Metalurgica Gerdau SA

BOVESPA:GOAU4

Q3-2025 Earnings Call

[Mariana Dutra, executive]

Good morning, and welcome to Gerdau's Third Quarter 2025 Earnings Release Presentation. I'm Mariana Dutra, Head of Investor Relations. And joining us on this conference call today are CEO, Gustavo Werneck; and our CFO, Rafael Japur. This call is being simultaneously translated into English, and you can choose your preferred language by clicking on the globe icon at the bottom of the screen. [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 guarantees of future performance and are subject to circumstances that may or may not occur. So now without further ado, I would like to turn the floor over to Gustavo to begin the presentation.

[Gustavo Da Cunha, executive]

Thank you, Mari, and good morning, everyone. Well, by the way, it's afternoon because it's past noon, past midday. I hope you're all well, and I really appreciate the opportunity to be together for another earnings release presentation. I will briefly comment on the highlights for the quarter and the outlook for our operations. And right after that, we will follow up with a Q&A session. I would like to start by highlighting that we had a quarter marked by different dynamics in the main regions where we operate, North America and Brazil.

We ended the third quarter of 2025 with a very solid performance in North America, reflecting fairly resilient demand for steel in the domestic market. The reduction in imports contributed to an increase in total shipments in both quarterly and annual comparison, reaching more than 10% increase. In addition, once again, the North America segment had a record share in our results, accounting for 65% of consolidated EBITDA in the period. Meanwhile, in Brazil, in Q3, the local market continued to be heavily impacted by the excessive influx of imported steel. The import penetration rate remains above 6 million tons in 2025, which accounts for 29% of domestic sales, reinforcing the urgent need for measures that can effectively protect the Brazilian steel industry and domestic jobs.

Given this landscape, I will highlight the internationalization and geographic diversification as important strategic differentiators for our business. And finally, I would also like to highlight the progress of the sustainable mining project in Miguel Burnier, which has reached 90% physical completion. Equipment commissioning and hot testing has already begun and the integrated operation of the project is scheduled to start in early 2026. I will now turn the floor to Japur, who will give us more details on the financial highlights and the impacts of the current scenario in the Brazilian market in our results. Over to you, Japur.

[Rafael Japur, executive]

Thank you, Gustavo. Hello, everyone. It's always a great pleasure to be here with you for another earnings conference call. We ended the third quarter posting an EBITDA of BRL 2.7 billion, 7% higher quarter-on-quarter. The positive highlights, well, they were mentioned by Gustavo. We have the continuous growth of our results in the North America segment, driven by higher steel prices and more shipments compared to prior periods and the recovery of results in South America -- in the South American segment, which together more than offset the decline in results that we unfortunately experienced in Brazil.

During this Q3, we generated a free cash flow of BRL 1 billion, converting 37% of our EBITDA into cash, reversing a trend that we have been seeing in the prior quarters of cash consumption in third quarters. There was an important working capital release of BRL 300 million, enabling us to reduce our cash conversion cycle, which was above 80 days. And now in Q3, it was down to 78 days, 6 days less than in the second quarter. Our leverage measured by net debt over EBITDA, given the cash generation we had in Q3 was reduced to 0.81x. Because of that, and since we are talking about leverage, we announced yesterday a make-whole call of our 2030 bond, which had an outstanding amount of $480 million, and this will collaborate for our gross debt by year-end, considering the make-whole of the bond and also considering other maturities that we have scheduled for the fourth quarter of this year, we should have a significant reduction in our gross debt that should end the year at around BRL 14 billion.

In terms of capital allocation and our CapEx, our investments totaled BRL 1.7 billion this quarter, 60% of which earmarked for projects to boost the competitiveness of our assets, particularly the mining project, as mentioned by Gustavo. In addition, I would like to emphasize information that we presented during our Investor Day on October 1. That's when we announced the CapEx guidance for 2026 of BRL 4.7 billion, significant 22% reduction below what we had forecast for 2025. Based on the results for the period, we approved the distribution of dividends in the amount of BRL 0.28 per share at Gerdau S.A. and BRL 0.19 per share at Metallurgica Gerdau.

With regard to share buybacks, we have already achieved 88% of Gerdau S.A.'s 2025 program. which represents 2.9% of the company's outstanding shares or an investment of BRL 902 million that we returned to our shareholders. If we sum it up and include in this quarter what we invested considering dividends and share buybacks. In Q3, we had a payout of 75% of our net income, more than double what is established in our policy, in our bylaws. The significant capital return to the shareholders happened without sacrificing our leverage. We actually improved our net debt over EBITDA ratio this quarter and maintaining investments, which are fundamental for Gerdau to continue to create value for our shareholders in the future.

I will end here, and I will join you later for the Q&A session.

[Gustavo Da Cunha, executive]

Thank you, Japur. So let's speak a little about the expectation for the coming months and for '26. In North America, we continue to see stable steel demand at high levels with order backlogs at healthy levels and above the historical average with a possible negative impact on shipments linked to the typical seasonality of a fourth quarter. Although the scenario for 2026 is still taking shape, we have a positive outlook for steel demand in the North American market, driven by the performance of the solar power, data center and infrastructure sectors with a projected continued decline in imports prioritizing the use of steel produced locally.

