Gerdau reports 1Q17 earnings

  • Adjusted EBITDA of R$853 million in the first three months of 2017.

 

  • Reductions in selling, general and administrative (SG&A) expenses of 32% year-on-year and 18% sequentially.

 

  • Gerdau announces a joint venture in Colombia and continues to execute its strategy to focus on its more profitable assets, which led to divestments of R$441 million in 2017.

 

In the first three months of 2017, Gerdau posted net sales of R$8.5 billion, down 16% from the same period last year, reflecting the effects from exchange variation on the performance of the overseas units and the divestment of the units in Spain. Shipments of steel goods amounted to 3.6 million tonnes, down 7% from the year-ago period. Meanwhile, steel production fell by 3% to 4 million tonnes.

Adjusted consolidated cash generation (EBITDA) came to R$853 million, 8% lower than in the first quarter last year, reflecting the reduction in gross profit, which was partially neutralized by the R$205 million reduction in selling, general and administrative expenses. However, compared to the fourth quarter of 2016, consolidated and adjusted EBITDA increased 19%, led by the 47% growth at the Brazil Business Division (excludes the special steel units), which is explained by the better product mix and other factors. In the period from January to March, consolidated net income amounted to R$824 million. However, excluding non-recurring events, the Company recorded a consolidated and adjusted net loss of R$34 million, given the lower EBITDA in the period.

Gerdau's net result in the first quarter of 2017 were influenced by the non-recurring reversal of a provision accrued between 2009 and 2016 for contingencies related to the exclusion of ICMS tax from the calculation base of PIS and COFINS contributions. This reversal was based on the conclusion of the trial by the Federal Supreme Court (STF) sitting the bank, which declared unconstitutional the inclusion of ICMS tax in said calculation base, and is supported by the position of the Company's legal counsel that the probability of loss in the pending lawsuits became remote after the decision by the STF. Therefore, the net effect from this reversal and from the other provisions on the Company's net result in the quarter was R$858 million.

Gerdau emphasizes, however, that there is a possibility the STF may understand that the application of the modulation mechanism necessarily applies to this decision, which is used to determine the time effects of a decision to declare unconstitutionality. If the STF applies the modulation mechanism, which would limit the effects of the decision in terms of time, the need may arise to reassess the risk of loss associated with said lawsuits, which consequently may require the accrual of new provisions related to this matter in the future.

"Gerdau's performance in the first quarter, excluding non-recurring items, reflects the challenging moment the world steel industry has been facing, marked in particular by overcapacity and unfair trade practices in the global market. In Brazil, we expect steel demand to recover gradually, starting in the second half of 2017. In North America, the strong inflow of imported steel goods continues to weigh on industry profitability, but the prospects for market growth are good. Our priorities for 2017 remain generating free cash flow, greater selectivity in CAPEX investments, reducing our debt indicators and the strategy to focus on our more profitable assets. This year, we formed a joint venture in Colombia and divested assets worth R$441 million," said André Gerdau Johannpeter.

Over the course of the quarter, the markets served by Gerdau presented distinct performances. In Brazil, shipments to the domestic market (excludes the special steel units) decreased 4% from the same quarter last year to 863,000 tonnes, due to weaker activity in the construction industry. This reduction was partially offset by higher shipments of flat steel goods, which is consistent with the Company's strategy to diversify its product portfolio. Flat steel shipments in the first quarter of 2017 accounted for 28% of total shipments in the domestic market. During the period, the fewer opportunities in international markets led Gerdau's export volume to decrease by 22% to 412,000 tonnes.

The operations in Canada, the United States and Mexico (excluding the special steel mills) shipped 1.6 million tonnes in the first three months of 2017, or 3% more than in the same period last year, driven by improvement in the non-residential construction and manufacturing industries. Meanwhile, the units in South America (excluding Brazil) shipped 489,000 tonnes, 3% less than in the first three months of 2016. Shipments by the Special Steel Business Division (includes the mills in Brazil, the United States and India) came to 441,000 tonnes, down 30% on the first quarter of 2016, due to the divestment of the units in Spain.

 Announcement of joint venture in Colombia and divestments of R$441 million in 2017

In 2017, Gerdau continued to execute the strategy to focus on its more profitable assets, which led to the divestment of assets worth R$441 million in the year to May. In March, Gerdau entered into an agreement to form 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. The transaction attributed to the joint venture an economic value of R$523 million, which implies that the 50% interest held by Gerdau has an economic value of R$262 million. The transaction has yet to be consummated, therefore Gerdau Diaco continued to be reported as a subsidiary on the first-quarter financial statements. Moreover, five special steel production units and five plants manufacturing products for the construction industry in the United States were sold, whose economic value amounted to R$179 million.

Gerdau invests R$237 million in the first quarter

In the first quarter, Gerdau invested R$237 million in fixed assets (CAPEX). For 2017, CAPEX is projected at R$1.3 billion, which is in line with the amount invested in 2017. The investments will focus mainly on boosting productivity and sustaining the operations.

 Gerdau will not advance the payment of dividends this quarter

In the period from January to March, consolidated net income amounted to R$824 million and was influenced by the non-recurring reversal of the provision for contingencies in the amount of R$858 million. However, considering the possibility that the Federal Supreme Court (STF) may apply the modulation mechanism prospectively to its decision to declare unconstitutionality, which could limit the production of its effects for taxpayers, the Company is not proposing at this time the distribution of early dividends to be calculated towards the minimum mandatory dividends, and will continue to monitor the matter until a decision is taken by the STF.

           

About Gerdau

Gerdau is a leading producer of long steel in the Americas and one of the largest suppliers of special 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 each year millions of tonnes of scrap into steel, 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.

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