Good afternoon, and welcome to Gerdau's conference call to discuss the results of the Third Quarter 2019 of Gerdau. At this time all participants would be in listen only mode and later on we'll initiate the Q&A session. [Operator Instructions] We would like to emphasize that any forward-looking statements that might be made during this conference call related to Gerdau's business outlook, projections of financial and operating goals are mere assumptions based on the management's expectations related to the future of the company. Even though Gerdau believes that its comments are based on reasonable assumptions, there is no guarantee that future events will not affect this evaluation. Here today are Mr. Gustavo Werneck, Director, President and CEO of the company; and Harley Scardoelli, Executive Vice President and CFO. With no further ado, I would like to give the floor to Mr. Werneck. You may proceed sir.

Good afternoon, everyone and welcome to Gerdau's conference call on the results of the third quarter 2019. Here with me is our CFO, Harley Scardoelli. And for the both of us, it's always a great pleasure to talk to you about our performance and also clarify possible doubts and answer questions that may arise during our presentation. I will start by talking about our overall results in the quarter. And next Scardoelli will elaborate on the financial performance of the company. After that I will return to comment on the outlook for the markets where we operate. And we will also talk about our investment plans. At the end we will both be available to answer all of your questions. So let's move to slide two and we will begin with our main highlights for the quarter. I would like to start the presentation of the slide, highlighting that last September we successfully concluded the refurbishing of Blast Furnace 1 at the Ouro Branco Mill in Minas Gerais. The equipment has resumed operation within schedule, complying with planned operating conditions. Over 5,000 people worked in this scheduled maintenance for approximately two months to ensure that the equipment and its peripherals would be up to speed when Brazilian economy resumes growth and demand for steel in the country increases. Moreover normalization of inventories at Ouro Branco led us to post the second best quarter in Gerdau's history in terms of free cash flow, something that will be further elaborated by Scardoelli later on. It's important to emphasize that despite the impacts from the Blast Furnace downtime and the lower pace of exports, resulting from a weaker performance of the world steel industry. We begin to see signs of recovery in Brazil civil construction industry at the end of the third quarter.…

Thank you, Gustavo and good afternoon to you all. I would like to start by saying on slide on page 4, for those of you with us on the web what are the most important financial highlights of the quarter. As we will see further on, free cash flow generation in the quarter was BRL 1.9 billion being the second best free cash flow generation in the quarterly history of the company. Adjusted EBITDA was BRL 1.5 billion, excluding the effects from Blast Furnace 1 downtime at Ouro Branco in Minas Gerais. EBITDA margin at North America BO remained high because it was able to be maintained at high levels. And finally, another highlight was working capital. Our cash conversion cycle went from 84 to 78 days. And in absolute terms that made a reduction from BRL 9.4 billion to BRL 8.6 billion, down by 8.5% from the second to the third quarter of 2019 and all of that was positively impacted by inventory adjustments. Now let's move to page 5 and I'll talk about the results and the performance of the company in the third quarter of 2019. In consolidated terms, adjusted EBITDA was BRL 1.5 billion on Q3 '19. And looking at the chart on the upper part of the slide, if we compare to Q3 '18, adjusted EBITDA and adjusted EBITDA margin were down due to divestments in our North America BO, lower volumes in special steels and also lower export prices from Brazil. On the other hand, the drop was mitigated by excluding the nonrecurring effects of BRL 181 million related to the downtime of Blast Furnace 1 at Ouro Branco, net of tax reversals, provisions in the period at the Brazil BO. Without these effects, EBITDA would have been BRL 1.276 billion. EBITDA margin at…