Meanwhile, in Brazil, the domestic market is expected to be negatively impacted in the fourth quarter by the typical end of year seasonality. For 2026, the outlook is also uncertain. But we are slightly optimistic with the progress of some trade defense mechanisms to be adopted by the government based on a solid dialogue that the sector is having with the authorities. We also believe in a slight recovery of the automotive and industrial sectors as well as stability in the civil construction sector. In view of this market scenario, we continue to boost internal operating efficiency and cost management initiatives. I will now hand over to Mari, and we will be available myself and Japur to answer your questions and queries. Thank you.

[Mariana Dutra, executive]

Thank you, Gustavo and Japur. So now we will start our Q&A session. The first question comes from Rodolfo De Angele from JPMorgan.

[Rodolfo De Angele, analyst]

Well, I have 2 questions. First, we -- I mean, I would like to hear more or I would like to give you -- I would like you to give us more details about what needs to happen? What are the strategies that will lead to changes in this very challenging scenario in Brazil for the business. And also along the same lines, we noted that there was an increase in exports, and this came as a surprise to me. So the question is whether this is part of a reaction that is under your control, speaking mostly about Brazil. And my other question is about prices in the U.S. We heard about price increases last week, especially for merchants. And apparently, there wasn't a follow-up. I don't know. I just want to understand if something happened and what we could expect going forward. So that's all.

[Gustavo Da Cunha, executive]

Rodolfo, let me start. I'm just finishing writing down some notes about your question. So I'll start answering the question and then Japur will complement. In Brazil, I think we reached a limit in terms of measures that could allow us to seek for further competitiveness and reduce costs, given a scenario where we have 30% of imported goods coming into the country. I mean, we've always tried to get further productivity to reduce SG&A, et cetera, et cetera. This has been continuous. But what can we do now to cut more shifts or decrease volumes or shipments, it came to a point when this is no longer so effective.

Therefore, the major change that we should have in Brazil is a trade defense. I know that with time, Gerdau could probably do more things. We can grow on the ore side. We could even look for recycling some of our capital in Brazil. I mean there are things that we could do. But in the short term, there isn't much more we can do or I don't think anything could change the scenario, except for the trade defense. Trade defense, I think I can mention a few points that I believe led to some progress. Well, first of all, and I know that you've been monitoring this in the past 2 years. When we talked about trade defense, there were some dissenting views about different industrial sectors of the economy and also customers, some against and some in favor of the trade defense. But this is a thing that got everybody by surprise.

So there were significant changes. The entire commercial sector, machinery and equipment, everyone understood that if something more structural is not done, the Brazilian industry will just be over. So we have to work together with the different ministries and even with President Lula, that something has to be done. It's also necessary that there should be a deeper involvement of the President of the country because I think he is the only individual that can seek for solutions that can suit different interests. In terms of having a better commercial relationship, a trade relationship at the same time in China, but at the same time, introducing mechanisms that can allow the Brazilian industry to survive.

I think the path is being paved so that in a not-so-distant future, we can find some balance between exports and imports and our share of the domestic market. So I hope that things can move on. I mean steel production in Brazil, Japur can talk about that. And the other aspect is North America. Of course, you talked about merchants, et cetera. But we understand that the metal spread has already reached a level where we don't see the possibility of major increases. Scrap is flat because most U.S. scrap buyers like Turkey, they are also being pressured by semi-finished goods coming from China. So it will be -- it will make more sense for them to buy the billet almost ready-made rather than buying scrap. So with flat prices of scrap at this current level of prices, the spread in our view, I think it's healthy.

So I don't see a lot of room for further expansion. On the other hand, we are working with our mills at full capacity. Demand remains sound, not only it sound in the short run, Rodolfo. But when you look at the coming quarters, everything leads to believe that this demand will remain as such. Just to give you an example of that, our centers the amount of steel that we are delivering to data centers is large. And when we look at the number of new data centers being built in the U.S., it's really staggering. I was just doing some very quick calculation in terms of square meter. The data centers being built in the U.S. correspond to 800 Maracanas or soccer fields. That's the amount of data centers that are currently being built in the U.S. And this will continue to happen because of AI and technology in general.

If you look at renewable energy, and there is still some incentives, and we are still delivering a lot of steel. Therefore, in the North America segment, things are very much balanced. I'm not concerned with the fact that some competitors announced increases. And the competitor that you mentioned didn't follow on the same footsteps, but reinstated my view, I don't think that there is any environment that will lead to further dilution of metal spread in terms of what is happening there at the moment. But Japur, I think there is something related to exports that I think is over to you.

[Rafael Japur, executive]

So about exports -- exports usually occur by sea. So one or another ship doesn't really impact one quarter compared to the next. Last quarter, we exported 17% of our sales. And this quarter, shipments were 20%. So this is pretty much in line with our operations. So there is nothing out of the ordinary. There are some shipments that sometimes if they are not happening in the end of the month, they will happen right in the next month. So there is nothing really different when we compare that to our results. But I would also like to answer a few questions that I saw in the chat about prices and results in North America.

