André Bier Gerdau Johannpeter - Group Chief Executive Officer, President, Director, Member of Disclosure Committee, Member of Strategy Committee and Member of Risk Committee Harley Scardoelli - Executive Finance Vice President.

Ivano Westin - Crédit Suisse Carlos De Alba - Morgan Stanley Thiago Lofiego - Merrill Lynch Kyle Hibader - BTG Pactual Leonardo Shinohara - HSBC Roy Yackulic - Merrill Lynch Christina Ronac - HSBC Marcos Assumpcao - Itau BBA Leonardo Correa - BTG Alan Glezer - Bradesco BBI.

Good afternoon, and welcome to Gerdau's conference call about the results for the Third Quarter of 2015.

[Operator Instructions] We would like to emphasize that forward-looking statements that might be made during this call related to Gerdau's business outlook, projections, and financial and operating 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 this evaluation. Here today are Mr. André Gerdau Johannpeter, Director, President, and CEO; and Harley Scardoelli, Executive Finance Vice President. Without further ado, I would like to give the floor to Mr.

Johannpeter. You may proceed, sir..

[Interpretation] Thank you. Good morning, Good afternoon everyone. And welcome to our conference call on the results of Gerdau.

We will now like to begin our analysis giving an overview of the world steel industry, right after that we will comment on Gerdau's performance on the third quarter of the year and next we will elaborate on all of the investments in the period and the capital increase done by Gerdau, as Gerdau S.A.

It's also important to note that we will analyze the performance of the consolidated results of the third quarter 2015 vis-à-vis the same period of the year before. After that Harley Scardoelli will elaborate on Gerdau financial performance and finally, we will be available to take your questions.

For those of you who are following us right now, we are on page two, and I’ll talk about the steel world industry which is still facing a very challenging moment as we mentioned in previous quarters.

According to Worldsteel Association, the estimate is that this year the apparent world consumption worldwide should be down by 1.7% this is due by the global excess installed capacity of approximately 700 million tonnes.

The economic slowdown in China low level world investment turbulence is in the financial market as lower demand from emerging countries, Russia and Brazil particularly and some geopolitical conflicts. All of these factors can influence the behavior of consumption in the next few years.

For 2016, the growth outlook for the sector is 0.7% still according to the Worldsteel Association. Other factors that are still impacting the market in which Gerdau operate is the entry of imported steel in Latin America.

Alliances of steel associations both in North America and Latin America are making governments more sensitive to the need of setting up measures to fight unfair trade particularly from China. Some anti-dumping measures have been recently taken.

For instance in China, Colombia and Mexico and India they had a minimum prices in tariff levied for imports of some steel long products trying to reduce that -- trying to avoid the reduction of the industrial activity and job cuts.

In Brazil, the economic slowdown is still impacting the demand from the main segments that consume steel like the industries have a construction, automotive industry as we have been following and also pulsating weak performance.

In North America, there is civil construction especially non-residential construction has been posting a consistent growth in 2015; however the prices of long are still feeling the pressure coming from the entry of imported goods in the region.

As for specialty steel, the segment of specialty steels in the North American market is facing a different reality. In the automobile industry we see some growth where there is a significant reduction in the segment of oil and gas.

In Europe, we see a gradual recovery of the automotive market whereas in India the sales of light and heavy vehicles is still strong. In Brazil, production in sales of vehicles is continuing to drop. On page three now, we will talk about this current environment.

In this quarter our scenario was impacted by non recurring items especially because of some asset write offs and good will amounting to R$2.2 billion with no cash impact.

With that, we will present EBITDA and the adjusted net income so as to reflect the performance of the company and the internal work that we are doing to manage all of our operations.

Starting with consolidated shipments, we shipped 4.7 million tonnes which represent a 2% increase when compared to the third quarter of the year before mainly due to a growth in exports that surpassed 180% exports from Brazil. Not our net sales.

Net sales was R$11.9 billion in the quarter which was an evolution of 11% vis-à-vis the same period of last year. This expansion was due to the positive effect coming from exchange rate variation in the conversion into reals of our revenues in dollars and also growing exports from Brazil.

Now SG&A, our efforts can be clearly seen through the reduction of 6% in SG&A in the first nine months of 2015, when compared to the same period of the year before.

