Now we move to Page 8, where I'll talk about the company's debt and liquidity position. Gross debt as of September 30, 2018, was BRL 18.2 billion, down by BRL 0.5 billion in relation to September 2017, and this was mainly due to amortization of debt in the period in spite of a 25% depreciation of BRL in the period.
This strong reduction of net debt over EBITDA ratio from 3.4x in September 2017 to 2.2x in September 2018, was mainly a consequence of the continuous EBITDA improvement in addition to the divestment program focused on the financial deleveraging of the company.
With all that, net debt over EBITDA, one of the most important KPIs of the company's capital structure, reaches its best level since 2012, aiming at optimizing its financial leveraging and debt management.
Now I'll move to the next and last slide of my presentation, Slide 9, where we demonstrate that the company generated a positive free cash flow of BRL 405 million in the third quarter of this year, which, once again, reinstates the continuous improvement in EBITDA and the strength to improve the free cash flow.
In Q3 '18, we were impacted by cash utilization to restore working capital in absolute terms as seen in the bridge chart in the lower part of the slide, and that was especially related to higher inventory levels due to improved business environment.
Thank you very much. And I'll give the floor to Gustavo for his final remarks.
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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO [4]
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Thank you very much, Ms. Scardoelli. Now moving to our final remarks on Slide 10, I would like to reinforce that we will continue to work hard to enhance the profitability of our operations and also to differentiate Gerdau in the world steel market by means of a digital transformation, in addition to our efforts to continuously improve the way we serve our customers. We believe that as our customers grow, so do we.
We remain focused on reducing our debt position further and generating positive free cash flow to increase the profitability of our operations.
For the past 118 years of history, we have been able to evolve constantly due to the quality of the teams of people we have at Gerdau, to whom I am very thankful for their dedication and their capacity to overcome challenges.
And finally, I would like to reaffirm our conviction in the growth potential of Brazil, hoping that the new President-elect seeks to improve the country's competitiveness and addresses the necessary reforms that the nation thoroughly needs.
We understand that downstream industry and the steel sector are strategic to the upturn of the development in the country. Well, here, we now finish the presentation, the formal presentation and the slide presentation. And we're ready now to move to the Q&A session together with Scardoelli. We'll be available now to take your questions and to discuss any issues you may think necessary.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Our first question is from Thiago Lofiego from Bradesco BBI.
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Thiago K. Lofiego, Bradesco S.A. Corretora de TÃtulos e Valores Mobiliários, Research Division - Research Analyst [2]
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Just two questions. Werneck, about North America, what about the margin looking forward considering the consolidation of assets and the operating improvement that you posted. And also looking at the fair level of metal spread, looking forward do you think that the margin level is optimum at 10.5%? Or do you think that we still have room to gain more? And the second question related to capital allocation. The net debt over EBITDA or the deleveraging plan, I think, is already completed, so what is your view in terms of capital allocation? Are you going to pay out more dividends in 2019 and 2020? Or you still have other projects in mind that are in your pipeline?
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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO [3]
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Thiago, this is Gustavo, thank you for your question. About the first part of your question, I will give the floor to Ms. Scardoelli. But in relation to North America margins, so knowing the culture of the company as we do, we are never happy with the margins that we currently have. So naturally, with the conclusion of the divestment of the rebar units that we announced recently, the margins tend to go up. So we will start operating with core assets that give us greater profitability, and this brings about margin gains. But we will continue to work in the future months to verify all other additional opportunities that will allow us to improve the performance of our operation and thus having better margin.
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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [4]
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Thiago, this is Harley. About the leveraging question, in a way, our levels are much closer to what we deem to be necessary. The capital allocation, our dividend policy is still 30% of dividend payout, of adjusted net income, and we will allow some cash allocation for dividend payout. We just have to, I think, this BRL 6 million will be allocated to pay out dividends. But naturally, this number should remain very strong. The second aspect is that we are experiencing a very careful moment. The simple comparison with the same period of last year already indicates that this year we have higher CapEx expenditures, which is natural because there is a downturn -- there was a downturn in the economy. Even though we don't have any major projects or M&A, we are still investing internally. So there shouldn't be any major changes in capital allocation, so we will experience stronger cash because the results are at better levels.