Thank you, Scardoelli. Now let's move to our next slide, slide number 10 and to elaborate on some important aspects related to our business operation and also talk about the outlook looking forward. We continue to see good prospects for both Brazil and the U.S. our two main markets of operation. In Brazil we’re optimistic look toward the improved demand for the coming months including 2020 was reinforced by the relevant increase in steel orders offers in the last few weeks, especially coming from the residential and commercial construction sectors. According to figures for 2020 published by the World Steel Association last October 14 in Monterrey, Mexico, steel global demand should grow 1.7% vis-à-vis 2019, reaching 1000806000 tonnes driven by the performance of emerging economies, despite a landscape of intense trade trend. In Brazil we will see the effects of seasonality which is typical for the last quarter of the year. However right now, we believe on a more robust recovery of steel demand in the domestic market in 2020 which should be above GDP growth expectations that should be around 2% according to estimates from the Central Bank. In the Civil construction sector, recent real estate indicators show an important acceleration in launches of new construction projects in the main urban areas with growth rates around 10% to 20% when compared to the same period of the previous year. Likewise, we've seen a significant reduction in real estate inventories which in centers like São Paulo for instance went from 2018 months in the beginning of the year to less than 10 months in the last few weeks. Another important indicator is the so-called confidence index of the Civil construction, they reached 87 points at the end of the quarter, being the best number in the last three years. In…

Ladies and gentlemen, we will now initiate the Q&A session. [Operator Instructions]. Our first question is from Leonardo Correa, BTG Pactual

Hello. Good afternoon, and thank you for taking my question. My first question Werneck you mentioned during your introduction, you talked about the evolution in the real estate market and new launches. I would just want to explore this topic a bit more because we've seen a frustrating demand in the country and we've been looking at the real estate market abroad. And there is a general euphoria and you see that in São Paulo, I mean inventory levels came down from 18 to 10 months. Interest rates are at a record level. We don't know exactly how the economy will react with all of these stimulus, an increase in credit but we see a very different landscape. It is clear that you are beginning to feel this positive impact, because obviously you are heavily exposed in the real estate market because of steel milling, but I would just like to know whether you could quantify this impact better. I understand it in this first week you're already feeling an improvement in the number of orders, particularly coming from the real estate industry. But is -- there's a 10% increase when compared to the previous phase or maybe less or more. If you can quantify that would be helpful. And if you could probably remind us of what is Gerdau's exposure percentage in regards -- I mean the long unit of Gerdau, how exposed is it to the real estate market? And this will help us have an idea of the magnitude of this positive impact looking forward in 2020? And the second question still talking about Brazil, it's difficult for us to map or quantify exports margins, but you increase shipments and giving the prices abroad, it is clear that we -- this is a loser business. And correct me if I'm wrong. Can you get any positive EBITDA margin with this level of external prices? And what, kind of, measures you would take. I mean, I just want to understand your rationale in terms of growing experts in such a pressure scenario? Thank you very much.

Leonardo this is Gustavo. It's a pleasure to talk to you. I like your expression and a structurally different scenario, because in fact now I think this is a major piece of news we are bringing out because we've been talking about optimizing and good outlook. But I think it's the first time in the last quarter is that I talked to you about this with concrete figures that really proves that in the last few weeks, the real estate market construction, residential and commercial construction market is experiencing a rebound. If we compare the first nine months of this year with the first eight months of last year there was a drop of 18%. But it's also important to look at the comparison of the third quarter of this year vis-à-vis the second quarter. And what we see in our case is a very important increase of 6% in longs. Now, if we break down the 6% growth as you asked us to do, we will realize that in that segment that we call steel for armed concrete like rebar and cut a band, we grew 17%. We can't say that the 17% only refers to market, but this also includes our growth strategy and the strengthening of our channel of Gerdau Commercial, our new company called Juntos Somos Mais. So there are a few things included that should be taken into account. But this is a number that I want you to consider. 17% was the overall growth of our shipments in the -- our concrete segment and this growth was more accentuated in the third quarter. It came in September it was maintained in October. And we see a good outlook looking forward. When we look at launches and the reduction in the real estate inventories this…

It's very clear. Thank you very much.

Thank you, Leo.

Our next question is from Daniel Sasson from Itaú BBA.

