Gerdau (GGB) Swings To Profits In Q1 On Solid Sales Growth

Gerdau S.A. (NYSE:GGB) reported impressive results for first-quarter 2018. The Brazilian steel maker’s adjusted net income totaled R$451.1 million ($138.8 million) in the reported quarter versus net loss of R$34.146 ($10.9 million) incurred in the year-ago quarter.

The bottom line benefited from higher revenue generation, rise in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and fall in financial expenses. However, increase in cost of sales adversely impacted results.

Revenues Improve Y/Y; Steel Production, Shipment & Prices Solid

In the quarter under review, Gerdau’s net sales were R$10,388.8 million ($3,196.6 million), reflecting year-over-year growth of 22.8%. The improvement came on the back of healthy performance in all business divisions (BDs) and rise in international prices.

The company’s crude steel production in the reported quarter grew 3.7% year over year to roughly 4.2 million tons while shipments of steel increased 7.8% to 3.9 million tons. These improvements were driven by healthy demand for steel, especially in North America and Brazil BDs.

The company reports its revenue results under four heads. The segmental results are briefly described below.

Net sales generated from the Brazil BD increased 29.7% year over year to R$3,611 million ($1,111.1 million). North America BD net sales grew 22.2% to R$4,428 million ($1,362.5 million) while the South America BD revenues declined 3.6% year over year to R$967 million ($297.5 million). Revenues from Special Steel BD increased 27.6% year over year to R$1,732 million ($532.9 million).

Margins Profile Strengthens

In the reported quarter, Gerdau’s cost of sales increased 16% year over year to R$9,049.7 million ($2,784.5 million), primarily due to an increase in raw-material costs. It represents 87.1% of net sales versus 92.3% in the year-ago quarter. Gross margin grew 520 basis points (bps) to 12.9%.

Selling expenses in the quarter were R$150.4 million ($46.3 million), increasing 8.7% over the year-ago quarter. It represented 1.4% of net sales versus 1.6% in the comparable quarter of the previous year. General and administrative expenses declined 10.3% year over year to R$270 million ($83.1 million) and represented 2.6% of net sales versus 3.6% in the year-ago quarter.

Adjusted EBITDA was R$1,484 million ($456.6 million), increasing 74% year over year. Adjusted EBITDA margin was 14.3%, up from 10.1% in the year-ago quarter. Financial expenses in the reported quarter decreased 20.9% year over year to R$366 million ($112.6 million) on the back of decline in gross debt and lower interest rates.

Balance Sheet & Cash Flow

Exiting the first quarter, Gerdau’s cash and cash equivalents were R$2,375.4 million ($719.8 million), down 7% from R$2,555.3 million ($772 million) recorded in the preceding quarter. Long-term debt was R$14,495.8 million ($4,392.7million), up 0.3% sequentially. The company’s net debt to EBITDA ratio fell to 2.7 from 3.5 in the year-ago quarter.

In the quarter under review, the company used net cash of R$204.1 million ($762.8 million) for its operating activities versus R$36.4 million ($11.6 million) generated in the year-ago quarter. Capital spent on the purchase of property, plant and equipment decreased 8.4% to R$216.7 million ($66.7 million). Dividend and interest on capital paid totaled R$55.2 million ($17 million) while R$149.7 million ($47.7 million) was used for purchasing treasury stocks.

Also, the company announced the approval of R$136.1 million or R$0.08 per share to be paid as a dividend to its shareholders of record as of May 21. The dividend will be paid on Jun 1.

Outlook

For 2018, Gerdau anticipates capital spending of R$1.2 billion. The company intends to utilize this amount for maintenance purposes and improving productivity.

Gerdau S.A. Price