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Thiago K. Lofiego, Bradesco S.A. Corretora de TÃtulos e Valores Mobiliários, Research Division - Research Analyst [5]
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Could you also tell us what would be normalized CapEx level looking forward? Already bear in mind this new economic landscape or maybe the increased capital. I think we are talking about BRL 0.3 billion or BRL 0.4 billion a year. I don't know whether you are thinking in terms of a bigger numbers in that.
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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [6]
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The quality of the sound was a bit poor, could you repeat, please.
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Thiago K. Lofiego, Bradesco S.A. Corretora de TÃtulos e Valores Mobiliários, Research Division - Research Analyst [7]
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I couldn't hear Harley what you said. I am sorry.
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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [8]
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Could you repeat your question please, we couldn't hear you well.
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Thiago K. Lofiego, Bradesco S.A. Corretora de TÃtulos e Valores Mobiliários, Research Division - Research Analyst [9]
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The question was about a normalized CapEx level and whether we could see a number above that 1.3, 1.4 that you refer to or whether you're envisioning something larger than that looking forward.
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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [10]
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We are still concluding our budget for next year. So CapEx numbers will only be coming to the market in February. But again, the levels are similar to those of 2017. So the -- a CapEx levels which is closer to reality. I mean, this will be the equivalent today of approximately 70% or 75%. And this is, I would say, more normalized. But as I said, we will be able to give you a more details and we will have details for the market next February, next year.
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Operator [11]
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Our next question comes from Leonardo Correa from BTG Pactual.
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Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [12]
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Maybe I have a suggestion. Werneck, your line is a bit better. Harley's line is cutting a lot. I don't know whether you have any connection issue but it has been very difficult to hear you sometimes. My question, I'm still trying to understand a little bit about the operating results for the third quarter. I mean, Brazil is performing quite well with an EBITDA margin above 20%, but the question that I have is that this has been quite a polluted quarter because of Ouro Branco and some stoppages and maybe that probably impacted your results. But in spite all that it was spectacular but maybe it could have been a bit better yet. I just want to hear from you something about the nonrecurring impact and how could we look at those results in a more clear sense and whether you could shed some light on what could have happened if the results haven't been impacted by the issues? The second question relates to special steel. Maybe I think that the performance was a bit more challenging, this time. I mean, this is something that has presented good performance in the past quarters and this quarter it was a bit down because as you said, there was cost pressure and this was probably a one-off situation when we talk about special steel, right? Just want to know whether this pressure cost was only in Brazil or it was also elsewhere. And in automotive, the price increases that you are announcing for Brazil in the fourth quarter, how is that evolving? And how would that also impact the recovery getting closer to 20% EBITDA margin?
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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO [13]
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This is Gustavo and thank you for your 2 questions. Answering your first question about the Brazil BD. In the second quarter, there was a maintenance stoppage in our blast furnace 2 in Ouro Branco, and this furnace is focused on steel production for export. So this stoppage in the second quarter was translated into volumes now in the third quarter. So if we haven't stopped the burners, we would have an additional revenue in this quarter, there will be additional shipments that we could have done probably. Now in regards to special steel, throughout the last 2 or 3 quarters, we've been experiencing a very strong pressure costs, particularly with scrap and alloy. Alloy in that segment of special steel is very important in the overall cost basket, and prices have increased in the last quarter. The dynamics of special steel's operation does not allow for a very quick margin rebound because of several long-term contracts that we have with our customers. Therefore, in the long run, we do not anticipate any additional worsening in the margin. On the contrary, we understand that as we renegotiate our contracts and then we adjust our margins with the new contracts, we see a good trend to recover margins in special steel.
