Gerdau 4Q Plummets, Expenses Soar

Brazilian steel producer, Gerdau S.A.’s ( GGB - Analyst Report ) fourth quarter 2010 net income plummeted 35% year over year to R$420 million (US$248.5 million) and registered a 31% sequential decline. Earnings per share (EPS) were R$0.29 (17 cents per ADR), compared with R$0.45 (30 cents per ADR) in the year-ago period and below the Zacks Consensus Estimate of 18 cents per ADR.

The bottom-line results were negatively affected by higher cost of sales and operating expenses, which more than offset higher revenue in the quarter.

In the fiscal year 2010, earnings per share were R$1.50 (86 cents per ADR), up compared with R$0.79 (74 cents per ADR).

Revenue

Net revenue was R$7,799.8 million ($4,615.3 million), up 23% year over year, but down 5% sequentially. The revenue increase was primarily due to higher shipments in the quarter.

Of the net revenue, Brazilian business accounted for 39.1% and registered a growth of 10% year over year. North American revenue increased 32% and contributed 28.1% to net revenue while Latin American revenue represented 11.1% of net revenue and spiked 33% over the year-ago period. Revenue from Specialty Steel grew 33% year over year and accounted for 21.8% of net revenue.

Crude steel production increased 14% year over year to 4,378 million tons in the quarter, primarily due to growing demand globally. However, steel production decreased 1% sequentially. Rolled steel production jumped 15% year over year and 1% sequentially to 3,663 million tons.

Shipments were strong in the quarter at 4,513 million tons and represented a 23% year- over- year and 2% sequential growth.

In the fiscal year 2010, net revenue was R$31,393.2 million ($18,575.9 million), up 18% year over year.

Margins

Gross margins in the fourth quarter were weak at 12.2% down from 20.1% in the year-ago quarter and 16% in the previous quarter. The year-over-year weakness can be attributed to a 34.8% increase in cost of sales, driven by higher raw material costs. Selling expenses, as a percentage of revenue, increased 10 basis points year over year to 2.0%, while general and administrative expenses plummeted 10 basis points year over year.

EBITDA at R$815 million (US$482.2 million) was down 35% year over year and 36% sequentially with a margin of 10% in the quarter. Operating income was R$674.7 million (US$399.2 million), down 17.6% year over year. Operating margin was 8.7% versus 12.9% in the year-ago quarter.

Balance Sheet

Exiting the fourth quarter, Gerdau had cash and cash equivalents of approximately R$1,061.0 million ($647.0 million) compared with R$599.3 million (US$350.5 million) in the previous quarter. Long-term debt was R$12,360.1 million ($7,536.6 million) versus R$11,310.4 million (US$6,614.3 million) in the previous quarter.

Cash Flow

Net cash flow from operating activities in the fiscal year 2010 increased 43.1% year over year to R$5,400.4 million (US$3,085.9 million). Capital spending was down 6.5% year over year to R$1,288.8 million (US$736.5 million million). Gerdau S.A. plans to spend roughly R$10.8 billion for the period from 2011 to 2015.