Now in the third quarter the reduction was 4.5% vis-à-vis the same period of the year before, however if we exclude the effect of exchange variation the reduction was even stronger at 17%. Now EBITDA, the adjusted EBITDA was R$1.3 billion, meaning 4% higher when compared to the third quarter of 2014 mainly due to lower expenses with SG&A.

Now speaking about the adjusted consolidated net income, it amounted to a R$193 million and also considering nonrecurring items the negative accounting income was R$1.9 billion. On page four, now we talk about our investment. In the third quarter CapEx amounted to R$509 million.

The main highlights are the continuity of the installation of the heavy plate rolling mill at the Our Branco mill in Minas Gerais and the construction of the mill shop in Argentina. Both investments are predicted to start up in the second half of 2016.

During that period there was a reduction of 21% in the CapEx expenditure vis-à-vis the second quarter of 2015. Year-to-date investments totaled R$1.8 billion. Now we will refer to the offering from Metalúrgica Gerdau. Metalúrgica Gerdau, one of the listed companies in Brazil will hold a public offering of common and preferred shares.

The transaction will involve 500 million shares to amortize the indebtedness of the company so as to improve the company’s liquidity position. There are different stages of this transaction like you can say in the chart. Pricing will be on November 17, and it should be concluded by November 24.

With that, I conclude this part of my presentation and I give the floor to Scardoelli. We’ll come back after his presentation..

[Interpretation] Thank you, André and good afternoon everyone. Now, I will talk about the results and the performance of each one of our business operations in the third quarter of 2015. We are on slide number seven of the presentation.

And after that, we’ll give you more details about our consolidated figures and in conclusion I will talk about some of the extra ordinary events in the quarter.

I would like to emphasize that the comments that will follow already contemplate the new business segmentation for Brazil, North America, South America and Specialty Steel where they are in our operation now reporting together with the Brazil BO and the Mexico BO as part of the North America business operation.

In terms of Brazil, the uncertainties in the economic environment has caused lower levels of demand which has affected our business sales of steel in the domestic market in the third quarter of 2015 were down when compared to the same period of 2014.

On the other hand, exports increased in this quarter vis-à-vis the same quarter of 2014 especially due to opportunities in the international market coupled with a favorable exchange rate.

Looking at the EBITDA for this third quarter, the absolute value was down by 21% vis-à-vis the third quarter of 2014 due to a worse mix in the market and a lower net sales per tonne. These affect also the fact that our EBITDA margin which went from 16.3% in the third quarter of 2014 to 12.6% in the third quarter of 2015.

In North America, the economic environment continues to be positive; therefore however the growing pressure from imported products resulted in reductions in shipments of 3.5% when compared to the third quarter of 2014.

EBITDA in the third quarter of 2015 was the highest ever since 2008 and it was $519 million when compared to $255 million in the third quarter of 2014 which is an increase of 46%.

This improvement is mainly due to the effects of the exchange rate variation in this and the period coupled with better EBITDA margin which went from 9.3% in the third quarter of 2014 to10.7% in the third quarter of 2015 due to lower costs per tonne sold in dollar terms in lower operating expenses.

Speaking about South America, the South America BO shipments in the third quarter presented an increase vis-à-vis the third quarter of 2014 with different behaviors in the countries where Gerdau operates. The high levels of imports in the region starts to be dealt with measures of anti-dumping such as what has been done in Colombia and in Chile.

The increase in shipments and the reduction of operating expenses brought about an increase in EBITDA margin which went from 8.1% in the third quarter of 2014 to 9.1% in the third quarter of 2015. So there was an increase in the EBITDA margin going from as I said 8.1% in the third quarter of 2014 to 9.1% in this quarter of 2015.

Specialty Steel, specialty steel shipments in the third quarter posted a reduction of 13% vis-à-vis the third quarter of 2014 due to a strong drop in demand in the automotive industry in Brazil and at a lower degree changes in the oil and gas performance of the market in the U.S.

The reduction in EBITDA for specialty steels in the third quarter of 2015 vis-à-vis the same period of 2014 occur due to a lower dilution of fixed costs and a worst geographic mix. With that the EBITDA margin went from 11% on Q3, 2014 to 10.2% in Q3, 2015. Now I’ll talk about the consolidated numbers on the next slide.

In consolidated terms the adjusted EBITDA was $1.3 billion in Q3 of 2015 an increase of 4% vis-à-vis Q3 of 2014.

