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Edited Transcript of GGBR4.SA earnings conference call or presentation 6-May-20 5:00pm GMT

Q1 2020 Gerdau SA Earnings Call

Porto Alegre Jun 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Gerdau SA earnings conference call or presentation Wednesday, May 6, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gustavo Werneck Da Cunha

Gerdau S.A. - CEO & Director

* Harley Lorentz Scardoelli

Gerdau S.A. - Executive VP, CFO & IR Officer

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Conference Call Participants

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* Caio B. Ribeiro

Crédit Suisse AG, Research Division - Head of LatAm Metals and Mining Team

* Carlos De Alba

Morgan Stanley, Research Division - Equity Analyst

* Daniel Sasson

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Leonardo Correa

Banco BTG Pactual S.A., Research Division - Research Analyst

* Marcio Farid Filho

JP Morgan Chase & Co, Research Division - Research Analyst

* Thiago Augusto Ojea

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thiago K. Lofiego

Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research

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Presentation

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Operator [1]

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Good afternoon, and welcome to Gerdau's conference call to discuss the results related to the first quarter 2020. (Operator Instructions)

I would like to emphasize that any forward-looking statement that might be made during this conference call related to Gerdau's business outlook, projections and operating and financial goals are mere assumptions based on the management's expectations related to the future of the company. Even though Gerdau believes that its comments are based on reasonable assumptions, there is no guarantee that future events will not affect its evaluation.

Here today are Mr. Gustavo Werneck, Director, President and CEO; and Mr. Harley Scardoelli, Executive VP. Now I would like to give the floor to Mr. Werneck. You may proceed, sir.

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [2]

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Good afternoon, everyone. I would like to begin by welcoming each one of you to our earnings release conference call related to Gerdau's results of the first quarter of 2020. I hope that you are all well and safe and actually going through this dire period in the best possible way. For us at Gerdau, the life and health of people always come first.

Before jumping into our quarterly results, I would like to spend a few minutes to express our gratitude to our employees, who, even despite the serious moment that we are going through, we all continue to work relentlessly every single day, working in a safely manner to ensure the continuation of our operations, even those that due to the current circumstances are now working remotely. A special thanks goes to all of you who are enduring such a difficult and complex moment. I strongly believe that the quality of our teams, coupled with the commitment and dedication of all of our employees, will certainly allow us to navigate safely through this crisis, and I'm sure we will come out of it even stronger.

Also with us here today is our CFO, Harley Scardoelli, and for both of us, it's always a pleasure to talk to you about our performance and also clarify possible issues and answer questions that may come up during our presentation, even if we might not even have all the short-time answers that you need given the current volatility of the landscape.

Also, I would like to highlight that this conference call is being carried out in accordance with all of the recommendations by the health authorities, and we have teams scattered in different locations. Scardoelli and I are in different sites of Gerdau. And for that reason, if you allow me, I will deviate from our original script to congratulate Scardoelli, because today, he celebrates 32 years at Gerdau. Congratulations for such an excellent and successful career. Rest assured that we all are very proud of you. We admire you. And I'm very flattered because I have the opportunity to learn a lot from you. So please accept our congratulations. And then Scardoelli will start by talking about the highlights of the quarter, and he will also talk about the performance of our operations. After that, I will come back to comment on the impacts of COVID-19 pandemic in the markets where we operate and what is Gerdau doing to preserve lives and maintain the sustainability of our business.

And as always, at the end, we will be available to answer your questions. So now I'll give the floor to Scardoelli.

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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [3]

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Thank you, Gustavo, and good afternoon, everybody. It's always a pleasure to be with you and another earnings release call, especially in such a delicate moment we are going through. And I really resonate with Gustavo's words, and I hope you're all in good health.

So starting with Slide #2. We talk about our financial results in the first quarter, and we will start by talking about our free cash flow. In the first quarter of 2020, it was negative by BRL 441 million, which is a significant reduction when compared to Q4 '19 and also in relation to Q1 -- to our previous quarter. This decline is attributed to the use of working capital in the period after the significant release of working capital that we had in the fourth quarter '19, mainly due to the optimization of our inventory levels. It's also important to mention that in the last 12 months, the company posted positive free cash flow of over BRL 4 billion, thus reinforcing the company's liquidity position. The cash conversion cycle was over 62 days in December 2019, and as I mentioned before, it was a period of strong inventory reduction, and now it reached 83 days in March 2020, mainly impacted by lower net sales in the period.

Now moving to Slide 3. We will talk about our debt position. I would like to emphasize that at the end of Q1, '20, our net debt was BRL 14 billion, impacted by the BRL depreciation of 29% vis-à-vis the fourth quarter 2019. Also, I would like to mention that 82% of this debt is long-term with an average tenure of 7.4 years and an average cost of 5.1%. It is also important to mention that we have a very balanced and well distributed schedule looking forward in the next few years, as you can tell by looking at the lower left part of the slide.

This net debt is comparable to a debt of BRL 9.7 billion in December of last year and this is mainly attributed to the FX effect, as 84% of this debt is denominated in U.S. dollars. The net debt over EBITDA ratio went from 1.67x in the fourth quarter of '19 to 2.55x in this first quarter of 2020, also as a result of the BRL depreciation already mentioned.

