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Gerdau S.A. (NYSE:GGB)

Q3 2020 Earnings Name

Oct 28, 2020, 12:00 p.m. ET

Contents:

Ready Remarks

Questions and Solutions

Name Members

Ready Remarks:

Operator

Good afternoon, and welcome to Gerdau’s Convention Name to debate the outcomes of the Third Quarter of 2020. [Operator Instructions]

We want to emphasize that any forward-looking statements that may be made throughout this convention name associated to Gerdau’s enterprise outlook, projections, and monetary and working objectives are mere assumptions primarily based on administration’s expectations associated to the way forward for the Firm. Regardless that Gerdau believes that its feedback are primarily based on cheap assumptions, there is no such thing as a assure that future occasions is not going to have an effect on this analysis. Right here right now are Mr. Gustavo Werneck, Director, President and CEO; and Harley Scardoelli, Vice President and CFO.

Now, I want to flip over to Mr. Gustavo Werneck. You could proceed, sir.

Gustavo Werneck da Cunha — Chief Govt Officer

Effectively, good afternoon, everybody. I want to start by welcoming every considered one of you to Gerdau’s convention name on the outcomes of the third quarter of 2020. And I actually hope that you’re all nicely, in good well being, and protected and going by means of this era one of the best ways potential. Additionally, current right here right now is our CFO, Harley Scardoelli, and so, for each of us, it is all the time a pleasure to speak to you about our efficiency and in addition make clear potential points and reply questions which will come up throughout this presentation. Scardoelli will then begin by speaking in regards to the highlights and the final outcomes of the quarter and in addition in regards to the efficiency of our operation. And subsequent, I’ll confer with the markets the place we function, and in addition I’ll discuss to you in regards to the panorama wanting ahead. After which on the finish, we’ll each be accessible to reply your questions.

So now, Scardoelli, the ground is yours.

Harley Lorentz Scardoelli — Govt Vice President, Chief Monetary Officer and Director Investor Relations

Thanks, Gustavo, and good afternoon, everybody. It’s a nice pleasure to be with you as soon as once more for an additional earnings launch and I hope you are all nicely. I’ll begin with the monetary outcomes for the third quarter 2020.

As you’ll be able to see on the slide, free money stream in Q3 of this yr was optimistic by BRL2.Three billion. This improve vis-a-vis the second quarter ’20 displays a mixture of an EBITDA 62% increased than in Q2 and decrease working capital attributed to the return to lower than 70 days of the money conversion cycle. It is also essential to say that within the final 12 months, the Firm posted optimistic free money stream round BRL4.Four billion, reinforcing its liquidity place. The money conversion cycle went from 95 days in June 2020, to 63 days in September of this yr, thus optimizing working capital after the consequences of the COVID-19 pandemic, selling a discount in inventories within the interval mixed with days payable growing greater than days receivable reflecting the restoration within the financial exercise and good situations for cost phrases.

Now shifting to Slide 3, I want to emphasize that on the finish of the third quarter of this yr, our web debt got here all the way down to BRL12.Three billion. I additionally take this chance to say that 89% of this debt is long run, with a median tenure of seven.7 years and — nearly Eight years, and a median nominal price of roughly 5% with our well-balanced amortization schedule distributed alongside within the subsequent coming years. Presently, 85% or BRL16.5 billion of the debt is denominated in U.S. {dollars}. We perceive that with a good portion of our EBITDA being generated in U.S. {dollars} and with nice a part of our belongings in operations positioned in North America attributable to our geographic diversification, we’ve got a pure hedge to assist this debt place, and as well as, this can be a long run debt with maturities scheduled all through this era with no overlapping of commitments in any given yr. Even so, we’ve got been monitoring the Brazilian debt market to detect potential home windows of alternative to rebalance our publicity.

The web debt over EBITDA ratio went from 2.78 instances in Q2 of ’20 to 2.07 instances within the third quarter of the yr, attributable to increased EBITDA within the final 12 months. The Firm stays centered on decreasing leverage and reaching the indications outlined by the Board, which is between 1 to 1.5 instances the web debt over EBITDA within the long-range.

Now shifting to Slide 4. We’ll now spotlight the principle components that impacted the consolidated EBITDA which went from BRL1.Three billion in Q2 of ’20 to BRL2.1 billion within the third quarter. This improve was partially attributed to increased shipments to the home market within the Brazil BD, good ranges of demand within the North America BD, and improved leads to the South America BD. EBITDA margin was additionally positively impacted reaching 17.5% with a margin of 25.1% in Brazil. It is also essential to emphasize that the Firm’s self-discipline relating to SG&A that reached 3% this quarter, the bottom historic degree ever posted by Gerdau with a direct optimistic impression on the EBITDA margin.

In Brazil, EBITDA was increased attributable to an improved market combine. Shipments within the home market when in comparison with complete shipments, went from 73% in Q3 ’19 to 86% in Q3 ’20. I additionally take this chance to say the rise of complete shipments in Q3 vis-a-vis the earlier quarter as a result of vigorous rebound into the development, each retail and direct gross sales to development corporations, along with the restoration of the trade as a home market.

In North America, EBITDA in Q3 ’20 was increased quarter-on-quarter attributable to resilient shipments and efforts to optimize prices regardless of the metallic unfold discount that went from $415 per quick ton within the second quarter of this yr, to $402 of quick ton in Q3 of this yr. Additionally, the margins of this operation had been above 10%. In South America, the great outcomes stems from the robust demand from the civil development trade primarily in Peru and Argentina, additionally contemplating the unhappy demand of the second quarter of this yr when some tasks had been shut down in the course of the pandemic interval.

To conclude, on the Particular Metal’s BD the rebound got here from the automotive sector with a optimistic impression on EBITDA. For nearly 4 months, trade was closely hit by the destructive impression of the pandemic. In Q3 of ’20, gross sales began to recuperate quantity and as a consequence, the capability utilization charge was — what’s 30% in Q2 of this yr, is now at 50%.

Thanks, all, in your consideration, and now, I will give the ground again to Gustavo who will remark in the marketplace outlook.

