Edited Transcript of GGBR4.SA earnings conference call or presentation 7-Nov-18 4:00pm GMT

Overall, Gerdau's impressive performance also reflects the management's effort in all our operations. This comes as a result of our austerity in managing CapEx investments and also the lower historical levels of SG&A that reached 3.3% of net sales. Free cash flow generation was BRL 405 million. This quarter, foreign exchange, or more precisely, foreign exchange variation of BRL, was also positive to us because we posted gains in converting revenues generated abroad into Brazilian real.

In the period, once again, we were able to improve our net debt over EBITDA ratio. It reached 2.2x, being the best performance since 2012.

Our debt position follows a downward trend since the conclusion of the divestment of the rebar units in the U.S. this week, and which was also previously announced back in January for USD 600 million in addition to the regular working capital adjustment.

Recently, we also announced the sale of our operation in India, in line with our divestment strategy already mentioned before that focuses on assets of greater profitability potential in the Americas.

In addition, we would like to inform you that after the completion of the sale of the units in the U.S. and India, we now concluded our divestment program.

In Brazil, the highlight goes to our partnership with Votorantim Cimentos and Tigre as part of the program that we call Juntos Somos +, together we are more, which is already in motion and which official launching should happen at the end of this month of November.

So now let's move to Slide #3 to talk about the outlook for 2019 or next year. We are working with a very positive outlook for next year. A few weeks ago, in an event in Tokyo, the World Steel Association revealed that in the year 2018, actual global steel demand should grow 2.1% vis-à-vis the year before. In 2019, global demand for steel should grow another 1.4% over demand of 2018, growing to 1.68 billion tonnes, boosted by the rebound of investments in developed countries, coupled with improved performance in emerging economy despite the potential scenario of trade tension, as we've been seeing in the recent news.

In Brazil, the gradual evolution of the industry and the civil construction segment were the important highlights in the period. In this regard, we managed to increase the EBITDA margin of our Brazil BD to 20.3% in Q3 '18. We benefited from our extensive product portfolio of longs and flats, and also from our strong presence from north through south of the country through our 76 stores of Comercial Gerdau, which continue to advance in its transformation journey to better serve our innumerous customers.

At the same time, we continue to work to mitigate the significant impact of inputs and raw material pressures, especially scrap, pig iron and coal in the quarter that could last throughout 2019.

Looking ahead, the Brazilian market trend is positive for 2019 as we believe in higher GDP growth when compared to 2018. And that is because we already see a gradual increase in real estate launches in the country, also investment in oil and gas that are currently going through a licensing phase and to be initiated next year. In addition to that, we have urban mobility works that should take place in the second half of 2019.

So in regards to our operation in North America, I already commented on our good performance with EBITDA margins of 10.5%. For 2019, the outlook is quite positive, led by the growth of the economy and lower unemployment, therefore, generating higher demand from industry and the construction segment.

We also expect to see the continuity of Section 232 in 2019, and we hope to continue having a high use of installed capacity in North America market as a whole of approximately 80%. At the same time, we see new investments being made in capacity in the market at the moment, which should lead to increased domestic competition when these new capacities start up in the U.S. early next year.

Another point to be remembered is that the Trump administration spent great part of its first year focusing on priorities like health, immigration and tax reform itself, even though one of his main campaign topics was trade and investment in infrastructure. Now we hope that he turns the focus to an investment plan in infrastructure, which should be announced in 2019. I also want to say that with the approval of the sale involving the rebar fabrication facility in the United States, we hope to see our margins going further in 2019, and that's because we are continuously focusing on our core assets with greater return potential and products with higher added value.

In regards to special steel, we had an EBITDA margin of 16.1% in the quarter, impacted by inputs in raw material costs, mainly scrap and metallic alloy. And these alloys are extensively used in the manufacturing of our product, mainly those geared towards the automotive industry. However, I would like to emphasize that the EBITDA margin of the special steels operation does not represent a trend towards the future.

In addition, our JV called Gerdau Summit, a partnership with the Japanese company Sumitomo and JSW is already producing parts for wind powers, and these products are currently being certified as we speak. Early next year, we should start shipping these products. And when that happens, we will experience a margin growth because these products have a high added value.

Looking forward to 2019, the outlook for our special steel operation is also very good. In Brazil, the automotive industry should post moderate growth. On the other hand, the oil and gas and wind power industries in Brazil should grow as we expect to see increased consumption as a result of a better economic landscape. In the U.S., the perspective is also favorable for 2019, mostly influenced by the potential performance of oil and gas industry and growth of the automotive industry, particularly the production of commercial vehicle. Demand from the civil construction equipment industry should also experience a good momentum.

Now looking at the other countries in South America, the region should experience some economic growth, especially in Peru, where GDP is estimated to reach 4% growth in 2018 and also 2019.

But the economy of Argentina is our point of attention in the region as the economy is supposed to experience a downturn in both years, according to estimates from the IMF.

Well, now let's move to Slide #4, and we will talk about investments conducted in the third quarter 2018. Considering the amount of BRL 319 million, 43% was earmarked for Brazil; 32% earmarked for the North America operation; 20% for Special Steel; and 5% was earmarked for the remaining countries in South America.

In the first 9 months of the year, CapEx spending amounted to BRL 835 million, aimed at improving performance and the maintenance of our operation.

And now I'll give the floor to Ms. Scardoelli who will continue the presentation talking a bit more about the financial indicators. And after this presentation, I will come back to my final remarks.

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

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Thank you, Gustavo, and good afternoon to all. Now I will elaborate on the results and performance of the third quarter 2018. For those following us online, we're on Slide #6.

In consolidated terms, adjusted EBITDA reached BRL 2 billion in Q3 '18. If we look at the bridge chart on the upper part of the slide, we will see the evolution of adjusted EBITDA margins that went from 12.3% in Q3 '17 to 15.7% in Q3 '18.

This increase stems from the performance improvement in the Brazil and North America BD, reaching the best EBITDA since 2008. Adding to the previous slide, I would say that Gerdau presented this quarter as the best quarterly EBITDA.

Now moving to Slide #7. In adding to the previous slide, we noted on the bridge chart that shows the EBITDA evolution from Q3 '17 to Q3 '18, whereas net sales per tonnes sold more than offset the increase in cost per tonnes sold. This stems from a better environment in the world steel industry and the maintenance of international prices combined with management effort.

In the bridge chart, on the lower part of the slide, we see that we went from an adjusted net income of BRL 145 million in Q3 '17 to an adjusted EBITDA of BRL 998 million in Q3 2018, this was mainly due to improvements in EBITDA. This net income figure does not contemplate the negative and nonrecurring effects of BRL 207 million from the investment program because it does not have an impact on cash.