The company remains focused on reducing leverage and reaching the KPIs defined by our Board, which is reaching and maintaining this indicator around 1 to 1.5x in the long term.

Moving now to Slide 4. We will now talk about our cash and liquidity position. So I would say that due to the crisis of COVID-19, one of the most frequent questions we get refers to the company's financial liquidity. So therefore, I take this opportunity to present our current cash position that amounts to BRL 6 billion. And also, we have credit lines of BRL 4 billion, of which today, we have BRL 2.3 billion in cash equivalent, representing a total liquidity for the company of BRL 8.3 billion.

At present, we have BRL 17 billion of debt denominated in U.S. dollars, accounting for 84.4% of the total debt, as I mentioned in the previous slide. We understand that as our -- half of our EBITDA is generated in U.S. dollars, and a significant portion of our assets and operations are in North America due to our geographic diversification, we have a natural hedging for those debt position in U.S. dollars.

It's also important to mention that as of 2015, the company does not have any financial covenants or any material adverse change clause, or MAC clause. This alone gives us the assurance that we will have the necessary time to adjust our operations and CapEx through the long-term commitment to maintain debt aligned with the financial policy of the company, as has previously -- as was previously announced earlier this morning. Another frequent question we are asked refers to the delinquency levels of our customers. We've noticed a gradual increase in delinquency levels. But for the time being, we do not believe that this will have a relevant effect on our books.

Now moving to Slide 5, I will refer to EBITDA. And I will highlight the main factors that affected consolidated EBITDA that went from BRL 1.1 billion in Q4 '19 to BRL 1.2 billion in Q1 of 2020. This increase is mainly due to the improved performance in the North American BO, coupled with a better market mix in the Brazil BO.

In Brazil, when we compare to the fourth quarter of last year, EBITDA in first Q of 2020 was very much in line. On the other hand, EBITDA margin grew, mainly boosted by improvements in the market mix stemming from lower export volumes. In Q1 of '20, the market for long steels was more resilient, particularly due to the continuation of the construction activities in the construction side and the demand for infrastructure projects.

In North America, EBITDA and EBITDA margin in Q1 2020 was significantly higher when compared to the 4Q '19, due to increased shipments in spite of lower spreads that went from USD 426 short tonnes in Q4 '19 to USD 410 per short tonne in first Q '20. Shipments in first Q '20 grew both Q-on-Q and year-on-year due to good levels of demand coming from the civil construction industry. We noticed almost no effects from COVID-19 in this BO during this period, and I'm referring to the North American BO.

Also, I would like to emphasize that in the last few years, our North American operation has been delivering significant profitability improvements as a result of our improved product mix and our diligent focus on cost reduction. As for Special Steels, even though the results for the first Q of 2020 are very similar to what was reported in Q4 '19, we noticed a difference in the regions where we operate. In the United States, we experienced an improvement in shipments, which compensated for the drop in shipments originated in Brazil. However, in Brazil, higher prices in the market allowed us to maintain our margins.

And to conclude our South America BO, lower shipments as a result of the effects of COVID-19 in March resulted in a lower EBITDA. However, EBITDA margin was up due to a higher equity income coming from our other operations. So thank you very much for your attention, and I will give the floor back to Gustavo, who will talk about the market outlook.

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

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Thank you, Scardoelli. Now I would like to ask you to move to our next slide to discuss the impact of the coronavirus pandemic in our operations, and also, I will talk about the outlook for the next coming months.

As we saw during Scardoelli's presentation about Gerdau's performance in the first months of 2020, COVID-19 emerged at a time when demand projections for steel, particularly in Brazil and in the U.S., were very positive. Also showing a rebound in the activities of the civil construction industry and other important sectors such as automotive and wind farming. Moreover, our estimates were very positive in terms of how the economies would evolve in these geographies. The current moment is very unique and also very challenging to all nations and industries, and there is no clear answer on how the events and mainly the economic activities will be resumed. We live in a time of many uncertainties, and so it is not possible today to draw a more precise picture for the economies in the markets where we operate. However, we believe that our company is well prepared to face this period. Our liquidity and cash positions are very comfortable. And in the last few years, we promoted a deep restructuring of our costs and expenses. We reorganized SG&A or expenses -- general expenses in sales and admin expenses. And we did -- we implemented zero-based budget in our everyday activity. We also made important advances in terms of modernizing our culture and in terms of our relationships with our customers and vendors. Therefore, our company today is much more resilient with a much simpler process structure. We are a more agile company. We are much closer to the markets as well as to our customers. And in addition, the strategy to promote geographic diversification in the Americas will certainly contribute to increase our soundness through this very complex moment.

There is another important aspect I would like to comment is the fact that the electric melt shops account for 80% of Gerdau's installed capacity. And therefore, this gives us flexibility to turn on and off the equipment in a much quicker way at lower costs.

