The main explanation resides in the fact that the engines, technology changed in Euro 6 that precipitated a pre-purchase in the end of 2022. So this segment, which is very relevant for our business in Brazil. The segment of heavy duty vehicles, buses, trucks that felt an impact. What we’re seeing a recovery here, although not all recovery in light vehicles is directly related to recovery in demand. The shipments of electric EV vehicles in China, imported from China it’s not good for us. There’s no steel from us in that. But in the vehicles manufactured in Brazil, combustion engine or hybrid vehicles for those we already see a recovery in the demand for steel for light vehicles. And we also see a recovery in the demand for steel for heavy vehicles.
We believe, and this is already materializing in a higher demand over last year. Not the same as 2022, though, because while players need to rebuild their fleets and other needs of the customers that need to buy more trucks. At the same time our Special Steels production is much easier to adapt to the current demand than our operation of long steels and flats. So we are also looking to increase our competitiveness in Special Steels. I should say that in the last 60 days, we’ve adapted the operation. So in Brazil, we’re going to have competitiveness with better costs. We adapted our operations to this more restricted market situation, and we also see recovery in the market of light vehicles, and especially of heavy duty vehicles. I think it’s important to stress that a hybrid vehicle requires more steel than a combustion engine vehicle.
So in Brazil, we see the automotive industry brewing with hybrid vehicles than fully EVs. So over time, I should say this will contribute to our earnings, our results of Special Steels in Brazil. In the United States, deal was good and has everything to be good again in terms of manufacturing and sale of vehicles. Of course, the strike of the four big ones in September did impact volume, but things are coming back on track. We will be ripping the fruits after a long cycle after five years of investments in preparation of our biggest mill, the Monroe Mill, state of the art mill to produce Special Steels, coupled with the fact that some competitors did leave the market. So we have everything to have a very positive year in the United States, in North America for Special Steels.
So among our BDs, I think Special Steels has everything to serve smoothly, perhaps with an upside compared to last year in terms of better financial results over the year. So this is a general overview of Special Steels.
Rafael Barcellos: Thank you very much Renata, Japur, Werneck. Thank you for participating.
Operator: Our next question is from Guilherme, sell-side analyst from Bank of America, and he would like his camera to be enabled, please.
Guilherme Rosito: Can you hear me?
Gustavo Werneck: Yes, we can hear you well.
Guilherme Rosito: Thank you for taking my question. My first question is on North America. For some years we’ve been talking about margin normalization and the margins going to lower levels, but it’s been in the high teens right now. So when you look at the business and when you run your models, what is a normalized margin? Would it be around 20% or 17% is low or maybe lower than that would be a normal level? So what is your expectation in terms of margins? And my second question is about Ouro Branco mill. You said that during that review you have to add more added value products. Could you give me a little bit more details about what you have in mind? And do you think about any change in trajectory in Ouro Branco? Bear in mind that you also think about the decarbonization strategy?
Gustavo Werneck: That’s a great question. I will answer your three questions. I think it’s difficult to say today about normalized margin considering the current environment, because there’s a lot of volatility in the world. But I think that according to the current levels of margins, we should probably see the maintenance of these margins throughout the coming quarters this year and next year. I don’t see any major move in terms of possible risks. I don’t see that in the horizon or anything that could impact margins both up or down in terms of demand. And we have a very sound backlog with the growth of all of these incentive programs that I mentioned that has been very good for us. So IRA is very present in terms of our backlog.
The increase of solar energy in the U.S. I mean, we are providing steel for the solar racks. There is a significant demand in the country, the Chips Act, the Science Act that involves a lot of new facilities being built in the U.S. In our view, I mean, what is taking so long but this will happen is this translation of the infrastructure projects into something real, because there is breakdown by region, different projects. But in general, when you look at the backlog, and when you look at the coming demand, and when you also look at the fact that there hasn’t been any new investments in new capacity on our side, everything converts to the maintenance of the margins that we’ve seen. It could vary a little bit, up or down. But if there is such a thing as normalization concept, I think we could apply it in 2024, 2025 and 2026 given all of the things that I mentioned.
