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Brazilian steel maker, Gerdau S.A. (GGB - Analyst Report) reported an impressive financial result for first quarter 2014. Net income was R$440.1 million (US$186.5 million), soaring up 175% from R$160 million (US$80.0 million) in the year-ago quarter.

The bottom line improvement was driven primarily by healthy top line performance and increased gains from exchange variations, offset partially by a rise in costs and expenses.

Gerdau’s net sales were R$10,553.8 million (US$4,471.9 million), reflecting an increase of 15.1% year over year.

Effective first quarter 2014, Gerdau added a new business operation (BO), Iron Ore, to its existing four business operations, including Brazil BO, North America BO, Latin America BO and Special Steel BO.   

Gerdau’s Brazilian business accounted for 35.0% of net revenue in the quarter and registered a 5.7% year-over-year increase. Revenues generated in North America rose 11.4% and contributed 30.0% to net revenue, while Latin American revenues represented 13.1% of net revenue and increased 22.3% year over year. Revenues from Special Steel business operations stepped up 24.8% year over year and accounted for about 19.7% of net revenue. Iron Ore business accounted for 2.2% of total revenue and revenues generated grew 300.0%.

Crude steel production in the quarter increased 3.3% year over year to 4,557 million tons. Shipments fell 3.7% to 4,387 million tons.


Gerdau's cost of sales increased 11.9% year over year and represented 87.5% of total revenue. The top line improvement though partially offset by higher cost of sales led to roughly 44.9% increase in gross profit. Gross margin in the quarter was at 12.5%, up 260 basis points (bps) year over year.

Selling expenses, as a percentage of revenue, were flat at 1.6%. General and administrative expenses decreased 30 bps year over year to 5.1%.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were R$1,196.0 million (US$506.8 million), up 48.6% year over year with a margin of 11.3% in the quarter. Operating margin was 6.2% versus 3.7% in the year-ago quarter.

Balance Sheet

Exiting the first quarter 2014, Gerdau had cash and cash equivalents of R$1,870.9 million (US$827.8 million), down 10.9% over the preceding quarter. Long-term debt increased 0.7% sequentially to R$14,583.3 million (US$6,179.4 million).

Cash Flow

Gerdau generated cash of approximately R$167.0 million (US$70.8 million) from its operating activities in the first quarter 2014, down 64.2% year over year. Capital spent on annexations of property, plant and equipment increased 18.4% to R$676.8 million (US$286.8 million). Of the total capital spending, the company invested around 49.1% in its Brazilian operations, 20.2% in Special Steel, 11.7% in North American operations, 11.5% in Latin American operations and 7.5% in Iron Ore operations.

Gerdau currently has a market capitalization of $11.0 billion and carries a Zacks Rank #3 (Hold). Some better-ranked companies in the industry include ArcelorMittal South Africa Limited (AMSIY), ThyssenKrupp AG (TYEKF) and General Steel Holdings, Inc. . All of these companies hold a Zacks Rank #2 (Buy).

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