It's important to remember that there was an exchange variation issue in Brazil because there was a depreciation of the U.S. dollar. So in dollar terms, what was the price variation in the market. And there is also the issue of mix. I mean, in terms of structural, we were able to capture some price throughout the quarter and the half year. But thinking about other products like SBQ and rebars for some clients, we have agreements that link the sale price to the cost of scrap. And in some sense, that cost has gone down in the U.S. So in dollar terms, the price was down a bit.

So if you look at the U.S. dollar mix, there was a variation of 1.5% in the quarter in regards to prices in North America.

[Rodolfo De Angele, analyst]

Excellent. And congrats. I mean I was just talking to Mari. You're doing some excellent job.

[Gustavo Da Cunha, executive]

Yes, she just smile. I think she's thanking you.

[Mariana Dutra, executive]

Our next question comes from Ricardo Monegaglia with Safra Bank.

[Ricardo Monegaglia Neto, analyst]

I also have 2 questions. My first question is about rebar antidumping in the U.S. We talk a lot about antidumping of flat steels in Brazil, but I think there might be another decision coming on the 12th of November about antidumping of rebar. So I would just like to learn more about what will happen since -- once this is implemented. I know it's not so relevant vis-a-vis the other segments where you operate. But maybe do you think we could expect something new in terms of the preliminary, no -- adhesion or maybe if maybe there will be an impact in case it's positive next year? And whether you think that the application of this dumping could probably impact price increases, not only for rebars but other products as well.

And the second question is about capital allocation for dividend payout and buybacks. There has been some discussion about changes in the taxation. So how are you dealing with this topic in-house, given the fact that your cash position is very robust, you generated a lot of cash in the third quarter, and I think you generate just as much cash in the fourth quarter. So should we expect any changes or maybe a dividend payout or a more aggressive buyback going forward, given this general backdrop of sound results and a change in the dividend payout policy.

[Gustavo Da Cunha, executive]

Well, thank you for your questions. I will start speaking about rebars in North America. We have been monitoring the possible implementation of the antidumping for rebars in the U.S. And I mean even though rebar is only accounts for 10% of our product mix, depending on the quarter, now it's closer to 10% of our mix is rebar. But there are 2 positive aspects. First is the obvious impact in our shipments, but also related to the competition because some competitors, they can produce both merchants and rebars. So if we start seeing a movement where rebars are better for these companies to produce, they may replace merchants by rebars. And our mills are more focused and they have a vocation for merchants.

So therefore, there will be more room for us to sell products because of our focus. So we've been monitoring the progress. But now to your second question, you asked whether this could be like an example for other authorities vis-a-vis the competition. I don't think that's very likely because the discussions are very technical, and it takes into account the different realities of the different countries and markets. And these antidumping investigations, they have, first of all, to prove dumping. They have to prove damage caused by dumping and the correlation between the 2.

So I don't think this will have an impact in Brazil, but well, we might be even hopeful that in terms of margins and results, they may have a positive effect for us. I mean, this period of the year is a bit complex because there is a lot of seasonality in the U.S. in this period, mostly due to climate. Therefore, I think it's difficult to imagine that there will be significant price moves given the current period of the year.

Now moving to your second question on capital allocation. We've been very vocal, both in terms of our last Investor Day and our last earnings release presentation because at the moment, Gerdau's focus has been to privilege buyback of shares over extraordinary events. This has been so true that this year, we already invested almost BRL 1 billion in buybacks. That was part of the 2025 program. We still have to conclude the program. And if we continue to have strong cash generation going forward in the next quarters, the idea is certainly to privilege buyback over dividend payout.

[Mariana Dutra, executive]

Next question from Carlos De Alba with Morgan Stanley.

[Carlos de Alba, analyst]

I don't know what is -- video is not working, but thank you very much for taking the time. So my first question, Gustavo, maybe is related -- related to the dynamics in Brazil, right? If for whatever reason, the antidumping cases, the termination on antidumping cases is negative or the remedies imposed are not enough or are small. What is the company plan in that scenario? How much further can you reduce cost? How many operations can you maybe consolidate? And obviously, if the government -- if the country doesn't support the sector, you need to take dramatic actions, I think. So can you elaborate as to what is the company's plan on that scenario? And I'll have another question maybe for you, Rafael.

[Gustavo Da Cunha, executive]

Carlos, thank you for the question. I think that I'll link your answer with Rodolfo's question. In the short term, what needed to be done in the operation to adjust our shipments to the current reality of 30% of steel imports, everything has been done incrementally. Next year, we will pursue some additional performance gains. And there is one relevant factor for next year, which is the start-up of the mining project, which will bring an important benefit for our EBITDA.

So we understand that for 2026 compared to 2025, we believe that we're going to have the Brazil operation performing better with more competitiveness. If the Brazilian government does not implement additional trade defense mechanisms, we will need to accelerate our plans to transform Gerdau in the midterm. We will need to review more in depth our routes of production, whether it makes sense to continue to maintain 3 production routes as we have today. I'd like to remind you, we have one production route for scrap, one for the integrated mill, Ouro Branco, another one for charcoal. So this is a topic that we will need to revisit.