Gustavo Werneck da Cunha — Chief Govt Officer

Thanks, Scardoelli. So please let’s go to the subsequent slide, the place we’ll discuss how Gerdau has operated all through this yr of 2020. Scardoelli talked about Gerdau’s efficiency within the third quarter and we proceed to publish strong outcomes. I might even inform you that performing quick to renew our industrial operation and in addition the truth that we had been very near our prospects, all of that allowed us to totally serve all the completely different markets the place we function globally within the midst of our strong rebound of metal demand, after a interval of nice uncertainties and in addition volatility led to by the COVID-19 pandemic, as you’ve got been additionally experiencing. I might additionally wish to say that in the previous couple of months, we had been additionally capable of speed up the tempo of our digital transformation technique, which resulted in an elevated variety of quotes in our web site from 40,000 again in January to 50,000 in September, thus reinforcing our dedication to generate higher worth to our business companions.

Now shifting to the subsequent slide, I’ll discuss in regards to the markets operated by Gerdau and I can even inform you in regards to the outlook wanting ahead. So in Brazil, we are actually reaping the advantages of getting an anticipated and extra constructed view in regards to the rebound in several markets we serve, particularly within the development trade that’s displaying clear indicators of a V-shaped restoration, pushed by elevated gross sales of properties and retail. With the speedy and gradual restart of all of our industrial unit within the nation, within the second half of April, that means lower than a month after the onset of the pandemic together with the resumption in July of the Blast Furnace 2 in Ouro Branco Mill, Minas Gerais, our workforce was capable of diligently serve all of our markets and sectors the place we function. There’s agility to renew operations after a robust effort to make changes to our manufacturing capability, as I mentioned on the finish of March, mixed with a rebound impact of repressed demand seen within the second quarter, led us to extend manufacturing volumes in lengthy metal shipments within the third quarters, when in comparison with the pre-crisis interval, and even comparable durations of the previous couple of years.

This rigorous restoration of the development trade in Brazil, particularly between July and September, benefited not solely from its gross trajectory but in addition, it benefited from the resumption of a number of tasks which have been interrupted and even slowed down within the second quarter. This led corporations within the trade to speed up the tempo of their tasks to compensate for this delay, which in flip boosted, as I mentioned earlier than, the metal consumption. We monitor an indicator from C&I referred to as Fundacao Getulio Vargas [Phonetic]. This index developed fairly a bit displaying the development exercise at 51.Four factors in September, that means that it was at 3.Three factors vis-a-vis July. That is 51.Four index is the very best scores since June of 2009, which signifies a major enchancment when in comparison with the earlier month.

The third quarter was additionally impacted by a robust motion to replenish inventories within the development chain as a complete because the sector suffered a major discount in stock ranges within the second quarter attributable to all the market uncertainties. I feel it is price mentioning the continual progress of the retail section that has been displaying spectacular development primarily boosted by gross sales of development supplies to the so-called self-builders, who obtained the emergency help from the federal authorities.

In keeping with the final Month-to-month Commerce Survey performed by IBGE, the retail marketplace for development provides skilled its third consecutive gross sales quantity development. It was 3.6% above July and 24.1% increased than what was posted in August 2019. 12 months to August exhibits a 4.9% gross sales improve when in comparison with the identical interval of 2019. Additionally, I feel it is price mentioning that completely different industrial segments in Brazil resumed their development trajectories after a sudden interruption in March and April, when quickly after, most of them restarted their productions at ranges equal or increased than these posted it early within the yr.

I want to point out, specifically the sectors associated to agri enterprise, power, and sturdy items. Much like what we noticed within the development trade, we additionally skilled an essential transfer towards replenishing inventories within the industrial market. The Business Confidence Index from Fundacao Getulio Vargas, one thing that we monitor very intently, superior Eight factors in September, reaching 106.7 factors, the very best degree since January 2013, which once more reinforces the restoration outlook.

Now, wanting ahead, we’re very assured that the demand for lengthy steels in Brazil can be maintained, reflecting the rise in gross sales of latest properties, retail purchases, and in addition infrastructure tasks. As an example, by way of infrastructure, we already noticed the restart of essential tasks just like the subway in Sao Paulo and Fortaleza, and bridges and overpasses across the nation. We’re additionally very optimistic relating to the brand new authorized framework for primary sanitation.

Now, as for the economic sector, our outlook can also be very optimistic for 2021. A latest survey performed by C&I signifies that the boldness charge of business entrepreneurs elevated in all 30 sectors of the trade thought of within the survey. This indicator for the downstream trade reached 62.6 factors, a leap of 51 factors within the month-to-month comparability. I might additionally wish to stress that the continued development of metal demand in Brazil depends on fixing these structural issues of the nation in the long term and in addition the evolution of the reforms proposed by the federal government, just like the tax and administrative reforms, and in addition different measures to spice up the economic system and improve competitiveness and productiveness within the industrial sector. Effectively, now I’ll discuss our Particular Steels operation and I’ll discuss extra about Brazil, particularly one, in the course of the Q&A session.

So beginning with Brazil, I feel the demand restoration of the automotive trade was intensified in the course of the third quarter after 4 months of a major drop in consumption, leading to a related development within the orders portfolio as a result of proper now, we’re seeing a development within the variety of orders. Regardless of the optimistic outlook, automakers are nonetheless working in decrease ranges when in comparison with the early projections for the yr.

In keeping with the Nationwide Affiliation of Automotive Producers, ANFAVEA, the every day common manufacturing for brand new automobile was 9,900 autos year-to-September towards 11,200 in 2019. Simply as an instance this level, within the worst second of the disaster in April, just one,847 autos had been produced that whole month. On the next months, this — the efficiency of the automotive trade can be paired by additionally a optimistic efficiency within the wind farming and agricultural equipment sectors. And we’ll stay very diligent to seize alternatives to increment home manufacturing of auto elements attributable to this new market dynamics that observe the disaster.

