Metalurgica Gerdau SA

BOVESPA:GOAU4

Earnings Call Analysis

Gerdau's Strategic Cost Reductions and Future Investment Plans

Gerdau's Q2 2024 saw a BRL 131 million one-off cost due to hibernating units in Brazil. Excluding this, EBITDA was BRL 665 million, 12% higher QoQ. Total quarterly EBITDA was BRL 2.624 billion with a 15.8% margin, down 1.6 points. The firm saved BRL 150 million in H1 2024 and plans another BRL 400 million in H2 through efficiency projects. By early 2025, annual savings are projected to reach BRL 1.5 billion. Gerdau is investing heavily in strategic projects in North America and Brazil, ensuring long-term competitiveness and exploring new market opportunities.

Navigating Through Uncertainty

In the wake of a turbulent quarter, Gerdau has demonstrated resilience amid challenges in both the North American and South American markets. The company is adapting to a complex environment characterized by inflation, fluctuating import dynamics, and domestic demands in Brazil. Notably, Gerdau's management underscored their commitment to navigating these challenges through strategic cost management and operational efficiencies.

Cost Reduction Initiatives

Gerdau has initiated a series of cost control efforts, forecasting a significant reduction in expenses. By early 2025, the company expects to achieve an annualized reduction of approximately BRL 1.5 billion in its cost structure compared to 2023 levels. In just the first half of 2024, they have already realized savings of BRL 150 million, with a projected additional BRL 400 million savings by year-end through enhanced production efficiencies and decreased maintenance costs.

Financial Performance Highlights

In the second quarter of 2024, Gerdau reported an EBITDA of BRL 2.624 billion, albeit with a slight margin decline to 15.8%. This drop was primarily attributed to lower sales prices in the North America business division and nonrecurring costs linked to the strategic hibernation of industrial units in Brazil. Excluding one-off costs, EBITDA would have risen 12% from the previous quarter. The management anticipates a rebound as they implement cost-saving measures and respond to improved market conditions.

Market Dynamics and Outlook

Despite pressures from imported steel and domestic market disruptions, such as those seen in Rio Grande do Sul during severe weather, Gerdau remains optimistic about market recovery. The Brazilian construction sector is on track to grow, with forecasts suggesting an 8.5% increase in new housing launches in 2024. Gerdau's management believes that these indicators, along with a stable demand in the U.S., will bolster sales in the upcoming quarters.

Strategic Growth and Investment Plans

Gerdau is poised to invest significantly in its growth initiatives, with BRL 1.42 billion in capital expenditure earmarked for 2024, half of which is focused on competitiveness projects. The company has already deployed 47% of its planned BRL 11.9 billion strategic CapEx covering 2021-2026. Furthermore, kickstarting new projects like the mining expansion at Ouro Branco will support long-term competitiveness and operational integrity.

Shareholder Returns and Buyback Programs

Recognizing the importance of returning value to shareholders, Gerdau has approved a new share buyback program, aiming to repurchase up to 68 million preferred shares and approximately 1.8 million common shares, which equates to an investment of about BRL 1.3 billion. This buyback program reflects the company’s positive cash flow outlook and strategic intent to enhance shareholder value.

Focus on Sustainability and Innovation

Gerdau has reinforced its commitment to sustainability, having become the first company in the steel industry to be certified as a B Corporation in North America. This milestone signifies a dedication to meeting social and environmental standards while promoting sustainable practices within their operations, bolstering their corporate reputation and stakeholder trust.

Navigating Forward

As Gerdau looks towards the latter half of 2024, it remains cautiously optimistic, bolstered by its strategic initiatives and positive market signals. The company aims to stabilize and improve its performance in response to economic conditions and operational adjustments. The outlook suggests a gradual resurgence in profitability driven by improved market efficiencies and ongoing project developments.

Earnings Call Transcript 2024-Q2

[Mariana Velho Dutra, executive]

Good morning, everyone, and welcome to Gerdau's video conference call for the second quarter '23 -- '24. I am Mariana Dutra, Head of Investor Relations, and participating in our video conference today are Gustavo Werneck, the CEO of Gerdau; and Rafael Japur, the CFO.

We would like to remind you that the broadcast of this video conference is being done with timely translation and to choose your preferred language simply click in the interpretation button via the globe icon at the bottom of the screen. For those of you listening to the video conference in English, there is the option to mute the original audio in Portuguese by clicking on mute original audio.

During the Company's presentation, all participants will have their microphones disabled. Later on, we will begin the Q&A session. Analysts and investors may be able to join the queue via the Q&A button and can open their microphone and camera if they so prefer.

The business prospects, projections and targets contained in this presentation are based on the beliefs and assumptions of the company's management as well as on information currently available. Forward-looking statements are no guarantees of performance and depend on circumstances that may or may not occur. Investors should understand that general economic and market conditions and other operating factors may impact the company's future results and the actual performance may differ from the outlook presented.

I will now turn the floor to Gustavo Werneck to initiate the presentation. Gustavo, you may proceed.

[Gustavo Da Cunha, executive]

Hello, everyone. I hope you are well. And thank you for the opportunity to meet with you during this video conference to announce Gerdau's results for the second quarter of 2024. I'm joined by our CFO, Rafael Japur. And it's always a pleasure for both of us to talk to you about our performance and also to answer questions that may arise during our presentation.

I will start by talking about the macro business environment, the highlights of the overall results. And next, I will detail the performance of our business operations in the quarter. Next, Japur will share some information about our financial performance. And then finally, I will move on to our Q&A session.

Well, I start my presentation by saying that we ended the second quarter of 2024 with an accident frequency rate of 0.67, a historically low figure, reinforcing our commitment to the health and safety of our people. At Gerdau, safety always comes first, since no result is more important than people's lives.

Before we move on to the presentation of the results, I would like to express once again on behalf of all Gerdau employees our solidarity with the people of Rio Grande do Sul, who are still going through a very difficult period due to the heavy rains that hit the state in May. Since then, Gerdau, which is a centennial company founded in Porto Alegre 123 years ago, has been active on various fronts in support of Rio Grande do Sul.

We have already contributed more than BRL 26 million to a series of initiatives to support, recover, and rebuild the state. These actions seek to support emergency and structuring projects so that Rio Grande do Sul can reclaim its leading role and the strength that is inherent to the people of Rio Grande do Sul. Among these initiatives, I would highlight the partnership with the UN Refugee Agency, UNHCR, to provide 100 emergency housing units to benefit up to 600 people affected by the rains in the metropolitan region of Porto Alegre. The project is part of a fund set up by the Company and the NGO Gerando Falcões to raise funds to rebuild homes in the state of Rio Grande do Sul.