We will also revisit the mining efforts, whether it makes sense to continue to grow and produce more our, we will need to review more in depth our footprint in Brazil because we believe that we have an opportunity over the next few years to drive some changes, and we might have to accelerate them. So the big question mark now is to what extent we will need to accelerate Gerdau's transformation plans in Brazil so that we can be on equal footing to compete with subsidized Chinese steel. This transformation can be accelerated for some reasons. If we show that the results of North America will remain strong, this will give us more momentum to accelerate that. I would say that even our CapEx, we might add more CapEx or not over the next 5 to 10 years, depending on the results to accelerate this transformation. So the plans for the next 10 to 15 years already.

So the big point is to what extent we will accelerate them. we wish to improve our footprint in the United States. So we have to decide where to allocate capital to accelerate the changes in Brazil. That's a topic that we have been developing and debating. So that would be my general answer.

[Carlos de Alba, analyst]

You kind of anticipated the question that I would have for Japur. I don't know whether he or you could answer. How should we understand the sequential benefit of the iron ore project that is almost ready.

[Rafael Japur, executive]

Carlos. Well, you joined the conference call well identified with our theme here, but jokes aside. Gustavo kind of spoke about this. We are doing some tests for crushing and some other initiatives. And that's the dry part of the project. And in the end of the year, we'll have the wet part of processing, and we'll start to ramp up in the end of the year and beginning of next year. The main benefit we'll have in the first year will be the cost reduction of the mix in the blast furnace. It's not going to be integral in year 1 because we're going to have a learning curve in the mine to operate the new complex and also in the Ouro Branco mill to use the new product mix. So we don't expect to have a substantial reduction in the first quarter of operation of mining. But over the year, we understand that we will convert to a cash cost of $30 per tonne, which is what we disclosed in the project.

And this is going to be an important lever for our blast furnace. We will reduce our metal basket, how much ore we use to have a reduction in the blast furnace. And this is estimated for year 1, not just reducing the metal load in the blast furnace, but also the amount of coal that we used to produce the same amount of steel. We are reducing the cost of the metal load, but also increasing the percentage of iron in the metal load. Since we're going to have a higher concentration of iron in that same volume in the blast furnace, we'll produce more steel with this consuming less coal to produce an equal amount of steel.

In year 1, we expect to have about BRL 400 million of benefit -- that's what we mentioned in our Investor Day, particularly with the cost driver and also selling iron ore to third parties. And after that, we should have the full benefit of the project, BRL 1 billion, BRL 1.1 billion with the price levels for ore that we see today, close to $100 per tonne.

[Gustavo Da Cunha, executive]

And Carlos, I'm not sure I made this comment before. So here it goes. The mining rights we are exploring now at Miguel Burnier is one of the several mining rights we have in the state of Minas Gerais. So it's a mining right, which is very significant in terms of the quality of the ore, but also in terms of volume that we can explore in the coming years. This project specifically ensures the production of high-quality iron ore for a period longer than 40 years.

And we also have the possibility in the future to mine more ore because the amount of ore in this asset is very large and we have other mining rights. And according to your question, we can decide to explore those or monetize those in time. If we understand that this is indeed an opportunity, we will not have to rely on CapEx disbursement to buy mining rights. We've had those mining rights for many, many years now. And those are high-quality mining rights with a good location, a good geography in the state of Minas Gerais, okay?

[Mariana Dutra, executive]

Next question from Caio Ribeiro with Bank of America.

[Caio Ribeiro, analyst]

My question would be about the infrastructure package. There's a considerable amount of resources to be disbursed. We're having the sound chopped, we apologize for that. I would like to hear from you, your expectations over the next 10 months. What do you expect regarding the remaining resources. And also, we apologize, but the sound is cutting a lot. How do you see this possibly impacting your operations in Canada, in the United States and the possible decision to invest in a project in Mexico?

[Gustavo Da Cunha, executive]

Well, Caio, the sound was chopping quite a lot for us, but I think I could get your questions. This is important information that you bring. Indeed, 60% of what we call of the infrastructure bill is still to be disbursed, the only this approval of this package of incentives, the only thing that we imagine would happen differently was that this would be spent faster. But then we understood that considering the U.S. bureaucracy, the detailed approval of the budget, which depends on involving some states, municipal legislations, well, things would take longer than we expected. So the budget was not dispersed in the time line planned. But undoubtedly, this will be renewed, and this will be extended because until U.S. infrastructure goes back to an acceptable level to support the economic and industrial activity that the current administration expects, I am totally convinced that these segments will continue to develop.

The main point that it has a connection to your question, that might changes regarding incentives to renewable power. And I'm talking about impacts closer to our business. We continue to deliver a lot of steel. And if we look at our backlog, there is a lot of demand for steel for renewable power, particularly solar power. If the incentives start reducing, there might be smaller or lower demand for power. On the other hand, we see the strategies of the current administration regarding fossil fuel power and the production of oil and gas, and that drives the demand as well, one which is important for our special steel operation.