Well, now I would like you to move to Slide #7. And as you can see or you can tell, we are quick to act to the facts. And in the past few weeks, we took several measures to protect our cash and to adjust our operations to the reality that calls for a short-term reaction. In Brazil, we stopped some of our operations in the first half of April. And among the several measures that the company adopted, we announced the temporary suspension of all working contracts and the reduction in terms of the working hours of part of our employees. We also applied all of the tools related to job preservation, and the purpose of that is to prevent dismissals. So after the maintenance stoppages and collective vacation in April, our electric melting operations stopped operations following all of the recommendations of the health care authorities and recommendations from the governments where we operate, like São Paulo, Rio Grande do Sul and Minas Gerais.

The Ouro Branco Mill remains in shut down and it should resume operations in the midst of the second half of the year. Until then, we will continue to operate our Blast Furnace 1 so as to comply with the demand from our customers. Even though, as I said before, the landscape is still very uncertain, we foresee for Brazil a gradual recovery from civil construction and the industry in the next coming months, as the limitations that were imposed by the countries are loosened up. Civil construction is an industry that has proven to be more resilient when compared to other sectors of the economy. We've been noticing an effort on part of this industry to maintain the construction size active, also taking all necessary health care measures and complying with what the authorities have established. There was an average of 6% drop in the country when compared to the period prior to the crisis, with the worst performance coming from the Southeast of Brazil, posting a 20% drop. We believe that the measures to preserve jobs and the increase in credit offering and the gradual rebound of the market should therefore motivate the new launches in the future. I would also say that public and private investments in infrastructure may be released early next year and at the end of this year. And this will help the civil construction industry that has been heavily hit in the past, but also was showing an important sign of recovery. The retail construction business that was the highlight in the last few years should grow a bit more in the short-term because of delinquency levels. But as we noted in previous crisis, the rebound of the economy in the mid- and long range will certainly have a positive effect over this industry. I would also like to emphasize that given this landscape, the civil construction industry becomes even more relevant as job generator and to generate more income to our population.

Now referring to our Special Steel operation. We had some maintenance stoppages in our melt shop, both in Brazil and in the U.S., as the demand from the automotive sector had experienced a sudden decline in March and April. In Brazil, after 2 weeks of intense activities in the domestic market, which pointed to a very robust growth in the automotive industry in the second half of March, the OEMs experienced a drop of almost 90% in sales, according to the latest figures published by ANFAVEA. And with that, automobile production in this quarter came down 16% in a year-on-year comparison. I would like to remind you that earlier this year, ANFAVEA thought that there would be a 7% increase in automobile production. In the U.S., the numbers are very similar. Almost all U.S. OEMs stopped their operations. And the expectation is that in both countries, the activities from the automotive industry will be resumed gradually, which will contribute to the production of special steels, even though, at much lower levels when compared to what was initially projected for the beginning of this year. In the U.S., major OEMs like GM, Ford and Fiat Chrysler, they should resume their activities this month with almost 800 factories resuming operations. But in Brazil, the automobile production will probably be resumed only next month.

And finally, I would like to emphasize that the demand from the wind farming industry was positive throughout this first quarter, and this trend should be more consolidated further into the year. Our North America operation maintained its mills operating normally because the demand from civil construction remains healthy, and that allowed us to maintain a consistent volume of orders throughout these past months. Metallic spread, on the other hand, in the second quarter should be higher than $410 per short tonne when compared to the first quarter. We still think that it's too soon to make further projections for the year because we still have to see what will happen once the activities are resumed in the U.S. And also, we have to look at the new estimates for the U.S. economy, which GDP went down by over 4% in this first quarter according to the U.S. Department of Commerce. We also believe that it's possible that the market will react quickly, given the previous history of local consumers and also due to low inventory levels in the steel industry. There is also an expectation that there should be some stimuli for investments in public infrastructure in this period after the pandemic. And we -- and our point of attention mainly referred to a combination involving a landscape with high unemployment, coupled with the next coming presidential elections in the U.S.

In South America, we resumed our steel production in our units in Uruguay and Argentina on April 27. And Peru operations are still on hold due to the limitations imposed by the federal government, which declare a state of national emergency and the deliveries to our customers have also been suspended.

So in view of all of these market uncertainties, we are now more conservative when it comes to approving projects. We shut down some of the ongoing projects. And with that, we have our investment plan in the projection for CapEx [dispersion], for this year went down from BRL 2.6 billion to BRL 1.6 billion. And this led CapEx, a 3-year CapEx from 2019 to 2021, to go down to BRL 6 billion, when in the past, the projection was for BRL 7 billion. The investment amount anticipated for 2021 will be revisited pending the evolution of markets in the next coming months.

Now moving to the next slide. I would like to highlight all of the actions taken by Gerdau to support the fight against coronavirus, especially in Brazil, where we have our main operations. These initiatives are fully aligned with our intent and also our vocation to have a positive impact in the municipalities where we are located. And therefore, we realigned our social investment strategy, allocating our resources to the health care area.