Over the next three slides, I will emphasize that Gerdau continues to deliver solid financial results to its shareholders and investors and also a transparent business strategy based on strong discipline and cost management and its assets in Brazil continue to show increasing competitiveness. We constantly seek opportunities to adapt the company's structure to the current global business scenario.

Also, I would like to point out that, in the last 12 months, the monthly average of steel imports into Brazil was 396,000 tons, 66% above the historical average, totaling 4.8 million tons according to data from the Brazil Steel Institute. The penetration rate in the same period was 19.2%. We expect that, in the second half of the year, the domestic steel market should begin to feel the effects of the trade remedies recently implemented by the Brazilian government with the mixed tariff rate quota system.

Finally, regarding our sustainability highlights, I would like to point out that Gerdau has become the first company in the steel industry to be certified as a B Corporation in North America, representing another step in our journey of sustainability and value creation with our stakeholders. The certification of our long steel and special steel operations in the US and Canada reaffirms Gerdau's century-old commitment to contribute to solving society's challenges and quandaries while promoting a positive impact in the regions where we are present.

Moving on to the next slide, I will comment on the highlights of each of our business divisions and the outlook for the coming months. In 2Q24, the performers of the North America business division remained unchanged from previous periods. The results reflect the resilience of the North American market, which contributed to keeping local demand for steel at healthy levels with our backlog stable at a high level of around 50 days, even despite lower prices in the period. The U.S. market will continue to be positively impacted by government measures such as the Inflation Reduction Act, IRA, the public infrastructure investment package, in addition to reshoring movement and the maintenance of Section 232.

As a point of attention, we are closely monitoring the uncertainties linked to the presidential elections in November and also the dynamics of the economy in general, including inflation and interest rates. In parallel, we continue to invest in improving operating efficiency and modernizing our units in North America in order to improve the competitiveness of these operations and provide a portfolio of innovative products and solutions that meet the current and future needs of our customers, like for example, the future demand for steel brought about by the major infrastructure investments planned in the country.

Moving on to the next slide, I will now talk about our Special Steel business division. The automotive market in the US continues to recover, with the production of light and heavy vehicles projected to exceed 16 million units in 2024. There is still room for however for a more intense recovery in the coming periods, returning to pre-pandemic levels. The heavy vehicle and oil and gas segments should face a scenario of slight deceleration in the year to date. In turn, the outlook for the special steel market in Brazil is cautiously more optimistic as a result of some signs that point to a rebound in automotive activity, especially in the heavy duty segment. Heavy duty production in 2024 is expected to grow by 32.1% according to data from ANFAVEA, mainly driven by the performance of bus production. The market, however, remains attentive to the uncertainties linked to access to credit lines, high interest rates, and the excessive entry of imported vehicles.

As a highlight, we recently completed the certification of all the steel produced from the new continuous casting process at the Pindamonhangaba plant, which allows us to offer products with higher added value to the market and optimize the performance of our operation in terms of productivity.

We now move on to the next slide to talk about the South America business division. In Argentina, meanwhile, the local steel market reached its lowest point ever in the second quarter following inflationary pressure and the economic measures taken by the new administration, such as the depreciation of the Argentine peso. Steel demand in the country is expected to recover slowly in the short term, with a stronger upturn expected in fourth quarter of the year. The outlook for Uruguay remains positive, reflecting good levels of steel consumption, particularly from the agribusiness sector and public and private investments. In Peru, GDP has exceeded market expectations in recent months and has risen by 5.5%, boosted by a good performance in the fishing, manufacturing, and construction sectors. The construction sector even reported a similar rise of 5.5% in the period, driven by investments in public works.

Moving to the next slide, I will now talk about the long and flat steel scenario in Brazil, whose performance in 2Q24 continued to be impacted by the strong inflow of imported steel in the country, since the trade remedies I mentioned earlier have not yet taken effect in the local market.

In addition, during this period, our shipments were impacted by production capacity readjustment initiatives and were also partially affected by the temporary shutdown of our unit in Rio Grande do Sul and the logistical restrictions imposed by the heavy rains that hit the state in May.

I would also point out that we expect to see some positive indicators come to fruition in the Brazilian market, especially with regard to the construction industry and a more significant drop in interest rates. One example is the forecast of an 8.5% increase in the number of new housing launches in 2024 compared to the previous year, according to ABRAINC. Furthermore, I would like to mention that the GDP of the construction industry is expected to increase by 1.7% this year, reversing the slight drop reported last year, according to IBGE.

Now, I will hand over to Japur, who will give some more details on the Brazil Business division, and afterwards I will be back to answer your questions. Over to you.

[Rafael Japur, executive]

Thank you, Gustavo. Hello, everyone. It is always a great pleasure to be here with you for our earnings release conference call. As you can see the blue highlight on the slide, in the quarter, we had BRL 131 million of one-off costs related to the hibernation of some industrial units in Brazil, as Gustavo has mentioned previously. Excluding this impact, EBITDA in the second quarter would have been BRL 665 million, which is 12% higher than in Q1 '24.

Moving on to the next slide, I will give you more details about our cost reduction initiatives. Since the end of last year, we have been carrying out a series of initiatives in our business divisions with the aim of optimizing our cost base. The expectation is that, at the start of 2025, we will have a cost and expense base of approximately BRL 1.5 billion lower than that posted in 2023.

Looking at the left-hand side of the slide, we detail the initiatives coming from the Brazil BD, where we expect to see savings of approximately BRL 1 billion in annualized terms. In the first half of 2024, we have already saved around BRL 150 million through initiatives to readjust reduction capacity in Brazil and efficiency improvement projects. For the second half of the year, we expect to save another BRL 400 million focusing on increasing the operating leverage of our plants due to hibernation, optimizing maintenance costs, and a lower consumption of specific materials.

At the start of 2025, we anticipate the annualization of these earnings that I have just mentioned. On the right-hand side of the slide, we present initiatives of the other business divisions where we intend to save around BRL 500 million on an annualized basis. These initiatives primarily contemplate improvements in the productivity of our operations and stabilization of gains from some CapEx that we have recently executed.

Therefore, without taking into account the possible impacts from shipments, inflation, exchange rate variations, and fluctuations in raw material prices and focusing only on what we can actually control, we expect to see the reduction in our costs and expenses reflected in the whole year 2025.

Now, let us move to the financial results in our EBITDA. We ended the quarter with an EBITDA of BRL 2.624 billion, with a margin of 15.8%, down 1.6 percentage points from 1Q24. This reduction in EBITDA in the period was mainly driven by lower sales prices in the North America BD due to the rollover of higher raw material costs compared to the first quarter. And as already explained, the nonrecurring impact associated with the hibernation in Brazil.