So there might be a trade. But in terms of having a solid demand for our business, we are not concerned. And the USMCA will be approved eventually. It's hard to say, given the way the President Trump conducts the current administration. But I see that Mexico is preparing for that, considering what the U.S. considers of what is negotiable. So in terms of concerns about our business, if Mexico has the right conditions to ensure that all of the steel that will translate into some kind of component to be exported to the United States that it will be melted locally.

In other words, Mexico is implementing mechanisms to avoid the triangulation of Chinese steel going through Mexico and then going to the United States. So there will be a balance among all 3 countries and very soon, and this will benefit us, just like the agreement was beneficial while it was in force. We have some doubts regarding the real possibility of executing that investment in special steel that we paralyzed. Well, this is not something we'll get out of the draw just after the agreement. We will need to observe if there are other phenomena impacting the local production of automotive engines in North America because the decision to invest a relevant amount, I mean, this could -- this could make us slow in other capital disbursements that we think are relevant. So we'll be careful. So this is our general approach. Okay.

[Mariana Dutra, executive]

Our next question is from Daniel Sasson with Itaú BBA.

[Daniel Sasson, analyst]

My first question is related to something you mentioned on Miguel Burnier, which is very important for the company, but I would also like to mention the other project, which HRC that you started early this year, it ramped up and is now operating at full capacity. Could you comment on how much of that additional benefit of BRL 400 million that you disclosed during Gerdau Day about the project. How much of that was used in 2025. So I can calculate the additional EBITDA or the delta that will contribute or what will be a building block to improve EBITDA quarter-on-quarter in addition to the Miguel Burnier project. I just want to have a better understanding of the project per se.

My second question probably addressed to Werneck revisiting your point on capital allocation. I just want to get a better understanding about the U.S. dollar or whether anything changed given the fact that there are more protectionist measures in the U.S. Maybe it seems like Brazil is moving in the same direction in terms of the allocation of $1 in the U.S. and $1 in Brazil, whether it will be reasonable for us to think that investments in the U.S. continue to be on better productivity or enhanced productivity, increase efficiency and you choose different plants from time to time to focus on that improvement or whether in Brazil, like you said, you already did everything in your power to be more and more efficient to face the competition with imported goods.

So would it be fair to say that you would only put more money in Brazil if the scenario leads towards consolidation? Or is there any room to acquire smaller players? Maybe this is easier to justify with [indiscernible] given like 25% or 35% of what is consumed here comes from abroad is imported. So I would just like to get your views about capital allocation between regions.

[Gustavo Da Cunha, executive]

Good. Okay, I will start because in my rationale when it comes to capital allocation, I will just pave the way for Japur to elaborate more on the other issues, okay? So we've been doing CapEx for 125 years. So we've had 25 years of experience. We know what it works and what it doesn't work. So we made a lot of progress in terms of our capacity to analyze investments, pretty much motivated by the questions that you ask us in our interactions with you. Even though we made enormous progress in capital allocation and investment decisions. In general, we noticed that in Brazil, there are more variables that impact our business when compared to North America, a practical example that everybody is facing in the electric side or like payments.

Who would think that there would be this level of energy cuts as we see now. So throughout the years, we learned that it's more difficult to allocate $1 in Brazil than allocating $1 abroad. There are many variables that escape our control. We've been looking at this very carefully because a capital allocation process I mean we will only see returns 1, 2 or even 3 years later. When you look at investments in HRCs, we were very optimistic that when -- once we invested, the market will be there for us. But now the reality is different. So when we think about the next phase, because the project is not over, there's still a third phase of hot-rolled coil that we could implement, but we have to be more careful.

On the other hand, in Brazil, this motivates us to be very careful with our operation. I mean, we've always been very careful with the quality of our operation. And there is one topic that you know very well, blast furnace and coke plant, and there are a lot of companies struggling with that. Our coke plant and our blast furnace, especially the blast furnace 1, and we are seeing year-on-year a dilution in their time lines. I mean we are postponing the stoppages because this gives us some additional breadth in terms of not taking investments from other areas to put in the blast furnace and the coke plant.

When we look at integrated mills, many companies are having a difficult time to invest $800,000 -- or I mean, $800 million or $1 billion. So the health and breadth we have at Ouro Branco give us the opportunity to produce relevant transformation at Gerdau in the coming years. And this could also lead to much higher competition in Brazil, even to compete with the Chinese in the U.S., we have lots of opportunities as well. The execution of CapEx in North America is simpler because they do not have the variables that we cannot control in terms of the quality of vendors, civil construction and assembly, we can control that much better. Therefore, in terms of business environment in general, investing $1 in the U.S. today is much easier than here.

So we will look at investments in Brazil much more carefully. And I'll say that my demand and Japur's demand is that we look at a portfolio with many opportunities. So how can we select the best among the best. So now I will turn the floor over to Japur because this backdrop also raised questions about HRC, what kind of returns we anticipated, how much we're going to sell, how much -- what would the price be? I mean this is also a very important symbol to the federal government.

