Gerdau (GGB) Q1 Earnings Fall Y/Y On Low Sales, High Costs

Brazilian steel producer Gerdau S.A. (NYSE:GGB) reported weak results for first-quarter 2016. The company’s adjusted net earnings plunged nearly 94.7% year over year to R$14.2 million (US$3.64 million). The fall was triggered by lower revenue generation and higher financial expenses.

Talking about Gerdau’s top-line results, net sales in the quarter totaled R$10,084.5 million (US$2,585.8 million), down 3.5% year over year.

Crude steel production in the quarter declined 4.3% year over year to 4.154 million tons, while shipments fell 7% to 3.851 million tons.

Segmental Details

A brief discussion on Gerdau’s segmental result is provided below.

Revenues sourced from the Brazil BD (business division) accounted for 27.9% of net sales, down 18.7% year over year, while that from North America BD represented roughly 40% of net sales, up 12% year over year. The South America BD revenues constituted 12.2% of net sales, down 6.4% year over year. Revenues from Special Steel BD decreased 3.4%, comprising 19.9% of net sales.

Margins

Gerdau’s margins suffered weakness in first-quarter 2016, with cost of sales representing 91.9% of net sales compared with 89.4% in the year-ago quarter. Gross margin was down 250 basis points to 8.1%.

Selling expenses, as a percentage of revenues, were 2.1%, while general and administrative expenses were 4.3%. Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) were R$930 million (US$238.5 million), down 15.9% year over year. EBITDA margin came in at 9.2% compared with 10.6% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting first-quarter 2016, Gerdau had cash and cash equivalents of R$4,730 million (US$1,317.5 million), down 16.3% from R$5,648.1 million (US$1,426.3 million) at the previous quarter-end. Long-term debt decreased 11.9% sequentially to R$20,992.6 million (US$5,847.5 million).

In addition, Gerdau’s net cash generation from operating activities decreased 1.6% year over year to R$929.1 million (US$238.2 million) in first-quarter 2016. Capital spent on purchase of property, plant and equipment totaled R$485.3 million (US$124.4 million), down 20.7% year over year.

Outlook: For 2016, Gerdau expects capital expenditure to be R$1.5 billion, down 35% year over year.

Gerdau, with a market capitalization of $3.4 billion, currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include ArcelorMittal (NYSE:MT) , POSCO (NYSE:PKX) and Universal Stainless & Alloy Products Inc. (NASDAQ:USAP) . All these stocks hold a Zacks Rank #2 (Buy).