If we look at the bridge chart on the upper part of the slide we can see that this EBITDA, this adjusted EBITDA increase occur due to increases in the volume so -- and higher net sales per tonne which offsetted the higher cost of sales in addition to lower expenses with SG&A.

And the bridge chart in the lower part of the slide we can see that the consolidated net income in the Q3 of 2015 was down in relation to Q2 of 2014 basically due to lower depreciation and higher financial expenses impacted by the exchange rate effect.

In terms of dividends based on the adjusted net income from Q3 of 2015 we will pay out dividends of R$67.5 million to Gerdau S.A. shareholders, equivalent to 0.04 per share.

Despite all of the extra ordinary events that impacted their results this dividends will be pay out due to pre existing, income wizards and based on our liquidity position that contemplates the generation of positive cash in the quarter. These proceeds will be paid out on November 19 based on the position of that date.

Now on page nine, we look at the indebtedness of the company which is under control, even despite the impact of the exchange rate variation. The gross debt on September 30, of 2015 was R$27.6 billion higher when compared to June of 2015 due to the effect of the exchange variation.

The weighted average cost of the debt was 6.8% a year with an average amortization tenure of 6.6 years. The net debt over EBTIDA ratio was 3.8 times in September 2015 due to exchange rate variation.

In September 2015 the company concluded the process of eliminating the financial covenants maintaining the net debt over EBTIDA in all contracts with commercial banks.

With that the company can maintain the focus towards reducing its leverage without running the risk of breaking these covenants in moments of volatility and cyclicality that are inherent to the business.

Another important item that must be mentioned in the company has already signed a new line for R$1 billion higher than the amount we had before to ensure working capital have access to liquidity and the one with its operations.

We would also like to highlight that the company still maintains its investment grade with a three major rating agencies even with a lowering of Brazil’s investment grade; we are still maintaining our investment grade allowing the company to access capital markets with more competitive costs.

Now going to slide 10, I would like to refer to working capital.

In September 2015, the cash conversion cycle of the company was down by six days, had a reduction of six days when compared to June six days in one quarter that was due to the fact the nominal increase of 3.9% over our working capital accounts was offset by an increase of 10.8% in our net sales.

I would like also to highlight that this increase in working capital of R$426 million from June to September also contemplates an exchange variation in the companies abroad, excluding this variation I mean there was a reduction of R$1.3 billion from June till September which clearly demonstrates all of the company’s efforts to optimize its working capital and as a consequence to generate cash.

Now moving onto slide 11, the slide shows something very important that speaks about Gerdau’s operating performance this year and more particularly in this quarter.

The first nine months of 2015 the company generated R$1.8 billion of free cash flow and this is due to an EBITDA of R$3.6 billion which was up by R$595 million vis-à-vis in relation to all of the commitments of the company in terms of CapEx income tax and interest, in and in addition to the release of 1.2 billion of working capital this free cash flow, this property of free cash flow is in keeping with the company strategy to pursue a capital discipline as it has been the case in 2015 and 2014 despite a very challenging environment faced by the steel industry.

Now, concluding my part of the presentation, we go onto slide where we refer to extraordinary events during the period. Gerdau presents its financial statement in compliance with the international standard of IFRS and the standard determines that we run on an annual basis, tests for goodwill recoverability and other long term assets of the company.

These calculations for the recoverable amount involves calculations per business segment based on the methodology of discounted cash flow due to changes in the business segments of the company and also the deterioration of some markets where the company operates, the company decided to anticipate that the goodwill recoverability tests for this third quarter of 2015.

In these tests, we recover impairments of R$1.9 million. In addition, the results of the write-off of some tax credit from deferred income tax that presented no hope of ever being utilized amounting to R$1.9 billion as you can see on the chart and the slide.

I would like also to highlight these extraordinary events affected the results of EBITDA however they did not produce any cash affect. And now I’ll give the floor back to André for his final comments..

[Interpretation] Thank you, Scardoelli for your presentation. But once again I would like to emphasize that Gerdau’s results in this quarter was strongly influenced by non-recurring items with no cash impact.

Once we exclude these items the net income and the growth of EBITDA already reflects all of the work that our teams have been doing to increase competitiveness and efficiency in other operations and all of that is part of our initiative called Gerdau project 2022.

The project also involves the simplification of operations and internal structures, the modernization of the business culture and the reassessment of the profitability potential of our assets following a long term strategy view.

