Brazilian steel maker, Gerdau S.A. (GGB) reported an impressive financial result for first quarter 2014. Net income was R$440.1 million (US$186.5 million), soaring up 175% from R$160 million (US$80.0 million) in the year-ago quarter.
The bottom line improvement was driven primarily by healthy top line performance and increased gains from exchange variations, offset partially by a rise in costs and expenses.
Gerdau’s net sales were R$10,553.8 million (US$4,471.9 million), reflecting an increase of 15.1% year over year.
Effective first quarter 2014, Gerdau added a new business operation (:BO), Iron Ore, to its existing four business operations, including Brazil BO, North America BO, Latin America BO and Special Steel BO.
Gerdau’s Brazilian business accounted for 35.0% of net revenue in the quarter and registered a 5.7% year-over-year increase. Revenues generated in North America rose 11.4% and contributed 30.0% to net revenue, while Latin American revenues represented 13.1% of net revenue and increased 22.3% year over year. Revenues from Special Steel business operations stepped up 24.8% year over year and accounted for about 19.7% of net revenue. Iron Ore business accounted for 2.2% of total revenue and revenues generated grew 300.0%.
Crude steel production in the quarter increased 3.3% year over year to 4,557 million tons. Shipments fell 3.7% to 4,387 million tons.
Gerdau's cost of sales increased 11.9% year over year and represented 87.5% of total revenue. The top line improvement though partially offset by higher cost of sales led to roughly 44.9% increase in gross profit. Gross margin in the quarter was at 12.5%, up 260 basis points (bps) year over year.
Selling expenses, as a percentage of revenue, were flat at 1.6%. General and administrative expenses decreased 30 bps year over year to 5.1%.
Earnings before interest, taxes, depreciation and amortization (:EBITDA) were R$1,196.0 million (US$506.8 million), up 48.6% year over year with a margin of 11.3% in the quarter. Operating margin was 6.2% versus 3.7% in the year-ago quarter.
Exiting the first quarter 2014, Gerdau had cash and cash equivalents of R$1,870.9 million (US$827.8 million), down 10.9% over the preceding quarter. Long-term debt increased 0.7% sequentially to R$14,583.3 million (US$6,179.4 million).
Gerdau generated cash of approximately R$167.0 million (US$70.8 million) from its operating activities in the first quarter 2014, down 64.2% year over year. Capital spent on annexations of property, plant and equipment increased 18.4% to R$676.8 million (US$286.8 million). Of the total capital spending, the company invested around 49.1% in its Brazilian operations, 20.2% in Special Steel, 11.7% in North American operations, 11.5% in Latin American operations and 7.5% in Iron Ore operations.
Gerdau currently has a market capitalization of $11.0 billion and carries a Zacks Rank #3 (Hold). Some better-ranked companies in the industry include ArcelorMittal South Africa Limited (AMSIY), ThyssenKrupp AG (TYEKF) and General Steel Holdings, Inc. (GSI). All of these companies hold a Zacks Rank #2 (Buy).
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