Therefore, this market share that we mentioned in the first quarter is more related to a more intense focus to the Brazilian market. So we will gear that export capacity to new products, to new things that with time can generate new investments, particularly in Ouro Branco of our export capacity. So it was just a consequence of our mid- to long-term strategy rather than some one-off actions in the first quarter just to recover market share. In general terms, I mean this is what I would have to say. And Japur, if you want to add anything please jump in.
Rafael Japur : Caio, good afternoon. In addition to what Gustavo said, I think we — I mean, I must say that we are very pleased with that measure. It was a major progress because we work together with the government for a few months, and that ended up in these measures and these measures can help us to increase our operating leverage with increased sales volumes — increased shipments. We saw particularly in the last quarter, we saw an increase in imported goods to the domestic market. And so we understand that this new measure will help us have a more reasonable market and this will — and when we think that there was an increase of almost 10 percentage points of penetration of imported raw materials, when compared to the numbers we had last year.
Renata Oliva Battiferro: Our next question is from Rodolfo Angele, sell-side analyst from JPMorgan. It came in writing, but he asked me to open the camera. So please, can you open Rodolfo’s camera. I was just promoted to panelists. Now we can see you well, great.
Rodolfo Angele : So one of my questions — I mean two questions have been answered. So I only have one question left. I would like to ask you to elaborate a bit more on that Mexico project. Can you give me some more color, tell me a little bit more about the rationale? If there is anything you can tell me in addition to the article that was published on [São Paulo], I think CapEx of BRL500 million, something in that order. So that I can check my economics of this new investment.
Gustavo Werneck : Let me and start with the concept behind it. Rodolfo, as you know, we’ve been operating in Mexico for some time. We are quite aware of everything that is happening in Mexico and in the U.S. So it’s very impressive to see all of the investments that have been announced in Mexico, more particularly investments from the automotive industry. If you look at the segments we serve today, I mean, large structural profiles and rebars. There were months in Mexico that there was a scarcity of rebars. And we we’ve been visited by some clients, and they’ve been consulting on us. Therefore, they are building new productive capacities in Mexico and all of that to cater to these new investments in Mexico from Tesla, BMW, et cetera.
And even though Mexico is where it is today, they import special steels today. With our investments in Mexico and with the platform that we’ll be able to serve that automotive industry in the near future. I would say that we are highly motivated to increase our productive capacity because there is a market and there is demand. Therefore, now we are engaged in a more detailed feasibility study. Throughout this year, we will continue with that study, that it should be concluded by the end of the year, and then we will make a final decision to be submitted to the Board by the end of the year. So starting 2025, if it is approved, we will then mobilize the resources to start with our new capacity in Mexico in 2026. I mean we do not have all the members yet, but Japur has some things.
So maybe I’ll turn the floor over to him so he can give you a little bit more color.
Rafael Japur : I can shed some more light to some of the points that Gustavo mentioned. The Mexican market, they import still the market is of about 1.2 million tonnes. It’s a significant market, but they import 70% of all of the materials they need for auto parts. But at the same time, they are the largest exporter of auto parts to the U.S. We are already participating in some operations in La Brea and others in Mexico. But in addition, we sell a significant amount of special skills to Mexico from our operations in the U.S. and Brazil. Therefore, we already have a good footprint in Mexico with important clients. Therefore, part of our rationale is based on that and also due to our expertise with special steels in North America and our knowledge of the Mexican market.
So for the next coming months until the end of the year, we will take a deeper look into the economics to find what will be the best location. So we have to make decisions related to our partners, supply chain and important customers that are investing more heavily in Mexico, also taking into account a more detailed analysis about cost. Last time, we look at Mexico was 10 years ago with our land in that country. Therefore, it’s important that we look at CapEx and costs until we have the approval, and we see some concrete returns. And finally, between the opening and disclose the steady to customers in the market in general in addition to being in line with our assumptions and our transparency towards the market. We should have some constructive conversations with our customers to understand what would be the ideal product mix that they will demand in view of the investments that they themselves are contemplated.
In special steels, once we certify a product, we are certifying a platform that will consume still five years into the future once we get into production. Therefore, this investment has to be well coordinated with the entire supply chain, where it’s not simply to sell for distribution. I just have a final comment. The amount that you mentioned that was published is a market reference. It’s not an internal number that we have. We are conducting studies to understand what are the synergies that can be captured with our current operations. We haven’t yet announced any specific location where the productive capacity will be installed. We are still in negotiations with the local government. So it will be a bit premature to tell you what will be the amount of the investment.
