Edited Transcript of GGBR4.SA earnings conference call or presentation 8-May-19 5:00pm GMT

In our North America BD, we posted a significant increase in EBITDA that more than double in the quarter vis-à-vis first Q '18. The good results reflect the full impact of the measures to boost local production as a result of Section 232 and the all-time high of metallic spreads. The value of the spread was influenced by higher prices in the region and high utilization of installed capacity. It's also worth mentioning our management efforts in this operation that include SG&A reduction and the acceleration of the cultural and digital transformation program.

On the other hand, steel consumption in the first 3 months of the year was mainly impacted by poor climate conditions in the U.S. and Canada impacted by heavy rains above historic levels that affected several of our markets.

In Brazil, I would like to stress that our shipments of finished goods had a good performance in the quarter. Flats and longs, that performed above-market average despite the weak performance of the economy in the period. It's worth mentioning that the 14.6% drop in shipments of flat steel in the domestic market in the quarter when compared to the same period of the previous year should not be interpreted as a like-for-like demand reduction as we reduced shipments of semi-finished goods available to the market. This quarter, we were more selective in relation to our shipments exported from our Brazil BD due to the drop in prices in the international market and the strong pressure from raw material costs, especially iron ore and coal.

In our Special Steels operation, we entered a cycle of recovery of margins after the renegotiation of contracts with our customers resulting from the significant cost pressure we experienced in 2018 in this operation that could not be immediately transferred to our products due to the market dynamics of part of our Special Steel business.

Now I'll give the floor to Scardoelli and will get back to you after that.

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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 you all. For those of you following us on the web, we are now on Slide #4 and I will talk about the results and the performance of the company in the first quarter of 2019. In consolidated terms, adjusted EBITDA in the first quarter of this year was BRL 1.6 billion and this, as Gustavo said, was the best result for this quarter in the last 11 years. Looking at the chart on the upper part of the slide, if we compare to the first Q of '18, we notice that adjusted EBITDA went from BRL 1.5 billion to BRL 1.6 billion in absolute values. This increase was mainly due to the enhanced performance in the North America BD and lower SG&A.

The significant improvement of the North America BD in the first quarter of '19 in relation to Q1 '18, as mentioned by Gustavo, was caused by the measures to stimulate production in the U.S. stemming from Section 232 and the all-time record of the metallic spread supported by favorable economic growth. So the 5% increase in consolidated EBITDA vis-à-vis the first quarter '18 even with the 23% reduction in shipments and in production volumes demonstrated the success of our divestment plan carried out in the last few years.

Also when you look at EBITDA per tonne sold, we achieve impressive levels. When we compare to BRL 373 in the same period of last year, meaning an increase of 33%.

I would also like to highlight that at the end of the quarterly earnings results that was published today, we posted the main figures and results net of the effects from the divestment program for the entire year of 2018 and broken down by quarter. This is done in order to help you in your modeling analysis.

Now moving to Slide 5. Adding to the previous slide, on the bridge chart, we see the evolution of EBITDA from Q1 '18 to Q1 '19 and we can see the increase of net sales per tonne sold and lower shipments in the period, all due to the deconsolidation of assets sold throughout 2018. This reflects the good momentum of the world steel industry combined with cost management efforts that we already talked about and also the simplification of the organizational structure consistent with the new governance introduced in the company in 2018. It also reflects a significant improvement of the North America BD that once again accounted for 30%, or even more than 30% of consolidated EBITDA in the first quarter of '19.

In terms of dividends, dividend payout in Q1 '19 will be BRL 0.07 per share to shareholders of Gerdau S.A. and BRL 0.04 per share to shareholders of Metalurgica Gerdau S.A.

Now I move to Slide 6, and I'll talk about the company's liquidity and debt position. Gross debt on March 31, 2019, was BRL 15 billion, down by BRL 1.7 billion in relation to March of last year, was mainly due to debt amortization in the period even considering the negative impact from the BRL depreciation of 17% vis-à-vis U.S. dollars, considering that great part of our debt is denominated in U.S. dollars. The strong reduction in the level of net debt over EBITDA ratio of 2.7x on March 31, 2018, to 1.8x March 31 of this year came as a consequence of the continuous improvement of EBITDA and the proceeds from the divestment program, focus on the financial deleveraging and optimization of the asset portfolio of the company.

The debt amortization schedule is well-balanced and also well-distributed along the next coming years with an average term of 7.2 years. It is also very important to mention the financial policy of the company already announced during our last earnings call with a mid- to long-term with a net debt over EBITDA ratio between 1 and 1.5x average tenure of the debt, no higher than 6 years and maximum gross debt of BRL 12 billion. It's also very important to say that the holding of Gerdau S.A. called Metalúrgica Gerdau S.A. conducted this quarter the anticipated payment of BRL 400 million of debt through the sale of GGBR4 shares, which is an important step towards the full liquidation of its debt.

And finally, moving to Slide 7, we show our free cash flow in the first Q '19 where we see that EBITDA was sufficient to -- on our CapEx commitment, income tax and interest rates. However, with the use of BRL 1.2 billion of working capital stemming from the readjustment of inventories and increase of accounts receivables, free cash flow was negative by BRL 166 million, representing the usual seasonality very typical from the first quarter of every year that usually requires more working capital when compared to other quarters.

In addition to the seasonality, we rearranged our strategic inventory of products and inputs, mainly iron ore and slabs, aiming at preparing Ouro Branco Mill in Minas Gerais for the scheduled maintenance shutdown of the Blast Furnace 1 in the second half of 2019. All in all, management remains focused on generating positive free cash flow as we see because we managed to accomplish that by generating BRL 2.4 billion in the last 12 months.

Thank you for your attention, and now I'll turn the floor back to Gustavo.

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO [4]

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Thank you, Scardoelli. Now I would like to move to Slide #8 where we will talk about the outlook looking forward. We remain very optimistic in relation to the main markets we operate, mainly Brazil and the U.S. According the most recent figures for this year published by the World Steel Association, global steel demand should experience moderate growth of 1.3% over 2018 to 1.735 billion tonnes driven by the rebound of investments in developed countries and the enhanced performance from emerging economies. Also despite a scenario of [commercial] tensions and a possible deceleration of steel consumption in China, that should increase by only 1% in 2019.

In Brazil, despite the fact that the steel consuming sectors posted a lower-than-expected performance in the first quarter, below expected particularly in the industrial segment, we believe in an effective rebound of the economy throughout the year.

According to data from Instituto Aço Brasil, it's estimated that the apparent consumption of steel in the country should grow 4.