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Gerdau Slips into Loss in Q4, Brazil Sales Hurt Revenues

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Brazilian steel producer Gerdau S.A. (GGB - Free Report) reported weak results for fourth-quarter 2015, incurring an adjusted net loss of R$40.9 million (US$12.3 million) as against earnings of R$95.8 million (US$37.7 million) in the year-ago quarter. The loss was triggered by lower revenue generation and higher cost of sales, selling expenses and financial expenses.

In 2015, Gerdau’s adjusted net earnings were R$684.3 million (US$205.5 million), down 42.6% year over year.
 
Revenues

In the quarter, Gerdau’s net sales were R$10,449.1 million (US$2,714.1 million), down 3.6% year over year. A brief discussion on the segmental result is provided below.

Revenues sourced from the Brazil BO (business operation) accounted for 29% of net sales, down 28.6% year over year, while that from North America BO represented roughly 38.7% of net sales, up 16.7% year over year. The South America BO revenues constituted 12.3% of net sales, up 8.6% year over year. Revenues from Special Steel BO increased 3.8%, comprising 19.9% of net sales.

Crude steel production in the quarter declined 10% year over year to 3.889 million tons, while shipments fell 11.6% to 3.887 million tons.

In 2015, Gerdau generated net sales of R$43,581.2 million (US$11,005.4 million), up 2.4% year over year.

Margins

Gerdau’s margins suffered weakness in fourth-quarter 2015, with cost of sales representing 92.5% of net sales compared with 88.2% in the year-ago quarter. Also, cost of sales increased 1.1% year over year. Gross margin was down 430 basis points (bps) to 7.5%.

Selling expenses, as a percentage of revenues, were 2.2%, while general and administrative expenses were 4.1%. Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) were R$911 million (US$236.6 million), down 26.9% year over year. EBITDA margin came in at 8.7% compared with 11.5% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting fourth-quarter 2015, Gerdau’s cash position improved with cash and cash equivalents coming in at R$5,648.1 million (US$1,426.3 million), up roughly 8.8% from R$5,190.5 million (US$1,266 million) in the prior quarter. However, long-term debt decreased 5.4% sequentially to R$23,826.8 million (US$6,016.9 million).

In addition, Gerdau’s net cash generation from operating activities improved 178.6% year over year to R$7,162.3 million (US$2,150.8 million) in 2015. Capital spent on purchase of property, plant and equipment totaled R$2,324.7 million (US$698.1 million), up 2.6% year over year.

During the period, Gerdau paid dividends and interest on capital of R$358.2 million (US$107.6 million).
 
Outlook: For 2016, Gerdau expects capital expenditure of R$1.5 billion, down 35% year over year.

Gerdau, with a market capitalization of $2.1 billion, currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include NovaCopper Inc. , AK Steel Holding Corporation (AKS - Free Report) and Usinas Siderúrgicas de Minas Gerais S.A. (USNZY - Free Report) . While NovaCopper sports a Zacks Rank #1 (Strong Buy), both AK Steel Holding and Usinas Siderúrgicas de Minas Gerais carry a Zacks Rank #2 (Buy).

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