Note: This is a note I wrote for Reuters News. Suggestions/comments more than welcome,
SAO PAULO, Aug 2 (Reuters) - Robust output and sales in
Brazil helped steelmaking giant Gerdau <GGBR4.SA> post
second-quarter net income that beat analysts' estimates, as the
world's No. 2 producer of long steel products foresees a gradual
recovery in its home market.
Operational results signaled that activity in the sector is
recuperating despite the impact of high raw materials costs,
mounting competition from imported steel and a year-long
slowdown in Brazil. A recovery in homebuilding in Brazil should
spur steel sales through 2013, Chief Executive André
Gerdau-Johannpeter told reporters at a conference call on
"We believe that the market is coming back and the company
is getting prepared for that," Gerdau-Johannpeter said.
Gerdau, based in Porto Alegre, Brazil, earned 549 million
reais ($269 million) in the quarter, compared with 503 million
reais a year earlier, according to a securities filing on
Thursday. A Reuters poll of 11 analysts had forecast average net
income of 428.4 million reais for the period.
On a quarter-on-quarter basis, the most-widely used gauge of
earnings performance by investors, profit soared 38 percent from
397 million reais in the first quarter. Revenue per tonne sold
rose in the quarter, highlighting efficiency gains and the
ability of Gerdau to keep expenses relatively at bay.
Production of raw steel gained 2.1 percent sequentially to
5.046 million metric tonnes, the highest level in a year, as the
company's Brazilian unit and, to a lesser degree, the Latin
American and specialty steel units experienced rising orders.
Sales climbed 1.1 percent from the first quarter.
As a result, gross margins in the Brazil and specialty steel
units rose, and will do so as demand for long steel, mostly used
in construction projects, gains traction. Despite all that,
revenue came in at 9.975 billion reais, below the poll's
estimate of 10.008 billion reais.
"We highlight improvements in the Brazilian domestic market
demand, which in our view is a positive sign for the second half
of this year," said Ivano Westin, a senior mining and steel
analyst for Credit Suisse Group in São Paulo.
Preferred shares of Gerdau rallied 2 percent to 18.40 reais
on Thursday. The stock is up 29 percent this year.
Costs per tonne produced rose 3.4 percent, below the 6.2
percent gain in revenue per tonne produced. Expenses rose 6
percent on a sequential basis and 8 percent from the
"We are taking all the steps to rein in the impact of costs
and expenses in a very challenging environment,"
Gerdau-Johannpeter said in the call.
Still, the company borrowed more short-term debt to unload
unwanted inventory. Working capital loans, or the money that
Gerdau borrows to finance day-to-day operations, rose by 13
percent in the quarter to 10.3 billion reais, the filing added.
Working capital turnover rose by five days in the quarter,
prompting management to "instruct all our units to reduce it," a
move that could help enhance profitability, Chief Financial
Officer Osvaldo Schirmer said in the same call.
Gerdau's investment totaled 850 million reais in the quarter
as management exerted greater selectivity when assessing new
projects. "This is a sign of discipline in capital allocation in
a period of challenging environment," said JPMorgan Securities
analyst Rodolfo de Angele.
Growing optimism over a potential recovery in the United
States, where results disappointed for the first time in three
quarters, led Gerdau to resume plans to build a $540 million
plant in Mexico to produce profiles in cold-bended steel.
The new mill will have capacity to produce 1 million tonnes
of steel and 700,000 tonnes of rolled products and should begin
operations by 2014.
A hot rolled coil mill with the capacity to produce 770,000
tonnes of the product will begin operations by year-end,
Gerdau-Johannpeter added. The company maintained its estimate
for capital expenditures at 10.3 billion for the 2012-2016
Earnings before interest, tax, depreciation and
amortization, a gauge of profitability known as EBITDA, jumped
23 percent to 1.244 billion reais from the first quarter.
EBITDA came slightly below analysts' average forecast of 1.270
The sequential gain in EBITDA was stoked by the robust
results posted by the Brazilian steel and the specialty steel
divisions. Both increases helped outweigh a 24 percent tumble in
EBITDA at the Latin American steel division and a 1 percent
decline at the North America unit.
EBITDA per tonne produced, a gauge of profitability per
unit, rose 21 percent to 246.5 reais in the second quarter from
the prior three months. EBITDA rose to 12.5 percent of revenue,
compared with an 11 percent so-called EBITDA margin in the first
Net income rose 9.1 percent from the second quarter of last
year after a drop in taxes and financial expenses helped offset
a faster gain in production costs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.