Gerdau S.A. (GGBR4) Earnings Call Transcript

Good morning, and welcome to Gerdau's Third Quarter 2026 Results Presentation. I am Mariana Dutra, Head of Investor Relations. And joining us today are our CEO, Gustavo Werneck; and CFO, Rafael Japur. [Operator Instructions]. It is worth noting that the forward-looking statements contained herein are based on the company's beliefs and assumptions based on information currently available. Forward-looking statements are no guarantee of future performance and are subject to circumstances that may and may not occur. I will now turn the floor to Gustavo to begin the presentation. You may proceed, Gustavo.

Hello, everyone. Good afternoon. I hope you are all doing well, and I do appreciate this opportunity to join you for another earnings release presentation. We will briefly discuss the highlights of the third quarter of 2026 and also the outlook for our operations. And then right after that, we will move to our Q&A session. The third quarter once again posted strong results in North America. Resilient demand in the key markets where we operate and the very strong operating performance of our facilities in the region resulted in an EBITDA margin of 27.7%, the highest in 4 years. However, in Brazil, we continue to report a slight recovery in results despite ongoing pressure from imports and also an oversupply of steel in the local market. This performance stems from a very strong initiative focused on increasing the productivity and profitability of our assets in the country. To this end, I would like to note that we have begun operations at the recycling center in Pindamonhangaba, Sao Paulo, and we are now conducting final integrated tests for the expansion of new iron ore capacity at our Miguel Burnier mine in Ouro Branco in the state of [ Minas Gerais], which is scheduled to begin operations in the fourth quarter. I will now turn the floor over to Japur, who is right next to me, who will detail the financial highlights and the impacts of the current environment on our results.

Hello, everyone. Thank you so much for joining us once again for the earnings presentation of the third quarter of 2026. We ended the third quarter with EBITDA of BRL 3.8 billion with a margin of 20.2%, the highest since the second quarter of 2023. Adjusted net income was also higher, reaching BRL 1.5 billion, whereas earnings per share rose from BRL 0.74 per share to BRL 0.79 per share. This quarter, we converted a significant portion of our EBITDA into free cash flow, generating BRL 1.4 billion, 6x the amount recorded in the second quarter. When we look at the first 9 months of 2026, our free cash flow totaled BRL 1.7 billion compared to a consumption of BRL 1 billion that we had in the same period of '25. This difference is mainly driven by higher EBITDA, especially in North America, but also due to lower consolidated working capital requirements and lower investments when compared to what we did in the past few years. Now reflecting the quality and resilience of our results, Gerdau S.A. will pay out this quarter BRL 0.34 per share in dividends, while Metalurgica Gerdau will pay BRL 0.16 per share. Combining dividends and share buybacks in 2026 done by Gerdau S.A. throughout the year 2026, we certainly returned more than BRL 1.85 billion to our shareholders, certainly demonstrating in concrete terms, our commitment to creating value to our shareholders. This is not merely words, but this is a testament to our commitments. As for our balance sheet, our financial position remains very solid with a leverage ratio of just 0.58x net debt to EBITDA. In addition, throughout the third quarter, we renewed for an additional 5 years, our global credit facility, our revolving line because we can withdraw in different countries where Gerdau operates. And there was an increase of 29%, amounting to $1.125 billion available for withdrawal, which strengthens our liquidity and also the company's financial flexibility. I mean in line with the previous topic, I would like to say that on October 22, the S&P rating agency revised our outlook from neutral to positive. So now we are BBB. We have a BBB rating with a very positive outlook, very similar to a movement done by Fitch, which earlier this third quarter also reviewed our rating. This not only reflects the resilience of our business, but also our financial discipline. These are levers that, in our view, are crucial to our capacity to invest while at the same time, we create value to our shareholders in the coming years. So I will wrap up here, and I'll join Gustavo for the Q&A session.