Daniel, when we invite the government agents to visit our plants, we show that we already anticipated BRL 1 billion of investments. Now all of the shareholders need return. And sometimes we lack enough customers to buy our products. This helps them to really believe and reinforce the fact that the trade mechanisms of defense are very necessary.

[Rafael Japur, executive]

Okay. Let me just detail some of the things. Where do we get the return from our investment in HRC? Out of the BRL 400 million we mentioned, BRL 100 million comes from cost reduction, more so in terms of metallic spread. I mean we have a better metallic mix for the entire production volume there and about BRL 20 million or BRL 30 million is due to fixed cost reduction. So BRL 100 million, roughly speaking, is to reach the ramp-up, and we are reaching that number. This past month, we will get close to 100,000 tons of production. This is a record production level in terms of performance and production and costs.

We are performing very well. But to produce results, we also need price, not only these results. When we think about HRC prices from the beginning of the year until now, there was a drop of about 15%. So much of the benefit that we had from the other BRL 300 million that was an arbitration between the cost of opportunity to sell plates in the foreign market or to sell HRC in the domestic market, an important amount of that benefit was diluted. So if we were thinking about X, now it's X minus 15%. So this is what was quite hurt this year because we are talking about an integrated mill. Therefore, ore costs and coal costs did not move much throughout the year. And this basically the dilution of fixed cost is that moves the needle a little bit in terms of performance. That's why we have to look for prices.

Once we have something moving competition-wise, things are improving. But if you look at the big numbers, the U.S. is performing with a margin of 20%, but there was an 11% reduction in exports year-to-date. Brazil that we are running with less than 10% margin or at a loss. We have plus 24% of imported goods in the year. So if we see an evolution in this scenario, we will be able to materialize the benefit of BRL 400 million.

[Mariana Dutra, executive]

Next question from Gabriel Barra with Citi. We don't have your audio.

[Gabriel Coelho Barra, analyst]

Okay, I think you can hear me now, right?

[Mariana Dutra, executive]

Yes, we can hear loud and clear.

[Gabriel Coelho Barra, analyst]

I think my first point would be a follow-up on that investment in mining. During Gerdau Investor Day, I think Werneck talked about something and the market was quite curious when you referred to your desire to invest in mining, to have production surplus of iron ore and take advantage of the company's potential that sometimes is not very clear to most of us. So could you elaborate a bit more on that and talk about the mining rights because nobody -- not everybody is aware that you have these mining rights. So what do you have in mind about the investment?

And I was speaking about Miguel Burnier. We believe that both Ouro Branco and Miguel Burnier will have a positive effect next year. Ouro Branco, there was a point in the next quarter. There was an initial cost because of that new operation. And Miguel Burnier, do you think we should expect something similar? Do you think that there will be any impact in the process to adjust the production given the fact that iron ore now has a higher grade. Would there be any impact? Just wanted to get that clear.

And my second question -- and this is very much related to an issue raised during the Investor Day. And you talked about the multiple that the company is trading today. When we compare that to the multiples of other companies abroad, there is a gap. This gap has been with the company for some time. And in a way, it's something that we've been discussing with you for some time. My question is, how can we mitigate or reduce the gap vis-a-vis other U.S. companies? And the point to my question is, could we discuss like some listing, something similar to what JBS did more recently? Do you think it will be fair to discuss this today to maybe try to reduce the gap. I don't know. I don't know whether that makes sense to you or not. I would just like to hear your views about that. So these are my 2 points.

[Gustavo Da Cunha, executive]

Well, you listed 3 points rather than 2. So I will start with the numbers, and then we'll go from there. I think you asked about the Miguel Burnier system. That was a nonrecurring event. There was a worsening of our Brazil operation this quarter, but there was an improve of BRL 300,000 and 8% of our cost. So we showed that was not structural at Ouro Branco. It was a one-off situation and a nonrecurring event, mostly due to imports. In my previous answer to Carlos, when I referred to ramp-up, it is possible to have cost fluctuations in the mills, not only due to the learning curve of the mining equipment. I mean the cost of processing ore is not going to be $30 per ton on day 1 of operation, and this is obvious.

And maybe the operating cost will require a learning curve in terms of centering and the use of mining in our blast furnace. But for that, to that end, we are doing a few things to mitigate these effects, probably having a higher inventory of pellets just to add up to the basket and then promote a gradual change. We are not going to produce 5.5 million tons on year 1 because there is a ramp-up curve. We will produce -- I mean, consume more pellet feed in the sintering operation. There might be some effect throughout the year. For example, we will have to have some stoppages in our sintering system to make some connections when the investment starts operating.

We will consume pellet feed in our sintering process using a process of cold clustering so that we could have pellet fit clusters in the centering operation. So there might be some stoppages that will probably affect cost, but it's nothing structural, and this can be changed from one quarter to the next in case this occurs. Now speaking about mining investments, as Gustavo said during the Investor Day, I think Rodolfo asked that question at the end of our Investor Day. When we invested in mining way back in 15 years ago, we acquired different areas in the state of Minas Gerais, some closer and some further away from the Ouro Branco mill at first. We focus on Várzea do Lopes where the material was closer to the ore that was being used without processing.