Now by way of the U.S., the demand for Particular Steels, particularly within the automotive trade can also be rising within the second half of the yr, thus contributing to a rise in automobile gross sales. And by the top of 2021, the trade ought to produce over 14 million items. The nation continues to publish a decrease degree of exercise within the oil and gasoline trade however by way of different sectors like agriculture, have been fairly resilient regardless of the disaster. Furthermore, we stay centered on our initiatives to extend productiveness within the Particular Metal items in the US with the shutdown of the Jackson unit in Michigan and the transformation of the Monroe unit in that very same state, which is a world-class mill that can be a world reference in know-how and productiveness. This mill is being ready to meet the longer term demand for metal.

Now, we’ll discuss lengthy steels in North America. I want to begin by highlighting the volumes for this operation remained very excessive in the course of the third quarter since manufacturing and development industries carried out nicely. A vital index is the Architectural Billing Index, which anticipates the efficiency of the non-residential development sector within the U.S., and in 12 months, it jumped 40 — it went from 40 factors in August to 47 factors in September, even above pre-pandemic degree. Alternatively, metallic unfold had a slight decline within the quarter, reaching near $400 per quick ton however we consider that there needs to be a restoration within the subsequent coming months returning to earlier ranges of round $415. Additionally, I want to spotlight our relentless initiatives to cut back prices and enhance efficiency together with the shutdown of the St. Paul unit in Minnesota.

Now wanting ahead, we see a optimistic outlook, not just for the development trade but in addition for the economic sector. We’re additionally intently monitoring the unfolding of the presidential election within the U.S., which can happen in early November, and we hope that the numerous investments in infrastructure are lastly launched in 2021.

Now shifting to South America. I want to spotlight the rebound of the economic and civil development sectors, particularly in Argentina and Uruguay, and in addition in a really robust approach in Peru with gross sales efficiency of their respective home markets being fairly robust, significantly throughout this third quarter. And at last, to conclude this slide, I want to say that we invested on this third quarter BRL360 million in PP&E, Plant, Property, and Gear, as a part of our BRL1.1 billion of investments in the course of the first 9 months of the yr, with a complete funding estimate of BRL1.6 billion for 2020.

Now let’s leap to the subsequent slide. And right here, I want to point out the institution of Ventures Gerdau, which is the not too long ago created start-up for Gerdau Subsequent, our new enterprise arm, which I discussed to you earlier than. In October, we ran the primary batch of the accelerated, specializing in entrepreneurship within the civil development trade. By doing so, we related with the principle world innovation ecosystem, and with comes by means of tax in search of to generate worth and suggest options to our personal sector. Moreover, I want to say that our groups have labored nonstop to serve our prospects on this second of a robust rebound.

From the onset of the pandemic, we had been very near our prospects, making an attempt to grasp their wants and placing our groups at their disposal to assist them seize all the alternatives that we had been capable of determine. In a short time, we had been capable of improve our overhead and we are attempting to function in a really productive approach, particularly in Brazil, in an effort to serve all the completely different markets. And I’ve a particular thanks that goes to our prospects for his or her partnerships throughout these dire and difficult months and reaffirm Gerdau’s dedication to generate much more worth by means of the chains the place we’re part of. Additionally, I want to spotlight one other essential transfer throughout this quarter, which was the approval by Cargill of the acquisition of the metal producers, Metal North Star [Phonetic]. The acquisition of this firm will contribute to assist Gerdau serve the longer term demand for metal within the Brazilian market and extra particularly, within the Northeast of the nation. I might additionally wish to say that at Gerdau we’ve got deepened our discussions round sustainability and the way we developed with our enterprise. We’re always in search of to generate extra worth to all the stakeholders concerned, and as a part of our dedication to sustainable improvement and in addition a consequence of our goal, as of September, we grew to become a part of the B Motion Builders, a coalition launched by B Lab in Sistema B Brazil that gathers massive listed multinational corporations aiming at reworking the worldwide economic system right into a extra sustainable mannequin that contemplates long-term worth technology to all stakeholders.

And at last, to conclude this half, I want to actually thank our workers for his or her monumental effort and dedication throughout this third quarter as a result of attributable to their laborious work we had been in a position to make sure the fast rebound of our manufacturing items and thus serve all of our prospects. Additionally, I lengthen our due to the groups for placing the well being and security of our workers first, as a result of for Gerdau nothing issues most than the lives of every considered one of us.

Now, I conclude this half and, Scardoelli, any longer can be at your disposal to reply your questions and in addition to provide you extra particulars about our efficiency on this third quarter and what we see wanting ahead. And now, let’s go to our Q&A session.

Questions and Solutions:

Operator

[Operator Instructions] Our first query comes from Mr. Leonardo Correa from BTG Pactual.

Leonardo Correa — BTG Pactual — Analyst

Hiya, good afternoon. Are you able to hear me nicely as a result of I feel my line just isn’t superb?

Gustavo Werneck da Cunha — Chief Govt Officer

We won’t hear you very nicely.

Leonardo Correa — BTG Pactual — Analyst

Nice. Congratulations in your outcomes. First query is about [Technical issues] I do know that you’ve got been monitoring the tempo of the market. I feel that the traders are debating the sustainability of this degree of demand. What is going on on this third quarter is one thing that I’ve by no means skilled earlier than, I do not know whether or not you’ve got see it — one thing like that earlier than that’s one thing unprecedent. Your demand is spiking within the home market reaching — growing by 30% year-on-year. And I do know that the chain was not nicely provided, and I do know that there was a drop in demand in the course of the pandemic and there’s a lot of competitors from the small market or the self-builders. It is laborious to watch all the information, however we all know that demand is growing by 30% year-on-year, so it’s kind of uneven. I feel individuals are questioning how for much longer this degree of demand will be sustained as a result of possibly within the subsequent few months this can be exhausted as a result of I do not assume that we’ll — the federal government will not have the ability to maintain this degree of emergency help for for much longer. So what do you see wanting ahead when you have a look at your orders portfolio? How do you see this evolving towards the fourth quarter? So when you may inform us a bit about 2021, despite the fact that it’s totally quickly, possibly this can assist us perceive whether or not this can be sustainable.