Thank you, Gustavo. Thank you, Scardoelli. Thank you for your presentations. My first question refers to your net debt. Maybe Scardoelli you can help me reconciliate that BRL1.9 billion. And with that drop of BRL5 million in your net debt because even considering the depreciation of the currency in the period, which increases that in about BRL1 million in the payment of the debt of about BRL100 million. That net debt should have come down a bit further. So if you can help me do the reconciliation I would appreciate it. And my second question refers to the U.S. Even with that a $20 decrease in metal spreads in the quarter, it is still over 10.5%. So, if we put together COGS and SG&A per tonne it is dropping 5% to 6% vis-à-vis the second quarter. Therefore, my question is whether you could comment a little bit on the metal spread levels the current levels and going towards the fourth quarter. And whether you have already reached higher efficiency levels in order to have more sustainable margins of around 10% in a longer period of time? Or you still believe that you'll still have room to reduce COGS as a percentage of your revenue? That's all. Thank you.

Good afternoon, Daniel. This is Harley. In terms of reconciliation of the variation of that almost BRL1.9 billion vis-à-vis the net debt. You almost got there. There was just a few minor points that I will clarify. So let's look at the big figures. Free cash flow generation BRL4 billion. We – there was a variation of 9% of the U.S. currency. So there was BRL1 billion in exchange rate variation. And this was a effect. Now we see the reversion of that also this effect should be made now, but BRL1 million of exchange variation. And now we have to include the non-recurring effects BRL0.2 million. That you subtract of nonrecurring events. So then we subtract that. And now so we have dividends that we pay out this quarter and related to the second quarter about BRL0.1 billion – in something million reals. And there was interest rates that became part of this calculation. So 1.9 minus 0.1 dividends and accrued interest you get to that variation of net debt.

Thank you, Scardoelli.

Now let me refer to metal spread in our North America deal. Looking at a further – looking further. 2017 that was one of our worst years in terms of metal spreads. In the entire steel industry, in the U.S. we were at a level of $350 for short time in the metal spread in general it was that in the U.S. and throughout 2018 things changed a bit because of Section 232. So I think we saw an increase of about $100 from 2018 to 2019 considering $450 per tonne in 2019. In 2019, I would say that on average I think it increased metal spread increased by $20. And the peak of that metal spread occurred around March of this year. And at one point it was $502 per short ton. I think I mentioned that number in a previous occasion. So since that spike from February through March there has been a reduction but it has been a gradual reduction. So that reduction of $20 that you mentioned meaning that what we see looking forward is that there should be a slight reduction in a certain stability, but we don't have any indicator that can tell us that we will experience a very sudden drop in metal spreads in the coming years And I think that we're moving towards stabilization, especially considering what we've seen in the last quarters. Now in terms of the performance of our operation, I would like to remind you Daniel that there are two large avenues of opportunities that will allow us to improve our longs performance in the U.S. In terms of longs, we will recover margins. And I think that with the plans that were deployed up to now. We were able to recover 50% of our performance but we still will have the opportunity to capture increased performance throughout 2020. And there is another path to recover performance through the technological advances of our equipment and this depends on CapEx that was approved last year. And as of next year that CapEx will be materialized and will increase our performance. I would also like to take up the opportunity to say that our special steel operations in North America. I mean, more recently, we promoted changes in the leadership of the organization; Mark Marcucci, our former CEO is retiring now after several years of excellent contribution to Gerdau. And now the new CEO is Rodrigo Belloc, who's been with the company for many years and he has a long time expertise in long steels. And he will take the CEO position of our joint venture in the Caribbean. So I have no doubt that with Rodrigo in the special steel segment we will lead you down to another level. And as we promoted this performance improvement in longs, I am sure that throughout next year I'll come back here to tell you more about the achievements that we will be able to get in the special steel operations.

Thank you very much, Gustavo.

Next question from Timna Tanners from Bank of America Merrill Lynch.