Our managerial efforts are also reflecting for example, the reduction of SG&A, the optimization of working capital also the significant free cash generation amounting to R$1.6 million in the third quarter of 2015.

We were also able to maintain our investment grade in the main rating agencies and also we were able to negotiate the removal of some covenants which allows us to have a better management or the debt focusing on long term.

I would also in addition like to reinstate our offering of shares which is an important initiative to amortize the debt level of the company and in turn, to improve our liquidity position. This is a very challenging moment for this two industry and the world and also in Brazil due to the economic slowdown.

Our teams are working very diligently to operate in different front to make the company even more profitable and more competitive. And with that, I conclude our presentation and Harley and I are now available to take your questions. Thank you very much..

[Interpretation] [Operator Instructions] Our first question comes from Ivano Westin from Crédit Suisse..

[Interpretation] Good afternoon, everyone and thank you for the presentation.

I would like you to elaborate a bit on the Brazil BO, and what can be expected in terms of pricing for the end of the year and early next year? How do you see prices going to? And what would be the shipment expectation for next year? And what would be the quality of that exported product? And the second point is whether you could comment on North America.

The operating result was quite robust.

Do you believe that the margin reported can be sustainable? Or whether you think that -- with the evolution of the metal spread, what could be expected for 2015 -- 2016, pardon me?.

[Interpretation] Hello, this is André we will answer the first part of your question about Brazil. Your question was about market, volume, mix etcetera.

It’s very difficult to anticipate anything about Brazil, of course given the current environment and what we see, I mean, the first quarter was better in comparison and in the second quarter there was about an 18% reduction in the domestic market and part of that volume was upset with exports.

This is a landscape that will probably be maintained from now on.

The export level in the third quarter was a bit higher maybe it will not be a high in the fourth quarter but we will continue to maintain you know a robust export policy given the slowdown in the domestic market, the margins of export despite the fact that there was a depreciation of the real there still low margins, but the margins are low because you since the depreciation of the real there was also in addition to the depreciation of the real we also experienced a lower -- we experienced lower prices in the international market.

About prices in Brazil, I have no comments because we do not make any comments about that and once again apparently I think that the markets will continue to perform at the same levels of the third quarter, this is my view..

[Interpretation] Good afternoon, Ivano this is Harley. Now speaking about North America, which is the second part of your question. In North America, we had seen at least or in the market in general we see a recovery in consumption levels this is something very clear. This recovery has been very apparent and very segment.

But one thing that has happened and we see a clear trend in stores import. We -- the levels went back to pre-crisis levels, so there has been an increase in imports and this is a trend that we anticipate for a short term, even yesterday we’ve heard that possibly interest rates in South America may go up even before what the market expects it.

So I don’t think that we will see the major change when it comes to imports. But now speaking about exports, the metal spread has been stable, has been at very good levels I would say.

And at the same time maybe one positive aspect for the future having a mid and long term view is that we may be able to see some recovery in the infrastructure areas, the infrastructure industry is very important to us and when you know once this situation becomes stronger, the great part of this consumption will then go back to local producers, because infrastructure products backed up by the government, I mean of course the steel consumption will be resumed.

This is an important aspect and something to be mentioned about North America. There is also the traditional seasonality factor, traditionally if the market faces seasonality in terms of volume because we are approaching winter in North America..

[Interpretation] Thank you, Harley and André. I would just like to link the outlook, Brazil and North America, your two main businesses. Harley, could you say something about your indebtedness level, your net debt over EBTIDA ratio was 3.8 times and you know you negotiated the covenants.

So what is your comfort level concerning this just debt level and how far you want to go?.

[Interpretation] Well in terms of indebtedness, one important thing about the negotiation of the covenants is that we wanted to eliminate any short term pressure regarding the net debt over EBITDA ratio.

But the trend is that this leverage goes up once the real is appreciated but with time, the trend is debt to go down because we see negotiations in a R$1 million. So we see pressures coming from the U.S. and that part of specialty steel that is also in the North America.

And some economies there have prices linked to the dollar will lead us to a decrease in that trend. So in mid and long term this leverage will be resumed. I mean this short term trend we saw of you know a higher net debt over EBITDA ratio maybe seen in this near future. But we know for sure that we will not have any problems with our debt.

Thank you very much..

[Interpretation] Next question in English is from Carlos De Alba from Morgan Stanley..