And the second level is about the truth that that is unprecedent. We live in unprecedent time, I feel pricing is one thing very one-off factor. However I feel what occurred was the variable of results as a result of it elevated by nearly 40% which led you to announce these 4 or 5 readjustment strikes. However we nonetheless see a zero-sum premium after the rise in November relying on the way you have a look at it, however how do you see it as state of affairs? We’re already issues from some associations, there may be some political noise right here and there. I simply wish to hear from you, how do you see the pricing habits, and whether or not you continue to assume that you may revisit the premium costs sooner or later?

Harley Lorentz Scardoelli — Govt Vice President, Chief Monetary Officer and Director Investor Relations

Nice query. Let’s begin, let’s concentrate on demand and market and costs, and many others. I might identical to to say one essential factor. Individuals are always speaking about digital transformation in different segments like providers, and many others. However I’ve all the time insisted and I’ve all the time talked to you about the truth that Gerdau being a centennial Firm, a 100-year-old Firm that it is essential that we introduce digital transformation that may convey good outcomes for the Firm. So, when you recall again in Might, in considered one of our earnings launch name, I mentioned then in response to Gerdau’s view, I feel the more serious is already behind us. However again then I used to be very sure about what the panorama can be and that the issues had been starting to recuperate. I imply, my studying could possibly be primarily based on instinct or feeling, however quite than that, my studying comes from concrete knowledge and components that we had been capable of gather out there. I might say that right now, our Firm has the capability to make the most of a variety of knowledge and algorithms and in a approach, we additionally resort to synthetic intelligence to anticipate future demand.

Our projections wanting ahead contemplates science and digital transformation. Not solely that, however I might say that it’s increased than what we have seen as a result of we’re about to have fun our 120th anniversary with long-term relationships with our prospects. So we’ve got an concept of what occurs on the different finish. Now, that is simply an introduction simply to say that our studying proper now it’s totally constructive and I do know the demand will stay sustainable for longer. All through 2021, our projection whenever you evaluate 2020 to 2021, ought to develop between 6% to eight% and on the finish of this yr our portfolios are already constructed up, due to this fact this transfer now ought to proceed to final till the subsequent few months. However all year long, we can have the lodging of the principle markets and I am speaking about, I imply, civil development and retail that was posting development. I am additionally speaking about agriculture of the — despite the fact that it is from what it was months in the past, I imply we have already got a backlog of orders. I am speaking now about infrastructure and the trade, how is it an essential restoration as nicely, and we consider that this restoration will last more. This can be a optimistic second whenever you assume by way of what’s forward of us.

Now, by way of costs. Effectively, I simply wish to be very direct and possibly my pricing reply could possibly be a bit educational, I have been listening to opinions and rumors that aren’t actually true by way of that exact matter, however I do not wish to steer any extra polemic about this matter, however nicely, what I am saying is that that assertion that some are saying that the worth of metal has been sequentially going up, particularly within the home market, is unfunded. It isn’t true. We have been going through a robust improve within the value of inputs. So the degrees of metal in 2020 haven’t recovered. When in comparison with 2019, our monetary leads to third quarter of 2020 replicate a mixture of a really robust quantity improve attributable to a stronger metal demand that no person anticipated, but in addition that was attributable to a really robust transfer to cut back prices as an expense. This can be a motion that has been taking place for a couple of years again as a result of we are attempting to focus there to assist our prices. So the Firm is totally able to face excessive demand and we’re capable of then publish very sustainable efficiency. The file we posted this efficiency by way of SG&A versus income is proof of my assertion. And in addition you need to take into consideration our price reductions being an essential a part of our backside line.

We’re working laborious to provide the market. In our view, we’re one of many first corporations to renew manufacturing, which — it occurred again in April so due to this fact, we’re capable of absolutely serve our prospects. This — the rebound of the Blast Furnaces in Brazil till it resumes pre-crisis degree for provide and demand, I imply we had been — regardless of that, we had been capable of absolutely serve our prospects we’re supplying merchandise to all of our prospects and we don’t anticipate any shortage of merchandise. Subsequently, to conclude we’ll improve our profitability ranges. Scrap and enter costs are going up. With a view to be worthwhile and in an effort to remunerate our shareholders, we’ve got to work actually laborious in digital — diligently.

Leonardo Correa — BTG Pactual — Analyst

All proper. Thanks, Werneck, very a lot.

Gustavo Werneck da Cunha — Chief Govt Officer

Thanks, Leo, in your query.

Operator

Our subsequent query is from Daniel Sasson from Itau BBA.

Daniel Sasson — Itau BBA — Analyst

Hiya. Good afternoon, everybody, and thanks for this chance. Congratulations in your outcomes. My query is a follow-up of Leo’s query. May you elaborate a bit in your market share? I imply, evaluating your volumes to that of the trade, how do you see this competitors within the third and fourth quarters with the resumption of the Blast Furnaces? Do you assume that there needs to be a distinction in your market share as soon as the opposite industries additionally resume operations? Now as a — with reference to pricing, you talked about margin restoration and price strain. I do know that you do not discuss potential future bulletins, however possibly you can shed some mild by way of the pricing carried over to the fourth quarter of what has been already introduced within the third quarter, I feel this could possibly be useful.

My second query is in regards to the South America margin. I feel that the margins had been repressed as a result of all — due to all the shutdowns and there are some international locations the place issues had been extra restrictive like in Peru, however 30% margin was the very best in your historical past. May you inform us what was behind that, and the way sustainable the South America margin could possibly be? Thanks.

Gustavo Werneck da Cunha — Chief Govt Officer

Thanks, Daniel. It is all the time a pleasure to speak to you. Effectively, the numbers which might be public, we evaluate gross sales to the home market and the numbers revealed by IRBR and the numbers revealed this morning, all of them show that affirmation in regards to the share. Gross sales grew by 1.4% whereas ours 6.4%. There was a discount of 8% out there whereas we grew 10%. Subsequently, Daniel, that is what I mentioned earlier than. We had been very fast to learn to the rebounding indicators. I feel we had been, I feel the primary firm to renew operations and we had the suitable merchandise to ship to our prospects once they wanted it. This is because of an infinite effort on the a part of our groups, we had been fast to market and we had been fast to behave to serve the demand. So now what we’ve got to do is maintain the present ranges that we have reached now. That is the work we’ve got forward of us. However I do not wish to provide you with too many particulars about pricing as a result of definitely, there can be some carryover into the subsequent months or the subsequent quarter. That is pure however we’ve got to always look for profitability. We are attempting to revisit our historic unfold volumes however strain is right here to remain. Scrap costs have had an essential impression however definitely, for the subsequent few months, I feel we must always anticipate some carryover.