Yes. Thank you for taking the questions for the time. I wanted to follow up if I could please on the market outlook for specialty Steel, because if you look at the volumes they are the lowest I could find on record. So I appreciate that you have a better outlook. But I'm just trying to quantify how much better given again how much it's dropped. So just to understand what the delta could look like and what you're seeing there? And then to follow up on the second question is on the U.S. market. Some of the latest leading indicators on construction like the ABI and construction spending levels are pointing to more of a downturn or a stall in activity. So can you tell us what your customers are indicating to you there? What you're seeing in terms of activity? And also help us understand some of the competitive behavior in the market like sharp decline in beam prices. If you could elaborate a bit more on that please? Thank you.

Timna we had a difficult time listening to your question. So we are trying to get things here and there to be able to get the full scope of your question. So in general, she's asking about the fundamentals of the U.S. economy, the possible weakening of the economy and our business in the coming years coupled with the announcements of new discounts, particularly in the large structural profile. So in general, how do we see the health of our businesses in the U.S? In general, for next year, we see the U.S. economy moving strong. We are anticipating GDP growth of about 2% in the U.S. We haven't seen in terms of new orders any weakening in terms of volumes our backlog of orders that entered in the past few weeks does not indicate any weakening of the businesses where we operate. In fact, there was a price decline because of discounts published by the structural profiles industry. But in a way they mitigate the drop in scrap prices. I remember in our last conference call we talked about scrap and I was telling you that we were seeing a continuous drop along the next months, which indeed materialized. So in terms of both items we were able to maintain a spread, which I mentioned before, within stable and comfortable levels. But looking towards 2020, we don't see any structural changes in our results or our profitability levels in the long segment. Now talking about specialty steels. So it has been a more difficult year because there was a very important destocking in that chain. After Section 232, there was a destocking in the chain. And there was an outlook of scarcity of raw materials. So -- but after the 232 there was a better understanding in the market…

Okay. Thank you.

Our next question is from Carlos De Alba from Morgan Stanley.

Thank you very much everyone. So, first question, so maybe continuing with the outlook for the fourth quarter in Brazil. Gustavo, you mentioned that the company has seen now some recovery in civil construction. Could you maybe elaborate as to whether or not you expect to see the performance of the business unit already reflecting this improved demand conditions? Or if it is something that you will probably see really only materialize in the numbers in the first quarter. Also what is the capacity utilization right now in Brazil? And how has it moved in the last few weeks or months do you expect to shut down any electric furnaces? Or how do you see your operations running? And then my second question has to do with working capital which obviously did extremely well in the third quarter. But as we close the year, how do you see the current levels of receivables and inventories which declined significantly in the last quarter do you see them remaining stable as of September 31 -- relative to September 31st or you see scope further improvement? Thank you.

Thank you, Carlos. So, I will answer his first question related to all of the impacts in terms of cost, utilization of installed capacity. And in the next coming months with the demand growth coming from residential and commercial construction. So, as I said before, the long segment accounts for 25% of our business or one-fourth of our business and it has an important impact in our results. But once again, we also notice that we are being more selective in our businesses related to exports. So, we always have our exports portfolio settled three months in advance. So, today we already have shipments scheduled for November, December, and January and this allows us to work with a capacity of about 70%, Carlos and our production concentration will be very strong in our auto brand cameo, the refurbishing of the blast furnaces. And the advantage we have with our own ore production close to the mills. Once we increase volumes in Ouro Branco, we will be able to capture important cost gains in our main mill. The decision whether to maintain this capacity around 70 or maybe slightly before -- slightly lower than that will depend on what will happen after February. So, before we make any decisions, we will take a closer look of our capacity, so as to maximize our results vis-à-vis the reduction in export prices. Our decision will be very strong in view of the profitability that this will bring to our business. I will now give the floor to -- we'll elaborate more on that. I mean Carlos ask about what we see in the quarter working capital or whether that situation would be maintained. There was an increase -- a significant increase in working capital earlier this year and that was much related to the refurbishing of our blast furnace one of which led our working capital levels to be higher-than-expected and we've been seeing that in the last quarters which was below 80 days. That reversal that we were able to do in the third quarter should be maintained. Traditionally, we try to optimize working capital by year-end. So in the fourth quarter, we see a very positive trend in terms of our working capital looking towards the end of the year. For 2020 there is a slight change of reversal. But again our idea is to maintain our average cycle levels below 80. So for the fourth quarter the trend is positive and we will also reduce working capital and we will maintain on average is below 80 days.