Thank you very much. So I would like to talk, very quickly, about the view for cash flow generation in the fourth quarter, and in next year. Clearly, third quarter had a very positive performance, so you can comment as to what the CapEx level that you expect for the remainder of this year and next year as well as working capital efforts.

Say for example, finally to achieve in the year. And then, there were some comments about potentially selling the European assets in specialty steel division, so if you could elaborate on that.

And finally, specialty steel remains clearly quite difficult, but could you comment as to have you seen any stabilization at all in your order book? And what are your expectations for next year? Thank you..

[Interpretation] Okay summarizing Carlos De Alba’s question. The first point referred to CapEx and working capital trends and the second question was about our specialty steel operations in Spain and what will be the general outlook for the Brazil operation.

Now, concerning CapEx and working capital, one important point that I’ll highlight is that the company is focusing heavily on the optimization of our working capital and the efforts will materialize in this quarter and particularly, so now we have adequate working capital, adequate to our operations level and this is lower this year.

So the trend is that, we will have a consistent working capital, I mean, consistent with the level of operation. So in moments where the market is down we will able to optimize our working capital.

So there was a significant reduction and we want to continue with that trend likewise with CapEx we've been very discipline in terms of our CapEx expenditures. There's R$8 billion which is year to-date amount, also reflect an exchange aspect that occurs throughout the year, which led to that amount.

At the same time, it is important to highlight that our CapEx trend, I mean, in this quarter and this quarter before, had a drop of 21%.

We've spend R$448 million in the second quarter, and we spent a bit over R$500 billion, R$509 billion in this quarter, which stems from the consistent effort by the company to pursue a very strong discipline in terms of CapEx..

[Interpretation].

Now, concerning the order book, and I think that you are referring to the order book, right, so I'll go back to what I said before in the first quarter we had a drop of 7% to 8% and in the second and third quarter in Brazil we experience an average of 18% decline vis-à-vis of the previous years, so we see a certain stability at this low level.

The fourth quarter usually comes with more seasonality in Brazil, so it’s difficult to make a comparison, but for next year it’s very difficult to anticipate what will happen due to the overall economic environment in Brazil, so its very difficult to give any guidance, but what we've seen is a certain stability at a much lower level when compared to previous quarters..

Thank you very much, Scardoelli and André..

[Interpretation] Next question is from Thiago Lofiego from Merrill Lynch..

[Interpretation] Good afternoon. This is Karel [ph]. My question is about demand in Brazil. Today we saw Usiminas announcing a readjustment in their output, but after you announced the closing instead Sorocaba, demand continues to deteriorate. Do you have any initiative or any plan towards adjusting your production considering the current demand levels.

This is my question. My second question is whether you can give me -- what is the trend level of the metal spread today and about SG&A, we saw very good performance of SG&A which was very stable in the quarter and with the drop of 5% year-on-year.

My question is whether you still see some room to make improvements along these lines or whether great part of the benefit has been already contemplated?.

[Interpretation] Good afternoon. This is André. We've been making adjustment to assets.

As of November, December of last year when we revisited some operations, we took operations to the mining route, focusing on more integrated route and giving more flexibility to our scrap operation and throughout the year we also made other necessary adjustments to cope with the current demand.

But Karel [ph], currently we do not know what the next step will be, but it will certainly depend again on the demand, because if demand – if the demand goes down further we will have to reassess it, but we are operating at about 70% in Brazil. We are also ready to reassess any time..

[Interpretation] Good afternoon, Karel. About the metal spread in North America, I cannot give you exact figures, but it has been stable. It has been very resilient and it is currently at this levels or adequate levels to our operation.

In terms of our SG&A effort, I must say that this a continued efforts, we've been focusing on that in the past years and so the trend is for us to maintain all the reduction that has been captured thus far.

I would like to remind you and this is something André already mentioned that the 6% of drop that we have today in real specially in our North America operation there is a very strong exchange rate variation and once you exclude that exchange effect it would be -- the number would be 17% in terms of SG&A year-on-year. Okay. Thank you very much..

[Interpretation] Our next question is from Kyle Hibader from BTG Pactual..

[Interpretation] Good afternoon everyone and thank you for this opportunity. My first question refers to the current scrap pricing landscape in Brazil and how do you see the price evolution in Brazil and the short-term trend considering either prices we've seen in the international scrap prices.