We now move to the next slide, where we will talk about our cash flow. In the second quarter, we allocated BRL 259 million to working capital, mainly as a result of the preparation for the reallocation of production capacity of our units in Brazil. The working capital line, when we look at our balance sheet rose by another BRL 800 million due to the 11% exchange rate variation due to the 11% exchange rate variation between March and June, but it is important to highlight that this exchange rate variation has no cash effect. We spent approximately BRL 1.2 billion on CapEx in line with our guidance.

In addition, it is important to remember that, historically, the second quarter of every year sees a more substantial concentration of income tax payments. But even with significant cash outflows, we had a positive free cash flow of BRL 89 million in the second quarter. We ended the second quarter with a gross debt of BRL 12.5 billion and a healthy leverage level of 0.53x. The increase in the company's debt was a result of the conclusion of the issuance of BRL 1.5 billion in debentures with a five-year maturity plus the effect of the exchange rate variation on our foreign currency debt in the period, corresponding to BRL 839 million. The chart on the right shows the new maturity schedule of our debt in our robust liquidity position of BRL 11.5 billion, considering the sum of our cash position of BRL 6.6 billion and the $875 million of our revolver line, which is fully available and undrawn by the company.

Now, let us talk about our CapEx in 2Q24. Our investment in CapEx totaled BRL 1.42 billion, 50% of which was earmarked for growth and competitiveness projects. To date, we have already invested 47% of the BRL 11.9 billion foreseen in Gerdau's strategic CapEx for the 2021-2026 cycle. In Brazil, investments in mining and flat steel in Minas Gerais have reached around 55% of the physical and financial plan, and their schedules remain unchanged as planned.

Moving on to the next slide, let us talk about the return to our shareholders. In addition to the dividend of BRL 0.12 per share at Gerdau S.A. and BRL 0.08 per share at Metalúrgica Gerdau, the Board of Directors of both companies approved a new share buyback program. At Gerdau, up to 68 million preferred shares and approximately 1.8 million common shares may be acquired. Considering the prices of the last few weeks, the buyback program represents an investment of approximately BRL 1.3 billion. At Metalúrgica Gerdau, up to 33 million preferred shares may be acquired, which represents an investment of approximately BRL 350 million. Both programs will be valid for 12 months starting now on August 1 of 2024.

[Unknown Executive]

Thank you, Japur. Well, I'd like to thank you all for listening to our initial comments and remarks, and we'll be happy to answer any questions you may have now. And perhaps go over any points of interest that you might have. Thank you.

[Operator]

[Operator Instructions] So first question is from Daniel Sasson from Itau BBA.

[Daniel Sasson, analyst]

First of all, I would like to thank you for being so transparent because you gave us a road map about how you are going to reach your target this year, and I think the market in general is not fully aware of the potential that is gained through these models. If you can please remind us what the potential of the Brazil cost in dollar terms is so that we can have an idea of the dollar amount or the depreciation of our currency, this would be very helpful.

If I am not mistaken, the guidance or this expectation of BRL 1 billion is also in actual base is real basis, because is it reasonable to consider IPCA in this map because your costs seem to have a different inflationary calculation when compared to IPCA. Could you help us think about the main drivers that impact this account?

My second question is on CapEx. I think your CapEx was BRL 2.3 billion in the first half year, so do you think we should expect an acceleration in the second half so that you reach that BRL 6 billion of guidance for the year, or maybe the number for this year should be slightly below, probably rolling over to 2025 and onwards? I think this is what I have.

[Rafael Japur, executive]

Gustavo, and -- well, Daniel, thank you for your excellent questions. I think Japur can give you more details. So, first of all, welcome -- let's welcome Mariana Dutra. She is now a new addition to our IR team. I mean, she has been with us for a long time, and she had experiences in other companies also, so we are very pleased to have her with us today.

Daniel, in terms of your first question regarding cost composition, as part of our Brazil cost structure, it may be unlike other companies that are probably more focused on integrated measures or more dollar-denominated costs. Let us take a typical year of the company and let us think about the dollar-denominated accounts like coal that we import and ore from third parties that sometimes we have to buy. And even though it is in Brazil, it is denominated in US dollars and also alloys that are acquired in the international markets.

So, approximately between 20% to 25% of the Brazil operation, not the entire operation, but more specifically the Brazil BD, I would say that there is a very strong relationship with the U.S. dollar. On the other hand, when we think about our revenues, between 10% to 15% depending on the mix and international prices, between 10% to 15% of our revenues are also directly linked to that foreign currency without even considering possible moves that may occur due to the parity of the imported goods.

So, specifically regarding to foreign exchange exposure, these would be the percentages that should be taken into account. Now, when we think in terms of inflation based on the IPCA index or other indexes, our expense costs SG&A and personnel salaries, these are very much correlated to the IPCA index. So I think that it will be closer for us to have a relationship with IPCA.

Other costs like variable costs, like utilities, raw materials, scrap, the dynamics of these costs are very peculiar and depend on market dynamics. That is why when we talk about BRL 1 billion in the Brazil operation, what we expect to gain in terms of competitiveness is based on the cost that we can control, that it's in our hands without mentioning things that are out of our managerial control, I would say.

So I think that this quarter we were able to deliver part of these gains, but the part that is linked to the hibernations would be more clearly seen in the second half of the year but we are very confident that we will be able to deliver things in line with what we plan, and so in 2025, we will be more in line with what we were in 2023.

Now, to answer your second question on CapEx, in the last few years, our disbursements have been stronger in the second half of the year when compared to the first half that's where we typically have our maintenance downtime. There is a typical seasonality that comes in the third and fourth quarters, mostly in the fourth quarter. And as the bulk of our CapEx investments, they are now not greenfield, they're brownfield, we have to stop some critical equipment so that we can have some more serious interventions in these CapEx. That is why, typically in the second half of the year, we spend more CapEx when compared to the first half.

[Gustavo Da Cunha, executive]

Daniel, I just have an additional comment. That cost has been very relevant for us here in Brazil. It was relevant in the last quarters and continues to be very relevant. We made an important change in our Brazil BD, we promoted one of our leaders. His name is Mauricio Metz, and he is the number one person in charge of long steel and mining. He has been with us for several years, and he worked on several occasions with me he was a rolling mill manager, melt shop manager, and, more recently, he was a corporate officer for the engineering operations. He had the opportunity to travel around the world and be very familiar with the cost operations of several competitors, competitors that are very bold in that regard.

So, in terms of cost and performance, these are subjects that are quite relevant to us, especially throughout the journey that Japur just referred to before. So, he is a new leader in our Brazil BD, and, at the right moment, I will formally introduce him to you so that you can talk to him in more depth. But certainly he is an individual that could escalate our operations in Brazil, and we will attain a level never seen before. So, I would like just to highlight that everything that Japur said should be translated into practical examples. But like one example of our commitment is that we brought to our Brazil operation an individual that is very knowledgeable about performance and competitiveness.

