Gerdau SA (ADR) (NYSE: GGB) Gerdau S.A. (Gerdau) is a manufacturer of long steel in North and South America. The Company is engaged in the production and commercialization of steel products in general. It supplies its customers a range of products, including iron ore semi-finished products.
The company recently announced its result for the 4th quarter of 2016 and year ended 2016. Gerdau reported positive free cash flow of R$1.2 billion (Brazilian Real currency) in 4Q16, marking the seventh straight quarter of positive flow. Consolidated net sales decreased in 4Q16 compared to 4Q15, due to effects from exchange variation and the divestment of units in Spain. On a consolidated basis, gross profit and gross margin decreased in 4Q16 compared to 4Q15, due to the weaker performances of the North America and South America BDs, which were partially neutralized by the better performance of the Special Steel BD. For 2017, the company expects capital expenditure to be R$1.3 billion on productivity and maintenance enhancement.
During March 2017, Gerdau also announced that it has entered into a joint venture, based on the sale of its 50% interest in Gerdau Diaco, in Colombia, with Putney Capital Management, which already is a partner in its operations in the Dominican Republic. Before this, Gerdau announced plans to divest its business unit, Premier Thermal Solutions, L.L.C, to Z Capital Partners, L.L.C.
The divestment is part of the company’s global strategic strategy to exit low yielding businesses & focus on the profitable ones. Additionally, the accelerated divestment strategy is also expected to increase operational and financial flexibility and reduce overall debt levels for the company. During 2016, company already disposed of its Spain-based special steel producer to Clerbil SL in 2016.
After many months of decline, Brazil’s steel industry prospects are showing signs of gradual recovery driven by positive GDP growths, stable macros and progress in reforms. This means that the government/administration and core industries (including Iron & Steel) will have to continue to do the heavy lifting over the near to medium term, especially on the infrastructure side, to ensure growth stays the course. Thereby boosting market conditions & off take scenario for steel producers like Gerdau.
From an individual & standalone perspective, Gerdau’s business risk profile is expected to benefit from its solid product lines and manufacturing techniques, and its well-diversified business structure. The company’s diversified revenue source is evident from the fact that it derived nearly 30.1% of fourth-quarter 2016 net revenue from its Brazilian operations, 39.9% from the North American business and 12.2% from South America.
The company’s stock has unsurprisingly found enormous strength in the recent past. GGB reported increase in volume backed by these developments laying the foundation for expanding its market size and overall business growth.
Description & about the Company: Gerdau is a leading producer of long steel in the Americas and one of the largest suppliers of specialty steel in the world. In Brazil, it also produces flat steel and iron ore, activities that are expanding its product mix and boosting its competitiveness. It is also the largest recycler in Latin America, and around the world it transforms millions of tons of scrap into steel each year, reinforcing its commitment to sustainable development in the regions where it operates. Gerdau’s shares are listed on the São Paulo, New York and Madrid stock exchanges.
Product portfolio and geographic diversification:
The company’s products are used in the following industries:
Outlook over the near to medium term:
As per management, the business scenario for 2017 will remain challenging, but with a gradual recovery in demand and the results of the measures it has implemented, the company is now even better prepared to compete in the world steel industry. The company will continue to focus on divestment of low-yielding businesses and initiatives to modernize the culture and implement digital innovations in the operations.
Economic outlook
Key near to medium term economic & business drivers for Brazil & USA:
Brazil: The company is expected to benefit from expected GDP growth in 2017, reduction in interest rates and Inflation, release of inactive FGTS accounts around R$40 billion, and progress in reforms amongst others. In fact, driven by these improving sentiments, Moody’s has revised Brazil’s credit rating outlook from negative to stable.
USA: The company’s business profile is likely to derive strength from improving Consumer confidence & Job numbers, the Trump government’s focus on lower corporate tax rates from 38% to 15% and reducing regulations. The company could benefit from potential U.S. plans to invest around US$1 trillion in the next ten years to rebuild U.S. infrastructure.