Secondly, can you comment on the anti dumping investigations that are being conducted in the U.S?.

[Interpretation] Good afternoon. This is Harley. To answer the first part of your question about scrap, yes, the numbers are quite volatile in the market. But we've been also monitoring what is been happening to iron ore in different markets. They counterbalance each other. The consumption varies according to the price of ore.

Large world producers are replacing the scrap consumption by other products based on ore when the price of iron ore is lower, but we haven't seen any significant drop recently, but you have to monitor the market due to its volatility and also look at what is happening with iron ore.

Now, referring to anti dumping, this is also another thing that is closely monitored by the company.

We've seen trend in countries like Chile and Colombia and more recently we didn't think that there would be any reaction, so this is something that shows that countries are more concern with the excess capacity and as a consequence a higher volume of input that are entering several countries.

The United States has been closely monitored for obvious reasons, but thus far, we do not know of any new things concerning cases in that country. Thank you very much..

[Interpretation] Next question is from Leonardo Shinohara from HSBC..

[Interpretation] Good afternoon and thank you all very much. My question refers to projects, and also the installation of your heavy plate rolling mill. And we see some companies with some difficulties in the flat market.

How do you see that as a new entrant? And entrance of the melt shop in Argentina, in your view, this will be good to supply that local market in Argentina, or you have other things in mind?.

Hi. This is André. About the heavy plate project Ouro Branco, Minas Gerais it still according to plan. It should start up in the second half of 2016. And our expectation is that it will startup in the second half of the year.

In the first year it still in the initial phase of the learning curve, we will then be better prepare to supply the market after maybe 2018.

And then, we will probably see some rebound of the market in Brazil by then this is very differentiated project because we will introduce a very modern state-of-the-art rolling mill that will cater to all different demand segments in Brazil.

And so, we know for sure that even though this is very difficult economic environment, we will be able to provide rolling products of high quality.

Now, about the melt shop in Argentina, it should startup in the second half of 2016 and the focus is to supply the local market with the levels that we will be able to assess with all the billets that we send to Argentina, so the focus is very domestic. Thank you very much..

[Interpretation] Next question is in English from Roy Yackulic, Merrill Lynch.

Hi. Could you give more detail about the covenants I guess removal, just remind me, I think, what the covenant was? And is it temporarily waived, or what exactly are the circumstances? Thank you..

[Interpretation] The question is about the covenant and whether the wave was only temporary? The covenants we had was of four times net debt over EBITDA but the removal of the covenant is our permanent nature from now on all of contracts with commercial banks related to the debt will no longer contemplate any leverage covenants as we had in the past..

Can I ask a follow-up, if and I don't think it’s likely are going to happen, if Gerdau is to lose investment grade than the covenants would not kick back in?.

[Interpretation] No. This question is whether if Gerdau comes to lose this investment grade whether the covenants would be reinstated. And the question is no, this is a permanent wave. It will not return..

[Interpretation] Next question is also in English from Christina Ronac from HSBC. Christina, your line is open..

Thank you. It went quiet for while there. I just want to ask some questions if you don't mind on the working capital cash benefit that you realized in third quarter.

I know this for the third quarter you had a inventory working capital benefit in cash flow R$1 billion and to add to that, the next of purchasing and proceeds from trading securities was capital benefit of R$583 a quarter.

I'm just trying to better understand that and if you go back to the inventory question similar you had a benefit in working capital inflow, your actual inventory balance sheet increased, so I wasn't sure how you can increase you inventory balance sheet, you have cash inflow that if your working capital, you could help me understand that better as well as how you think about purchase and proceeds of trading securities? Thank you..

[Interpretation] I would like to ask you please to repeat the first part of your question. Our line is a bit noisy and I couldn't really under it.

Can you please repeat the part of your question slower please?.

Sure. The third quarter saw cash benefit from inventory of R$1 billion but the balance sheet of inventory increased in the third quarter compared to the second quarter. I want to better understand how could inventory increase if you cash flow benefit of R$1 billion? Thank you..

[Interpretation] You question was about working capital. We have a cash generation through working capital issues in Real. It seems like there was an increase in working capital. But to answer your important question indeed in fact the cash effect occurs when we look at the working capital per operation in according to the currency of its domination.

Looking at North America and it was dominated in dollar terms, so there was a reduction in inventories and a reduction in working capital and this was rewarded into generation of cash which entered our banking accounts in North America.

