Brazilian steel producer Gerdau S.A. (GGB - Free Report) disappointed investors with its weak second-quarter 2017 results wherein adjusted net income fell roughly 19.1% year over year to R$149 million ($46.4 million). The poor bottom line was due to sales decline, adverse impacts of foreign currency translation and higher income tax expenses.
Net sales in the quarter declined 10.6% year over year to R$9,165.9 million ($2,855.4 million). The fall was triggered by forex headwinds and special steel units divestment in Spain.
Crude steel production decreased 5% year over year to 4.09 million tons while shipments of steel fell 12.6% to 3,707 million tons. Production decline was primarily due to divestment of Spain-based special steel units and a fall in production volume in Brazil business division.
A brief discussion on Gerdau’s segmental results is provided below.
Revenues sourced from the Brazil BD (business division) accounted for 32.5% of net sales, inching up 0.4% year over year while that from North America BD represented roughly 39.8% of net sales, down 9% year over year. The South America BD revenues constituted 11.9% of net sales, down 20% year over year. Revenues from Special Steel BD decreased 17.7%, comprising 15.8% of net sales.
In the quarter, Gerdau’s margins suffered due to a fall in net sales, partially gaining from year-over-year decrease of 10.2% in cost of sales. As a percentage of net sales, cost of sales was 89.8% versus 89.4% in the year-ago quarter. Gross margin was down 40 basis points (bps) to 10.6%.
Selling expenses, as a percentage of net sales were 1.5% while general and administrative expenses were 3.1%. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were R$1,120 million ($348.9 million), down 6.7% year over year. EBITDA margin came in at 12.2% compared with 11.7% in the year-ago quarter.
Balance Sheet & Cash Flow
Exiting the second quarter, Gerdau had cash and cash equivalents of R$4,305.4 million ($1,304.7 million), marginally below R$4,476.1 million ($1,430.1 million) recorded in the preceding quarter. Long-term debt was R$15,646.2 million (US$4,741.3 million), increasing 1.8% sequentially.
In the quarter, the company used net cash of R$19.6 million ($6.1 million) for its operating activities versus R$543.7 million ($155.3 million) generated in the year-ago quarter. Capital spent on purchase of property, plant and equipment totaled R$195.3 million ($60.8 million), down 40.1% year over year. Dividend payments in the quarter were R$0.253 million ($0.08 million).
Also, the company announced the approval of R$34.2 million or R$0.02 per share to be paid as dividend to its shareholders on record as of Aug 21. The dividend will be paid on Sep 1.
Zacks Rank & Key Picks
With a market capitalization of $6.14 billion, Gerdau currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the industry include POSCO (PKX - Free Report) , Universal Stainless & Alloy Products, Inc. (USAP - Free Report) and Nippon Steel & Sumitomo Metal Corporation (NSSMY - Free Report) . While POSCO sports a Zacks Rank #1 (Strong Buy), both Universal Stainless & Alloy Products and Nippon Steel & Sumitomo Metal carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
POSCO’s earnings estimates for 2017 and 2018 were revised upward over the last 60 days. Its earnings are anticipated to grow 5% in the next three to five years.
Universal Stainless & Alloy Products’ earnings estimates for 2017 and 2018 improved over the last 60 days. Also, the company pulled off a positive earnings surprise of 30.77% in the last quarter.
Nippon Steel & Sumitomo Metal’s earnings estimates for fiscal 2017 and fiscal 2018 improved over the past 60 days.
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