Divestment initiatives: Divestments amounted to R$1.3 billion in 2016
Gerdau continued to execute its strategy of focusing on its more profitable assets by divesting, in the past year, assets worth R$1.3 billion based on their economic value. The divestments comprised the special steel units in Spain, a long steel mill in Colombia, Cleary Holdings Corp (producer of coke and holder of coking coal reserves in Colombia), a 30% interest in Corporación Centroamericana del Acero and manufacturing units and properties in the United States. Since 2014, divestments have amounted to R$2.4 billion. Over these three years, the Company has sold 13 assets in the United States, Europe and Latin America.
Risk Factors & Stock Influences:
- Notwithstanding improving sentiments, the company’s performance is still subject to challenges in the global steel industry and the recession in some of the economies. Therefore, the company’s ability to ramp up operations, while improving profitability would continue to remain a challenge.
- While risks persist as to a sustained improvement in company’s profitability, they have been partially mitigated due to continuous positive developments & GGB’s focus on divesting non-profitability businesses. Therefore, any improvement in profitability metrics could be an immediate trigger for the company’s stock.
- In order to increase & improve capacity, the companycontinues to do capital expenditure. In fact, as per management, for fiscal year 2017, Gerdau expects to invest R$1.3 billion, prioritizing investments in capturing productivity gains, and in maintaining its plants. Higher-than-forecast capital spending presents a risk to GGB’s financial risk profile, apart from an unexpected deterioration in profitability.
- Any investments by the governments for infrastructure developments could be a booster for steel manufacturers in respective regions, thereby creating lucrative market conditions for steel producers like Gerdau.
Earnings Review:
Gerdau ended 2016 with consolidated net sales of R$37.7 billion, a reduction of 14% from 2015, which is mainly due to the lower steel shipments at all business divisions and the divestment of the special steel units in Spain. Shipments and production both amounted to 16 million tons, representing decreases of 8% and 7%, respectively, compared to the prior year.
In the fourth quarter, Gerdau’s net sales amounted to R$8.6 billion, decreasing 18% on the same period of 2015. Shipments came to 3.8 million tons, down 2% from the same period of 2015, while production decreased 14% to 3.3 million tons.
In 2016, shipments declined in all markets served by Gerdau. Shipments to Brazil’s domestic market came to 3.7 million tons in the year, decreasing 13% in relation to 2015, due to the slowdown in the construction and manufacturing sectors. Exports from Brazil, however, advanced 9% to 2.4 million tons, reflecting the commercial efforts made in the international market.
Profitability:
For 2016, adjusted operating cash generation (EBITDA), i.e. excluding nonrecurring items, was R$4 billion, down 10% from 2015, reflecting the decline in gross profit, which was partially offset by the R$343 million reduction in selling, general and administrative expenses. Consolidated adjusted net income amounted to R$91 million and, including the effects from nonrecurring items, the net result was a loss of R$2.9 billion.
In the period from October to December, adjusted operating cash generation (EBITDA) amounted to R$716 million, down 21% from the same period of 2015. In the fourth quarter, Gerdau posted an adjusted consolidated net loss of R$205 million; including nonrecurring items, the net loss in the quarter was R$3 billion.
Cash Flow & Balance Sheet:
Free cash generation, a financial priority of the Company, came to R$2.3 billion in the year, with a highlight free cash flow in the fourth quarter of R$1.2 billion. This marked the seventh straight quarter that Gerdau has delivered positive free cash flow.
In fiscal year 2016, Gerdau S.A. allocated R$85.4 million (R$0.05 per share) to the payment of dividends, which was distributed from the profit earned in the first nine months of 2016 and from the retained earnings reserve.
In 2016, investments in fixed assets came to R$1.3 billion, 43% lower than in 2015, reflecting the more rigorous criteria adopted for approving new investments.
For fiscal year 2017, Gerdau will continue to limit its capital expenditure and expects to invest R$1.3 billion, prioritizing investments in capturing productivity gains and in maintaining its plants.
Stock Performance
On Friday, April 21st, 2017, GGB shares (ADR) increased by 1% to $3.02 on an average volume of 9.63 million shares exchanging hands. Market capitalization is $5.34 billion. The current RSI is 34.58
In the past 52 weeks, shares (ADR) of GGB have traded as low as $1.50 and as high as $4.39
At $3.02, shares (ADR) of GGB are trading below their 50-day moving average (MA) at $3.73 and below their 200-day MA at $3.29.
The present support and resistance levels for the stock are at $2.97 & $3.04 respectively.
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