So far, Gerdau invested BRL 20 million in initiatives to fight coronavirus in the country. Among our main actions are the construction together with partnering companies of 2 new treatment centers for COVID-19, in the cities of São Paulo and Porto Alegre. Together, they will provide 160 new beds. The first 100 beds were delivered in São Paulo in a record time and is being used by the population since the end of April. When the pandemic is over, these will incorporated to the healthcare network of the region, and they will be a legacy to the local population. In the state of Minas Gerais, where we have our steel production plant, the Ouro Branco Mill, the company is allocating approximately BRL 7 million in humanitarian aid. With the intent of being part of the solutions to the current hardships, the company has been transferring funds to (inaudible) in the municipalities where the company operates to allow them to improve the hospital structure and also to help them increase the availability and capacity of beds.

In the town of Ouro Branco, funds were earmarked to (inaudible) for the improvement and increase in the number of beds cater to patients of COVID-19. The support to the hospital allow them to double the number of available beds to face the new coronavirus. Also in the municipality of (inaudible) hospital is being refurbished, allowing them to increase by fivefold the number of beds. In the town of (inaudible), these funds were earmarked through San Juan de Dios Hospital for the purchases of imports and essential equipment to serve the population.

To conclude my presentation, I would like to emphasize that Gerdau is a very sound company, and it is prepared to face hardships and instabilities brought about by this difficult moment. The time now calls for collaboration and unity of both people and enterprises. We hope that our routine gets back to normal soon. And yet, I would like to emphasize that our main concern is with the health, safety, well-being of our employees and their families, communities, suppliers and customers as well as with the continuity of steel production during the quarantine considered to be fundamental by the federal government. I thereby reinforce that steel is a crucial input in the supply chain of companies that cannot stop, like hospitals, machinery equipment and components used in health care, security and also used in the agricultural sector.

And so now Scardoelli and myself will be available to take your questions, clarify possible doubts, et cetera.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Leonardo Correa from BTG Pactual.

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Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [2]

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Good afternoon, everyone. I hope you can hear me. First of all, I would like to congratulate Gerdau for its amazing effort in fighting the new coronavirus. Congratulations for this initiative and for the allocation of funds. I also would like to thank Harley for his amazing service to the company and to all of the investors. We owe a lot to you.

And in terms of my questions, Gustavo and Harley, I know that visibility is very low. But I will focus on the second quarter and looking forward rather than focusing on the first quarter because, unfortunately, it's over and it's very difficult for us to have a very clear snapshot of it.

Now focusing on the second quarter, we already have about 1.5 months into the quarter. April is over, and we are already in the first month of -- first week of May. I don't know whether you have some color in terms of how orders are evolving and whether you notice any improvement, because the situation is not very fluid in terms of news. Many countries and many towns are now loosing up their restrictions and gradually going back to normality. But at the same time, we are here experiencing a peak in deaths and contaminations. And I've heard some rumors of a new lockdown or probably a worsening of the scenario related to COVID-19. So in your view, what can you expect looking forward in the second quarter? And what do you expect to see in April and May? In terms of quantifying things, the market is working with a consensus of a drop of 50% in volumes quarter-on-quarter in the second quarter. So I just want to hear from you whether this is a ballpark that makes sense or whether it will be worse or better than that.

My second question, speaking about the U.S., I know that sometimes it's difficult for us to understand what happens in the operations because maybe the country that has been more heavily affected by the virus was the U.S., and sometimes it's difficult for us to really understand that the operation in the U.S. is reasonable, resilient and a bit more normal when we -- if we think that this operation there is running more smoothly when compared to other operations. So what could we envision looking towards the second quarter? Gustavo, you already referred to higher metal spread, maybe prices around $420, $410 per short tonne. Do you think we can work with an EBITDA margin similar to 10% in the second quarter? And what type of volume or deterioration of volume should we expect looking forward?

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [3]

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Well, I will answer the question, but Scardoelli can jump in at any time. So please, Scardoelli, feel free to jump in any time.

Well, thank you for your acknowledgment about all of our initiatives in favor of society, where certainly this is very much aligned with our track record in our history. We are always imprinting our purpose, our intent, because we want to leave a legacy to society and to the communities around us. We think that this is the role the company should play. Therefore, I thank you very much for your acknowledgment.

Well, now I'll try to answer both of your questions because one adds up to the other; one complements the other. The second quarter tends to be worse than the first quarter because, in general, the first quarter was more heavily impacted after the second half of May. So all of the impacts throughout April and May, they will then cause the second quarter, in general, to be lower or weaker than the first quarter. But I would say, in general terms, that in Brazil, I think that the most critical moment is behind us. Well, with that, I don't mean to say that we are already back to the period prior to the crisis and the levels are getting back to normal. That's not it. What I'm saying is that at the end of March, we were facing some very dire times and since then, we noticed a gradual recovery. And I say that -- or maybe the most important indicator is the incoming flow of orders. By the end of March, there was a drop of 60% in the incoming number of orders when compared to normal months like January or February. Especially after the second half of April, we began to see a more consistent increase in the number of orders, which is still happening now in this first week of May. Therefore, we believe that by the end of May, in Brazil, we should see a drop in orders of around 25%, I mean lower when compared to a typical month. This is an important indicator. And maybe, I think that the most critical moment in terms of the business, on the point of view of the business, is already behind us. I don't want to mix the business with the health care system. I am only speaking in regards to the business.

