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Steelmaker Gerdau Sees Recovery In Brazil As Second-Quarter Profit Beats Estimates

|Includes:Gerdau S.A. (GGB), SID

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

year-earlier period.

"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

billion reais.

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.

Stocks: GGB, SID