Thank you, Japur. I will just go on saying that in North America, despite the typical seasonality for the period, we continue to see steel demand at high levels with a very strong order backlog, driven by a solid portfolio from segments such as renewable energy and data centers. In Brazil, we are seeing a slowdown in demand due to the typical year-end seasonality, among other factors. The domestic market continues to be impacted by excessive imports of steel and a scenario of steel oversupply. With President [ Lula's ] reelection, we expect the continuation and strengthening of the trade defense measures that have been adopted by this government as well as the implementation of new effective measures aimed at enhancing the competitiveness of Brazilian industry, insurance balanced competitive conditions in face of rising steel imports in order to preserve investments and the creation of new jobs in the country. It will also be essential to make progress on the energy agenda, particularly in opening up and developing a more competitive natural gas market as well as achieving greater stability in access to and use of renewable and low emissions energy sources, such as solar power. Similarly, it will be important to continue implementing the tax reform on consumption approved by the current administration, contributing to the simplification of the tax system and the strengthening of the competitiveness of domestic industry. So I'll now turn the floor over to Mari and Japur and will be available to answer all of your questions.

We will now begin the Q&A session. First question from Leo Correa with BTG Pactual.

I don't know for some reason, I cannot really enable my camera. I apologize. I have 2 questions. First, in the last few weeks, there was an article that was very complete with many comments by you on Brazil, asking for some additional adjustments to what has been done in recent months. Can you talk about personnel adjustment, capacity adjustment. And you talked about heavily cutting down exports, some CapEx adjustment. And I know that we're going to have Gerdau in some weeks. And I know you're going to be addressing all that. But perhaps if you can elaborate on what adjustments you intend to make in Brazil given the current context, we would appreciate. Second question and perhaps picking on Japur's brain. I know that this is old news. Japur, I apologize, but I think it is kind of obvious to ask about this. Given the relevance of the United States and given the super strong scenario ahead of you, the guidance you're providing a scenario that seems to have many implications in the future in terms of results. And the fact is that everyone has been monitoring this for years that the U.S. is totally detached from Brazil, the Brazilian operation and South American operation. And that there is a more difficult scenario in Brazil in the future. Is there any expectation that Gerdau would assess an opportunity for a spin-off or a more strategic movement in the United States? These are my questions.

Thank you, Leo. For what I talked in the new feed interview that we have a plan we're working on. It's not complete yet. We expect to give you more visibility and detail about the plan in the Investor Day, as you said it yourself. But the starting point is that we cannot just sit with the arm crop, waiting for factors which are not under our control will improve our profitability and margin to the [indiscernible]. In a way similar to the project we had in 2018 in North America, and now we have this level of results. On one hand, it's because of the conditions we found in the United States. And on the other hand, it's all the homework. Divestment in product segments that we thought would not bring the necessary profitability over time, investments in our mills, in our product portfolio, investments in competitiveness as we never had before. So looking forward, regardless of the current administration, we have to do our homework. We have been pursuing profitability. Every way we look at our business, but it has not been sufficient for us to achieve an adequate profitability in Brazil that would balance the results better. We've done some -- perhaps a small part of what we can still do. We are detailing those plans, [indiscernible] coordinating the plan himself. I don't know whether he wants to give you a [ filler ] or not? But during the Investor Day, we will be able to give you more visibility about that. We have been working heavily on what we can do, what is under our control, but we can continue to improve the profitability here. And well, I have to mention that if by any chance over the next 4 years, we see some efforts materializing efforts. We have been debating with the federal government. In terms of the tax reform, in terms of improving trade defense mechanism and continue with the gas auction so that we can have more volume and better prices in natural gas, all of that will benefit the work that we are doing. Earlier today, when talking to the press. I mentioned that in whatever situation, positive and negative. And with the reelection of the current administration, I see that we will continue to have a dialogue on trade defense mechanisms and its positive all. We go back to square 1 and start from 0. In the last of the 3 years, we have established a dialogue with the federal government. Your data, in fact, we have the basic trade defense mechanisms, and I think that they can be expanded in the future as the numbers show continue to have [ unloyal ] still flowing into [indiscernible], but we cannot rely on that. I'll stop here. And Japur will talk about North America. And perhaps we can add additional comments regarding the adjustments made in Brazil and to be made in Brazil.