But now when we look at the balance sheet it translated into Reals and considering the depreciation of the currency shows a nominal growth. But once we eliminate it, we eliminate the exchange factor. We see a reduction in working capital and positive entry in our cash flow. So there was in Reals a reduction in our working capital..

Thank you.

Can you discuss about the trading securities benefit? What does that consist of?.

[Interpretation] I think your question relates to accounts receivables in our working capital. These numbers also reflect a major effort on the part of the company to maximize and in this particular case to shorten the receivable term from our clients. This is very strong impact on the working capital of the quarter..

[Interpretation] Our next question is from Marcos Assumpcao from Itau BBA..

[Interpretation] Good afternoon. My first question refers to the Latin America operation. Despite this drop in international prices and an increase in import, the EBITDA margin is at a very reasonable level in the quarter.

Do you believe that these levels could represent a new level for the operation? We see that the margins in South America are around 8% to 9%, and it's been more consistent in the last quarters. Can we consider this new level as a new normalized level for the business? The second question is on specialty steel.

I saw, with a good surprise, the fact that the margin was up in the quarter, even though this was a lower quarterly, particularly in Europe.

Once again, is it possible to maintain the margin for specialty steels? Or you think that the margin will go up in view of the newer volumes, or the recovery of volumes in Europe, in particular?.

[Interpretation] Ladies and gentlemen, please wait. We will resume this conference call in a few moments..

[Interpretation] Marcos, we would like to apologize. There was technical problem here in our office, but we heard you very well and your question was about the margins for the specialty steel operations, and also Latin America.

So, starting with Latin America the margin levels were different especially if you compare to the margins we posted about a year ago, because now they are almost half of what they were before, and I think that the level – the current levels of 8 or 9 they are still sustainable – they are sustainable levels. This is the way we see the operation today.

But we much also look at the countries where we operate in Latin America because they were benefited from the exchange rate. Some countries have prices more pack to dollar and so of course the input also impacted volume. But I believe that we can say that there is certain stability in Latin America.

Now referring to specialty steel a positive aspect when you refer to the margins, this has something to do with diversification. We mentioned before that India went from a cash generation that was negative to a more stable cash generation close to breakeven and this is very good.

When we saw a slowdown in the automotive industry in Brazil and in North America this industry is performing well but the oil and gas industry still struggling. Therefore it's difficult for us now to have a good visibility.

But these are markets that are still struggling with seasonality in the last quarter especially when it comes to reinstating their inventories in the network, so we may see some readjustments by the end of the year due to seasonality..

[Interpretation] So, I have a follow-up if possible referring to working capital, working capital were improved in the quarter. You had a target that was posted at the end of last year and you said that you wanted to get closer to 75 days of cash conversion cycle.

Do you think that this target is too feasible?.

[Interpretation] Marcos, thank you for your question. In fact, we are pursuing more optimized working capital levels, due to the current environment, and also in an attempt to preserve liquidity. So therefore, we will continue to pursue lower cash conversion cycles.

It's difficult to say when we will reach these levels, but this is a continuous effort on our part, but it will depend on the predictability of deliveries. Most part of our working capital is inventory. And the optimization of inventory depends on the accuracy of our sales prediction.

If the prediction is good, we can reduce it so as to adjust the inventory levels to more adequate levels. So this involves a continuous work. And our focus has been very strong in that area. We will certainly pursue lower cash conversion cycles. I cannot just tell you now when this will happen. Thank you very much..

[Interpretation] Next question is from Leonardo Correa from BTG..

[Interpretation] Good afternoon everyone and thank you. I know that we are approaching the end of this call, so, if it's necessary, you can shorten your answer. But my question is addressed to André, first of all, because I want to know about your demand chains.

We've seen and we've been looking at the numbers and seen some resilience in the market -- well, in the past Brazil was facing a different environment. But I'm referring to that small spread around market.

How are you feeling the pulse of this new market? Are you already seeing a worsening of that demand, worse than when compared to other industries, or you already see a differentiation in the demand? This is my first question. And I have two other questions to Harley.

Could you please briefly talk about CapEx? Some competitors are already talking about a different CapEx level, assuming a more complicated landscape, in the near future. They are even referring to a lower CapEx, lower than when compared to a sustainable level.

