Gerdau (GGB) Records Loss In Q1, Steel Production Falls Y/Y

Brazilian steel producer Gerdau S.A. (NYSE:GGB) reported weak results for first-quarter 2017, with the bottom line plunging to a loss of R$34.1 million ($10.9 million) from earnings of R$14.2 million ($3.6 million) in the year-ago quarter.

The company’s net sales were R$8,458.7 million ($2,693.5 million), down 16.1% year over year. The decline was triggered by forex headwinds and special steel units divestment in Spain.

Crude steel production declined 3.3% year over year to 4.018 million tons while shipments of steel fell 6.8% to 3,591 million tons. Production decline was primarily due to divestment of Spain-based special steel units.

Segmental Revenues

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

Revenues sourced from the Brazil BD (business division) accounted for 31.6% of net sales, up 3.3% year over year while that from North America BD represented roughly 39.8% of net sales, down 15.7% year over year. The South America BD revenues constituted 12.2% of net sales, down 18.9% year over year. Revenues from Special Steel BD decreased 37.5%, comprising 16.4% of net sales.

Margins

In the quarter, Gerdau’s margins suffered due to fall in net sales, partially gaining from year-over-year decrease of 15.8% in cost of sales. As a percentage of net sales, cost of sales was 92.3% versus 91.9% in the year-ago quarter. Gross margin was down 40 basis points (bps) to 7.7%.

Selling expenses, as a percentage of revenues were 1.6% while general and administrative expenses were 3.6%. Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) were R$853 million ($271.7 million), down 8.3% year over year. EBITDA margin came in at 10.1% compared with 9.2% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the first quarter, Gerdau’s cash and cash equivalents decreased 11.6% sequentially to R$4,476.1 million ($1,430.1 million) from R$5,063.4 million ($1,558 million) recorded in the preceding quarter. Long-term debt was R$15,373.1 million ($4,911.5 million), below R$15,959.6 million ($4,910.6 million) at the end of the previous quarter.

In the quarter, the company generated net cash of R$36.4 million ($11.6 million) from its operating activities, down 96.1% year over year. Capital spent on purchase of property, plant and equipment totaled R$236.6 million ($75.4 million), down 51.2% year over year. Dividend payments in the quarter totaled R$2 million ($0.64 million)

Outlook

For 2017, Gerdau expects capital expenditure to be R$1.3 billion on productivity and maintenance enhancement.

Zacks Rank & Key Picks

With a market capitalization of $5.15 billion Gerdau currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the industry include Angang Steel Company Limited ANGGY, Aperam (OTC:APEMY) and Ternium S.A. (NYSE:TX) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Angang Steel Company Limited’s earnings estimates for 2017 were revised upward over the last 60 days.

Aperam’s bottom-line expectations for 2017 and 2018 improved over the last 60 days.

Ternium S.A.’s earnings estimates for 2017 and 2018 improved over the past 60 days. It posted an average positive earnings surprise of 16.43% for the last four quarters.

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