, thank you for your question. And this gives us the opportunity to explain something that it’s complex because it’s not like a routine subject, but it’s important that we shed some more light. So I will do that right now. I will just ask for our team to put on the screen again that slide that talks about Argentina. I think this simplifies the conversation. Argentina for a few years, I think, and several quarters, I mean, in the IFRS rule, they’ve been treated as an inflationary country. So every quarter we had to recalculate the results within that given year, looking at previous quarters using the last official exchange rate. So every time the government or the U.S. dollar would fluctuate, I mean, the official fluctuate, either up or down, we would do a mark-to-market looking at inflation and exchange rate in the line of expenses, et cetera.
And as a consequence, then we would have our results. But as in December, right after the election, the Milei administration promoted a very relevant depreciation. So from ARS360 for $1, that amount went up to over ARS800 per $1. The mark-to-market was almost 50% in relation to the official exchange rate we had a day before. So in accounting terms, we have to immediately realize that in the next coming quarter, and then we have to consider all the effects that occurred throughout the entire year. Looking at all of the revenues and all the costs within Argentina, adjusted by the less inflation number and the less exchange rate. And because of that, as a result, in this fourth quarter, I mean, we detailed all of the lines. The impact in our revenue was an adjustment of R$1.2 billion.
And this was more than half of the drop in revenue we had in the previous quarter, which was a drop of 7 percentage points. And this stemmed from this maxi devaluation and the impact was also an EBITDA of R$526 million. But this impact will not be repeated going forward every quarter, because this will only happen once we have some significant moves in the official exchange rate or maybe a slight difference between the non-official exchange rate vis-à-vis the official exchange rate, and whether there will be this effect of inflating results during the quarters and a sudden drop in a given moment. This will certainly depend on what will happen in Argentina in terms of the performance of inflation and the official and non-official dollar rate performance.
I mean, the normal operation in South America, excluding the effects of a maxi devaluation, should be very close to what we reported in the fourth quarter, when we will have a quarter without that effect. Because this quarter we have the effect not only from the fourth quarter, but everything else that happened throughout the year. Therefore, I believe that the reference for the year of 2023 is a good reference, because it could be a starting point for a modeling that we expect to see in the coming quarters. Now, in terms of the second part of your question related to the divestment, the divestments in Colombia and the Dominican Republic, I mean, throughout 2023, they contributed with approximately R$400 million of EBITDA in the results of the South America BD.
If you look at the pro forma numbers, it would be – I mean, for the year 2023, R$400 million came from Colombia and the Dominican Republic. Therefore, thinking about a normal year, I mean, if you could say that there is any normal year in the steel milling industry, South America going forward would include the result from the fourth quarter net from the joint venture participation we had throughout the year. So in 2023, it would be R$1.2 million for South America. This is what in our view, would be the result throughout this – the net result, net from all of these effects.
Daniel Sasson: Perfect, Rafael. Thank you. That’s very clear. Thank you, Gustavo. Thank you for your explanation on the tariffs.
Gustavo Werneck: Thank you, Daniel.
Daniel Sasson: All the best.
Gustavo Werneck: Renata, back to you.
Renata Oliva Battiferro: Thank you. Next question from Leonardo Correa, sell side analyst of BTG Pactual. Please, let’s have the camera open for Leonardo.
Leonardo Correa: Hi everyone, can you hear me now?
Gustavo Werneck: Yes, we can hear you very well.
Leonardo Correa: Well, that’s great. Good afternoon, Werneck, Japur and Renata. Maybe, perhaps going back to Daniel’s question, you see, Werneck, I think the big story in Brazil has been this deterioration of profitability that came strong going back to the levels of 2014-2015, when we had those past crises. I think that this draws everyone’s attention in the market, it should draw the attention of the government and of the authorities. So the question that remains is this Brazil normalization to those historical levels of Brazil, 18%, 20% in the mid cycle. How will it be now? We have heard from some construction companies and builders that Gerdau’s trying to pass through, of course, a small price increase, given what is possible, given the parody with the imports.
In the case of long steels, it’s probably around minus 5%. So obviously there will be room for more. But we have heard about 5%, 6%, 7% price increase attempt in February. So I’d like to hear from you. How is this unfolding? How are these conversations unfolding? And this is something that makes sense, and it would be a price re-composition. So let’s talk about re-composition of price and not price increase. Trying to help you there. And you spoke a lot about cost. And in the previous answer you said that you would be focusing on costs, you spoke about capacity adjustment, you spoke about layoffs. And like you to elaborate more on the homework that Gerdau is doing to try to bring the margins back to adequate levels in Brazil. So that’s number one question.
Second question has to do with CapEx. Well, at least for us here, when we speak with investors is it’s all about CapEx. It’s a little higher than what the market had modeled. Japur, in your presentation, in the very end, you kind of hinted that you could make adjustments according to the cycle. And I’d like you to speak more about that. We are in a complicated scenario with worse results. What is the room of maneuvering that you have from R$6 billion? What kind of cut can we expect if the scenario remains as it is?
Gustavo Werneck: All right, well, I think that Daniel’s question and yours are excellent, because we can speak a lot to that. And I’ll try to give Japur an overview to Leo and perhaps you can add the details later, Japur. Well, you see, Leo, these unprecedented moments we’re living in Brazil of having such a high penetration of imports. We did go through cycles over time, demand dropping, other difficulties. But a moment like this, where we have a relatively solid demand, Brazil is growing the demand for steel, but met have some seasonalities in some more difficult years. The demand is kind of solid, it’s stable. You mentioned civil construction, and there’s a solid demand coming from civil construction. We have new buildings being erected.
I can see the book order of cut and bend, the number of construction sites that we are supplying. So demand is kind of stable and it’s expected to grow a little compared to last year. This is not a problem to us, and this will continue to be so in the coming years. So Brazil, in a way, always had some imports coming in. We were never against it. We were never against a trade opening, despite the so called Brazil cost that we always talk about. We always pursued competitiveness so that we could compete on equal footing with any large steel producer. And in recent years, we always maintained a certain percentage available in Gerdau Brazil, for exports, always 22%, 23%, some years 25%. During the pandemic, there was a reduction. But we always thought that this was an adequate strategy to have this buffer.
For a while, we had been expecting some changes in China and some other things, and we thought that maybe that strategy would not be valid now and in the future. It is not by chance that for a while now we have a new strategic line so that we can transform our Ouro Branco mill, turn it into a higher added value product for the domestic market. So part of the CapEx centers will be detailed by Japur comes from competitiveness in mining, preparing Ouro Branco for the cycle, when it’s going through its latest renovations. So preparing Ouro Branco in Minas Gerais to be a very competitive platform for us. So the bulk of the CapEx will come from this. It’s part of a full transformation that the company is going to go through over time. So what are we thinking about the future?