How about Brazil, I think we've been talking a lot about, you know our rationale -- in the world where China is exporting structurally more with lower prices and more trade defense mechanisms. In an environment where we see less simple exports. So we are focused on reducing our with over time, and we're focused on making investments, which we believe are important in Brazil, [indiscernible] can be competitive. [indiscernible] silver bullet [indiscernible]. We have made an important stride forward with the CapEx adjustments we've made to expand HRCs in Brazil, expanding our mining activity, [indiscernible] now the opening of a shredder in our recycling center in [indiscernible], so you -- there are a number of support points in our strategy in addition to everything Gustavo mentioned, cut down costs. But we'll bring you more color on that during the Investor Day. And that's for North America, is not new. We have been talking about this in the last earnings call. We increased the share in EBITA to 77%. In the past quarter, it was 75% share of North America segment. But we have no plans to have a spin-off or any major acquisition in North America to increase our exposure there significantly. We don't have that in our radar at this point.

Next question from Marcio Farid with Goldman Sachs.

I have 2 points here, when starting with [indiscernible]. I think we talk a little about demand. But in the [indiscernible] I remember, you talked about mining and final ore in Brazil [indiscernible] to understand, what would be the optimal time looking forward? But I would say that it [indiscernible] this would make up your portfolio with more projectile [indiscernible]. So think about different scenarios and optimizing the portfolio, how do you see mining -- now [indiscernible] will start renting up in Q3. But what [indiscernible] alternatives to grow iron ore, I know that this the short time is more challenging, but this impacts what your thinking -- and I think that a lot of the debate we've had with investors regarding the new normal of margin. And until when can you gain more momentum? It means that in the future, the momentum to be gained that line of [indiscernible] the negative could be the USMCA deal that could gain momentum after the midterm and the ramp-up. So if you comment on how risky the trades can be for the U.S. moment and when we can -- where can we see the margins normalizing after the [ triggers ] are over because the market is seeing these triggers has netted out for North America.

Let me talk first about mining. We see rumors and avenue for growth and value information over [indiscernible] in mining, considering the portfolio of assets that we have, both industrial assets, the [indiscernible] expansion, the share we have in MRS [ logistic], the [indiscernible] of mining rights that we have in the state of [indiscernible]. So in addition to [indiscernible], we have the [indiscernible] to other mining rights that we can eventually explore. And we understand that structurally speaking, on all albeit under pressure now because of freight prices, fuel availability and it availability. We understand that these topic said after the mid run. For the long term, it continues to be a market where high-quality assets or high-quality mining right we'll continue to be able to generate [indiscernible]. So this is a path for growth that we intend to explore in the future. We haven't got any tangible plans right now. No tangible initiatives regarding these projects. One major focus is the ramp-up of our expansion project at [indiscernible]. This is the big lever, the main driver we see Brazil segment 2027. But the fact that mining prices are lower, shipping prices are higher, it is something that it really cuts down on our appetite to [indiscernible]. We'll look into that, into those opportunities in line for North America and the new normal that you [indiscernible].

