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GERDAU S.A. 20-F Analysis & Summary – 3/14/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

GERDAU S.A.

Filing date:

03/14/2025

TLDR:

ELI5:

Gerdau, a steel company, made less money in 2024 because they sold steel for less in North America and faced more competition from steel coming into Brazil. They’re trying to cut costs and invest wisely to deal with these challenges.

Accession #:

0001410578-25-000353

Published on

Analyst Summary

  • Gerdau’s net sales decreased by 2.7% to R$67.0 billion due to lower sales prices in North America, partially offset by the depreciation of the Brazilian Real and price increases in Brazil.
  • Gross profit margin decreased from 16.4% to 13.7%, indicating reduced profitability.
  • Management highlights increased steel imports into Brazil as a significant challenge, creating a competitive imbalance.
  • The company is focused on cost reduction initiatives and asset optimization efforts to mitigate the impact of market volatility.
  • Record steel imports in Brazil are creating an unhealthy market capture.
  • Temporary suspension of labor contracts at some Gerdau units in Brazil suggests operational challenges related to the import situation.
  • Reimposition of steel import tariffs by the new Trump administration could significantly impact Gerdau’s exports to the US.
  • Gross Profit Margin decreased from 16.4% in 2023 to 13.7% in 2024 (-16.5%).
  • Operating Profit Margin decreased from 15.2% in 2023 to 11.2% in 2024 (-26.3%).
  • Net Profit Margin decreased from 10.9% in 2023 to 6.9% in 2024 (-36.7%).
  • Basic Earnings Per Share (EPS) decreased from 3.57 R$ in 2023 to 2.18 R$ in 2024 (-39%).
  • Diluted Earnings Per Share (EPS) decreased from 3.56 R$ in 2023 to 2.18 R$ in 2024 (-38.7%).
  • Current Ratio increased from 2.59 in 2023 to 3.01 in 2024 (16.2%).
  • Quick Ratio increased from 1.28 in 2023 to 1.49 in 2024 (16.4%).
  • Cash Ratio increased from 0.28 in 2023 to 0.72 in 2024 (157.1%).
  • Debt-to-Equity Ratio increased from 0.22 in 2023 to 0.23 in 2024 (4.5%).
  • Debt-to-Assets Ratio increased from 0.15 in 2023 to 0.16 in 2024 (6.7%).
  • Interest Coverage Ratio decreased from 7.48 in 2023 to 4.96 in 2024 (-33.7%).
  • Inventory Turnover increased from 3.61 in 2023 to 3.64 in 2024 (0.8%).
  • Days Sales Outstanding (DSO) increased from 25.7 days in 2023 to 28.2 days in 2024 (9.7%).
  • Days Payable Outstanding (DPO) decreased from 37.0 days in 2023 to 36.1 days in 2024 (-2.4%).
  • Asset Turnover decreased from 0.92 in 2023 to 0.77 in 2024 (-16.3%).
  • Revenue Growth decreased by -2.7%.
  • Net Income Growth decreased by -39.0%.
  • EPS Growth decreased by -39.0%.
  • Net Debt decreased from 5,549,566 R$ million in 2023 to 5,359,641 R$ million in 2024 (-3.4%).

Opportunities and Risks

  • Cyclical Demand: The steel industry is subject to cyclical fluctuations in demand, impacting prices and profitability.
  • Global Competition: Gerdau faces intense competition from domestic and foreign producers, particularly from subsidized imports.
  • Raw Material Costs: Fluctuations in the prices of iron ore, coal, and steel scrap can significantly affect production costs.
  • Climate Change: Increasingly stringent environmental regulations and the physical risks associated with climate change pose challenges to operations.
  • Trade Restrictions: Protectionist measures and trade disputes can disrupt global steel trade flows.
  • Cybersecurity: The company faces ongoing threats to its IT systems and data security.
  • Political and Economic Instability in Brazil: Political uncertainty and economic volatility in Brazil can impact Gerdau’s performance.