Now I’ll give these over to Scardoelli to elaborate on the margins in South America. So I will simply share the reply with him and he’ll have the ability to provide you with extra particulars about that matter. Thanks. Scardoelli, I feel you might be muted. May you please begin over?

Harley Lorentz Scardoelli — Govt Vice President, Chief Monetary Officer and Director Investor Relations

I am sorry. I touched the button inadvertently. In South America, we’re seeing a requirement enchancment, which has been very robust in our third quarter. What we are able to inform you about these operations is that our EBITDA, it is a part of the consolidation of South America, so generally, there may be additionally that facet that we had an excellent efficiency within the case of Colombia and others as a result of that they had an excellent market restoration within the quarter, and this had a optimistic impact within the margins. For those who look traditionally, on this South America operation, margins have been a lot increased when put next to a couple years again. So the truth is, I might say sure, these margins are sustainable within the long-range. But when we have a look at the second quarter and searching ahead, this third quarter, we skilled a robust leverage, particularly due to our impartial margin as nicely.

Daniel Sasson — Itau BBA — Analyst

Wonderful, Harley. Thanks very a lot. And thanks, Gustavo, as nicely.

Gustavo Werneck da Cunha — Chief Govt Officer

Yeah. Thanks, Daniel.

Operator

Our subsequent query comes from Rodolfo Angele from J.P. Morgan.

Rodolfo de Angele — J.P. Morgan — Analyst

Good afternoon. I’ve two questions. First, working capital. We have seen a significant reversion of working capital, despite the fact that this was the quarter of robust development, so I want to know whether or not Harley may touch upon what we must always anticipate wanting ahead like fourth quarter and in addition 2021. And my second query is addressed to Gustavo. We clearly see that we’re coming into a really attention-grabbing for the Firm robust development. So my query to you is, inside the Firm, the — your agenda for subsequent yr and the next yr, this money is surplus, whether or not subsequent yr is simply nearly as good, are we going to make use of that to pay out dividends or you might be considering by way of natural development?

Gustavo Werneck da Cunha — Chief Govt Officer

Hello, Rodolfo. It is is all the time a pleasure to speak to you. So, Scardoelli, begin with working capital.

Harley Lorentz Scardoelli — Govt Vice President, Chief Monetary Officer and Director Investor Relations

Rodolfo, good afternoon. I hope you are nicely. By way of working capital, we had been capable of publish an essential discount this quarter. For those who have a look at the developments, you will note that in response to the exercise degree, we grew rather a lot this quarter. There was a rise each by way of accounts receivable and payable. There was a rise within the exercise of the Firm, however we had been capable of handle that accounts payable exceeded accounts receivable. I imply, there was some assist as a result of accounts receivable was not increased than accounts payable.

Quite the opposite, there was additionally a restriction by way of stock combine. Within the Particular Steels in South America, it was fairly strong contemplating additionally that we had some shutdowns as a result of pandemic, and we had an essential discount in stock. There was a discount by way of BRL of round BRL700 million, which is kind of robust, however we’ve got to have a look at the international alternate. If we have a look at that, this discount could possibly be even increased. The money impact is excessive, and on the identical time, whenever you have a look at the stability sheet in BRL, it was down. The web gross sales was up and this helped us to achieve that 73 days. For the subsequent coming quarter, and particularly the final quarter, we’ll nonetheless see an optimized working capital place. I feel that we can finish the yr at good ranges of working capital and even for subsequent yr, if we have a look at yearly, we begin the primary quarter with decrease ranges after which it goes up the second and third quarters. However we don’t see our working capital by way of days cycle going past 70 or 75 days. This disaster gave us the chance to take care of this degree of reserves.

Gustavo Werneck da Cunha — Chief Govt Officer

Okay, thanks very a lot. Rodolfo, now, as in your second query in money technology and in addition our agenda, I might say that we already know that the market will be very risky and the way these debt place is essential to us. So no person right here will relaxation, no person will sleep till we are able to take the debt of the Firm to the extent of 1.5 instances, which we mentioned earlier than. Subsequently, we’re nonetheless very obsessive about that, we’re obsessed in decreasing our indebtedness place and that is the principle matter in our agenda.

By way of the operation, we’re always in search of to extend our efficiency by way of prices and bills, growing profitability, making an attempt to construct Gerdau of the longer term. And as I mentioned, in January, we’ll have fun 120 years of historical past of the Firm, making an attempt to nonetheless generate worth to our stakeholders and shareholders for a few years to come back. We’re always in search of methods to generate additional profitability with our present items in search of some area of interest operations and now with Gerdau Subsequent, we see different alternatives to generate additional worth to our prospects. So mainly, that is the Firm’s agenda. I feel you are accustomed to it and we do not anticipate any main change within the subsequent coming quarters.

Rodolfo de Angele — J.P. Morgan — Analyst

Okay, thanks. Simply one other follow-up. What’s the capability utilization in Brazil right now, simply so I can have an concept?

Gustavo Werneck da Cunha — Chief Govt Officer

Rodolfo, in Brazil, it is presently 80%.

Rodolfo de Angele — J.P. Morgan — Analyst

With Acominas or with every part?

Gustavo Werneck da Cunha — Chief Govt Officer

With every part, Rodolfo. Every part included.

Rodolfo de Angele — J.P. Morgan — Analyst

Thanks. Thanks a lot.

Gustavo Werneck da Cunha — Chief Govt Officer

Thanks. All the very best.

Operator

Our subsequent query is from Thiago Lofiego from Bradesco BBI.

