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    GERDAU (GGB)

    Q4 2023 Earnings Summary

    Reported on Feb 18, 2025
    Pre-Earnings Price$3.59Last close (Feb 20, 2024)
    Post-Earnings Price$3.61Last close (Feb 22, 2024)
    Price Change
    $0.02(+0.56%)

    What went well

    • Strong North American Operations Supporting Margins: Gerdau expects its North American operations to maintain current margin levels throughout 2024, driven by healthy demand, a sound backlog, and supportive government measures like the Inflation Reduction Act (IRA) and the CHIPS Act. These factors contribute to increased steel demand for infrastructure projects, solar energy, and other initiatives, supporting sustained profitability in this segment.
    • Strategic Investments in Value-Added Products at Ouro Branco Mill: The company is investing in transforming its Ouro Branco mill to produce higher added-value products, such as expanding capacity for hot coiled rolled strips and structurals. This strategy aims to reduce exposure to external market cycles, enhance competitiveness, and position Gerdau for long-term growth with better margins in the Brazilian market.
    • Positive Outlook for Special Steels Division: Gerdau anticipates improvements in its Special Steels Business Division due to a recovering automotive market in both Brazil and the United States. In Brazil, there's a recovery in demand for steel for light and heavy vehicles, and in the U.S., strong demand and recent investments position the division for a positive year. The company has completed a state-of-the-art mill in Monroe and expects to capitalize on increased demand for special steels.

    What went wrong

    • Increased steel imports from China into Brazil are causing significant margin compression in Gerdau's Brazilian operations, returning profitability to levels seen in the 2014-2015 crisis. This has led to discussions about reducing capacity and reallocating investments away from Brazil ( , , ).
    • Lack of government action to implement trade defenses against unfair Chinese steel imports is forcing Gerdau to adjust its operations in Brazil, including cutting costs and laying off workers, which may negatively impact future growth and profitability in the region ( , , , ).
    • Reliance on cost-cutting measures to improve profitability in Brazil may not be sufficient, as there is "no silver bullet," and the company cannot expect to recover margins through price increases, indicating ongoing profitability challenges in the Brazilian market ( , ).

    Q&A Summary

    1. Brazil Margin Restoration
      Q: How will you restore margins in Brazil?
      A: Management plans to restore margins by focusing on cost reductions, capacity adjustments, and layoffs, aiming for a fixed cost reduction of about BRL 400 million. They see limited potential for price increases due to intense competition from Chinese imports and are adapting operations to the new market reality.

    2. CapEx Plans and Adjustments
      Q: Can you adjust CapEx given the current scenario?
      A: Management intends to proceed with the planned BRL 6 billion CapEx for 2024, focusing on long-term investments like the Ouro Branco mill. However, new investments not yet started may be delayed or reevaluated depending on economic conditions.

    3. North America Margin Outlook
      Q: What is the normalized margin outlook for North America?
      A: Management expects to maintain current EBITDA margins of around 20%, citing a strong backlog, robust demand driven by infrastructure projects, and no major risks on the horizon.

    4. Potential US Business Spinoff
      Q: Are you considering spinning off the US business?
      A: Management evaluates such options regularly but needs more clarity on tax reforms before making decisions regarding ownership reorganization or potential US listings.

    5. Impact of Argentine Peso Devaluation
      Q: How did the Argentine peso devaluation affect EBITDA?
      A: The devaluation resulted in a one-time EBITDA impact of BRL 526 million in Q4, due to accounting adjustments. This impact will not repeat unless there's another significant devaluation.

    6. Competition from Chinese Imports
      Q: What's the status on tariffs against Chinese imports?
      A: Management is urging the government for action on tariffs but notes that decisions are taking longer than expected. Meanwhile, they're focusing on adapting operations to the increased import competition.

    7. Demand for Special Steels
      Q: What's the outlook for special steels demand?
      A: Demand for special steels is improving, driven by recovery in the automotive industry in both Brazil and the US. Management anticipates better financial results in this segment over the year.

    8. Ouro Branco Mill Strategy
      Q: What are the plans for the Ouro Branco mill?
      A: The company plans to increase production of higher added-value products at Ouro Branco, focusing on structurals and preparing for future downstream opportunities, while continuing its decarbonization strategy.

    9. CapEx Guidance Details
      Q: Does the CapEx guidance include Gerdau Next investments?
      A: The BRL 6 billion CapEx guidance for 2024 covers core business investments and does not include Gerdau Next. Additional investments in Gerdau Next are expected to be around BRL 100 to BRL 200 million.

    10. IRA Projects in North America
      Q: Can you give examples of IRA projects you're supplying?
      A: Gerdau is supplying steel for solar farms and infrastructure projects in the US, benefiting from government programs like the IRA and CHIPS Act. Investment in the Midlothian plant in Texas supports this demand.

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