Gerdau S.A. (NYSE:GGB) Q1 2024 Earnings Call Transcript

Gerdau S.A. (NYSE:GGB) Q1 2024 Earnings Call Transcript May 3, 2024

Gerdau S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Renata Oliva Battiferro: Good afternoon and welcome to Gerdau’s Conference Call Results for the First Quarter 2024. I’m Renata, Investor Relations. Here with us today are Rafael Japur and Gustavo Werneck. We would like to inform you that this video conference is being recorded and it will be available on the IR side of the company where the entire material is available for download. It is also possible to download the presentation using the chat icon. I would like to remind you that the broadcast of this video conference is being done with simultaneous translation using the tool available in the platform. For that end, just click on the Interpretation icon via the globe icon that is in the lower part of your screen, and then choose the language of your choice either Portuguese or English.

For those of you listening to this video conference in English, you have the option to mute the original audio in Portuguese by clicking mute original audio. During the company’s presentation, all participants will have their microphones disabled. After that, we will initiate the Q&A session. Analysts and investors can send in their questions in advance using the Q&A and you can open your video if you so desire. Business outlook and goals of this presentation are based on beliefs and assumptions of the company’s management as well as information currently available. Forward looking statements are not guarantees of performance and depend on circumstances that may or may not occur. Investors should understand the general economic conditions, market conditions and other operating factors could affect the future results of the company and may differ substantially from those expressed in such forward-looking statements.

Now, I would like to turn the floor to Gustavo Werneck to initiate the presentation. Gustavo, you may proceed.

Gustavo Werneck : Hello everyone. I hope you are well, and thank you for the opportunity to meet with us during this video conference to discuss Gerdau’s results for the first quarter of 2024. I’m joined by our CFO, Rafael Japur and it’s always a pleasure for both of us to talk to you about our performance and to clarify any points that may arise during our presentation. I’ll start by talking about the macro business environment about the highlights of the overall results and then I will detail the performance of our business operations in the quarter. Right after that, Japur will share with you some information on our financial performance. And finally, we’ll highlight some points from our sustainability agenda and then we’ll move on to our Q&A session.

But before we move on to the presentation of our results, on behalf of all of Gerdau’s employees, I would like to express our solidarity to the population Rio Grande do Sul, which is going through a very difficult period due to the intense and heavy rains that have hit the state since the beginning of the week. Gerdau as a company original from Rio Grande do Sul is providing all the assistance needed and we are supporting our employees and neighboring communities in mitigating the damages. The company maintains an open dialogue with the competent authorities and we will spare no efforts to stand side by side and meet the needs of the population in this challenging moment. Now, on the second slide, I would like to point out that we ended the first quarter of ‘24 with an accident frequency rate of 0.47, reinforcing our commitment to the people’s health and safety.

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Q&A Session

At Gerdau safety always comes first since no result is more important than people’s lives. With this in mind, I would like to say that in April to celebrate the World Safety Day, we held a number of workshops, seminars and activities and all of our plans and corporate offices in the countries where we operate to share lessons learned and reinforce our culture of active care and safety, focused on monitoring critical activities and accident prevention. Over the next three slides, I would like to emphasize that Gerdau continues to differentiate itself by delivering solid financial results to its shareholders and pursuing a transparent business strategy, based on strong discipline in cost management and the continuous improvement of the competitiveness of its assets.

We continue to look for opportunities to adapt the company’s structure to the current business scenario. Furthermore, I would like to highlight the growth in steel exports from China throughout the first quarter as the main factor impacting our business in the markets where we operate. The growth of the Chinese economy, whose GDP rose by 5.3% in the first quarter was also accompanied by an increase in exports of 5% in the same period. At the same time, the infrastructure and residential construction segments in that country continue to lose prominence as drivers of the local economy, which has resulted in a significant imbalance between steel supply and demand in the Chinese domestic market. Steel exports rose by 25% in March, reaching almost 10 million tons, and in the quarter the increase was 31%, reaching 26 million tons negatively impacting the world steel market since the surplus steel production intended for export has been subsidized by the Chinese government.

