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Brazilian steel producer, Gerdau S.A.’s (GGB - Analyst Report) first quarter 2011 net income plummeted 29% year over year to R$409 million (US$246.4 million) and registered a sequential decline of 3%. Earnings per share (EPS) were R$0.26 (16 cents per ADR) down compared with R$0.35 (19 cents per ADR) in the year-ago period. Results were, however, above the Zacks Consensus Estimate of 8 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.

Revenue

Net revenue was R$8,363.8 million ($5,038.4 million), up 17.7% year over year and 7% sequentially. The revenue increase was primarily due to higher shipments in the quarter.

Of the net revenue, Brazilian business accounted for 35.3% and registered a growth of 3% year over year. North American revenue increased 31% and contributed 31.4% to net revenue while Latin American revenue represented 12.3% of net revenue and spiked 28% over the year-ago period. Revenue from Specialty Steel grew 22% year over year and accounted for 21.0% of net revenue.

Crude steel production increased 9% year over year and 8% sequentially to 4,749 million tons in the quarter, primarily due to growing demand globally. Long steel production jumped 13% year over year and 11% sequentially to 4,049 million tons.

Shipments were strong in the quarter at 4,710 million tons and represented a 16% year-over-year and 4% sequential growth.

Margins

Gross margin in the first quarter was weak at 13.9% down from 19.8% in the year-ago quarter. The year-over-year weakness can be attributed to a 26.3% increase in cost of sales, driven by higher raw material costs.  Selling expenses, as a percentage of revenue was stable at 1.7%, while general and administrative expenses plummeted 10 basis points year over year.

EBITDA at R$1,102 million (US$663.9 million) was down 21% year over year and up 35% sequentially with a margin of 13% in the quarter. Operating income was R$654.6 million (US$394.3 million), down 30.5% year over year. Operating margin was 7.8% versus 13.2% in the year-ago quarter.

Balance Sheet

Exiting the first quarter, Gerdau had cash and cash equivalents of approximately R$1,078.5 million (US$657.6 million) compared with R$1,061.0 million ($647.0 million) in the previous quarter. Long-term debt was R$11,844.5 million (US$7,222.3 million) versus R$12,360.1 million ($7,536.6 million) in the previous quarter.

Cash Flow

Net cash flow from operating activities increased 13.6% year over year to R$1,190.9 million (US$717.4 million) in the first quarter. Capital spending was up 42.8% year over year to R$333.2 million (US$200.7 million).

Gerdau S.A. is one of the leading Brazilian steel makers. The company plans to spend roughly R$10.8 billion for the period from 2011 to 2015. The company faces stiff competition from its peers like Companhia Siderurgica Nacional (SID - Analyst Report), Arcelor Mittal (MT - Analyst Report) and Usinas Sider.

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