And now I can also say that there is another indicator that we monitor very closely, which is the delinquency level in Brazil. NPL in early April reached the peak. But what we've noticed in the last 30 days is that the delinquency level is coming down, is lower. This may also be a sign that the worst period is over. Well, you talked also about lockdown and the difficulties encountered by some Brazilian regions. This is a fact. But on the other hand, we also see some business improvements in other regions of Brazil. The Southern part of Brazil is a region where we've seen an increase in the number of orders, especially in the Midwest. So you have to look at the balance between the different regions of Brazil, but this has brought about a positive impact in our flow of orders.

In terms of the U.S. level, the country is being impacted differently in the different steel segments. In the segments where we operate, the impact was extremely strong, especially in regards to Special Steels. Today, there are more than 80 OEMs that were shut down. They closed their operations, and this impacted our steel operations.

And in terms of long (inaudible) production, the impact was not that severe. Average utilization of our mills is very high, above 75%. And in the last few weeks or days, we did not notice any more significant (inaudible) drop in the second half of March, a small drop, but it still remains very resilient.

Now looking forward, we don't see any other major drop. We see further stability in the numbers of our North American operations. And with the maintenance of spreads, and as I said before, there was an increase in spreads between January and March of about $20 per short tonne, and this is a spread level that we also anticipate for the second quarter. Therefore, there are different impacts depending on the business operation.

When we look at our EBITDA margin, just to conclude my answer, the EBITDA margin that we had in the first quarter, we believe that these margins can be maintained also in the next coming quarters. So in general, I mean, these are my comments to your questions, and I think as Scardoelli wants to add something else. So Scardoelli, go ahead.

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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [4]

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I would just like to add a few points. The U.S. economy per se is very, very resilient. First of all, the level of stimuli that the government is trying to imprint in the economy is not small. So they're adding a lot of liquidity to the economy, and this certainly helps.

Another point is that the steel industry is considered to be essential. And in a way, it's more flexible. And we were able to continue to work depending on the regions where we were located, so the impact was not very significant in terms of not being able to operate.

So I'd like to remind you that cost of labor is high. I mean the person works, they will get paid. If they work less hours, they get less pay. And also, I mean this helps because they have a more flexible job arrangement.

And Gustavo also said something else during his presentation, looking at the mid and long range, is that finally, the so-called return of infrastructure projects in the U.S. is something that should gain momentum looking forward. Therefore, these are all of the factors that will be able to give us a more constructive view of our operations there.

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Operator [5]

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Our next question is from Daniel Sasson from Itaú BBA.

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Daniel Sasson, Itaú Corretora de Valores S.A., Research Division - Research Analyst [6]

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Congratulations for your donations, initiatives and contributions to help the communities where you operate. Also, I would like to emphasize Leo's words and congratulate Harley and his team for navigating so well throughout this crisis.

My first question relates to Brazil. Could you help us get a better understanding about the average price in the domestic market that is up 1% vis-à-vis the last quarter despite the increase between 8% to 10% of longs that you announced, and you said that it would be in January, and you talked about increasing your plans early this year. Was there any impact, be it due to mining or maybe we saw prices going down and discounts being given at the end of the quarter, like in March when the pandemic was more aggravated?

And still, on the same token, talking about exports of the Brazil BO, can you compare the margins or your shipments now versus what you had last quarter, comparing now this exchange rate, which is above BRL 5.50? And I just want to understand whether it would make sense for you to increase your shipments if the exchange rate remains at current levels.

And my second question is on working capital. I know that it is seasonally weaker in the first quarter because the base in the fourth quarter 2019 was strong. But I just want to know whether we should expect for this year some increase in working capital, maybe in the second or third quarter, once the mini-mills resume operations or once you reconnect the Blast Furnace 2 in Ouro Branco.

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [7]

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Okay. I will ask Scardoelli to elaborate more on the numbers. But before I give him the floor, I would just like to refer to the more general picture.

We had a price increase in January. It's still in force. And what happened, especially in April, Daniel, was a significant reduction in scrap prices, and (inaudible) prices were historically low. We have regular scrap inventories in our mills in Brazil. These inventories were partially recovered through purchases at these lower prices. Therefore, right now, spreads in Brazil in our electric melt shops are posting high amounts. So this is in terms of scrap in the electric melt shops.

On the other hand, now referring to shipments or exports, they have a direct relationship to our Ouro Branco Mill. And particularly in this quarter, Daniel, the margins are a bit better because of the exchange rate. But in terms of exporting higher volumes right now, that's not a reality, firstly, because the [auction] market is -- it's not fully operational yet; and secondly, because we still see a cost pressure, mainly caused by metallurgical coal. And this is important when you look at the whole basket of products at the Ouro Branco Mill. This is an input priced in U.S. dollars and subject to exchange rate, and there is a longer transition period from the ports in Australia and Indonesia until this coal is turned into a final product at the Ouro Branco Mill.