In this regard, I would like to acknowledge the Brazilian government for its recently announced trade defense measures aimed at defending the Brazilian industry against unfair competition from imports along the lines of initiatives already taken by other countries such as the U.S., Mexico and the nations that make up the European Union. The establishment of a mix system on 11 Common Nomenclature Mercosur or NCM with import quotas, which once reached are subject to an import tariff of 25% for anything above that ceiling, which is an important step towards forward in terms of competitive equality and covers around 25% of product mix sold by Gerdau in Brazil. I would also like to stress that the trade defense measures announced are the first step, but do not yet solve all the challenges faced by the Brazilian steel industry.

We will continue to monitor the real impacts of this trade defense initiative will have on the domestic market in the short-term and move forward with request for anti-dumping analysis with the appropriate agencies. Now moving to Slide 6, I will talk about the highlights of each of our business operations and the outlook for the coming months. On Slide 7, we see that in the first quarter of 2024, we saw a recovery in shipments and in the performance of the North America business operation, when compared to the previous period. This performance reflects the resilience of the North American market, which contributed to keeping local demand for steel at healthy levels with our backlog remaining stable at a high level of around 55 days. The U.S. market continues to be positively impacted by government measures such as Inflation Reduction Act, IRA reassuring movement and the maintenance of Section 232.

We continue to invest in improving operating efficiency and the modernization of our units in North America in order to provide a portfolio of innovative products and solutions that meet the current and future needs of our customers. Such, for instance, the future demand for steel linked to the large investments planned in infrastructure in the country. I would also like to highlight the modernization of the Jackson Plant in Tennessee, which will further increase the plant’s competitiveness and will become an even more relevant service center to cater to our customers in that region. Moving on to the next slide. I will now talk about our special steel business operation. The automotive market in the U.S. continues to recover gradually with production of light and heavy vehicles projected to be above 16 million units in 2024, with normalized inventory levels.

There is still room, however, for a more intense recovery in the coming periods returning to pre-pandemic levels. In addition, I would like to report that we are starting feasibility studies for the construction of a greenfield unit for the production of special steels in Mexico. This move reflects the positive outlook for the local automotive industry and the near shoring movement in the United States, which have had a positive impact on the performance of the Mexican economy. In turn, the outlook for the special steel market in Brazil remain more optimistic as more optimistic as a result of some signs that point out to a recovery in the automotive activity, especially in the heavy segment. Truck production in the first quarter exited 29,000 units, up 19.7% on the same period of 2023 according to [Alzavia] data.

For buses, the increase was 61.6% with 6,500 units manufactured. The market, however, remain attentive to the uncertainties, is still linked to access to credit lines, high interest rates and excessive entry of imported vehicles. Now moving to the next slide, I will now talk about the long and flat steel market in Brazil whose performance in the first quarter continue to be impacted by the strong influx of imported steel in the country. Since the trade defense measures that I mentioned earlier on had not yet been announced. Between January and March, imports reached 1.3 million tons up 25% when compared to the same period of last year according to data from the Brazil Steel Institute. In March alone, volumes of imported steel jumped by 46% leading to a penetration rate from imported goods to be close to 20%.

I would also like to comment that we continue to expect the development of some positive indicators for the Brazilian market, especially with regards to the construction industry and a more significant drop in interest rates. One example is the federal government signaling that it will introduce measures to release around BRL300 billion for real estate loans, which should help boost this market going forward. We now move on to the next slide to talk about the South America business operation. I will start by saying that we completed the divestment of our operations in Columbia and the Dominican Republic during the first quarter as part of our capital allocation strategy, which focuses on the growth and competitiveness of our assets with the greatest potential for generating value in the long-term.

In Argentina, on the other hand, inflationary measure import restrictions and the economic measures taken by the new administration such as the devaluation of the Argentine peso remain points of attention for the performance of the local market in the coming quarters. Uruguay scenario remains positive, reflecting good levels of steel consumption, particularly coming from the agribusiness sector and also by public and private investments. And Peru, meanwhile, GDP in February rose by almost 20 — the highest peak in February in the last 20 months due to mining and construction sectors, especially public works. I’ll now turn over to Japur and then I’ll come back to talk about our sustainability journey and then to answer your questions.