[Operator]

Our next question is from Marcio Filho from Goldman Sachs.

[Marcio Farid Filho, analyst]

My question relates to the North America BD. I think our recent interactions with investors, people were a bit scared with the performance of HRC and rebar this year. So what we see on our end is that merchant bars -- it's almost 80% of your volume is much more resilient, not only this year but in the past 2 years as well. And historically, the correlation with rebar has been quite strong. But since the end of 2022, we've seen a detachment, especially of metal spreads, which remains to this date. So if we could probably elaborate a bit more on that gap. And how much do you think would be sustainable looking forward? And what will be the main data points for us to look at?

In terms of the Brazil BD, there were some recent news and the first one being import tariffs. I think Gustavo, you were very vocal about the importance of these tariffs. And partially, we saw that things are already being implemented. But it's still a bit confusing in terms of the actual impact once the tariffs are put in place. So it will be nice if you could educate us further in terms of the impact of the tariffs, and consequently, the recent price increases that came on the trail plate of the depreciation of -- the foreign exchange cost is a relevant aspect as well. Just trying to understand how much of that is incremental EBITDA? Because if you assume that you lose revenue, would shipments and zero margin.

I mean the margins improved, but not necessarily your incremental EBITDA follow suit. So if you could also elaborate on that, I would appreciate it.

[Gustavo Da Cunha, executive]

Excellent. And these are excellent points for our debate. So connecting North America and Brazil, we were very confident also at the end of third quarter because we were overcoming the most difficult quarter of the year. And a few weeks ago, we had a very strong outlook that, starting the third quarter, results in general for Gerdau would improve.

And when we look at these two important geographies for the company, they were maybe slightly more concerned with the points that you raised. I mean, how much of these drops that we saw in terms of flat steel and rebars could really hit our main products, I mean, large structural alloys and structural profiles. And we had already anticipated that it would be a drop, but it will be more than compensated by the recovery of the Brazil BD in such a way that the second quarter would be the most difficult quarter for us this year.

So what happened now and we already started seeing the results. The results that occurred in July are just proving that our thesis was in the right direction. First of all, because in North America there was a lower reduction that we imagine in our business in these specific categories or products, which are the focus of the company.

In July, therefore, we did not notice such a drastic drop as we envisioned because things remained very solid, our business, our backlog, our strengths. We assume that there will probably be a slight drop in the next coming months, especially because of the coming election and the volatility, but we think that it will be lower than planned. Therefore, everything there remains very solid in terms of backlog and spread. I was very optimistic with the results from North America and even more now.

And another good thing that leads us to say that we will see a continuous improvement of our results are things related to Brazil. In July, we saw things performing better than we imagined. And a good part of it comes from the cost part that Japur mentioned. We are now reaping the benefits of all of the internal moves we made, like hibernating some operations and this continued search for being more competitive.

But, again, we start seeing some changes in the perspective related to imports. Of course, Marcio, it is still too soon to tell because the tariffs have been in place since July, but I was very pleased to see the results that came in terms of imports. I think it will take a few more months to be more certain about the results, but I am very optimistic, and I know that we are moving in the right direction. I am not saying that this will solve everything because probably it will not, but the dialogue with the Brazilian government authorities has been quite open.

So if this does not solve the issue, we will continue to debate, or maybe we will include other items in that mechanism of the tariff rate quota system and the anti-dumping process. But we have to be carefully -- we have to carefully look at this move. And probably, there will be a reduction in productive capacity in China. I think all the factors are becoming more aligned in terms of North America, Brazil, and special steels. And in fact, I think that the most difficult moment is already in the past, and now it is time for a rebound. That recovery will be slow. There will not be any out of the ordinary effect that will lead us to a very sudden change, but certainly everything that is happening is proof that our results will improve starting in the third quarter. Now Japur, maybe you can talk about that cost part of the question.

[Rafael Japur, executive]

Marcio. So, let me do a quick follow-up. The idea is that, with the reduction of our base of costs and expenses, particularly in the Brazil BD, where this is more significant, we will see a good increment in our EBITDA, very close to the numbers. Of course, there are other situations like price policy, raw materials, and other things that are also very representative in terms of the composition of that number, but these are things that we can control. But if we think about maintenance expenses, expenses with specific materials, expenses with travel and other SG&A topics, real estate expenses, and service providers, our idea is to have a leaner operation, more efficient, and also capable of navigating through a better scenario. Then we would have better results when compared to this last quarter.

[Operator]

Our next question from Leonardo Correa with BTG Pactual.

[Leonardo Correa, analyst]

So, Werneck, am going to get away from the usual protocol of differentiated questions, and I will go back to the same tune of the recent conversation about the last question. I just want to check if I understood everything well or if there is anything we should think about.

You see, when we look at the last few guidances of U.S. steel companies, your peers, we understand that there is a huge difference in the product mix of Gerdau. We observe that the flat steel price in the U.S. collapsed 40%, and, in your best scenario, this is not applicable to you. I do understand the mix, but the general message has been kind of this, the Q3 will get worse that there will be a margin compression of metal spreads. In the front line, we see a lot of macro indicators showing a more marked worsening. There is also the political issues that you mentioned in the introduction.

So I would just like to confirm this with you. Are you observing a different scenario than your peers, one that is more resilient and stable in the United States coupled with a Brazilian scenario that would improve sequentially, given all the successful work that you have been doing of cutting costs?

So the result tends to improve quarter after quarter, so I would like to confirm with you with a focus on the next quarter. We always try to look a little farther ahead, but the kind of your message is different from the message of your peers. I just want to check if I understood this well. What kind of progression do you see in Q3? So that's number one.

Now, moving to another point. Regarding prices, unfortunately, we did not have a lot of help from the government regarding long steels. There was nothing in the NCMs regarding the tariff rate quota. You are trying to approve this increase. I know that the Platts is imperfect, but it kind of captured some of this increase of 1% to 2% of pass-through. Therefore, I would like to understand how you see this scenario of recomposing your margins and passing-through prices. Werneck spoke about civil construction, so I just want to confirm that the prices are being passed through.

[Gustavo Da Cunha, executive]

Good things to debate. What you understood is correct. When we look at public information and when we hear the earnings calls of our US peers, just like our call here today, these are all public interactions that we follow so that we can understand how they are seeing the US scenario and to compare with the way we see things. And your interpretation was very precise. In the last earnings calls in the United States, we see that they are being very vocal regarding their plans increase in imported products. They started talking about the triangulation via Mexico. We start seeing some progress in the USMCA by putting some pressure.