Thiago Lofiego — Bradesco BBI — Analyst

Thanks. Good afternoon. Werneck, may you please discuss in regards to the inventories within the chain? You additionally mentioned that this was an element that boosted demand within the third quarter. How do you see this wanting ahead? Inventories are again to regular ranges otherwise you nonetheless see a replenishment within the fourth quarter and going towards the subsequent yr? And the second query refers to demand for longs in Brazil. How a lot retail represents by way of the demand for longs, I simply wish to perceive the scale of that a part of the pie and the way a lot it grew.

Gustavo Werneck da Cunha — Chief Govt Officer

Effectively, two superb questions, Thiago. Effectively, let me discuss in regards to the stock in that chain. It’s nonetheless beneath regular ranges. A traditional degree can be 25 to 30 days of stock and presently, this degree is at 10 to 15 days. So the pattern is that there can be a restoration all through the subsequent six months. It isn’t a really fast restoration within the quick time period, however the pattern is that there can be a full restoration till by the subsequent six months. Retail accounted for 30% of our longs shipments and with the investments by means of Comercial Gerdau, now this system Juntos Somos Mais, retail represents 30% of our shipments.

Thiago Lofiego — Bradesco BBI — Analyst

Now by way of retail once more, how do you see 2021, together with that half associated to no-income threat and strikes by the federal government? How do you see the section wanting ahead, and how much work you need to do? I do know you’ve got been doing a couple of issues, do you assume that might offset a destructive transfer by way of the revenue degree?

Gustavo Werneck da Cunha — Chief Govt Officer

Effectively, our grassroot work by way of going on to retail has been very optimistic prior to now two years. Effectively, retail grows 60% yearly. Now, presently, the demand is increased whenever you evaluate it to pre-crisis months however our place will stay very robust, even after the elimination of the emergency help. I do consider that even with this decline mattress will happen after the termination of the help, we can nonetheless make robust shipments as a result of we’re very enthusiastic about this section.

Thiago Lofiego — Bradesco BBI — Analyst

Wonderful. Thanks, Werneck, very a lot.

Operator

Our subsequent query from Caio Ribeiro from Credit score Suisse.

Caio Ribeiro — Credit score Suisse — Analyst

Good afternoon, everybody, and thanks for taking my query. My first query it is about Particular Steels. As a result of in relation to different under-performing segments, do you see any room for a possible value adjustment subsequent yr in Brazil, and what can be the magnitude of this improve and the way ought to that assist enhance your margins in order to achieve extra normalized margin? My second query is in regards to the margin of the Brazil section. As now it’s above 20% and with the worth of scrap going up in Brazil, additionally contemplating that within the fourth quarter if there may be historically a weaker seasonality. How do you see the evolution of the margin within the fourth quarter and whether or not the worth will increase can even have an effect?

Gustavo Werneck da Cunha — Chief Govt Officer

Caio, it is a pleasure to speak to you. Effectively, I will come straight to your second query. We’ll — we consider that we’ll maintain the margins towards the fourth quarter, we’re working with that assumption. Now by way of Particular Steels, pricing for Particular Steels, we’re simply going together with the worldwide costs out there. So I feel by way of efficiency enchancment, this can come from elevated demand. We needed to face tough months and we benefited from the automotive trade in our outcomes afterwards and we’re very optimistic as a result of, with all the incoming orders and our operations in Brazil and the U.S., we’ll expertise a brand new section of margin restoration any longer.

Caio Ribeiro — Credit score Suisse — Analyst

Good. Very clear. Thanks, Gustavo.

Operator

Our subsequent query in English from Carlos de Alba.

Carlos de Alba — Morgan Stanley — Analyst

Yeah. Hiya, Gustavo and Scardoelli. Thanks. So simply following on the stock query earlier than. I feel you talked about, simply to reiterate to verify I understood that the availability chain sometimes has 10 to — sorry, it has round 30 days, and also you are actually seeing the inventories between 10 and 15 days. Are you able to make feedback much like this by way of your individual inventories, that there was an enormous essential technology of money from decrease inventories within the quarter? How do you see that going ahead within the fourth quarter possibly into subsequent yr? If you may make feedback each by way of money regeneration in addition to the times of inventories that you simply presently have at your — in your completely different plans, significantly in Brazil, I suppose, can be extra attention-grabbing to me.

And then you definately — given your goal of decreasing web debt to EBITDA to between 1 and 1.5 instances, we see a really comfy debt amortization schedule. You do not have an excessive amount of coming due on 2021 and 2022, and actually as up till 2026, the place you’ve got a major quantity. What had been you actually planning on doing? Is accumulation of money in your stability sheet or retiring no matter is due within the coming years and not likely elevating extra debt? I imply, how ought to we take into consideration your technique of attending to the 1 to 1.5 instances? Clearly, EBITDA goes to personally improve however I am extra speaking in regards to the debt administration. Thanks.

Gustavo Werneck da Cunha — Chief Govt Officer

Thanks, Carlos. Now, I will let Scardoelli reply your query. So, Scardoelli, go forward.

Harley Lorentz Scardoelli — Govt Vice President, Chief Monetary Officer and Director Investor Relations

Good afternoon, Carlos. Carlos, query was firstly associated to inventories and in addition we talked in regards to the chain in our personal inventories. And the second a part of the query was about money stream, which may be very robust and our debt cycle is nicely balanced. And what’s our view about this money place wanting ahead, and the way do you see the state of affairs.

Effectively, referring to your first level as Gustavo was saying, particularly in Brazil, our stock ranges are barely beneath regular, however we nonetheless have some room to recuperate our stock degree within the subsequent few months. And this can enable us to foretell that this market dynamic has a sure momentum or a pattern wanting ahead. Now at Gerdau itself, this robust stock discount that we talked about about BRL600 million from June to September, if we have a look at that per operation this can be extra associated to Particular Steels. North America and Brazil had a really steady stock degree however definitely, we all know that in relation to rebuilding stock within the system, there’s a — the connection with working capital, possibly working capital will devour a bit more money, sure. However by way of cycle days, it needs to be extra steady and at common ranges.