But in order of magnitude in looking at other geographies, it is within the range that was mentioned by the press. I think they got that amount from other investments we made in other geographies. But this is not yet the final amount.
Rodolfo Angele : Gustavo, I just have a very quick follow-up. The chance of being a ground field is zero, right? We are talking about a new plant, you will not operate as part of a unit you already have?
Gustavo Werneck: No, special to investments, Rodolfo. They are very different from traditional investments or long steel investments. Just to certify a plant like that, to start supplying to a customer, it takes two years and that requires a very specific expertise. It’s not for anyone to do it. And the synergy will come from the acquisition of scrap and other synergies. But using any existing plant, no, definitely not.
Renata Oliva Battiferro : Next question from Marcio Farid, sell-side analyst at Goldman Sachs is asking to ask the question live so let’s enable Marcio’s camera, please.
Marcio Farid : Well, I guess that Q1 numbers were even better than expected. But in our analysis, at least a good part of the surprise came from cost reductions. I think volume remains relatively weak in most divisions, but particularly for long steel in Brazil. So my question is, how do you see this volume improvement? Gustavo, you spoke a little about Brazil and how revenues and tariffs can hope? But if you could speak about the other regions, particularly the U.S. and also on the cost front, again, you spoke a little about some improvements via raw material. But is there any room to deliver a greater profitability perhaps in the Brazil operation? And where are the main points of attention? Where are you putting more effort and perhaps you could quantify these efforts for us?
U.S. unlike Brazil continues to be a positive surprise. I think that recently, we saw a little discount from Nucor for rebar perhaps for merchant bars as well. So if you could speak about how you see the North America market in the margin? And also, CapEx execution in Q1, when we analyze the number, it was way below the annual guidance. I just want to understand, Japur, perhaps you could give us more color on how you would expect to spend the CapEx during the year?
Gustavo Werneck : I’ll try to talk about the concept, Japur and then you speak about the numbers and cost, okay? Let’s start with North America. Marcio, is all very solid. The orders keep coming. Our backlog is very stable. Still in the backlog, we don’t have great orders related to the infrastructure build that’s coming, but slowly. Of the things we have not understood well at the time, we thought that this was going to come faster, but there is a matter of state funding, project execution. So it took longer than we expected because it’s been a while since we had such a big infrastructure package. So it’s starting to come, but it’s not that representative. To us, it is certainty that the backlog continues high. What we see in the present is the IRA orders for merchant bars that service racks for solar panels.
So we have a backlog and orders coming and price will fluctuate up and down because of scrap, but we’ll maintain probably the current level of spread. All of the initiatives in the last five years of preparing our mills to compete head-to-head with our competitors has translated positive with — into positive benefits in terms of improved costs, more competitiveness. I think that for five years, we did well executed work that put us on equal footing with North America competitors. And we have the certainty that in the next quarters, perhaps years, the margins we’re seeing will remain. We don’t see any clouds in the horizon. They could challenge the results that we delivered in North America. Japur, anything that you would like to add? Well, Marcio, regarding Brazil, Japur will give us the numbers, but I’d like to make to some point.
Number one, we are not going to cancel or postpone any of the investments already announced in Brazil, particularly for in Ouro Branco. We understand that these investments advanced independently of China and trade issues, they are more related to the relevant transformation that we are going to have so that we can get out of Brazil historical productive capacity for exporting. In the next 10 years, we believe that the windows may be closed. Perhaps one quarter or another, we’ll have a spot opportunity to export. But this market has been closing, and it will continue to be closed for a long time. So we need to transform this exporting capacity redirected to the domestic market with higher added value products. That’s why we’re investing a lot in mining, so that we can get our supply for the next 40 years in the coiled hot strip rolling mills that will start operating.
All of that so that Ouro Branco will not be working for exporting. So we’re maintaining these investments. The trade defense measures will help us have more volume in the currently operating mills and plants. This will help us dilute fixed costs and improve operations. But there’s another transformation we’re still looking into. We don’t have details to disclose right now, but it will happen. In light of everything that I mentioned, a significant change, focusing on the domestic market rather than exports, we’ll optimize the assets in Brazil as well. I’ll get these more competitive mills that we have, we’ll have more production there. Perhaps we’ll stop producing some less competitive mills. So we have a plan that is not totally finished, but it will at least be started this year.