I can give you some thoughts about that [indiscernible]in market is much on bars and being in North America. This is a big and market of about 9 million tonnes. If we had merchants, we will more than that to 15 million, 16 million -- and of course, there will be a new in [indiscernible]. And they will compete in the line of speed, but an important part in the Mexican market is that they want to import. Have you been [indiscernible], we understand that. We will be focusing on the a part of that volume can be imported to North America. And we can already see volumes of imported material, the imports have been growing in North America, the statistics of inputs, but it's a very robust environment for our key markets there with this new entrant at 0 and I think that the new triggers we have to pay attention to there will be less free trade agreement between Mexico, Canada and the United States. We believe is very unlikely we'll have a 3-party agreement. We believe there will be individual bilateral agreement between U.S. and Canada, Canada and Mexico, and U.S. and Mexico. And it is important that we break down the facts further down which has part of its production in Canada with mill dedicated to products only for Canada. And likewise, we have products that only the U.S. [indiscernible] us to have an agreement between Canada and the United States because this is what's being talked about in the media. It would be positive. It would [indiscernible] transaction costs in our specialized mills, sometimes we lose, some shipments because of the tariffs. And like we have a symmetrical an agreement between Mexico and the United States. We understand can worsen for margins a little bit because of the [indiscernible] player, as you mentioned. And today, we have got a big exchange in shipment volumes -- so for us would be kind of net negative if there is an agreement within Mexico and it would be net positive if we have an agreement between the U.S. and Canada. I think our big focus if we think about the risk with the investment and focused on [indiscernible] in North America [indiscernible] or America evenly this traded across the markets. have a market related to artificial intelligence investments in energy, transmission and power generation. And when we break down the data of economic activity and nonresidential spending. Year-to-date, we have a slight [indiscernible] nonresidential spending, but a good part of that is explained by investment in AI and energy. If we see a substantial deceleration demand on the pocket. Perhaps this would be a much more representative risk the ramp-up of a new [indiscernible] mill, because given the nature of the products that their ramp-up will be slow.

Our next question from Carlos De Alba with Morgan Stanley.

Yes. So I wanted to ask maybe a little bit on the EBITDA benefit from the [indiscernible] and the [indiscernible] projects. How much do you still expect to capture this year in the second -- or in the fourth quarter, I guess? And then in 2027, should we see the full benefit of both projects already next year? Or maybe there is something that carries over and only sees the full potential in 2028?

I mean in terms of the benefits from the projects, we are now concluding the tests in [indiscernible]. The ramp-up will continue throughout the fourth quarter. It's not the ideal in terms of what we expected because the fourth quarter and the first quarter of the following year are rainier here in the southern part of the country, especially now with El Nino. So I think this will delay things a bit. We won't be able to do it as quick as we expected because we wanted to be very much focused on the safety of our industrial processes and our employees. Therefore, so an important portion of the benefit will be captured throughout 2027, but not the full benefit, but we will give you more details about it during our Investor Day. But it will probably be very close to what we mentioned in our last Gerdau Investor Day, we thought it would ramp up in the third quarter of 2026, and we were expecting, I mean, something around BRL 400 million. I think something around this order of magnitude may be since the -- we will get something close to that as it will come towards the benefit of the project in 2027. In the case of Midlothian, we are still in the midst of our maintenance shutdown, not only that will conclude maintenance, but we'll also focus on the expansion of our plant capacity of our mill in North America. And there will be also a ramp-up throughout the fourth quarter. And traditionally, this is a quarter when shipments are lower due to seasonality. So in terms of Midlothian and all of the additions of productive capacity will be fully noted throughout 2027, considering that we do not have any setup. I mean any problems along the way. So these are the 2 most important projects, both in Brazil and North America. And both projects will have a lot to add to our company in '27.

On the capital allocation front, very active in the company in paying dividends and buying back shares, more importantly, canceling those shares congratulations on those decisions. How do you see that going forward? Maybe the split between dividends and share buybacks and just the appetite to continue to return it to shareholders.

I think that while our shares are below the book value, we will see good opportunities to continue to invest and then we will be canceling the shares over time. This is option is no longer an option for us. So in the third or fourth quarters of the year, that's when we have the bulk of our cash generation, and that's why we accelerated the results. If we think about year-to-date, we -- our free cash flow for the past 9 months when we talk about our financial highlights in the presentation, you saw that we got BRL 1.6 billion of free cash flow. Remembering that the -- we go variation of the cash and all of the lines involved in. So we pay back our shareholders with the recent dividend announcement, we paid BRL 1.8 billion. So more than 100% of are generated in terms of free cash flow after important investments for the long run of the company. And so we gave that to our shareholders, which demonstrates that we are fully committed to return to our shareholders. what we did. So this is something nonnegotiable for us.