We had hematite and regulated products at our disposal, but we understood that this wouldn't be the case in the long run, and we needed a more robust investment in that mine that is close to our Ouro Branco mill because by doing so, we could perpetuate cost competition that will be very unique in Brazil's steel mining industry, but there are other minerals. And we already have those mining rights that we can explore. I mean, not self-sufficient in terms of ore like Miguel Burnier, but these could be profit centers. We are not interested in competing with Vale because Vale is a huge mining company. But we do believe that there is some potential to find some interesting partnerships and maybe work with other mining companies in the industry or even with large mining companies in the region, just as a way to unlock value that something which is already in our balance sheet is a mining right, but it is not bringing any economic benefit.

So that's why we decided to invest more in prospecting the land, doing some probes in the area just to have a more informed view for the future. But this is plan B. Our main focus is to deliver the Miguel Burnier and do the ramp-up of the investment of mining in Miguel Burnier and then maybe we could use our mining team to explore other frontiers. And last but not least, about the multiple and your question about the probable or the like relisting. This is a question we often get both from the market and investors.

I would say this is notable for us to talk about that or to discuss the reorganization of the capital structure of the company, of the ownership of the company. I mean, we look at what JBS did, but we do not have any concrete study underway, which would lead to an ownership restructuring of the company. Not only we are looking at what is being done by other companies in the market, and how the multiples of companies are performing, but we also have to consider structural changes like taxation on dividends, taxation on profits abroad. These are things that can have an impact on our appetite. So we may take longer to discuss possible changes. But it's not a taboo. It's not something that we never look at internally, but we will take a look at it when the time is right.

[Mariana Dutra, executive]

Next question from Marcio Farid with Goldman Sachs.

[Marcio Farid Filho, analyst]

I'll try to be brief given the time limitation. A follow-up question regarding the U.S. Of course, potential renegotiation of tariffs with Canada and Mexico is important for you. I think you spoke a little about this, Gustavo. But the debate we have with investors is about how strong or how sticky the U.S. movement can be. Assuming that we'll see U.S. government negotiating with Canada and Mexico, what will be the reaction in the plus 1 for your operations considering import risks and your operations in Mexico and Canada?

And very quickly, thinking more about the short term, fourth quarter and first quarter, well, these are seasonally weaker, but there is an important margin for the United States. In Brazil, we had a one-off effect, as you mentioned. So how should we see the short term with profitability improving, shipments decreasing? Should we expect some stable earnings for the next 2 quarters? Can we say that we reached a floor for Brazil and the United States with a more favorable moment?

[Rafael Japur, executive]

I think that in terms of margins, I think that Gustavo kind of talked about this in his part. We expect a more challenging environment in Brazil in Q4 because of the seasonality. We'll have some maintenance shutdowns normally they take place in Q4. So unfortunately, I'm not sure we can say that we have reached a floor for the operation in Brazil. In addition, a part of our business, special steels having even a stronger seasonality in the last quarter of the year. So this should hurt our margins. And that's why Gustavo detailed it in that way when he spoke about our outlook for Q4 and for 2026.

In North America, we have seasonality that is very much weather related. But in terms of margins, we don't expect a significant shrinkage of the margins looking forward, given what we are seeing both in prices and in metal prices. And regarding the question about the USMCA, in terms of immediate impact, we have seen Mexico adopting measures to protect themselves, not allowing imported goods coming in, so they won't have transshipment for the U.S. So we see that even if Mexico, Canada and the U.S. have an agreement, the effects will not be the same as we had in the pre-Trump period. We would have an environment with more protectionism than we had originally or with more trade defenses better yet than we had originally. And to us, some kind of agreement between U.S. and Canada would be very positive because we have a big volume, the way in which we are organized with mills close to the border of the United States and Canada, which were typically very integrated.

Now we see some operational difficulties in our product mix because of the tariffs. If they were reduced or eliminated, that would optimize sales from our U.S. mills to Canada and from Canada to the U.S., given the vocation of these mills. For example, in Canada, heavy merchants are not produced. They're produced in the U.S. So structurally, Canada imports beams and merchants.

So to us, this kind of change would be positive. Internally, in our discussions, we use what was negotiated between the United States and the U.K. as a good proxy, as the best agreement possible to be achieved regarding steel, considering that the U.S. and England are perhaps the closest allies historically from the geopolitical and commercial standpoint. So it seems to us that it's kind of difficult to affirm anything, but it seems to us to be unlikely that's the best word, that they will achieve a steel agreement that will be better than what England achieved with the United States, a tariff of 25%.

[Mariana Dutra, executive]

Next question from Lucas Laghi with XP.

[Lucas Laghi, analyst]

Well, actually, I have a follow-up question regarding capital allocation. I just want to understand a little better. I don't want to repeat the topic, but I just want to understand better this difference between the United States and Brazil in this process of defining new projects because when we look at EBITDA converted into cash, it becomes very clear that the United States are very different from Brazil today. But -- in a consolidated way, the company still has a comfortable balance sheet.