So, indeed, the flat segment is very much impacted, and the flat segment not just because of the imported products and a moment of recursion they use prime scrap. We do not use prime scrap, we use obsolete scrap. So, yes, there is a gap, but not just now. It has been happening for a while because the market demands are different. The supply and demand dynamic. In our segment, we do not have new capacities, greenfield capacities being built, it's all very stable. So the theme is using obsolescence scrap not using prime scrap and the fact that we do not have new capacities. But a theme that has been helping a lot is the strong demand. In recent months of two incentive programs of the federal government, what they call CHIPS Act and IRA, they haven't had an impact on our backlog.

CHIPS Act, which is a relocation of productive capacity of semiconductors, is an investment of $450 billion right now in the United States. If I am not mistaken, 25 new semiconductor plants that are being built. This has a direct impact on our product mix. So there is this gap -- this detachment. We are looking at this carefully a while because the presidential elections are coming up and there might be some volatilities along the way.

But in the month of July, these volatilities, these volatilities did not really have an impact as we had expected, so there is this detachment. And looking at 1/3 of the Q3, I guess that in the next 2 months, we can actually sell that it is better than we imagined. So that's what's happening. A number of small factors that are leading to this detachment in the market of structural profiles from rebar and others. So you were very accurate in your understanding. And you asked about cost and I'll give this the floor to Japur. But before that, you spoke about prices. We're recomposing the margins. In our plans, we never included that these commercial defense remedies that were implemented as of June 1, we never considered this to significantly change the pricing scenario.

We have to be very careful about this topic, we do not want to speculate. We just want to recompose prices considering inflation and costs. The impact of imported raw materials is lower for us at Gerdau, as Japur already mentioned, but it does have an impact. So there is a narrative in the market right now that is being well absorbed and digested i.e. that we can, through prices, recompose our margins. So this is unfolding. It is a slow process, but it is moving in the right direction, Leo.

And in this quarter most likely in the next one as well, we can expect an evolution of the margins coming from adjustments for inflation and for increased prices of raw materials that we had in recent months. So, overall, our visibility of the market is very similar to yours. I just want to reinforce that, in terms of demand, everything is very stable. Of course, I would like that the steel demand in Brazil would increase from 100 to 150 or 200, but this is not happening. However, compared to previous years, it is very solid. And the civil construction is easy to observe. We have our cut and bend operations. When a new real estate launch happens, we are demanded to help with the detailed engineering, calculating the demand of steel that will be necessary, so the backlog is rather healthy and in other segments as well.

In our special steel operation, we start seeing an increase in the number of orders placed for this segment, particularly for the heavy duty industry in Brazil and coming a lot from the manufacturing of buses, to be more specific. This recovery in special steels in Q2 came from this, and we are optimistic because the segment was suffering with a huge arrival of imported vehicles from China. This is being reversed, and it is very likely that we will have progress in our deliveries of special steels in Q3.

But, overall, your interpretation is very similar to ours at this point, and this is sustained by what happened in July. And Japur has spoken a lot about cost for [indiscernible] But Japur, of course, feel free to add.

[Rafael Japur, executive]

Just to add very quickly, the main topic to observe as a trend in Q3 should be the variation of prices in North America. In flat, we see some recovery, some announcements of increasing our in HRC. This normally matches scrap. And us, we have more visibility and maintenance of this price differential between our prices and other long products, perhaps the expectation will be that we'll maintain our margins.

[Gustavo Da Cunha, executive]

And Japur, perhaps you could tell Leo about the fact that we have been implementing these measures of hibernation to increase utilization of our mills. And also, this wind changed now that we have a slightly more positive scenario. I think that this will help us in Q3 also regarding the increase in imports because this will help us dilute costs. Increase in exports actually.

[Rafael Japur, executive]

But this is a thing that we are looking at close. So we see an exchange, totally different, 11% increase quarter-on-quarter, this was out of our radar, but we understand it as a positive upside to reassess our contribution margins and explore some opportunistic volumes of exports during Q3 and Q4.

[Operator]

Next question, from Rafael Barcellos with Bradesco BBI.

[Rafael Barcellos, analyst]

Regarding my questions. I think the first point that was not mentioned here, regards capital allocation.

In 2019, you had a gross debt of 2 -- target of BRL 2 billion from 2019 to now, the real has depreciated about 40%, and we know that more than 50% of Gerdau's results come from the US and North America. So do you think this level of BRL 12 billion of gross debt is still adequate for the company to pursue, or do you think it could be a little higher?

In addition, perhaps you could remind us of the appropriate level of minimum cash for the company. In this context, the main dividend in recent years has been announced in the result of Q3. Having said all that and about the context of a minimum cash and gross debt and after the announcement of the buyback program, how much room do you see for more cash returns to investors this year, particularly after the result of Q3, considering that you have a more positive outlook for the second half of the year?

And my second question would be about the Brazil BD. Just a follow-up in the release, you mentioned the one-off effect of readaptation of the operations with BRL 131 million as effect. It would be interesting if you could elaborate on until what quarter we should have these non-recurring events impacting the result, and what is the magnitude of order so that you can achieve a reduction of BRL 1 billion in costs and expenses?

[Unknown Executive]

So, Rafael Japur will answer Rafael Barcellos.

[Rafael Japur, executive]

For capital location and capital structure, it did not change a lot. When we spoke about BRL 12 billion gross debt is the debt target and our cash at the same time. Internally, we have always spoken about dollars, the corresponding amounts in dollars. So, our net, we are trying to get close to $1 billion and our cash of around $1 billion between, which is between BRL 5 billion and BRL 6 billion. So, materially, there is no change regarding what we see today as an ideal capital structure for the company looking at not just today's results but in the long run.

Regarding capital allocation, it is true, for a number of reasons, particularly due to our greater capacity to generate cash in the second half of the year compared to the first half of the year. Normally, our main capital allocation for buyback or extraordinary dividend payout always tends to happen in Q3 at this year as our balance sheet continues with a capital structure very close to what we consider to be optimal and as long as we can have a more robust cash generation in the coming quarters, the idea is that will probably repeat this trend that we saw in recent years.

Regarding the second question about capturing cost reductions, on the slide, we tried to give a little more color about that. And of course, considering that the hibernation we had in Brazil happened in the month of June and they continued to happen because we will finish rolling intermediate materials that we produced before in the chain and the mills over time, so, over the second half, we will see these expenses that were deferred and we will start seeing the benefits of a greater operating leverage of the mills that are receiving these volumes from the mills that were hibernated, so generating more concrete results -- concrete effects on the results. That is why we understand that, in the second half, we will be capturing more cost reductions in our plan to optimize our cost and the expenses based in Brazil of around BRL 1 billion in the comparison. In 2025 we expect to achieve a normalized base compared to 2023.