The advantage in terms of spread in the electric melt shops -- I mean we do not reap the same benefits that we would have in the integrated mills of Ouro Branco, and therefore, we cannot right now think about increasing our shipments or our exports.

In general, Daniel, I mean I would say I'll give the floor to Scardoelli because he will be able to give you more details about the numbers and he can also talk about working capital.

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Harley Lorentz Scardoelli, Gerdau S.A. - Executive VP, CFO & IR Officer [8]

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Let me first refer to working capital and yes, answer your question about our use of cash for working capital in this first quarter and how this should evolve until the end of the year.

Our working capital will always be proportional to what happens in our activity. So in general, if we look at the cash cycle, the cash conversion cycle, that was 63 and it went up to 82 days. We -- maybe we will be able to reverse that by the end of the year, and we can even go as low as 70 days of cash conversion cycle.

If we look at our cash consumption in this first quarter, the trend is that by the end of the year, we will be -- we want to be able to mitigate this increase in working capital with a more diligent discipline looking forward or until the end of the year. So the trend for the coming quarters is to reverse this use of cash in the first quarter vis-à-vis working capital, trying to reach a cash conversion cycle close to 70 days or even less, depending on the efforts. And this is for working capital.

As for prices, it's always a bit complicated to calculate that for you because our net sales revenue for Brazil, the domestic market, is impacted by the sales of iron ore products. So -- well, you said it yourself, something about 6% to 10% depending on the segment or the type of product. These numbers will materialize in the first quarter, but there is always a covenant.

Okay. Did everything was internalized? Well, not everything. So it was something like it was in the middle of the way. If you take between 6% and 10% and you run an average of 8%, it was not totally 8%, but it was probably something in between.

Well, how come your calculation gives you 1%? Because you have to factor in the iron ore, the number of sales of iron ore to third parties. And if you look on a quarterly basis, you see that in the Brazil BO, you have to discount what we sell to third parties. In the fourth quarter of '19, we sold 400,000 short tonnes of iron ore. In the first quarter of 2020, 93,000 tonnes. So almost 25% of the sales volume of iron ore in the first quarter vis-à-vis in the previous quarter. So our net sales revenue goes down in terms of iron ore, and this has an impact on the average price, the way we calculate it. And that's why you didn't see this effect being materialized.

It's a long answer, but yes, they happen. These increase effects happened, but they were mitigated by the aspects related to other sales.

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Operator [9]

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Next question is from Thiago Ojea from Goldman Sachs. .

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Thiago Augusto Ojea, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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I would also like to extend my congratulations to Scardoelli's 32 years in the company.

My first question is just a follow-up regarding the North American BO. There was a good margin in the first quarter, almost 11% of EBITDA margin. What is the utilization level in the U.S. today? How much more this number should increase given the impact of the EBITDA margin? I know that this is a very theoretical exercise. But maybe if you could give me an idea, it will be very helpful.

And my second question relates to the return of the blast furnace at Ouro Branco. I think in the last call, you had said that you would have to anticipate your view by 1 or 2 months, so this is a decision that is being made now. So is it certain that the blast furnace will resume operation? And how relevant is that?

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [11]

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It's a pleasure to talk to you. In terms of utilization, just to give you ballpark figures, at the end of the first quarter, our utilization level -- the general utilization at Gerdau was around 65%, looking at all the operations. The average in Brazil was 60% and in North America, 75%, meaning that it's very close to the level of 80%, which is what we could reach in the short term.

So mainly today, maybe in our mills, we could grow a little bit more, but we have to see whether demand will be maintained in the U.S. We don't see any major evolution in utilization in the U.S. in the next coming months.

Blast Furnace 2 of Ouro Branco is ready to resume operation anytime. There is no any scheduled maintenance at the time. So if -- whenever we decide to turn it on again, it will be in full operation after 2 weeks, meaning that this will not have any significant impact on costs. It is in hibernation right now because it's not paying off to have it on at the moment.

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Thiago Augusto Ojea, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

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Fine. If you allow me, what is your -- what will trigger a decision? What kind of KPI you are looking? I believe it's the order book but maybe if you can give me some more color. What kind of KPI you will look at to make you decide to resume the operations of the blast furnace?

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [13]

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The triggers would be, okay, a possible demand increase in the domestic market, also the possibility of new export windows with margins that would pay off for the business. And when I talked about the cost of coal, that's an important trigger for exports.

So as coal is purchased at a higher pricing and if the U.S. dollar is at the current foreign exchange level, if we look at inventories and as we're able to reduce the cost of our end product, then we will be able to reconnect the blast furnace and export a bit more. So mainly, it relates to all of the topics that I mentioned before. There is nothing new.

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Operator [14]

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Next question from Thiago Lofiego from Bradesco BBI.

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [15]

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I have 2 questions. First, going back to the U.S. And what the steel milling companies have been saying is that the demand from the construction industry remains resilient. And there was another comment saying that there is a 6-month gap in the construction cycle, meaning that the industry will start to feel the impact with a 6-month delay. Do you share that same opinion? Or you believe that our second half would be more challenging in the U.S.?

And the second question is about the demand in Brazil. I just want to get a better understanding. You said that you hope to get to the end of May with a drop of 25% in relation, too?

