Edited Transcript of GGBR4.SA earnings conference call or presentation 21-Feb-19 5:00pm GMT

Well, I would also like to stress that there was significant progress in the EBITDA margin of the North America operation, a market that remains extremely relevant to us. As a result of our team's dedication and the evolution of the markets in 2018, we are paying out higher dividends to our shareholders, much higher levels when compared to previous years. I also want to emphasize that these achievements demonstrate that the efforts from our teams to transform Gerdau into a more innovative and open organization is beginning to bear fruit.

Throughout 2018, we worked on something very important to our future, and that was the definition and the global launching of Gerdau's purpose. In other words, we reached for the true reason of being of our company, building up our purpose, which is to empower people who build the future is one more step towards the cultural transformation we've been going through in the last few years. In practice, this transformation is translated into more independence and openness for people, less hierarchy, more flexibility and an agility to help us adapt to a fast-changing world in an increasingly competitive global steel market. Therefore, our purpose will not only guide us in our day-to-day operation, but will also guide our decisions and business strategies in the years to come.

Now I'll give the floor to Scardoelli, right next to me, and then I will get back to you soon.

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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [3]

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Thank you very much, Gustavo, and good afternoon to you all. For those of you following us over the web, I will start with Slide #4, and I'll talk about the results and performance in the fourth quarter of 2018.

In consolidated terms, adjusted EBITDA was BRL 1.4 billion in the fourth quarter 2018, being the best result for this quarter in 10 years.

Looking at the chart on the upper part of the slide. If we compare to the fourth quarter 2017, we see the evolution of adjusted EBITDA and the margin that went from 12% to 12.9%, and from BRL 1.18 billion to BRL 1.4 billion in absolute value. This increase was mainly due to the improved performance of the North America BO caused by improvements in metallic spread and supported by the economic growth that favored the construction and industrial sectors.

In relation to the Special Steel's BO, it is important to mention the adverse effects in the second half of 2018 caused by a slowdown in the economic activity of Argentina, an important customer of our Special Steels operation in Brazil with implications to the Brazilian automotive industry. And with regards to cost pressure, cyclical price increases for superior scrap, electrodes and metallic alloys, all important cost components of this operations. And all of these factors affect the margins of the operation. With the results of this last quarter at the end of 2018, as mentioned by Gustavo, we posted the best EBITDA and net income of the last 10 years. There was a significant reduction of our debt. And we paid out much higher dividends. We reduced the profile of our debt. And the payout of much higher dividends was also in keeping with the betterment of our results. And we will talk about these topics in the next slides.

Now moving to Slide #4. We will talk about the pro forma and the divestments that took place throughout 2018. With the conclusion of the divestment of assets in India and the rebar assets in the U.S., Gerdau concluded its divestment program and is now focusing on the more profitable operations in the Americas. The economic value of all divestments carried out by the company since 2014 was over BRL 7 billion, thus, to demonstrate the results of the business operations net of the effects of the divestment program, this slide shows the pro forma results for 2018. We see that the consolidated EBITDA margin of Gerdau goes from 14.4% to 16% in 2018 once we disregard the results of the companies and assets that were sold throughout the year. To clarify, in North America, the wire rod assets of [Vermont] until March and the rebar assets until October.

In South America, the Chile assets are included in the results until June. And the Special Steel operation assets, the assets in India include the results that were posted until September 2018.

Now moving to Slide 6 and adding to the previous slides. The bridge chart shows EBITDA evolution from Q4 '17 to Q4 '18. And the growth in net sales per tonne sold that more than compensated for the increase in cost per tonne sold and lower shipments in the period stemming from the deconsolidation of the assets divested during 2018. This is due to improvements in the worldsteel environment throughout the year and also better average international prices throughout the year, all combined with cost management efforts, commercial policy and the simplification of the company's organizational structure in line with the new governance introduced in the company in 2018.

The charts on the lower part of the slide show the evolution in dividend payout throughout 2018 compared to the previous year, both for Gerdau S.A. and the holding Metalurgica Gerdau S.A., reflecting the growth of net income in both companies as a result of EBITDA improvement and lower financial expenses. These results allow the company's maintaining the minimum payout of today's 30% of the adjusted net income, allowed us to post a much higher flow of dividends when compared to 2017. The fourth quarter 2018. In the Fourth quarter, the company allocated BRL 170 million in dividend payout for the shareholders of Gerdau S.A. BRL 0.10 per share and BRL 49 million to the shareholders of Metalurgica Gerdau S.A. 0.5% per share. And the payment for both companies will be on March 18. In 2018, Gerdau S.A. allocated BRL 765 million, $0.45 per share for the payment of dividends, the equivalent of more than 5x the amount paid out during the entire year of 2017. In the same period, Metalurgica Gerdau S.A. allocated BRL 244 million per share, BRL 0.25 per share for dividend payout, equivalent to 12x the amount paid throughout 2017.

Now we move to Slide 7, when we'll talk about the company's debt position and liquidity. Gross debt on December 31, 2018, was BRL 14.9 billion. The reduction of BRL 1.6 billion, vis-à-vis December 2017, was mainly due to debt amortization in the period, even considering the negative impact from BRL depreciation of 17% during the period. When compared to September 30, 2018, the reduction was BRL 3 billion. The strong reduction in the net debt over EBITDA ratio of 3x in December 2017 to 1.7x in December 2018 was a consequence of continuous EBITDA improvement and the proceeds from the divestment program, focusing on financial deleveraging and optimization of the company's asset portfolio. It is also worth mentioning that in the fourth quarter '18, there was the issuance of the 15th debenture -- issuance of the 15th debenture of Gerdau S.A. in the amount of BRL 1.5 billion and the buyback of USD 1 billion in bonus distributed between bonds with maturities in 2020, 2021, '23 and '24, with the purpose of reducing the gross debt restructuring and balancing the debt maturity schedule in addition to reducing its exposure to U.S. dollars. Another very important point is the fact is that the board of the company, the board of Gerdau S.A., defined as the financial policy of the company the achievement in maintenance of the following parameters in the mid- and long range. Maximum net financial debt over EBITDA or leverage maximum should be between 1 to 1.5x, the average term of the debt above 6 years, maximum gross financial debt of BRL 12 billion. These guidelines allow the company to work towards an adequate balance situation while at the same time, it will be able to execute its investment plan in order to fulfill the demands of the market and cope with the challenges of the business.

Now moving to Slide 8, which is the last one in my presentation, where we'll talk about the company's free cash flow in this quarter, which amounted to BRL 2 billion. This amount comes from adjusted EBITDA that was more than enough to honor our CapEx commitments, income tax interest in addition to a strong release of working capital. 2018 as a whole, the -- in 2018, the equivalent amount was BRL 2.6 billion, the best result in terms of free cash flow in the last 3 years. It's also important to mention that a well-defined and flexible investment program for the next 3 years that Gustavo will detail later on, combined with the leveraging parameters and a debt position defined by the board, enable the company to pursue further positive free cash flow for the next coming years, which is something extremely important to an industry of capital-intensive and significant exposure to international prices of its main products and inputs.