So that we can take a step forward in Brazil to gain competitiveness, not just reducing prices of raw material, but also significantly improving the way we use the existing portfolio in Brazil. We don’t think that this will be translated into cost improvements in the coming quarters. But over time, with certain that will be more competitive when we optimize these assets. I’ll turn the floor to Japur because he has all the numbers. And he’ll give us the timing when we’ll see the impact of that on our results. Japur, what are you thinking? What are you seeing?
Rafael Japur : I guess that there are two points to add to what Gustavo said. First, I’d like to summarize two concepts; one, the carryover of our inventory cost — considering cost of production and cost of sales. We’ll look at our working capital today, the biggest account is inventories. It’s as big as our working capital account. When we think about our cash conversion cycle of about 86 days, it means that the inventory count has the same size, 86 days. Everything we consume, produce and including cost of goods sold, they go to our inventory and we’ll only see this in cost — in total selling costs along the following quarter. So there is an important timing aspect here between having a reduction in fixed costs until we see the reduction in variable costs raw, materials and how this translates in our results.
So we have to take this into account to when we start making these changes and the time it takes for the benefits to be seen as Gustavo mentioned. And you asked also a question regarding CapEx. I believe it is important to recall two factors. Number one, an important investment we are making today is investing in mining in the region of Minas Gerais. This investment depends on some weather events, more rain or less rain. So we can do some land movement in Minas Gerais. Typically, that’s a region where it rains a lot in the first quarter of the year, so that influences the pace, the speed with which we disperse CapEx over the year. That’s an important factor. Typically, the main maintenance downtime we have, we do recurring annual stoppages, which are necessary.
So a 10-day stoppage to change an element of the furnace, we extend another 5, 10 days to improve the equipment. So these stoppages typically occur in the second half of the year. If we look at recent years, our CapEx disbursement tends to grow comparing the first and the second half of the year. So we have to take into account the seasonality of CapEx and then you understand that CapEx disbursement so far is very much aligned comparing the annual guidance.
Renata Oliva Battiferro : Next question by Daniel Sasson, sell-side analyst with Itau BBA. He is asking to ask his question live.
Daniel Sasson : Well, most of my questions have been answered, but I have a quick one regarding the Brazil operation and I’m sorry to insist. I know that you’ve started doing the co-work of adapting the footprint, reviewing the footprint and personnel already in the beginning of the year. But perhaps it could give us a little more color because I imagine you’re already having additional costs by reviewing the headcount. And perhaps you could quantify to you — to us what the impact was in Q1? And to what extent this should extend along the first half of the year? And when should we expect to see a structure adapted to the current conditions in your view? So to what extent we can reduce personnel expenses, SG&A, personnel cost per ton because that could be helpful for us to quantify these efficiency gains you’re pursuing in the Brazilian operation.
My second question is related to the United States. Werneck, I think you mentioned about healthy backlog in the U.S. operation. If anybody had a doubt regarding the sustainability of margins in the United States, I think that little by little, the doubts will vanish. I know you avoid providing guidance or making comments about margins in quantitative terms, sustainable margins in quantitative terms. But perhaps Werneck, you can mention EBITDA margins in the United States versus EBITDA margin in Brazil. Given the Section 232 will continue in place regardless of the results of the U.S. elections. Perhaps U.S. margins can be sustainably better than Brazilian ones, perhaps close to 20%. In Brazil, margins close to 15%. So if you can make qualitative comments about that, it would be helpful.
Gustavo Werneck : I’ll make some comments about your two questions. I’m trying to give you a little more color, but I’ll not get into the numbers because that is up to Japur. So I made a comment about opportunities that we are pursuing to optimize our assets. That involves initiatives like Cosigua. Cosigua is a relevant mill we have in Rio de Janeiro. It has three rolling mills. Rolling mill one produces rebar and merchant bars. It is a highly competitive role in with excellent costs, and it is not being used in the way it should be used because we have lower volumes in Brazil. So we end producing less with the Cosigua rolling mill. And we believe that in optimizing the assets, we could use the state-of-the-art rolling mill to produce a maximum that it can.
