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Gerdau (GGB) Q3 Net Income Up Y/Y, Steel Shipments Aid Sales

Zacks

Brazilian steel producer Gerdau S.A. GGB reported impressive results for third-quarter 2017, with the adjusted net income increasing 52.2% year over year to R$144.9 million ($45.9 million).

The bottom line benefited from higher revenue generation, fall in financial expenses and positive impact of exchange variations. However, increase in cost of sales adversely impacted results.

Higher Steel Shipments Drive Revenues

The quarter’s net sales totaled R$9,476.2 million ($2,998.8 million), surpassing the year-ago tally by 8.9%. The improvement came on the back of higher shipments in the North America and Special Steel business divisions (BD).

The company’s crude steel production in the quarter grew 4.3% year over year to 4.1 million tons while shipments of steel increased 5.4% to 3.9 million tons.

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

Revenues generated from the Brazil BD increased 9.2% year over year. It accounted for 32.4% of net sales. North America BD sales, accounting for 40.3% of net sales, grew 15.4% while the South America BD revenues, constituting 11.1% of net sales, declined 17% year over year. Revenues from Special Steel BD increased 18.9%, comprising 16.2% of net sales.

Margin Profile Weakens

Gerdau’s cost of sales in the quarter increased 11.1% year over year and represented 89.7% of net sales versus 88% in the year-ago quarter. Rise in cost of sales eroded much of the benefits from increase in revenues. Gross margin fell 170 basis points (bps) to 10.3%.

Selling expenses, as a percentage of net sales, were 1.4% while general and administrative expenses were 2.8%. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were R$1,166 million ($369 million), down 2.8% year over year. EBITDA margin came in at 12.3%, down from 13.8% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the third quarter, Gerdau’s cash and cash equivalents were R$3,263 million ($1,032.6 million), down 24.2% from R$4,305.4 million ($1,304.7 million) recorded in the preceding quarter. Long-term debt was R$14,130.4 million ($4,471.6 million), down 9.7% sequentially. The company’s net debt to EBITDA ratio fell to 3.4 from 3.6 in the previous quarter.

In the quarter, the company used net cash of R$230.9 million ($73.1 million) for its operating activities versus R$364.1 million ($112 million) generated in the year-ago quarter. Capital spent on purchase of property, plant and equipment decreased 40.5% to R$170.2 million ($53.9 million). Dividend payments in the quarter were R$33.7 million ($10.7 million).

Also, the company announced the approval of R$51.3 million or R$0.03 per share to be paid as dividend to its shareholders on record as of Nov 21. The dividend will be paid on Dec 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 billion, Gerdau currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the Zacks Basic Materials sector include POSCO PKX, Carpenter Technology Corporation CRS and Air Products and Chemicals, Inc. APD. While both POSCO and Carpenter Technology sports a Zacks Rank #1 (Strong Buy), Air Products and Chemicals carries a Zacks Rank #2 (Buy). 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.

Carpenter Technology’s earnings estimates for fiscal 2018 and fiscal 2019 improved over the last 60 days. Also, the company pulled off an average positive earnings surprise of 53.72% in the last four quarters.

Air Products and Chemicals’ earnings estimates for fiscal 2018 and fiscal 2019 improved over the past 60 days. Also, the company delivered an average positive earnings surprise of 2.55% in the last four quarters.

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