[Operator]

Our next question from Rodolfo Angele from JPMorgan.

[Rodolfo De Angele, analyst]

I have just one question, and the question is to you, Gustavo. You were answering one of the questions, and, I think you, and also during the beginning of your presentation, you referred to the fact that the government measures have not yet had the material effect. And I believe that the industry is very close to the government authorities, but do you think there is a possibility of some further adjustments and then include more long steels?

I would also like to hear from you because I was quite skeptical about any kind of measure, but they came. So I know that you are very close to the government, and you have been talking to the government, so what should we expect going forward?

[Gustavo Da Cunha, executive]

Rodolfo, I do believe that there will be some adjustments. Everyone in Brasilia is very open about it. We talk about this topic twice a week. We talked to people from the Ministry of Industry and Development, and they were responsible for the initial debate and the implementation of the measures. So this control mechanisms of how the quotas through import licenses, what kind of visibility the members have, and the advance in the quotas. There is a better understanding now about how we control that. And because of that, the conversation is very good. We are on the same page.

So the entire technical team from the ministry understands the relevance of the steel industry in Brazil, and they understand what is happening in terms of unfair competition. Since Brazil exports a lot of iron ore, there is a lot of price competition, and they understand that once the ore goes, it comes back at a lower price. I mean, they have a very clear understanding of the market, everybody is very open.

But we hope to overcome a cycle of 4 months, 2 months have already passed, June and July, and once we look at the numbers at the end of this 4-month period and we realize that, in case of some mismatch and some lack of control, we see an increase in imports, there is a possibility of adding more things. The most difficult part has been done, which was to define the mechanism and find out how things would operate, but since we already have the base, other measures can be easily deployed. So the process is under control. So my objective answer is yes. I remain very optimistic, and other measures may follow suit.

[Operator]

Our next question if from Carlos De Alba from Morgan Stanley.

[Carlos de Alba, analyst]

The first question is on the share buybacks. Congratulations on the announcements. I just want to make sure that the intention is to execute the buyback. Just to be crystal clear, the board approved the program, so you will execute it the next 12 months, right?

[Rafael Japur, executive]

Hello, Carlos. It is nice to see you one more time. The idea is to execute the program. On the previous occasion, when we executed the program, we fully executed the buyback program. So, yes, we are approving the program with the intention of executing it in the maximum period of 12 months for both Gerdau S.A. and Metalúrgica Gerdau.

[Carlos de Alba, analyst]

How do you see, I mean, clearly in the second half of the year? You anticipate some improvement, right? What I could depict from the message was clearly an improvement of EBITDA performance towards the third and fourth quarters, and this contrasts very strongly with what other peers mentioned. Basically, I just want to confirm that information because this is very different from what we have heard from other steel companies in the industry.

[Rafael Japur, executive]

Well, I'll try to answer in [indiscernible] as well. I think that our cost structure is different. And as I said, in our case, between 20% to 25% of our costs are exposed to U.S. dollars. Other companies are probably more exposed to the U.S. dollars because maybe they depend on more imported inputs, which is not our case. And we also understand that the market has been positive, as Gustavo mentioned, the demand there is not the ideal demand, but we are seeing growth both in demand and domestic sales. Therefore, we understand that there is room for improvements in the Brazil results in the second half of the year, be it through better economic market conditions but mostly due to incremental results that we will have due to our initiatives to optimize costs and the hibernations that we did in the month of June.

[Operator]

Our next question from Caio Ribeiro with Bank of America.

[Caio Ribeiro, analyst]

Firstly, going back to the order book in the United States, particularly that linked to the infrastructure package, Werneck spoke a lot about the favorable dynamic of the IRA and the CHIPS Act. And the question is, would there be any component that you believe is missing to generate this effect of positive demand for long steel in the U.S.? Perhaps you could speak more about other components that would help.

Secondly, we see a relevant reduction in the sales mix abroad and that happened in Brazil as a percentage of the whole, with a clear trend in the last three quarters. And I understand that, historically, this tends to help the dynamic of realized prices, margins, and even the mix of products exported, which traditionally have been semi-finished steel products.

And, Japur you mentioned that sees an opportunity to take advantage of the exchange rate of depreciation to have a more opportunistic export. So my question is regarding the difference in profitability between these shipments abroad and domestically. Is there still a big difference, or whether the mix of exported products has been changing? And what percentage do you think that exports of the whole should stabilize it?

[Gustavo Da Cunha, executive]

Thank you, Caio. I will start speaking about North America BD and then Japur will help me detail Brazil BD. We have to take some steps back, Caio, some years back, not thinking that the current profitability levels are solely the result of the market. We went through an intense transformation in our footprint of assets in the last 7 years in North America. So, in terms of this process of hibernating some plants, we went through that. Just as an example, we shut down our Saint Paul plant, which was not productive. We transferred products to other mills. We made relevant investments in at least five mills in North America. The latest one is the Whitby plant in Canada to have a more complete and more profitable mix of products. So, everything we did, we are reaping the fruits of that now. Also the fact that we do not use prime scrap.

This is a 5-year strategy to work very structurally with obsolete scrap, which is cheaper and there is not a lot of competition. So our ability to compete in North America evolved a lot and progressed a lot in recent years. Now, we have been working more on recent orders to add more downstream capacity.

Regarding the IRA, a practical result is the racks of metal structures that support solar panels. So we have added some downstream, aiming to prepare these steel racks already cut and drilled. So, our capability of supplying a better mix of products and services to our customers in the segments where we operate has evolved a lot in the last 7 years.

So what's happening now is that these packages that were mentioned are directly linked to our product mix. A practical example is the current impressive growth of steel for data centers that have been built in the US. If we consider artificial intelligence and the need to store more and more data, we have a lot of orders for steel for data centers.

Another qualitative change we saw is that there is a lot of investment in health care in the United States, and this is directly linked to our product mix. So these are examples that are peaking in the United States, and they have been helping us quite a lot. In terms of infrastructure, the infrastructure package is moving slowly. We see an impact. We believe that this impact will materialize even more along the next quarters.

I would like to draw your attention to one last theme. We always comment on this, and you know about the sales of our rebar assets. We maintain our rebar production capacity in the United States. If there is a momentous reduction in demand, we can increase the production of rebar in these mills, continuing to have a very good level of utilization, and we continue to have a dilution of fixed costs, which is very effective.

So this has been contributing for us to maintain our performance level. Therefore, it is not just the packages but also a pool of factors that we have been working on in the last 7 years, and the market situation that we are going through right now all together is what is allowing us to positively detach ourselves from our competitors. Japur anything to add on about the specific topic. Can you speak about the Brazilian operation.