Thank you.

Thank you, Carlos. Our next question is from Thiago Lofiego from Bradesco BBI.

Thank you and good afternoon. I got two questions. The first is whether you can comment a bit on the competitive environment for longs in Brazil in the short-term and now thinking in terms of the mid-range whether you see any possibility of further consolidation in this very fragmented market. The second question relates to the ramp-up of Ouro Branco after the end of the downtime. How should we see costs evolving in Ouro Branco both for the first quarter as well as throughout 2020, what would be an optimum point? When would you reach an optimum point of costs?

Thiago, let me just answer both of your questions. The competitive environment is stable. We are not seeing any major changes to the competitive environment this quarter when compared to the previous one. So last time we talked, we refer to larger competition in terms of profiles but we are seeing a certain stability. Now in regards to consolidation this is always a topic that we monitor closely. But I would say that it's not anything simple in terms of competition, organizations and I couldn't be able to say whether there is any possibility in the shorter or mid-term for further consolidation in Brazil. The Ouro Branco furnace, we estimated a 60-day downtime and resume operation within schedule and the performance is extremely good. Now the two of blast furnaces of Ouro Branco are totally refurbished in full conditions to capture all cost opportunities that we see looking forward. So as I told Carlos, our strategy for next year is to work at full capacity in Ouro Branco because this is a platform where we can get a good cost performance. But we also have to take into account how prices will evolve, particularly coal prices because when it comes to ore, we have our own production and we use that alternative up to the limit, so I think the price of coal is what will dictate how competitive we can be in that operation. I think now I would say that we went through a moment when Ouro Branco production decline because of the downtime coupled with increases in coal prices. Will impact inventories in the second and third quarters, but we reached a peak and the trend now is to find a more comfortable and stable level. Therefore, I believe that the outlook is very positive in terms of costs and competitiveness in Ouro Branco. We just have to take a closer look at exports, looking at all the opportunities we have not only with Ouro Branco, but also in terms of our mini mills and scrap, a major -- we have to adjust the export levels to what we need.

I just want to go back to what you said. You talked about stable is still challenging or the environment is more balanced. And now going back to the second question, can you quantify what you expect in terms of average cost improvements in 2020 when compared to the average of this year or the third quarter, if you could give us some number -- numbers I would appreciate it.

Thiago this competitive environment in a way, it's very stable. And despite the slow demand, profitability in the domestic market is very adequate and very stable. So in a moment of low demand, we've been able to navigate in logs with export premium today of around 4%. And I believe that as the market recovers as it is happening now. We see good possibilities of expanding our profitability in the domestic market. In the flat steel market, I see more competition when compared to longs, for a series of reasons, including the impact of coal, in this segment. But also I see a concrete possibility for early next year. But we will stop working with premium of negative experts. And so today we have a 4% negative. So I see a good possibility of these premiums, reverting next year. So I think for 2020, we will have positive premiums, in the area of flats as well. Well in regards to costs in Ouro Branco, it's difficult to anticipate what the performance will be. It's about 2020. Because we will then, we will have to buy coal. And it's difficult to tell whether, the drop in prices will be more sudden. But in general, referring to ore, I will say that we can be competitive this year. There will be a dilution in fixed costs, which will be stronger, in this year. Because both blast furnaces will be working at full capacity. And the main issue is the behavior of coal prices.

