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August 6, 2010
Share ThisBrazilian steel producer, Gerdau S.A.’s (GGB) second-quarter 2010 earnings surged to R$856.0 million (US$475.6 million) from R$467.0 million (US$223.4 million) in the second quarter of 2009. Earnings per share came in at R$0.52 (US$0.29 per ADR) versus R$0.27 (US$0.13 per ADR) in the comparable quarter a year-ago. Gerdau’s quarterly result also surpassed the Zacks Consensus Estimate of US$0.25 per ADR.
The net income growth was driven by higher revenues and lower cost of sales and operating expenses as a percentage of revenues. Net income in the second quarter of 2009 excluded losses of R$797.0 million (US$381.3 million) related to asset impairment.
Revenue
Net revenue soared 30.0% to R$8,296.0 million (US$4,608.9 million) from R$6,401.0 million (US$3,062.7 million) in the year ago quarter. The company’s results were well above the Zacks Consensus Estimate of US$4,592.0 million. The revenue growth was primarily driven by higher shipments in the quarter.
Brazilian business accounted for 39.7% of net revenue and registered a growth of 37% year over year. North American revenue increased 10% and contributed 27.9% to net revenue while Latin American revenue represented 10.9% of net revenue and grew by 13% over the year-ago period. Revenue from Specialty Steel grew 34% year over year and accounted for 21.5% of net revenue.
Crude steel production nearly doubled in the quarter to 4,711 million tons, up 52% year over year, while rolled steel production jumped 40% to 3,910 million tons. Shipments were very strong in the quarter at 4,383 million tons and representing 30% year over year growth.
Margins
Gross margins in the quarter improved substantially to 21.9% compared with 11.8% in the year-ago quarter, attributable to lower cost of sales as a percentage of revenue. Selling expenses, as a percentage of revenue, were roughly stable at 1.7%, while general and administrative expenses declined by 140 basis points year over year.
EBITDA in the quarter improved 189% year over year to R$1,720.0 million (US$955.6 million) with a margin of 21% versus 9% in the year-ago quarter. Operating income was R$1,247.7 million (US$693.2 million) compared with R$152.8 million (US$73.1 million) in the year-ago quarter. Operating margin improved to 15.0% from 2.4% in the second quarter of 2009.
Balance Sheet
Exiting the second quarter, Gerdau had cash and cash equivalents of approximately R$1,875.3 million (US$1,041.8 million) compared with R$1,843.7 (US$1,013.0 million) in the previous quarter. Long-term debt was R$12,794.7 million (US$7,108.2 million), up from R$12,653.7 million (US$6,952.6 million) in the previous quarter.
Cash Flow
Net cash flow from operating activities soared 27.1% sequentially to R$985.3 million (US$547.4 million). Capital spending declined roughly by 5.6% sequentially to R$220.3 million (US$122.4 million).
Our Take
Gerdau is the second largest steel producer in the world and the largest in the Americas. We believe Gerdau stands well positioned to leverage from the growing world steel market. It is anticipated that the Brazilian market would also remain strong in 2010 with heavy demand from the manufacturing and construction industry.
Recently Gerdau entered into a definitive agreement to acquire the remaining 33.7% stake in its North American unit, Gerdau Ameristeel Corp. (GNA). The combined business will help Gerdau extend its global presence by bringing additional business development opportunities. Further, Gerdau’s credit worthiness will enable Gerdau Ameristeel to procure low-cost funds.
However, the company’s high leverage together with its above average exposure to U.S. housing is a major concern. Prime competitors of the company include Companhia Siderurgica Nacional (SID) and ArcelorMittal Brasil SA.
We currently maintain a Neutral recommendation on Gerdau.
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