We could also be — we might use slightly little bit of working capital to replenish our stock ranges. There’s additionally the difficulty of scrap and another parts that may most likely want some more money to replenish the stock. By way of robust money technology, initially, I might say that we attempt to reduce the upkeep of a destructive carry or investments that had been beneath the price of the debt. It is simpler to try this in Brazil quite than overseas. We attempt to carry the bottom potential destructive carry over this yr. As well as, our debt place may be very nicely balanced. We had a — we’ve got a maturity coming in three months and that was due to a bonus that was issued that matures in 2021. It’s about near BRL1 billion, about BRL600 million. Subsequently, this money can be used for that. Our pattern is to make use of the proceeds to pay short-term debt. We’ve not but performed any additional analysis by way of paying out dividend. Within the second and third quarter, this can definitely want more money to pay extra dividend. If we get more money, we can pay out extra dividend. I feel that is what I needed to say about liquidity.

Carlos de Alba — Morgan Stanley — Analyst

Thanks, Scardoelli.

Operator

Subsequent query from Timna Tanners from Financial institution of America.

Timna Tanners — Financial institution of America — Analyst

Yeah. Hiya, good afternoon. Needed to ask two questions. One was relating to the steering you gave for volumes, thanks for that. However did not know if the 6% to eight% enchancment into 2021 utilized to all of Brazil or for your complete Firm. So when you may simply make clear that and if it is simply Brazil, any coloration on the opposite segments can be nice. After which my second query is admittedly extra on the U.S. market. The non-residential development main indicators are pointing to a decline and the scrap demand is up. So simply questioning you probably have slightly extra coloration on the margin outlook within the seasonally weak fourth quarter after which into 2021. Thanks very a lot.

Gustavo Werneck da Cunha — Chief Govt Officer

Thanks, Timna. Timna’s, first query associated to demand development and what’s anticipated for subsequent yr. I mentioned that we predict a requirement development between 6% to eight% and this refers to our operations in Brazil for flat and lengthy steels. Now we have completely different numbers relying on the operation. We anticipate a 1% development in demand for the lengthy metal operations in North America, I feel that was Timna’s query. And in addition for — in Particular Steels, we predict the next development attributable to decrease demand. In Brazil, we anticipate 18% development and in our Particular Metal operation in the US, we predicted some development of round 9%. I imply, she requested for a bit extra coloration per operation due to this fact, I feel that with that I answered Timna’s first query.

And her second query was associated to the outlook for the fourth quarter of the yr. Proper now, our backlog is kind of robust. It stays on the ranges that we’ve got been experiencing prior to now few months. We see some good variety of orders and good shipments coming. Our predominant challenge within the U.S. is the unfold and as I mentioned earlier than, there was a discount in metallic unfold between the third and the second quarter. It was down by $410 — from $410 to $400 to $395. We proceed to purchase within the U.S. at costs much like what we had prior to now, however we are actually working laborious internally to cut back prices than the improved efficiency. So, due to this fact, within the fourth quarter, we can maintain these margins. Mainly, these had been the 2 questions posed by Timna, and I want to thank Timna for her questions and please be happy to come back with extra questions you probably have and you may discuss to our IR individuals.

Timna Tanners — Financial institution of America — Analyst

Thanks.

Operator

Our subsequent query from Andreas Bokkenheuser from UBS.

Andreas Bokkenheuser — UBS — Analyst

Thanks very a lot for taking my query, after which I hope you are all nicely and your households are nicely as nicely given the tough circumstances in the meanwhile. I simply needed to follow-up on Timna’s query. If we have a look at the development trade, it tends to lag the general economic system by about one yr, and sometimes when it goes right into a bear market, it sometimes decline to about two to 3 years. We’re seeing a variety of — in North America, a variety of U.S. development metal producers doing fairly nicely, to your level like you’ve got a really robust backlog, however we’re additionally understanding that a variety of that backlog is because of tasks that had been began in 2018 and 2019 earlier than COVID and naturally these tasks should be accomplished. If we have a look at new orders once more, to Timna’s level, non-residential development workers are down 30%, 40%, I feel you talked about the ABI, the ABI remains to be in contraction degree, we’re seeing decline in constructions jobs, there’s a variety of main indicators suggesting that with the harm to the economic system this yr, there’s simply not going to be some huge cash for tasks into subsequent yr. So I suppose the query is, provided that development sector does lag the general economic system by one yr and given how dangerous the worldwide economic system did this yr, what provides you the boldness that demand goes to do significantly nicely subsequent yr as a result of it might counsel that we’ll get a fabric contraction in demand subsequent yr? That is only one — my one query. Thanks very a lot.

Gustavo Werneck da Cunha — Chief Govt Officer

Andreas, thanks in your query. Andreas is asking for extra particulars in regards to the outlook, not just for one yr, however three years forward within the sectors the place we function within the U.S., particularly non-residential. And he desires us to elaborate on the expansion prior to now few years, the conclusion from completely different tasks, and the expectation wanting ahead, particularly contemplating the outcomes for the upcoming elections that may happen subsequent Tuesday.

Effectively, Andreas, this can be a matter that has been extensively debated prior to now few months. We checked out all potential situations and we centered on the principle indicators, and after we have a look at the indications, we proceed to see a optimistic outlook within the segments the place we function and the areas we serve with structural profiles and our lighter business profiles, we even see for the subsequent three years some slight development coming from these segments. We have a look at all of the infrastructure gaps within the U.S., however in the meanwhile, we don’t see a significant infrastructure undertaking coming that might result in a really robust demand pickup within the coming years. We simply see a slight development. However in parallel, for the previous few years, we have been working very diligently to extend the efficiency of our operations. We decided to put money into our bigger mills and all of those funding choices and choices to cut back price and improve efficiency will definitely lead us to enhance our monetary leads to the subsequent three years even in a market that won’t develop as a lot, however definitely, there needs to be some development that may enable us to maintain our margins.

Andreas Bokkenheuser — UBS — Analyst

Thanks very a lot.

Operator

Our subsequent query from Mr. Jon Brandt from HSBC.

Jonathan Brandt — HSBC — Analyst

Hello, good afternoon, gents. Simply to follow-up on Andreas’ query. I simply wish to just remember to’re not anticipating any main infrastructure spending regardless of the conflict from each U.S. presidential candidates to really just do that. And I do know we have seen this traditionally many instances, however probably relying on the end result of the election, it could possibly be in a little bit of a greater state of affairs than earlier than. And kind of in relation to that, if we had been to see U.S. infrastructure spending and it is kind of the “inexperienced nature”, is there an enormous distinction in metal depth versus conventional infrastructure spending?