So I just want to understand the approval of new projects, if return is accretive, if the projects have a positive effect, does it make sense to allocate regardless of the geography where they are as long as the balance sheet will allow it? Or if we use depreciation as a proxy of sustained CapEx, perhaps EBITDA less sustaining CapEx will not allow for the project, even if the consolidated balance sheet will allow it, could this change your decision of capital allocation to some projects in a certain geography? You see the reason I'm asking is because we talk a lot about the United States, difference of multiples in companies abroad. I just want to understand if there is a segregation of capital allocation at the company when you analyze the deployment and the approval of new projects.

[Rafael Japur, executive]

Lucas, this is a beautiful question. We have a lot of segregation to see. This is the pocket of investment for Brazil. This is the pocket of investments for North America and budget limitations for the country. We have a consolidated approach regarding our total portfolio. But yes, capital allocation considering the consolidated balance sheet. This is the maximum amount that I can invest. What are my priority investments for the coming years, considering my leverage, expected returns and my strategic priorities.

In that context, we use discount rates. In terms of minimum desirable and necessary returns, which differ according to the different geographies. But overall, we have been prioritizing either in Brazil or the United States, Canada or Mexico, those investments that will drive cost competitiveness in detriment of investments that will prioritize growth or revenue because we understand that with our macroeconomic context, thinking about China globally, we have an oversupply of steel capacity in the world. So looking to be more competitive in cost is absolutely essential for our long-term existence.

[Mariana Dutra, executive]

Now we are heading towards the end of our call. We have one last question from Rafael Barcellos with Bradesco BBI.

[Rafael Barcellos, analyst]

From everything I've heard this morning, I would like to connect that to some of the conversations we had with investors. I think the main issue is how much the company can distribute recurrently cash returns to shareholders. It's very clear that the company favors buybacks. Now given the valuation level, and that's very clear -- it's very clear that buyback is your preference. And the company is doing some excellent work to reduce CapEx, to improve balance sheet. And now we are about to see the company running at a lower CapEx. My question is, how do you see cash generation for the company going forward?

The first topic is that what drew my attention was your cash generation this quarter and some specific issues, very low financial expense. And again, I know that there has been improvements to your balance sheet. But I just want to understand from this quarter, I mean, removing the seasonal effect, EBITDA and price. So what this quarter we could see something normalized or not? And the other thing I want to understand has to do with I mean, your gross debt guidance is BRL 12 billion. You have like minimum cash.

So how do you see these KPIs? I think this is something that can allow us to have a better understanding of how much the company can generate things in a recurrent way going forward. Again, just I was rejoining, and I don't know whether I heard everything about the last question, not only the story about Brazil and the U.S., but today, I see a clear difference in terms of where most of your cash generation is located, and it's clearly in the U.S. And if you look at minimum cash in Brazil and buyback considering that particular issue.

[Rafael Japur, executive]

Well, speaking about this particular quarter and what is different when compared to other quarters, if you look at our financial expenses, not in terms of cash flow. But when you look at the financial statement, there were 2 things that were not present. First of all, the exchange variation was lower in South America and in Argentina when compared to the previous half year.

And the other aspect is that in the second quarter, we issued a bond, is a 2035 bond with buyback of other bonds. So there was an expense with the buyback of bonds and issuance of bonds, about BRL 40 million to BRL 50 million that was not repeated this quarter. I mean this is different. But since we do not issue bonds every quarter, so this should not occur in the fourth quarter as well.

So I think this is the difference that you noticed in terms of our P&L, financial statement. But the third quarter seems to be more normal. I mean, if there is such a thing as normal nowadays, but more normal when compared to the second quarter. And this is linked to your second question. When you talked about capital structure, we announced the make-whole of our 2030 bond. There are several things that will be settle and that will lead to a reduction of our gross debt, close to BRL 14 billion, which is closer to our financial policy level. We are not anticipating any structural changes to our financial policy because in our view, it is adequate.

There might be just some fine-tuning here or there, but this is not a priority. And structurally speaking, we wouldn't want to leverage the company too much considering our current debt position. I think it's 0.81x net debt-to-EBITDA ratio. We used to be higher than that in the past. And even with a worse EBITDA in year-to-date, we got better leverage because of cash generation. And as we said in our last Investor Day that we expected to reduce CapEx investments in the coming years, if we think about maintenance of the other results in lines like EBITDA, working capital, et cetera, there was an increase in cash generation.

And as you said it quite well, we will return that to our shareholders through the share buyback. So usually, we -- our payout is between 30% to 40%, maybe there could be more room. But at the current level, we put our priorities in the buyback side. And -- once we have a stronger cash generation in the next coming quarters and years, we will continue with the buyback program.

The program is approved until the end of the year. We still have 12% of the program to be concluded. So eventually, I believe that it makes sense, your provocation and the expectation that we might engage in other buyback programs in the future.

[Mariana Dutra, executive]

Well, thank you very much. Our Q&A session is now concluded. And now I would like to invite you to join us on February 24 for the earnings presentation of the fourth quarter. Thank you so much, and I will see you next quarter.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]