Q4 2024 Earnings Summary
- Strong Recovery and Positive Outlook in the North American Market: Gerdau's North American order backlog has improved significantly, now exceeding 70 days. The recent trade defense measures implemented by the U.S. administration, including the reinstatement of 25% import tariffs, are expected to strengthen the U.S. steel industry and improve Gerdau's competitiveness in the region. Gerdau has capacity available to meet increased demand, currently operating at about 70% utilization, and can ramp up production quickly.
- Strategic Investments in Higher Value-Added Products: Gerdau is focusing on investments in products with higher added value to diversify away from rebar and enhance profitability. The new hot coil rolled strip rolling mill at Ouro Branco is expected to start operations in mid-March and ship 250,000 tonnes this year. Additionally, the mining investment in Itabirito, starting operations in January next year, will further increase the competitiveness of the Ouro Branco unit by providing cost advantages.
- Potential Margin Improvement in the Special Steels Segment: There is potential for stronger margin recovery in the special steels segment in North America compared to traditional operations. Gerdau is making significant investments to grow in this segment, including expansions at the Midlothian plant in Texas, aiming to increase capacity to almost 2 million tonnes in the foreseeable future. This focus on higher-margin products supports long-term value creation.
- Struggling Profitability in the Rebar Segment in Brazil Due to Increased Competition and Falling Prices: Gerdau is facing difficulties in recovering profitability in the rebar market in Brazil. Increased competition from new capacity additions, such as a new iron ore rolling mill in the Northeast of Brazil, has led to higher discounts and lower margins. The company acknowledges that their attempts to recover profitability have not been effective and sees no short-term solution to this problem.
- Potential Decrease in Steel Demand in Brazil Due to High Interest Rates and Inflation: Rising inflation and high interest rates in Brazil, combined with a market heavily impacted by steel imports, could result in lower local demand for steel in the coming months. Gerdau anticipates that if credit availability decreases, especially for mid- and high-income brackets, there could be a deceleration in the construction sector in Brazil in the second half of the year. This would negatively impact the demand for their products, particularly rebar and special steels.
- Cost Pressure on Brazilian Operations Due to Exchange Rate Volatility and High Dollar-Denominated Costs: Approximately 25% of Gerdau's costs in Brazil are denominated in dollars or pegged to the dollar. The appreciation of the U.S. dollar in the second half of 2024 has led to increased costs for imported raw materials and inputs such as gas, coal, and iron ore. This cost pressure is expected to continue into the first quarter of 2025, potentially affecting margins in their Brazilian operations.
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
North American Market Performance and Order Backlog | Mentioned in Q1 as a very solid market with a stable backlog of around 55 days, supported by government measures such as the IRA and reshoring trends. | In Q4, executives noted a recovery in shipments and an improved backlog that increased to over 70 days, with improvements driven by new trade defense measures and a positive outlook for nonresidential demand and infrastructure. | Improvement and increased optimism: Enhanced backlog figures and market recovery indicate growing confidence. |
Trade Defense Measures Impact on U.S. and Brazilian Steel Markets | In Q1, the focus was on established measures like Section 232 tariffs, import quotas in Brazil, and the resulting stable conditions in the U.S. market. | In Q4, the U.S. market benefited from the reinstated Section 232 tariffs that improved spreads and recovered backlogs, while the Brazilian market continued to struggle with ineffective measures and high import penetration. | Diverging sentiment: U.S. improvements contrast with ongoing challenges in Brazil. |
Strategic Investments in Higher Value-Added Products and Special Steels | Q1 discussions centered on feasibility studies for a greenfield special steel plant in Mexico, driven by positive U.S. automotive trends and near-shoring, along with optimism in U.S. and Brazilian segments. | Q4 insights emphasized a potential strong recovery for special steels in North America, the execution of strategic projects such as the Itabirito mining project, and robust CapEx spending on strategic growth. | Consistent strategic focus with execution evolution: The focus is maintained but moving from planning phases to active investment and ramp-up. |
Brazilian Market Challenges: Rebar Segment and Weak Steel Volumes | In Q1, the rebar segment was noted as not being covered by initial trade defense measures while weak volumes were attributed to rising import penetration—with some optimism from government initiatives. | In Q4, challenges persisted with a declining rebar share in the product mix and weak overall steel volumes exacerbated by rising imports, inflation, and high interest rates. | Consistent negative sentiment: Persistent issues remain in the rebar segment and overall market weakness. |