[Rafael Japur, executive]

All right. So regarding the mix, we understand we cannot compare the margins between the domestic market and exports because these are very different products. We are very much focused on exporting semi-finished products sometimes to our subsidiaries abroad or old subsidiaries in the case of Colombia and the Dominican Republic.

But, yes, overall a rule of thumb, we have a better margin because we have a better added-value product here in Brazil. We believe that with the current exchange rate level and our cost structure, we have room to export some extra tons than we had before, considering these volumes that we have now the exchange rate in our available capacity, considering possible prices and the exchange rate fluctuation looking forward. This is something that we have to monitor month after month. And as regards -- would you like to comment on this, Gustavo?

[Gustavo Da Cunha, executive]

We are very optimistic in the coming months about the entry of the second phase of our HRC in Ouro Branco. In the coming weeks, we will start testing the equipment, and that will add 250,000 tons of HRC. Our rolling mill has been working at a limit. We have a differentiated capacity of delivering these products via Gerdau Comercial and some customers that require a more complex mix of products. But this is just one example of how we change our product mix to a higher added value product mix. And Japur would to like to add.

[Rafael Japur, executive]

Because I think that a super relevant point, Caio, and I think is kind of common in commodities companies, that, normally, the market does not consider face value and does not consider expansion and growth projects. But we're in the eve thinking about cyclical sectors like ours, and 6 to 18 months is a very short term. If we consider the investments of the arrival of coil, hot rolled strips, the conclusion of our investment in Monroe in special steels in North America, and the entry of a mining capacity in Minas Gerais at the end of next year.

So if we think about strategic projects of the company, in a 6 to 18 month time frame, we've a set of projects, we will start the ramp-up of a set of projects that Gerdau have the potential to generate two up to BRL 2 billion in result in the midterm. So we are talking about expanding.

If you think about the numbers that the analysts have that oscillate between BRL 10 billion, BRL 11 billion actually I correct himself, of EBITDA, we talk about an expansion of 15% to 20% in the potential of creating value and results for Gerdau in the midterm. These are important things. Of course, we have to pay attention to short-term opportunities, such as how to capture more volume with higher contribution margins, but we are about to have an important transformation in the intrinsic quality of our assets and Gerdau's results.

[Caio Ribeiro, analyst]

Excellent, Werneck and Japur. Thank you very much. I would just like to ask for a clarification, Japur, because when you were talking about increasing exports, there was a sound cut, so we could not hear the number. If you could repeat that, we would appreciate it.

[Rafael Japur, executive]

Of course. We see the potential of exporting 100,000 to 200,000 more tons than we would imagine this year considering this level of a high exchange rate. Of course, we will not go back to turning on other capacities to do this. We think about opportunistic exports, considering our cost structure, capacity availability, and this more positive moment we are seeing regarding the exchange rate favoring exports.

[Operator]

Next question from Ricardo Monegaglia from Safra.

[Ricardo Monegaglia Neto, analyst]

I have two objective questions. Firstly, it seems that the balance of the long steel market improved more recently, and it is a little tighter than in flat steel. I would like to know if you share this perception that, perhaps, we have an environment a little more favorable to increasing prices in long steel than in flat steel. That is my first question.

The second question is about Gerdau Next. If could you comment on your investees? Is there any news expected for the second half of the year, or no news is coming? These are my questions.

[Rafael Japur, executive]

Ricardo, regarding the market, particularly in Q2, there was an important topic regarding the floods in Rio Grande do Sul, which impacted our volume of shipments in Rio Grande do Sul state where, because of our history, we have a substantial market share but we believe that there is more room for recovery of volumes in long steel in the second half of the year.

Regarding Gerdau Next, we do not have a lot of news compared to what we have disclosed. Basically, the big investments we have are known. We'll start energizing some of our -- Parque Arinos in the north of Minas Gerais that should start operating in the second half of the year part of that park. And our investment in Addiante with Randon and is progressing well in recent months. These are the main capital allocations, and, at the moment, we haven't got any new front that we're opening at Gerdau Next.

[Operator]

Our next question from Lucas Laghi from XP.

[Lucas Laghi, analyst]

My question relates to something that Japur already mentioned, but it has to do with incremental return in terms of your strategic CapEx. He talked about the BRL 2 billion in results, and I just want to confirm whether this BRL 2 billion is total or whether we could think about this ramp-up from 16 to 18 months that you mentioned, maybe thinking about BRL 1 billion or half of that amount, given that you have already allocated half of that strategic CapEx.

Just running some quick math, the BRL 2 billion result considering post-taxes, 10% to 20% of ROIC, and considering that is strategic CapEx, whether this would be the ongoing rate for new projects? I think this is important for me in terms of capital allocation.

[Rafael Japur, executive]

Lucas, I do not think we should refer to it that way because the largest project, which is the mining expansion, will be concluded only at the end of 2025. Therefore, its ramp-up will occur throughout 2026. That is why, unfortunately, we cannot do that math. I think the return that is coming is the expansion of the HRC, which will occur at the end of this year. So, in 2025, we will have the ramp-up of the project. We already mentioned to you that before, so that should be around BRL 400 million of incremental EBITDA related to the additional production volume. When we think about the hurdle rate of our projects, we think about IRR, and that will be about 20% typically for projects that we approve at Gerdau.

[Operator]

Our next question from Yuri Pereira from Santander.

[Yuri Pereira, analyst]

In fact, you just talked about IRR and specifically in the HRC projects, and given the fact that the rolling mill operation is at its limit, are you expanding the rolling mill? What are the plans of the company? I know that your main target is IRR, but once you translate that into EBITDA margin, do you have any golden rule in terms of what you think would be healthy for Brazil? Thank you.

[Rafael Japur, executive]

Hello, Yuri. It is a pleasure to talk to you. We do not have any pocket rules for the margin. Sometimes this is translated in different ways in the results. There are some other projects that do not grow revenue but they promote a substantial reduction in our costs, such as the case of the Miguel Burnier mining expansion project. So we do not have an EBITDA margin as a target. This is not the main driver.

[Gustavo Da Cunha, executive]

Yuri, I'll just like to add to what Japur said. Ouro Branco mill is the main transformation platform for Gerdau in Brazil in the coming years. When we think about an integrated mill such as Ouro Branco and if you look at all of the other companies that still have productive assets that work in an integrated way, mining is important. So access to high-quality ore is complex, and logistics is becoming increasingly complex. Therefore I believe that if you don't have access to own ore, very competitive ore, the companies will have a difficult time to compete.

So, this investment in the mining project should be seen as a guarantee of competitiveness for Ouro Branco in the long run. So this is an asset certified for over 40 years. The mining operation is 13 kilometers from the Ouro Branco Mill. So the investment and the operation, which will start up in November next year, will be crucial for us to transform mining in Ouro Branco. This transformation has already begun.