Next question from Gabriel Barra with Citi.

I have 2 points. And still on that note about Miguel Burnier, I think that the landscape has changed a lot in the past few months, especially in terms of the margin. And I think exchange rate is moving quite fast. Therefore, without even talking about 2027. And speaking about the new project, we used to talk about that BRL 1.1 billion. I don't know how much you can share with me or advance the discussion that you will be probably talking about during the Investor Day. I would just like to understand the run rate at Miguel Burnier given the current landscape and probably foreign exchange may help us a bit, and this may change the scenario. And on the other hand, even referring to some previous questions. The company is in a very comfortable position in terms of its leverage position, FX exposure, but looking forward, I mean, looking ahead, I would like to hear a bit about foreign excision, whether that 4.7% is still feasible for this year. And also about leverage, whether the current scenario, looking at the scenario globally and also locally in Brazil, whether this changes the scenario going forward? I mean whether that 0.6% or 0.5% will change or whether this is an adequate level or whether we should expect higher leverage over time? So these are my main points.

So Barra, how are you? I -- it's good to talk to you. So let me first refer to mining. When we gave you the outlook saying that throughout the cycle, the return anticipated was [ 1.1 ] million from the mining project. If you look at the footnote on the slides that shows how we calculated that return, there is an important portion there that comes loss, some related to mining shipments, I mean, 30% to 40% of the amount, but the bulk of the banner that relates to internal consumption in that ore in Ouro Branco at a low cost, lower than buying for third parties, but the quality is also much better, about 65% of that. So in the past, when we calculated the benefit, we took into account a CFR price for iron ore of around [ 90 ] per ton. At that time, it was not even 61%. It was 62%, so slightly above if we think about that quality enhancement of 1%, and the [ ApoB ] price was about USD 70. So we understand that, yes, the variables have changed. They're already changing again. And the only certainty we have is that once we have a full ramp-up of our mining operations throughout 2027 when we go through the first priority which is own consumption at [indiscernible]. Certainly, we will find ourselves in a different situation, which, in our view, will be much closer to a normalized level for freight costs and ore. Another important element is that given that iron ore has a worse price if we think about FOB, I mean, [indiscernible] to get the iron ore in Brazil. On the other hand, coal is more expensive. Therefore, the benefit of having ore with a higher grade of [indiscernible], which will, in turn, reduce our consumption of coke and coal to produce the same amount of our -- I mean that increases. I mean it gains even more impact of having higher quality are that will reduce the consumption of coke in the blast furnace. So these are things that will be calibrated throughout time. Now moving to the second part of your question, about investments, CapEx and leverage. I mean 2 questions I know, but CapEx, in our view, we are lagging a little bit behind. But right now, even due to uncertainties related to FX, we decided not to update our guidance. Thus, we understand that there is an upside risk thinking about free cash flow generation. So we might dispose less in 2026, rather than what we gave as a guidance in our Investor Day last year, in October of last year. Now speaking about leverage, last but not least, given the current scenario. I mean we see a scenario of higher interest rates, not only in Brazil but all over the world. Now 10-year treasury is down to 5 after many weeks but it's still heating 5, which is a very high level, thinking about the last 10 years, in particular, and speaking about our markets and our business, let me just give you a statistic data. When we run the results of our Brazil operation and compared with NTNB of 12 months ago, I mean, the Brazil result today versus, I mean, tracking NTNB of a year ago, that's when real estate investors in superconstruction investors, or those who are thinking about buying a truck, a car or a long-term debt, which is a capital-intensive investment, the comparison is greater than 70% comparing Brazil Gerdau's results in terms of long-term interest rates. So given a scenario with so many differences. This is an important flexibility and leverage. Not only in terms of balance sheet, but also operationally speaking, when you talk about allocating capital, it's nicer to have a less leveraged balance sheet.

Next question from Ricardo Monegaglia with Safra bank.