Rafael Japur : Thank you, Gustavo. Hello, everyone. It’s always a great pleasure to be here with you to announce Gerdau’s first quarter 2024 earnings. With regard to financial results, we ended the quarter with an EBITDA of BRL2,813 million s with an EBITDA margin of 17.4%, 3.5 percentage points higher than the previous quarter, as we can see on the chart on the left. The growth in EBITDA happened in all Gerdau business operations driven mainly by the North American operation, where we also had an expansion of our shipments. In addition, we had a better mix in our Brazil operation with lower export shipments and more deliveries to the domestic market as shown in the graph on the right. In addition to the more positive operating context, we recall that revenues as well as costs in the fourth quarter of 2023 have been negatively impacted by the currency depreciation in Argentina.

Now speaking about the working capital, on the next slide, we ended the quarter with a position of BRL15.4 billion, despite this 9% increase compared to Q4 ’23. It is important to highlight that our cash conversion cycle fell to 86 days due to the 10% increase in net sales, which boosted the client’s account. When we compare our working capital with the same period last year to take into account seasonality, we can already see an important reduction of BRL900 million in our working capital. Looking at a graph on the right, we see from the bars highlighted in red that typically the first quarter of each year consumes cash due to the recovery of sales volumes after maintenance stoppages that we normally do at the end of the year. Let’s talk more about cash flow on the next slide.

In Q1 ‘24, we adopted a new free cash flow model. The aim is to support reconciliation with the cash flow statement of the financial statements and with our cash position at the beginning and end of each quarter. As we saw in the previous slide of this quarter, we had a significant investment in working capital totaling BRL1.1 billion, driven with increase in revenues in all the company’s businesses. We executed our CapEx in line with the plan, also dispersing BRL1.1 billion. Heading to columns, we had a negative free cash flow of BRL610 million in the first quarter. For comparison purposes, if we were to apply the previous format of free cash flow, we would have had a cash flow generation of BRL85 million positive. On the next slide, we’ll talk about liquidity in debt.

Our liquidities to stood at a robust BRL10.3 billion and we closed the first quarter with a gross debt of BRL11 billion. We continue with an excellent leverage level with a net debt over EBITDA ratio of 0.4x. In addition, during the second quarter, we plan to issue debentures in the amount of BRL1.5 billion with a five year materiality to roll over some short-term debts. A host spread and interest rates are currently above our cost of new funding, also taking advantage of the good momentum and extending our 2024 and 2025 obligations to 2029. Moving on to the next slide, let’s talk about the return to our shareholders. Gerdau S.A. and Metallurgica Gerdau will pay dividends on May 27 and 28 respectively. Gerdau S.A. will pay BRL0.28 per share, while Metallurgica Gerdau will pay out BRL0.19 per share.

In both cases, shareholder positions as of May 5 positions as of May 15, 2024 will be taken into account. We would like to remind you that on April 22, Gerdau S.A. shareholders received a bonus of one new share for every five shares of the same type. Our shares have been trading at the price adjusted by the bonus, since April 18. Now let’s talk about CapEx. In Q1, our CapEx investment totaled BRL858 million with 50% going to maintenance projects and 50% to competitiveness projects. To date, we have invested 41% of the BRL11.9 billion forecast in Gerdau’s strategic CapEx for 2021 to 2026 cycle. In the next slides, we will highlight some of these projects. In Brazil, we highlight a sustainable mining and flat steel investments in Minas Gerais.

Both projects are already significantly ahead of schedule, both physically and financially. We have already received all the critical equipment for our new mining complex in Miguel Burnier and work in progress for starting operation in the end of next year. In our Ouro Branco unit, the expansion of the hot rolled — of the coiled rolled strip has already entered the assembly phase for the rolling mills and main engines and is scheduled to start operating at the end of this year. In the United States, we would like to highlight conclusion of the modernization of the rolling mill at the Jackson plant in Tennessee, which will lead to greater competitiveness by expanding the product mix, allowing for a one-stop shop business model at this unit.

With that, thank you very much for your attention. I’ll join you, Gustavo during the Q&A session.