Ouro Branco is a mill that was built many years ago by Siderbrás and the mill has been location to produce semi-finish for exports. But once Gerdau acquired that mill, this transformation has been taking place since then, but it will be more so now because we will accelerate the transformation for HRC.

So not only we will, I mean, we will not only no longer have exports of semifinished, but we will focus on the domestic market in terms of that product. When you asked about the market of flat and long steels, at the moment, as Japur said, it is very likely that our growth in terms of increasing deliveries will come from long steel because our capacity to produce and deliver HRC is at its limit.

Therefore, this expansion project comes in a very timely fashion. Because, once it starts producing, we will be able to deliver that additional capacity and then generate that additional EBITDA or revenue that you mentioned.

And Ouro Branco has many other options. We could also increase HRC. We already have additional equipment for the third phase. And in the future, we could also produce more rolling products, and there is also the option to increase the production of structural profiles because it is the only rolling mill of structural profiles in Latin America. Therefore, we have lots of different options to promote the growth of Ouro Branco in the future.

We are now discussing which investment should come first. So, once we finalize the studies, we will certainly announce them to you. In short, rest assured that, once the mining project is concluded and once we switch the key from finished products to rolling products, things will be changed.

[Operator]

Next question is from Igor Guedes from Genial.

[Igor Guedes, analyst]

We saw the export's volume dropping about 40% quarter on quarter. And I would like to understand how much of that has to do with the impact related to the hibernation of Barão de Cocais. From what I understood, this is a mill that you used to for -- a mill that we used for exports partly. So, by hibernating mills that possibly had this possibility of having products exploited, and given the exchange rate that you mentioned, how much do you think you can ship the volume that you mentioned in the call? That is my first question.

My second question has to do with the debate I had previously with Japur about CapEx. 70% of the CapEx is being executed in Brazil. This is no news that your strategic plan is to invest more in Brazil, but North America still has a margin that is about 3x higher than Brazil.

Of course, as the cost reduction package starts coming to fruition, we tend to see the margin of the Brazil operation expanding a lot, but I still want to check if you believe that you have arrived at a level that you think is competitive in the United States to the point of being investing CapEx massively in Brazil considering that Brazil has to deal with the government and this mixed tariff rate quota system still entails a lot of debt -- lot of doubts actually. I do not know whether it is going to work. The United States is being more vocal in trying to help meet the demands of the industry, particularly with Section 232. Is it possible that, in the future, you will relocate more CapEx to the United States, given the profitability level, or do you believe that Brazil is the priority?

[Gustavo Da Cunha, executive]

Thank you, Igor. I will start answering the question more conceptually, and Japur about Barão de Cocais. For a long time now has not been exporting. It is a mill dedicated to manufacturing light profiles for the domestic market. We transferred the Barão de Cocais' production capacity to our Cosigua unit in Rio de Janeiro. What we are doing now to grow the volume of exports. Since we're stepping on the gas of our Ouro Branco mill. Ouro Branco had additional capacity, and we were working at reduced capacity there, so these additional export volumes will practically all come from Ouro Branco mill. So that's the general concept.

The Barão de Cocais hibernation, well, the goal was to redistribute capacity to other assets in Brazil, particularly Cosigua, so as to increase production and dilute fixed costs of Cosigua so we can be more competitive. It is a very differentiated mill in general aspects and in terms of competitiveness.

Regarding the CapEx in Brazil, when we look at it in detail, basically, it does not involve growing the volume of crude steel. It is a transformation in Brazil regarding the product mix, and that is why we need CapEx. This includes a demand from the mining project, this is a project that is developing now but has a large cycle of more than 40 years, as I mentioned, and investments that needed to be made in Ouro Branco in the coming years to retrofit. This was a long cycle mill with a blast furnace, and, in some years, we will have to retrofit the coke unit.

So the mill has been operating with differentiated quality. It is not by chance that we announced for a while that this maintenance downtime of the Blast Furnace I that was going to happen in 2025 was postponed, most likely to 2027. Therefore, we will need CapEx in Brazil to requalify our assets to make them more competitive and to maintain an integrated mill like Ouro Branco.

But, we do want to continue to invest continuously in North America, and we include Mexico here. As announced, we continue with our feasibility study for a greenfield special steel mill in Mexico to supply the automotive market, which is strongly growing. Several customers of special steel in Brazil and in the United States are building their units. And this cycle of relevant investments in the last 7 years, as I mentioned in Caio's question, is not over yet.

There are many opportunities there. Our biggest mill in Texas, our Midlothian mill, still requires some investment in the sense that there is an important cycle there to increase capacity and make it more productive. Therefore, as soon as we finish the cycle in Brazil of maintenance for Ouro Branco and investment for higher added value products manufactured at Ouro Branco, this Brazil-US mix of CapEx tends to be more balanced. So that is the general concept. Japur, anything you would like to add?

[Rafael Japur, executive]

On the same slide where we showed the Brazil operation, if you look to the left, we see what we invested in our North American operations. That is where we started. So a part of the homework was done in past years. Just to mention two examples, this is being executed now with the conclusion of the investments in Whitby and in Jackson, in Tennessee, which are investments that we completed in recent quarters. And we have a big challenge, which is a beautiful project that we are detailing and executing, which is the expansion of our main unit in the United States, the Midlothian Mill, where we have the expectation in which to expand it to about 2 million tons in the coming years.

As Gustavo mentioned, as soon as we are over this stronger investment cycle in Brazil, we'll reach a more balanced CapEx. The margins in the US are higher than in Brazil, and the idea is to bring the margins of Brazil up closer to those of the United States. CapEx will be dedicated not necessarily to the more profitable geographies but to those where we believe we have a better potential of return.

[Mariana Velho Dutra, executive]

Well, then the Q&A session has come to an end. I will turn the forward to Gustavo for his final statement and, of course, the Investor Relations team will be available for any further clarification you might need.

[Gustavo Da Cunha, executive]

All right. Mari, and Japur, and myself -- well Mari we wish you a lot of success now that you have returned to Gerdau. We are very happy to have you on board again. So, together with the whole team, we would like to wish you a very successful journey and that we will be very happy together in Gerdau's long-term history.

On behalf of Mari, and Japur, and myself, I would like to thank all of you for joining us in this earnings conference call. It's always a pleasure and a delight to debate these themes with you.

So, now, I would like to invite you for our Investor Day, which will happen on October 3 in the city of Sao Paulo. Very soon, you will receive more information, and I have to remind you that, on November 6, I hope to see you all again for our earnings conference call referring to Q3 2024. So thank you all very much. Take care, and I hope to see you soon.