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [16]

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Thiago, I don't know whether you finished your question because I couldn't hear the question until the end. But I think from what I heard, I will answer the question, Thiago.

Now about the U.S. What we see today is that the second half will be very similar to us, to what we saw in the first half of the year. There are no productions or no KPIs that would indicate that the second half would be much more challenging. Of course, there are concerns such as the unemployment rate. But on the other hand, there are also some other positive outlooks such as increased investments in infrastructure. And certainly, I think this will be part of the incentives that we see looking forward. And today, the projections for the second half in the U.S. are very similar to what we experienced in the first half.

In relation to Brazil, Thiago, just to clarify, let's take 2 months, let's take February. That was a month prior to the crisis. When you compare the inflow of orders of March and February, there was a drop of 60% comparing March to February. Our expectation for May, comparing May to a typical month that was February, our expectation is that the drop should go to 25%. This shows that there -- that the orders are increasing, number of orders are increasing. I think Thiago got disconnected maybe. Thiago, did you hear my answer?

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [17]

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Yes. But can you hear me now? Werneck, can you hear me?

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [18]

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Yes. Yes, I can. I can hear you well.

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [19]

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Yes. I couldn't hear your answer, but Isabella, who works with me, she heard you loud and clear. I do apologize for the connection. Working from home is not always the same.

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [20]

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It's a new world. We are all facing this new reality. This is part of the evolution of society. So if Isabella heard the answer, she can tell you what I said. But as always, we are all available to answer your questions later on, and we can go back to that question again.

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [21]

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So Werneck, if you'll allow me a second question. You talked about the drop of 25% in relation to a normal level. So you believe that by the end of May, you will reach that 25% decline. And where do you stand today? Is it going up? Where is that number today?

And I just want to understand 2 things, whether you already have any visibility for June or whether it's still too soon? And exports, what could we expect for Brazil in terms of exports in the next coming quarters? There was a sudden drop this quarter. I just want to get an idea for my modeling looking forward.

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [22]

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Thiago -- this is an important point, Thiago, and I think it's always important to reinforce it.

In January and February, we had 2 normal months in terms of the inflow of orders. We didn't see any indication that COVID could impact our business. So let's consider February a normal month.

Now in March, the impact was more intense, and the inflow, the entry of orders in March was 60% lower when compared to the inflow of orders in February. So these were the most difficult moments for us. I mean the end of March was a very difficult moment.

So new orders started to come in. Especially after the second half of April, there was an increase in the number of orders. So we believe that we estimate that by the end of May, that drop in the inflow of orders comparing May to February would reach 25%. And we think that in June, there should be a slight evolution. Our expectation is that it should fall between 15% to 20%. So we believe that in June, there will be a new recovery. But what we cannot tell you right now is what the second half of the year holds for us. There is a possibility that things will go back to normal, the normal that we had in January and February. In May, we are already noticing a gradual evolution, and we now see orders coming in to be delivered further on.

And in terms of exports, we do not anticipate any major increase in exports originating in Brazil in the second half of the year.

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Operator [23]

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Next question from Caio Ribeiro from Crédit Suisse.

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Caio B. Ribeiro, Crédit Suisse AG, Research Division - Head of LatAm Metals and Mining Team [24]

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My first question relates to the strategy you think that you would adopt when you see a pickup in demand or whether you would pursue a strategy more geared towards increasing prices or whether you (inaudible) in capturing another strategy vis-à-vis your competitors.

And secondly, could you tell us a little bit about your inventory system, what you see overall in the chain and if you have any visibility of your main customers about their inventory levels, considering the gradual recovery that you are anticipating, and whether you think that there should be a replenishment of inventories for the future?

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [25]

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Caio, to answer your first question, the word I often use is called profitability. More and more, we will try to be a more profitable company. So among all the choices we could have, profitability always comes first.

Now regarding your second point related to inventories, there was a reduction in inventory all over the steel chain in April. Right now, it's slightly higher than a regular inventory level. But we do not anticipate any inventory formation in the industry. The inventory of flats, it's a bit higher when compared to the inventory of longs.

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Operator [26]

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Next question, from Marcio Farid from JPMorgan.

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Marcio Farid Filho, JP Morgan Chase & Co, Research Division - Research Analyst [27]

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I just have a follow-up question related to CapEx. You had a cut down to BRL 1 billion this year. I just want to get a little bit more detail how much of that was FX, how much of that was hedged initiatives. And you didn't change your numbers for 2021. Does that mean that the initiatives for next year are still in place? Or is there any FX component that will have an impact on the numbers for 2021? Should we expect more cuts for this year in case it's necessary?

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [28]

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Today, our CapEx plan in terms of investments for the next few years is very robust when it comes to the return that these investments can bring to the company. We didn't cancel or we didn't put aside any investment. What we are doing now when we refer to that reduction to BRL 1 billion, we're just postponing some investments.