Gustavo Werneck: Thank you, Rafael Japur. On the following slide, I detail the progress we have made in our sustainability journey. Gerdau stood out as the B2B industrial company with the best reputation in Brazil according to the 10 edition of the Merck 2023 ranking. The company climbed 10 positions compared to last year, reaching 24 places among the 100 Brazilian organizations evaluated. The company is the only steel producer in the ranking and remained the leader in the mining, steel and metallurgy category. The survey carried out by the corporate reputation business monitor Brazil or Merco. The survey identified the top a 100 companies with the best reputation in Brazil and involved more than 11,000 respondents. Merco’s research methodology includes six evaluations with 25 different groups and sources of information, taking into account economic and financial results, the quality of the commercial offer, talent, ethics and corporate responsibility, the international dimension and innovation.

This recognition reflects our commitment to a continuous and transparent dialogue with all our stakeholders into strengthening the Gerdau brand’s connection with society in general. And as the result of the efforts made by our more than 30,000 employees to build the Gerdau of the future. I would like to thank everyone for listening to our comments or initial remarks. From now on, we will be available to answer questions and to go into more detail on your points of interest. Thank you very much.

A – Renata Oliva Battiferro: Thank you, Gustavo. We now initiate the Q&A session. For please click in the Q&A icon in the bottom of your screen and write down your question to get in line. Once your name is called, you will receive a pop-up to activate your microphone. So activate your microphone and ask your question. In case you want to use video, please let us know so that we can enable your camera. Please ask all of your questions at once. We will now proceed to our first question.

Caio Ribeiro : Caio Ribeiro sell-side analyst from Bank of America. The question is, good morning, everyone. My first question would be about the Brazil BD. I do understand that early this year the company’s strategy was focused on capturing market share, but I would like to see if you see any room to increase prices along the following months. And if you can tell us, what kind of margin you could reach throughout the year in this segment, especially when initiatives of cutting costs are delivered, I would be really happy with it. And also, the initiatives to cut costs in Brazil is my other question. Whether these will be enough measures to significantly reduce the pressure coming from imported goods and whether you could also anticipate price increases in the short run?

Gustavo Werneck : Thank you, Renata for the introduction. And Caio, thank you for your question. I don’t think my video is enabled but will start answering your question. And Japur, if you have anything to add, please do so. This commercial defense was not a simple journey. We’ve been talking about this topic in the past quarters and months and in our view, there has been a positive advancement. Finally, the Brazilian government heard the claims from the steel industry and it gave a first step. I mean, this is not the last step. I think this was the first step given that allows us to evaluate in more details, what will be the performance from now on. And from this point forward, we will make adjustments to this mechanism so that in the coming months, we will have a more fair competition scenario.

In this first measure, I think the main question from the industry was not particularly the fact that they consider this time period between 2020 and 2022, but they also added that additional 30%. We understand that this followed a certain appropriate methodology and the question that usually appears is why is it that 11 NCM was more focused on flats rather than long steels? Because flats were the main products that had a more aggressive penetration in the market during this period between 2020 and 2022. But there is a very clear commitment on the part of the federal government that as other products, including long steels as imports increase along the coming months, new measures and new NCM may be put in place. Therefore, in general, it was a very positive measure and the government also took into account claims from other sectors that initially were against it.

And I understand that these sectors, as I was saying before, it was just a matter of time that these Chinese imports would also have an impact in other industries in Brazil, and this is what happened. Therefore, there was a general consensus from the industry that if Brazil were not to fight the entry of imported goods, not only in the steel industry but in other industrial segments, this could become a very, very difficult problem to manage. Therefore, the measures were considered very positive. We do not believe that in the short-term, this would be translated into a significant price increase or the rebound or profitability. So in the next few months, the pricing issue will be mostly related to getting more competitiveness related to coal or other raw materials and factors that now can also impact price.

But there will be no short-term measure or pricing or increase in import premium. I believe that the major gain to be captured in the next few months, it will be an increase in production in the domestic market. These would be like material gains going forward. . Now market share, as we mentioned in the first quarter was not a specific recovery strategy or measures to recover market share in a particular quarter. Because at the end, it is related to something that I’ve been telling you before because we are putting a greater focus on the domestic market. The production capacity that we had and still have in Brazil for export. I’ve been telling you that this will no longer exist in the future in Brazil. It will be more and more complex for us to export from Brazil.