And I suppose my second query is considerably associated to that on the ESG facet of issues, we — this has been a significant theme, not solely in Brazil but in addition globally, we have seen different corporations within the sector make enchancment, so I am hoping you’ll be able to remark slightly bit on what your predominant initiatives are for enchancment within the ESG wealth. Thanks.

Gustavo Werneck da Cunha — Chief Govt Officer

Jon, thanks in your questions. His questions referred to our outlook like for the U.S., after the election by way of the stimuli and in addition 232, he additionally requested about ESG, the place we’re putting our efforts, and the place our priorities are? Effectively, I will begin together with your first query after which I will give the ground to Scardoelli. From all the evaluation we performed, by way of the potential end result of the U.S. election exhibits that in 2021, whatever the end result, there should not be any main operation by way of a stimular or financial elements that would instantly impression our enterprise. Subsequently, in 2021 we’re projecting a sure stability. There’s nonetheless slight development, however now I will give the ground to Scardoelli to see whether or not he has bought the rest so as to add to the remark, after which we are able to additionally discuss ESG too.

Harley Lorentz Scardoelli — Govt Vice President, Chief Monetary Officer and Director Investor Relations

Good afternoon, Jon. So speaking about infrastructure, I feel an essential facet is that whenever you have a look at our outlook for North America subsequent yr, we’re not together with any potential improve in infrastructure. There’s a risk that that may occur, however the debate right now on either side of the political spectrum, Republicans and Democrats, that is within the occasion of each candidates. Subsequently, we see a possible demand improve within the U.S., however we’re not together with that in our planning proper now. Clearly this — there’s a risk that we’ll see a major demand for metal. It’s tough to match as a result of the U.S. must put money into infrastructure. So, when lastly, these investments are materialized, the quantities at stake can be fairly vital. Infrastructure investments within the U.S. that use any sort of funding from the federal government at any degree federal, state, or municipal ranges you need to body this well-known so-called bi-People behind it. That implies that this demand, as soon as it comes it will likely be geared towards native producers like we’re and in a approach, as soon as we left the rebar enterprise some two years in the past, we is not going to be topic to market results. I imply, on the identical time, we had been capable of keep our capability to enter extra strongly within the rebar market in case of a stronger demand. The impact will definitely be very optimistic for the metal producers within the metal market.

Gustavo Werneck da Cunha — Chief Govt Officer

Thanks, Scardoelli. I’ll transfer on. To begin with, I want to thank John for his query on ESG, this can be a essential query as a result of it has to do with the way forward for the Firm. So I want to thanks for giving us the chance to speak about such an essential matter for the Firm. We consider that any firm, and I am proper now talking in regards to the metal trade, it is essential that if we wish to proceed driving a profitable story sooner or later. Now we have to include matters of sustainability like ESG. ESG is a vital matter and in — it gained relevance on this previous yr. Our Board is completely dedicated to ESG and we wish ESG to achieve each single worker of the Firm in each single factor they do, in any space of the Firm.

We developed fairly nicely in all the three letters of ESG. In phrases G, governance, we made essential advances, we accepted our sustainability insurance policies, we additionally accepted human rights insurance policies, we created a vital committee referred to as a Technique Committee for sustainability simply to make sure that all long-term strategic choices like capex, investments, capital allocation is nicely adjusted to ESG. And by way of the S letter all of the acronym, Social, we made essential advances this yr and one main transfer was that we are actually licensed as a B firm. We can be one of many largest, B-certified corporations and this journey begins with the certification of our Brazilian operation. We additionally reviewed our technique by way of social accountability at Gerdau Institute. We had been capable of escalate our actions like housing methods, recycling methods. We additionally included different initiatives, the inclusion, demonstrating, respect for individuals and society, and that’s additionally mirrored in our overhead, in our workers. We embrace all data of society and ethnicities. And by way of the setting, the letter E, this can be a problem for all metal producers. In our case, we’ve got a bonus as a result of 70% of our manufacturing base makes use of electrical furnace and scrap. However within the subsequent few months, we’ll publicize our objectives to cut back gasoline emissions and greenhouse impact.

Subsequently, I consider that in all three areas of ESG, we’re — we’ve got well-structure plans and they are going to be executed the absolute best approach. Sooner or later, we wish to be referenced in sustainability amongst metal producers.

Jonathan Brandt — HSBC — Analyst

Thanks very a lot, gents.

Operator

We now conclude the Q&A session. I would really like now to show the ground again to Mr. Gustavo for his remaining remarks.

Gustavo Werneck da Cunha — Chief Govt Officer

Effectively, I want to thanks very a lot for becoming a member of us right now. It’s all the time a pleasure for each of us to speak to you. Additionally, I want to invite you to hitch us once more in our subsequent earnings launch associated to the fourth quarter of 2020, that may happen on February 24th of subsequent yr. Time flies, it is nearly early November, so in case we don’t discuss once more this yr, I want to take this chance to want you an excellent 2021, with [Technical Issues] stuffed with well being and the opportunity of revisiting your private plans or tasks which have been put to sleep for now, and I want you all brighter days sooner or later. Thanks very a lot and be nicely.

Operator

[Operator Closing Remarks]

Period: 80 minutes

Name individuals:

Gustavo Werneck da Cunha — Chief Govt Officer

Harley Lorentz Scardoelli — Govt Vice President, Chief Monetary Officer and Director Investor Relations

Leonardo Correa — BTG Pactual — Analyst

Daniel Sasson — Itau BBA — Analyst

Rodolfo de Angele — J.P. Morgan — Analyst

Thiago Lofiego — Bradesco BBI — Analyst

Caio Ribeiro — Credit score Suisse — Analyst

Carlos de Alba — Morgan Stanley — Analyst

Timna Tanners — Financial institution of America — Analyst

Andreas Bokkenheuser — UBS — Analyst

Jonathan Brandt — HSBC — Analyst

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