I have 2 important examples to give you that can maybe help you with my answer: investments in Special Steels, which are some of the most important investments we have today; investments also in the Pindamonhangaba mill; and investments in the Monroe Mill in U.S. We will resume these investments later on once we have a better visibility of the recovery of the automobile industry both in Brazil and in the U.S. Recovery will probably be slower when compared to other markets. So we will (inaudible) investments once we are certain that it's the right moment.

Now in relation to the investments for 2021, we will review the investments. We will revisit that later on. But right now, we don't know exactly how we will redistribute these investments in our time line. That's why right now, we are still maintaining the numbers for 2021. And as along the next months we conclude this exercise, we will talk about our investment plans for 2021 and looking forward, okay?

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Operator [29]

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Next question in English, from Carlos de Alba from Morgan Stanley.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [30]

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And congratulations, Scardoelli, for the 32-year anniversary. Bless you.

So the question is maybe for Scardoelli first. Why did the company raise debt in a quarter around BRL 1.2 billion, if I'm not mistaken, and just to end up with a still very solid, close to BRL 4 billion in cash and equivalents and another BRL 1 billion or so or more in investments?

The second question has to do maybe more with operations, Gustavo. What is the cost of keeping the Blast Furnace 2 hot so that you can bring it on relatively quickly? And would it make potentially some sense to shut that down in a more permanent basis and just flex the electric arc furnaces that you have in Brazil? Or you are considering bringing back on the blast furnace #2 whenever it is the right time and shut down the electric arc furnaces at that time?

And then if I may squeeze a third one, just to be maybe a little bit more -- just to reiterate a prior question. Is the company seeing discounts in prices either on the flat side or the long steel side in Brazil at the moment?

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [31]

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Thank you, Carlos. He -- Carlos de Alba (inaudible) 3 questions. The first one, about the debt, (inaudible) company decided to increase its liquidity and our line of credit. So I will answer your question.

And the second question was about maintenance costs of Blast Furnace 2 that is stopped, that is nonoperational right now, and whether we intend to turn it on again or the idea is to keep it off for a while.

And the third question is whether Gerdau sees price discounts in the present moment.

So the first part of your question is about the credit line. It was just because we decided to be more prudent, and that relates to less than half of our credit availability. Currently, (inaudible) visibility in terms of the increase was not very high, and we are certain that this is a line of credit that is [readily available] (inaudible). So as we confirm the results throughout the year, when we look at our cash position and we have more visibility of our (inaudible), we have full flexibility to pay off that line. So it was just due to the liquidity. And even though we took something around $300 million, we only have available for withdraw $400 million to $500 million. Therefore, we still have a large liquidity availability.

So I will now answer the other 2 questions. In terms of the Blast Furnace 2, the operations we have in place now -- with everything we have in place now, it should resume operations in the second half. But we still consider the possibility of not putting it back in operation. It will depend on all of the triggers that I mentioned. I mean all the electric melt shops are back in production. They are all operating. And the cost of maintaining the blast furnace at a halt is around $4 million.

And about your third question, prices remain stable. What we notice in the market today is some kind of incentives for cash payments, as there is this need for cash flow and we want the money to move around. We see some discounts for cash payments. But negotiated discounts is something that we do not see often in everyday operation.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [32]

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And just to clarify, the cost of keeping the Blast Furnace 2 hot is $4 million per month or for the period? Or could you clarify that, please?

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Unidentified Company Representative, [33]

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It's around $4 million a month.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [34]

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All right. Excellent. And then I don't know if I have time to squeeze just last -- one more. But it seems that the commentary that I'm hearing for Brazil is relatively constructive, assuming that we come out of the COVID crisis and the health crisis and the lockdowns. And then it seems that you expect that we're going to see a recovery in the coming months. So do you see any signs of a deeper, more permanent recession in the different end markets that you serve given the income loss that the population has experienced and probably will experience for a few more months?

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Gustavo Werneck Da Cunha, Gerdau S.A. - CEO & Director [35]

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Carlos' question, that he has heard that discourse about Brazil is more constructive and whether we see any differences and if, depending on some factors, we'll be able to see that more clear -- or clearer, I think that there are some sectors that were more or less impacted. Civil construction is where we see the possibility of resuming the projects that were underway. The new -- the only question pending is about the budget, and we don't know how that will evolve. But all of the projects that were underway, we see that there is a great chance that they will be resumed in the next coming months. Industry is -- has been more impacted by the health care crisis, but the construction industry has been more resilient.

The impacts, as Scardoelli said, they vary between segments. The drop in Brazilian industry has been quite severe. When we look at the Brazilian industrial production, there was a drop of 9% in March when compared to February of 2020. The industrial sector went backwards in time some 17 years. The industrial level of March was equivalent to the same levels of August of 2003, and the projections for April are even more dramatic, with an expectation of about 20% comparing April and March. So it will -- this industry will recover more gradually.

But we remain optimistic because what we noticed is that some construction sites were paralyzed in the Southeast, but they are now resuming their activities. Therefore, projects that were underway were not totally put at a halt.

The only question that still remains relates to new launches in the second half of the year. We believe, for a good number of reasons and considering low interest rates and incentives, that things will begin to happen. It's very likely that once we compare civil construction to the industry sector, the recovery will follow different paths and different rhythms, a different...

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