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Gerdau (GGB) Q2 Net Income Falls Y/Y, Steel Production Weak


Brazilian steel producer Gerdau S.A. GGB disappointed investors with its weak second-quarter 2017 results wherein adjusted net income fell roughly 19.1% year over year to R$149 million ($46.4 million). The poor bottom line was due to sales decline, adverse impacts of foreign currency translation and higher income tax expenses.

Net sales in the quarter declined 10.6% year over year to R$9,165.9 million ($2,855.4 million). The fall was triggered by forex headwinds and special steel units divestment in Spain.

Crude steel production decreased 5% year over year to 4.09 million tons while shipments of steel fell 12.6% to 3,707 million tons. Production decline was primarily due to divestment of Spain-based special steel units and a fall in production volume in Brazil business division.

Segmental Revenues

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

Revenues sourced from the Brazil BD (business division) accounted for 32.5% of net sales, inching up 0.4% year over year while that from North America BD represented roughly 39.8% of net sales, down 9% year over year. The South America BD revenues constituted 11.9% of net sales, down 20% year over year. Revenues from Special Steel BD decreased 17.7%, comprising 15.8% of net sales.


In the quarter, Gerdau’s margins suffered due to a fall in net sales, partially gaining from year-over-year decrease of 10.2% in cost of sales. As a percentage of net sales, cost of sales was 89.8% versus 89.4% in the year-ago quarter. Gross margin was down 40 basis points (bps) to 10.6%.

Selling expenses, as a percentage of net sales were 1.5% while general and administrative expenses were 3.1%. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were R$1,120 million ($348.9 million), down 6.7% year over year. EBITDA margin came in at 12.2% compared with 11.7% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the second quarter, Gerdau had cash and cash equivalents of R$4,305.4 million ($1,304.7 million), marginally below R$4,476.1 million ($1,430.1 million) recorded in the preceding quarter. Long-term debt was R$15,646.2 million (US$4,741.3 million), increasing 1.8% sequentially.

In the quarter, the company used net cash of R$19.6 million ($6.1 million) for its operating activities versus R$543.7 million ($155.3 million) generated in the year-ago quarter. Capital spent on purchase of property, plant and equipment totaled R$195.3 million ($60.8 million), down 40.1% year over year. Dividend payments in the quarter were R$0.253 million ($0.08 million).

Also, the company announced the approval of R$34.2 million or R$0.02 per share to be paid as dividend to its shareholders on record as of Aug 21. The dividend will be paid on Sep 1.

Gerdau S.A. Price and Consensus

Gerdau S.A. Price and Consensus | Gerdau S.A. Quote

Zacks Rank & Key Picks

With a market capitalization of $6.14 billion, Gerdau currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the industry include POSCO PKX, Universal Stainless & Alloy Products, Inc. USAP and Nippon Steel & Sumitomo Metal Corporation NSSMY. While POSCO sports a Zacks Rank #1 (Strong Buy), both Universal Stainless & Alloy Products and Nippon Steel & Sumitomo Metal carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

POSCO’s earnings estimates for 2017 and 2018 were revised upward over the last 60 days. Its earnings are anticipated to grow 5% in the next three to five years.

Universal Stainless & Alloy Products’ earnings estimates for 2017 and 2018 improved over the last 60 days. Also, the company pulled off a positive earnings surprise of 30.77% in the last quarter.

Nippon Steel & Sumitomo Metal’s earnings estimates for fiscal 2017 and fiscal 2018 improved over the past 60 days.

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