About Ouro Branco, right from the beginning, when it was [indiscernible], it was meant to be a place to make semi-finished goods. But throughout the last few years we are trying to reduce that capacity. But it became very clear to us, due to all of the changes in the steel landscape that we wouldn’t have enough capacity of semi-finished to export. So now, throughout the year, we are deploying the second phase of the hot coil rolled strips. And then in the future, we will have a third phase of hot coil rolled strips because this gives us more options. Not only we’re able to serve our customers better, but in the future at Ouro Branco we could also have some flat down streams or maybe cold and cold or galvanized. I mean, there are some options that are being looked at, at the moment.
In terms of structurals, I think the only big rolling mill of structurals is in Ouro Branco. So there is a growing demand for that product for – due to the growth of the use of metallic structures for both commercial and residential construction. Therefore, we see the possibility of increasing the production of structurals from Ouro Branco. We have to look at all the options and then understand what would be the priorities. But it’s inevitable looking at the future that Ouro Branco will be the right platform to produce more added value products. In terms of CapEx for the next 40 years this will bring an absurd competitiveness in terms of iron ore, a reserve mine and long-term resources. And in this current investment phase, we already have 40 years of iron ore supply.
The mining deck is only 13 kilometers far from the plant. Therefore we believe that Ouro Branco will be highly competitive and at the same time we are using all the available technology to decarbonize the mill. In companies that have integrated assets have some time to decarbonizes as technologies become more radically available? So in general that’s it, I think I already covered that question about Ouro Branco. And in case I forgot anything, maybe Rafael can help me to add anything in case I left something behind.
Rafael Japur: Yes, I think you said it all, Gustavo. I think the issue has to do with our journey for Ouro Branco, because we want to add – to increase added value products not only in terms of our product portfolio, but also in terms of raw materials. The main investment of this cycle, 22 to 26 hours, the bulk of our environment is in terms of sustainable mining and the production of iron ore, Minas Gerais because this will allow Ouro Branco to be extremely competitive with a high iron grade. And this will contributed to our decarbonization process, but at the same time will be highly competitive in terms of cost. Therefore, we want to see Ouro Branco being less exposed to external market cycles, but increasingly more robust, both in terms of downstream or the product mix, but also in terms of sell up and the supply of raw material sold.
Guilherme Rosito: Very good. Thank you, Werneck.
Gustavo Werneck: Thank you. Renata, do we go back to you?
Renata Oliva Battiferro: Okay, thank you. Then the topic is CapEx, we have three questions that are very similar. First, Carlos de Alba asked whether that R$6 billion of CapEx guidance for 2024 includes Gerdau Next, what’s the number for a Gerdau Next? The second question comes from Guilherme, sell-side analyst from XP. The question is whether CapEx for 2026, that was R$5.7 billion. It was R$5.7 billion higher than what was previously indicated. Does that reflect any one off factor? Could we say that this is related to the prepayment of the CapEx plan that was earmarked for 2024? And the third question comes from Igor Guedes, sell-side analyst from Genial. The question is the following. Could you please give me a breakdown of that R$464 million CapEx that were part of the R$2 million of the fourth quarter of 2023, but did not have a cash effect because when you look at your cash flow – the free cash flow CapEx is R$1.5 billion, but the total reported CapEx is R$2 billion.
So my question is, how do you justify that R$474 million not having a cash effect? Were these events – these events were related to what?
Gustavo Werneck: Okay, I will start with Igor, because I think this is a more technical question. And then Igor’s question about CapEx reconciliation and the cash effects are free cash flow. I’ll start with the last question then. When we talk about CapEx guidance and how we put CapEx together, we are talking about additions of real estate to our balance sheet. So we start building, we hire suppliers. We start with that. And there are some installments of accounts payable that we have to pay for the equipment we acquired and suppliers, things that were delivered but weren’t totally paid, because we hire things throughout the year and so within the month of December, but not necessarily, that means that we paid all of the accounts payable, so to speak, within that current year.