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Operator [14]
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Our next question is from Gustavo Allevato from Santander Bank.
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Gustavo Allevato, Santander Investment Securities Inc., Research Division - Research Analyst [15]
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I have 2 questions, still related to the cost evolution in special steel. I mean, this cost pressure still remains looking forward into the fourth quarter of 2019? Or do you think that this price review in Brazil could probably mitigate the price increase. And my second question relates to the North America BD. Looking at the business and with a better capacity use, do you see any bottleneck capacity? I mean, if we look at a very strong demand landscape that you depicted in your presentation?
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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO [16]
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Thank you for your questions. In terms of special steel, which is different when we talk about long because we consider other imports that are important like scrap itself. So we noticed an escalation of costs within the first 3 quarters of the year. Now we see that prices and costs will be flat from now on. And the levels are much higher than what we had in previous years. So when we look, even looking forward to 2019, we believe that the high-level of growth will remain even though there is an additional pressure that we noticed in the first quarter this year. In terms of our North America operation, we've been trying to work as much as possible for capacity. If we know that The U.S. has full employment, this basically is not just at Gerdau, but all of the other companies are trying to find enough skilled labor so that we can put all of our assets in operation. So the question is, I mean, if we're able to increment our capacity in the next coming years, we will do so. But today, in our assets, we do not have any large plant or no equipment stopping and everything is in operation but we just hope to increase the volume compared to the current volumes today. That's very clear.
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Operator [17]
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Our next question comes from Renan Criscio from Crédit Suisse.
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Renan Criscio, Crédit Suisse AG, Research Division - Research Analyst [18]
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My question is a follow-up when it comes to your North American decision. We recently saw an announcement by Gerdau and also other competitors said the same, referring to about $35 reduction for certain type of products. Could you elaborate a bit more about your demand per line of product in that division? And can you probably comment on what led to that price decrease or whether this is just a one-off situation? Or whether there is also a risk of a drop in prices to other lines? And the second question refers to the Brazil BD. Imports now are much lower than what you had in previous quarters. Could you please tell me what latched to that? I know that the demand in the domestic market lead you to change things a bit. But could you comment on your profitability for exports versus domestic shipment? And how can we think -- what would you consider in terms of mix of sales looking forward?
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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [19]
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This is Harley. I will answer your first part of the question about North America. The price drop in the case of longs, it's a one-off situation. I think that the highest effect more recently occurred with flats in the third quarter. We remain with a very positive environment and then in the second quarter as well. But then the North America market is due to what I said before that we are looking at some very positive market outlook, the nonresidential construction market is keeping up, it's maintaining activities and our expectation is that the economy still reflects a very low unemployment rate and Gustavo just said how difficult it is to hire people in the U.S. The recovery of metal scrap that we saw throughout the past quarters is still maintaining, so the outlook is positive. And so in the case of long, the price variation is slower and is more like a one-off situation.
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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO [20]
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And now this is Gustavo. The second part of your question related to exports from Brazil, this drop in the third quarter was mainly due to what I said before, when we had a stop for maintenance, our furnace 2 in Ouro Branco. The demand for international still remains robust. Today, there is a slight volatility in the steel prices in the international markets in the last 3 months, but they remain at very high levels. For next year this will remain a very important avenue, I mean, the delivery of our products until the internal market recovers in Brazil. It is also good to remember that we still have some assets in Brazil that are currently nonoperational. As the demand in the domestic market recovers, we can in a very short period of time, put more things in the market without jeopardizing our export. I see that once we have to reduce imports or exports to cater to the domestic market, this is something that may take a little bit of time.
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Operator [21]
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Our next question is from Marcos Assumpção from Itaú BBA.