Cost Pressures from Exchange Rate Volatility and Dollar-Denominated Costs | Q1 mentioned cost management with an emphasis on inventory management and cost reductions, with limited focus on currency issues. | In Q4, the appreciation of the U.S. dollar was highlighted as driving inflationary pressures on imported raw materials, with about 25% of costs being dollar-denominated, intensifying cost pressures. | Increased emphasis: Greater focus on exchange rate volatility and its impact on the cost structure. |
Production Capacity Utilization and Ramp-Up Potential | This topic was not mentioned in the Q1 earnings call. | Q4 discussions detailed North American rolling mills operating at about 70% capacity, additional flat steel capacity in Brazil, and opportunities to ramp up through available idle capacity. | Newly introduced: A fresh focus on capacity utilization and ramp-up potential emerges in the latest period. |
Capital Expenditure Execution and Investment Delays | In Q1, CapEx execution was discussed with seasonal patterns and investment delays noted, such as the postponement of Blast Furnace refurbishment. | Q4 provided a revised CapEx guidance of BRL 6 billion for 2025, emphasizing strategic energy investments and a more even distribution of spending throughout the year. | Evolving execution focus: The approach shifts towards steady, strategic investment despite some delays. |
Feasibility Studies for a New Special Steel Plant in Mexico | Q1 discussions focused on feasibility studies for a greenfield special steel plant, with an expected decision by year-end and plans to engage suppliers and engineering in 2025 if approved. | In Q4, the feasibility studies are being revisited due to a changing geopolitical context and additional tariffs, with an updated decision timeline expected by June 2025 and considerations of current export market share. | Ongoing evaluation with timeline adjustment: Continuation of feasibility studies with revised timing in response to external factors. |
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U.S. Market Outlook
Q: What's the outlook for the U.S. market considering tariffs?
A: Management is optimistic about North America in 2025, seeing a recovering backlog and positive demand indicators in the first 30 days. Tariffs against Canada are not expected to have a significant impact, as only around 7% to 8% of products are affected. -
Brazil Rebar Strategy
Q: What's the strategy for the rebar market in Brazil?
A: Rebar profitability in Brazil is challenging, leading Gerdau to focus on flat steel and mining investments. They are increasing flat steel production by 250,000 tonnes with new rolling capacity in Ouro Branco. -
Mexico Investment Update
Q: What's the update on investment in Mexico and U.S. growth?
A: Due to tariffs, Gerdau is reconsidering the greenfield investment in Mexico, with a decision expected by June. They hold an 18% market share in Mexico's special steel segment through exports. In the U.S., they're expanding capacity in Midlothian to almost 2 million tonnes, focusing on beams and merchant bars. -
CapEx Guidance
Q: How does the BRL 6 billion CapEx break down?
A: The BRL 6 billion CapEx includes around BRL 400 million for energy generation assets. Future CapEx may be lower as new investments are carefully considered due to trade defenses and market conditions. -
Special Steel Margins
Q: What's the margin outlook for special steel operations?
A: Special steel margins in the U.S. may strongly recover compared to other segments. In Brazil, margins depend on demand in heavy vehicle production, which consumes more steel per unit. -
Strategic Projects EBITDA
Q: How much incremental EBITDA from strategic projects?
A: Benefits from strategic projects will ramp up, with significant contributions expected in 2026, especially from the mining project in Itabirito. -
Hot Coil Rolling Mill
Q: What's the expected impact of the new hot coil mill?
A: The new rolling capacity in Ouro Branco is expected to produce 250,000 tonnes of flat steel this year , increasing competitiveness and providing options for future expansion. -
Trade Defense Measures
Q: Is there a push for stronger trade defenses in Brazil?
A: Gerdau advocates for stronger trade defenses similar to the U.S., proposing effective tariffs of around 25% to 30% to combat unfair imports. -
Rebar Pricing in Brazil
Q: Why are rebar prices decreasing in Brazil?
A: Increased competition and new capacity have pressured rebar prices in Brazil. Gerdau anticipates ongoing pricing challenges with no immediate solution to recover profitability. -
Energy Investments
Q: Are there energy investments outside of CapEx?
A: Gerdau acquired two hydroelectric plants for around BRL 440 million not included in the CapEx. Investments in solar farms totaling around BRL 440 million are included in the CapEx. -
Reporting Segment Change
Q: Does the reporting change indicate a U.S. spin-off?
A: No, the change to report by geography reflects markets becoming more regional due to trade defenses. There are no current plans for a U.S. spin-off. -
Cost Improvements
Q: Is there room to improve costs in Brazil?
A: There's potential for cost improvements, but inflation and exchange rates are pressures. Approximately 25% of costs in Brazil are dollar-pegged. -
Working Capital
Q: What's the outlook for working capital this year?
A: The first half may see increased working capital needs due to production ramp-up and market rebound, but over the year, no additional demand is expected.
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