Do you think that even if we have recession next year you will have a higher CapEx in considering all of the assets and the competitiveness, having a dollar-denominated CapEx, including the inflation and everything, what would be your opinion about a good CapEx level that is workable, despite the difficulty we find in the economy? About leverage, maybe if -- net debt-to-EBITDA is 3.8, I know that you negotiated all the covenant.

But, Harley, we also know that, historically, you've always been very conservative in terms of the net debt-over-EBITDA ratio.

What ratio would be ideal at this moment of the cycle, before you start thinking about paying out dividends in a more aggressive way? To what level that leverage should fall to allow you to pay more dividends to your shareholders?.

[Interpretation] Leonardo, this is André. I will answer your first question about the business segments and to the decrease and you also talked about that very pulverized market.

That market, the pulverized market did not experience significant drop or decrease as it was experienced by construction industry, I mean, it wasn't even close to that 18% experienced by the larger segments. It was only one digit. Now it's difficult to say whether things will remain the same next because you have to look at the level of employment.

But this is a good market and we've been monitoring that market closely. If you look at construction materials, finishing market these areas have experienced some slowdown but not as significant. And this is also an important market to our industry..

[Interpretation] This is Harley Scardoelli. Now, to answer your question about CapEx. Today, we have a very strong discipline concerning CapEx. We are only focusing on the investments are geared towards maintenance. We only have two large projects, still underway as André mentioned before.

One is our heavy plate project in Ouro Branco, and also the new melt shop in Argentina. So, we saw a downwards trend in our CapEx slightly and we use to make a more encompassing review of our CapEx close at the end of the year and in a year like this maybe we will wait until the year end approaches to give you a better guidance.

There are only two projects now as part of our CapEx and all of the remaining expenditure approved is for maintenance. Now in regards to the net debt over EBITDA ratio, we will continue to work towards reducing that leverage. As we saw with the covenants, now we have a leverage more consistent with our conservative profile.

And so we want to keep our investment grade and have a lower net debt over EBITDA ratio. With the current results I mean naturally the passing of time net debt over EBITDA ratio tends to go down because we have cash generation coming from our business that are denominated in dollars, so this leverage is improving.

I don't want to give you any guidance. We have to look at our local levels that are in keeping with our investment grade. And if we lower this leverage and maintain the company as a generator of positive this is what we want and this is important for a company such as ours. Thank you very much..

[Interpretation] I just have one thing to add about our dividend policy, our dividend policy is proportional to our results, therefore we wants to keep our dividend policy of 30%. So these dividends will be adjusted to profitability levels of the company..

[Interpretation] Next question comes from Alan Glezer from Bradesco BBI..

[Interpretation] Good afternoon and thank you very much for this opportunity. I have two questions. The first is about the Brazil BO. It saw a significant increase of exports in the first quarter, 60% quarter on quarter.

Where are the main destinations of your exports, and whether you can say something about products that were exported this quarter? The net sales per tonne was about flat quarter on quarter. This is my first question. My second question is about the North America BO.

Do you have any information about scrap? We have seen a drop in scrap exports in the U.S. Have you seen an increase in the scrap availability, and whether the pressure on prices has increased, because of the availability of scrap in North America? Thank you..

[Interpretation] Hello, this is Harley. In terms of the destination of our exports we always look at the opportunities.

So when prices are convenient we look at the convenience of prices; and we also look at the aspect related to the depreciation of the Brazilian currency, the export shipment has been directed to Latin America, Asia, Europe and something also to North America. And in terms of the mix the bulk of the exports are semi-finished goods.

Our mill of Ouro Branco is very competitive in terms of cost. We have our own supply and the cost is very competitive. Therefore we can make very good use of the opportunities. Now referring to scrap in North America the trend is of a recent drop in prices. But for us what is important is the monitoring of the metal spread.

Metal spread has been flat or stable in the last quarters..

[Interpretation] Okay. Thank you very much for you answers..

[Interpretation] Now we conclude the Q&A session. I would like to give the floor to Mr. Andre Gerdau Johannpeter for his final remarks..

Thank you very much on my behalf and on behalf of Harley for your questions and your interest. If you still have any further questions, our IR people are available to assist you there. I would like to invite to join us again on March 1st of 2106 for the results of the fourth quarter..

[Interpretation] Thank you very much. Gerdau's conference call is now concluded. I would like to thank you all very much for participating and have a very good afternoon..