And as we have more CapEx now than what we had in the past, this remaining payments, things that have been already hired and things that are underway, and there is PP&E and things that were not in fact paid or did not leave. The company’s cash, I mean, this year involved R$450 million. The bulk of the amount corresponds to investments made in Brazil, investments at Ouro Branco, because that’s the mill that is probably taking up most of the CapEx investment in this cycle that I’m referring to. Now, to answer Carlos de Alba’s question about the CapEx in the guidance and the investments in Gerdau Next. In that number of R$6 billion we are solely speaking about CapEx investments in our core business, in our full subsidiaries. This does not include investments that we as a company will do in terms of capital raise of not controlled companies in the case of – which is the case of Gerdau Next.
For 2024 in addition to that R$6 million that we will have in CapEx investment in PP&E and Fin our companies and in our core business or next companies or full subsidiaries of Gerdao, we will probably do some capital raise and things that we have already committed to do last year, especially, I mean, capital, I mean, most of the projects still have to be disbursed and Addiante, our rental of heavy vehicles together with random. So we have some installments or capital payments to do. In the case of the energy company, we have 50% Addiante, we do have some holding. And so the money that we will be paid throughout 2024 should be realized, depending on the business plan of all of these two JVs. So it will be in the range of R$100 million to R$200 million.
This is the committed amount of investments throughout the year of 2024. And finally, to answer Gileadmi’s question about that additional amount that we spent in 2023 vis-à-vis the guidance refers to in some cases, anticipated investments, important investments in the case of maintenance of our blast furnace in Ouro Branco. So sometimes we just prepay depending on more favorable market conditions. So in these cases we just guarantee some critical purchases for our long-term maintenance projects – just to prolong the lifespan of Ouro Branco. So that was one storm and then other payments depends on the exchange rate fluctuations. So investments denominated in U.S. dollars using the exchange rate of 2022 and the currency or the foreign exchange of this year.
I know that that was a long answer, but I think we covered all of the three questions.
Renata Oliva Battiferro: Carlos de Alba, Morgan Stanley asked another question. I believe that the other ones have been answered during the call. So what is the dividend that the management will propose to the Board for 2024? That’s one additional question by Carlos de album.
Rafael Japur: The dividend we’ll propose along 2024 will depend materially on the earnings. We’ll be able to have during the year considering our dividend payout policy. Our policy and the bylaws have not changed, they are 30%. We have been paying over time in recent years, a payout significantly higher than 30%, and we understand that there is room to continue to remunerate our shareholders above 30% in the coming quarters. Now, the amount that we will actually pay out for all of our shareholders will depend materially on our results, considering that we need to maintain our financial health, solidity, stable balance sheet, and to continue to create profitability in a sustainable fashion as we have done to date.
Renata Oliva Battiferro: Thank you, Japur.
Renata Oliva Battiferro: Very well. We are coming to the end of our earnings conference call in the benefit of time and because we value your time, the Q&A session is closed. All questions that were not answered will be answered later by our Investor Relations Team. And before I turn the floor back to Gustavo with great joy that I inform you firsthand, we are launching today the new Investor Relations website with supplementary analysis, new resources, and a more intuitive navigation demonstrating our commitment in evolving and meeting market needs. With more close communication with our stakeholders, I invite you all to navigate our website. Same address – same email address. I mean same website address. I’ll turn the floor to Gustavo Werneck for his final comment.
Gustavo Werneck: Thank you. Renata, I’d like to thank everyone for participating. As always, I would like to thank all of you for joining us. It is always a huge pleasure for me, for Rafael Japur and for Renata to be with you. And I would like to invite you to participate in our next earnings video conference call, referring to Q1 of 2024, which will be had on May 3rd. So thank you very much. All the best and take care.