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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [22]
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Congratulations for more than BRL 6 billion in EBITDA in the last 12 months. My first question refers to working capital. Harley, I would like you to comment on how you see this current level of working capital. Looking at the cash conversion cycle, I think it is very close to your normalized levels but there may be some events that may release some additional working capital as a conclusion of the divestment in the U.S., and also a stronger BRL currency by the end of the quarter or the semester. Now in relation to the U.S., what would have been the EBITDA margin in North America? I know that you repeat that exercise, if the volume had remained flat quarter-on-quarter and you didn't have any nonrecurring issues more related to climate in the East Coast in Texas. So if you can tell us something about the margins in The U.S. in September, in October. It would really be helpful because we can have an idea of how things will resolve looking forward.
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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [23]
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Marcos, this is Harley. To answer your first question on working capital, if we look in terms of days of cycle, our levels are quite optimized. But there is certainly always room to get more, and we go after these additional gains even though there may be marginal gains, but they're still gains that can be extracted from that cash conversion cycle and we will try to optimize it. In this particular quarter, we had an effect of higher inventory levels and the cost of these inventories impacted our working capital. And particularly, the working capital as of June to September, this was a one-off situation for the quarter. The annual seasonality is always present, so towards the end of the year, we want to try to reduce that working capital and return some additional cash to the company. One thing that is worth mentioning, and if you look at our working capital throughout the year that the price -- the sale price of the operations in North America, 600 million, had an upward adjustment of about $100 million, much of that is working capital. The base working capital we had at the end of the year up-to-date in those mills was up significantly, that's why there was an adjustment to the price. I mean, that was a direct return of working capital. This is an important aspect that has to be mentioned. Now referring to the last part of your question related to North America and volume loss, this was the effect stemming from some one-off situations like the hurricane in the U.S. There were series of climate events that affected production. Now if you look at the North America production on a more structural way, we are at a different operating level. So obviously, we hope to continue improving our results. We also know that we have the divestment of rebar assets in the U.S. The products that remain in our portfolio like structural profiles, special steel and other bars, they have better margin, and the new portfolio will tend to generate stronger margins in the future.
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Operator [24]
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Our next question is from Gabriela Cortez from Banco do Brasil.
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Gabriela Elerati Cortez, BB-Banco de Investimento S.A., Research Division - Senior Analyst [25]
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My question relates to capacity utilization, you talked a lot about North America, but I would like you to comment a bit more on the Brazil BD. If you saw a more robust rebound in demand, and how are you going to cope with that additional demand? Or whether that would require additional investment to increase capacity and therefore cater to that additional demand. My second question relates to prices. What is the scenario for the fourth quarter and 2019 regarding pricing for both Brazil and North America? That's all.
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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO [26]
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Gabriela, thank you for your question. In terms of the capacity in Brazil, we have to be ready for -- in a very short period of time, to place additional product offering. The plants are currently operating with a lower headcount lower-than-expected, but we should be increasing our headcount in these plants, so that we would be able to increase capacity quickly. More recently, when we face the need to expand our steel production in the special steel segment, in less than 30 days, we were able to mobilize everyone and restarted the plant. And this was because of the reforms that we had in the country, the labor reform and the outsourcing platform. And so in a very short period of time, we had the opportunity to add more people to operate in our plants. Some other plants are hibernating. The equipment is in place so if we look at these plants, all we have to do is to put people there and initiate the operation. So in summary, I must say, that we are very ready to add additional offering as soon as the domestic market rebounds and needs our products.
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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [27]
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Gabriel, this is Harley. Related to your question on pricing, we don't usually comment on our commercial policies, but maybe some KPIs, just to mention some of the 2 major markets. In Brazil, the import volume remains under control because our prices are very much aligned to international prices, therefore, there is no excess pricing or quality issues in Brazil and this is very positive. And in North America, metal spread are now at better levels. And if we look at our outlook for both market, the perspective is quite positive for both market. In the fourth quarter, we also have seasonality issues that may impact volume, but we are not concerned at all in terms of prices. And the international prices are at very good levels. They have been higher before but they're still very good. So pricing behavior, in general, is quite positive.
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Operator [28]
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Our next question, in English, is from Timna Tanners from Bank of America.
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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [29]
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