GGB's 3Q Surges Y/Y; Ups Estimate

Brazilian steel producer, Gerdau S.A. (GGB - Analyst Report) reported its financial results for the third quarter of 2011 on November 10, 2011. The company’s net income increased 17.1% year over year to R$713.3 million (US$437.6 million). Earnings per share (EPS) were R$0.41 (25 cents per ADR) up compared with R$0.38 (22 cents per ADR) in the year-ago period. Results were also above the Zacks Consensus Estimate of 11 cents per ADR.

The bottom-line results were impacted due to higher sales growth, lower G&A expenses and higher financial income, which were partially offset by higher cost of sales.

Revenue

Net revenue was R$8,967.3 million ($5,501.4 million), up 9.5% year over year, due primarily to higher shipments in the quarter.  

As for the net revenue, Brazilian business accounted for 36.6% and registered a 1% increase over the year-ago quarter. North American revenue increased 15% and contributed 29.8% to net revenue while Latin American revenue represented 12.7% of net revenue and spiked 24% over the year-ago period. Revenue from Specialty Steel grew 10% year over year and accounted for 20.8% of net revenue.

Crude steel production increased 14% year over year but plummeted 2% sequentially to 5,018 million tones in the quarter. Long steel production jumped 16% year over year and 1% sequentially to 4,210 million tones.

Shipments were strong in the quarter at 4,849 million tones and represented a 10% year - over- year and 1% sequential decline.

Margins

Gross margin in the third quarter was at 14.9%, down compared with 16.5% in the year-ago quarter. The year-over-year weakness can be attributed to an 11.5% rise in cost of sales, driven by higher raw material costs and higher shipments. Selling expenses, as a percentage of revenue was stable at 1.7%, while general and administrative expenses plummeted 90 basis points year over year.

EBITDA at R$1,215 million (US$745.4 million) was down 4% year over year with a margin of 14% in the quarter. Operating margin was 8.7% versus 9.5% in the year-ago quarter.

Balance Sheet

Exiting the third quarter, Gerdau had cash and cash equivalents of approximately R$1,278.6 million (US$698.7 million) versus R$1,182.4 million (US$753.1 million) in the previous quarter. Long-term debt was R$11,192.4 million (US$6,116.1 million) versus R$9,906.1 million (US$6,309.6 million) in the previous quarter.

Cash Flow

Net cash flow from operating activities in the third quarter was R$337.7 million (US$207.2 million) versus R$1,495.3 million (US$917.4 million) in the year-ago quarter. Capital spending more than doubled in the quarter to R$616.1 million (US$378.0 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), Arcelor Mittal (MT) and Usinas Sider (USNZY.PK).

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