That's great. Thank you.

Our next question is from Caio Ribeiro from Crédit Suisse.

Good afternoon, everyone. And thank you. My first question relates to the sales mix in Brazil. This quarter, you had higher sales in the domestic market while compared to the foreign market. And I think this impact to the revenue per tonne in the third quarter. But, in the fourth quarter, do you anticipate any special rebound that could change the mix effect? Or, you still see stronger exports than sales in the domestic market. And my second question has to do with steel import tariffs, and a possible reduction that may come up in the government's agenda, that more recently came up. So, how are the conversations with the government evolving, so that -- and then, what is your expectation?

Caio, well, we are just facing a typical seasonality for this time of the year, even though, indicators of new launches, of residential and commercial construction, points to, a very positive trend in terms of sales of longs. And this is a typical seasonality. So, for the fourth quarter, we shouldn't expect different shipment numbers, when compared -- I mean, any different than what we had in previous years. But the positive outlook is that, as soon as the seasonality season is over, we will see new levels of demand and exports as well, we are being more selective in our choices. We don't expect to replace this non-production in the domestic market, replacing it with exports. A large part of the business is we see a $360 is good. They do not leave positive margins. That's why we have to be very selective in our choice. In December, we will stop production. Last year, we had prices that allowed us to work with stronger capacity in the fourth quarter. Now in regards to the so-called commercial opening, and export tariffs, I think, we are very comfortable with the way this will take place in Brazil. We are not anticipating any major short-term changes. And we communicate with the government through the institutions, that we belong to. One of them is, Institute to ASO Brazil. And as such, they're -- they have a very strong relationship with the Ministry of Economics, and the secretaries of the ministry. And I think there is a general consensus that the commercial opening in Brazil, has to take place once we increased competition. I'll give you a typical example, an in-house example, the impact of the freight table introduced in Brazil since the trucker strike in May of last year would bring a direct impact to our business of around BRL 200 million. But we seek for all of the parts of our alternatives things that we didn't even think about doing before we venture into predictive platforms, digital technologies et cetera, et cetera. We did everything we could to mitigate the risks out of that BRL200 million. That BRL 300 million did not make part of our books, because we found alternative solutions. Imagine in the industry as a whole. So, I would say that the government is very sensitive to this issue. And they have deep knowledge that -- and they believe firmly that the commercial opening in Brazil will happen once the competitiveness -- the competitive bottlenecks are solved things related to new tax issues, et cetera, et cetera. So, we are comfortable with the way things will evolve in Brazil.

Perfect. Thank you very much, Werneck.

, :

Thank you. I think most of my questions have been answered. I just have a follow-on question. Werneck, I think you said that the parity of imports today is slightly positive. I just want to understand what is the prospects for price increases at the end of the year or whether for any price parity for any other given reason.

Marcio, let me give you more details about the premiums. In the long segment, in early October, the premium was 3% positive. With this round of price increases in longs, which is taking place right now, we hope that in early November, premium will be around 6% to 7%. We believe that in the next few months this will be the level that we will work with. Now in regards to flat steel, in early October, there was a negative premium of 3%. And at the end of the month, I think the same level we made. We believe that in -- by December or the end of this year, this level will still maintain with a possibility of leaving this negative position and going towards a more positive position after the seasonality season is finished.

Thank you.

We now conclude the Q&A session. I would like to give the floor back to Mr. Gustavo Werneck for his final remarks.

Well, I would like to say that as always, it's been a pleasure to talk to you. On my behalf and on behalf of Scardoelli, thank you very much for participating. Thank you for your questions that always help us to become a better company. And I would like to invite you all to join us again in our next conference call, which will take place on February 19, 2020. And I would like to put all of ourselves available to answer any further questions, so that we can straighten our ties. Good afternoon and I wish you a very good week. Thank you very much.

Gerdau's conference call is now concluded. Thank you very much for participating and have a very nice afternoon.