Potential Implications

Company Performance

  • Continued pressure on profitability due to increased steel imports into Brazil.
  • Potential impact on exports to the United States if steel import tariffs are reimposed.
  • Need for ongoing cost optimization and efficiency improvements to maintain competitiveness.
  • Importance of diversifying into less cyclical markets or higher-value steel products.
  • Necessity of strengthening cybersecurity measures to protect against evolving threats.

Stock Price

  • Potential for stock price volatility due to market uncertainty and trade policy developments.
  • Negative impact on stock price if profitability continues to decline.
  • Positive impact on stock price if the company successfully implements cost reduction initiatives and diversifies its markets.

Executive Summary

This report analyzes Gerdau S.A.’s Form 20-F filing for the fiscal year ended December 31, 2024. Gerdau, a leading steel producer in the Americas, faces a complex operating environment characterized by cyclical demand, global competition, and fluctuating raw material prices. While the company demonstrates strong financial management and strategic investments, key risks include increasing steel imports into Brazil, potential economic downturns, and the impact of climate change regulations. A neutral outlook is warranted, pending further clarity on trade policies and macroeconomic stability.

Company Overview

Gerdau S.A. is a Brazilian corporation engaged in the production and sale of steel products. The company operates primarily in Brazil, North America, South America, and through its Special Steel division. Gerdau is also involved in iron ore mining and recycling. The steel industry is highly cyclical and competitive, influenced by global economic conditions, trade policies, and raw material costs.

Detailed Analysis

Financial Performance

Gerdau’s net sales for 2024 were R$67.0 billion, a decrease of 2.7% compared to 2023. This decline is attributed to lower sales prices in North America, partially offset by the depreciation of the Brazilian Real and price increases in Brazil. Shipments also decreased by 3.0%.

Key Financial Ratios

Ratio 2024 2023
Gross Profit Margin 13.7% 16.4%

Management’s Discussion and Analysis (MD&A)

Management highlights the challenges posed by increased steel imports into Brazil, creating a competitive imbalance. They also emphasize cost reduction initiatives and asset optimization efforts. The MD&A acknowledges the impact of economic volatility and political uncertainty on demand in North America.

Risk Factors

  • Cyclical Demand: The steel industry is subject to cyclical fluctuations in demand, impacting prices and profitability.
  • Global Competition: Gerdau faces intense competition from domestic and foreign producers, particularly from subsidized imports.
  • Raw Material Costs: Fluctuations in the prices of iron ore, coal, and steel scrap can significantly affect production costs.
  • Climate Change: Increasingly stringent environmental regulations and the physical risks associated with climate change pose challenges to operations.
  • Trade Restrictions: Protectionist measures and trade disputes can disrupt global steel trade flows.
  • Cybersecurity: The company faces ongoing threats to its IT systems and data security.
  • Political and Economic Instability in Brazil: Political uncertainty and economic volatility in Brazil can impact Gerdau’s performance.

Uncommon Metrics & Red Flags

  • Record Steel Imports in Brazil: The filing highlights a significant increase in steel imports into Brazil, reaching record levels and creating an “unhealthy market capture.” This is a major red flag, indicating potential price pressure and reduced profitability.
  • Temporary Suspension of Labor Contracts: The temporary suspension of labor contracts at some Gerdau units in Brazil suggests operational challenges related to the import situation.
  • Reimposition of Steel Import Tariffs by the US: The reimposition of steel import tariffs by the new Trump administration could significantly impact Gerdau’s exports to the US.

Conclusion & Actionable Insights

Gerdau operates in a challenging and dynamic industry. While the company has demonstrated resilience and strategic focus, several risks warrant careful monitoring. The increasing steel imports into Brazil pose a significant threat to profitability. The reimposition of steel import tariffs by the new Trump administration could significantly impact Gerdau’s exports to the US. A neutral outlook is recommended, pending further developments in trade policies and macroeconomic conditions.

Recommendations:

  • Monitor Trade Policy: Closely track developments in trade policies, particularly those affecting steel imports into Brazil and exports to the United States.
  • Focus on Cost Optimization: Continue to implement cost reduction initiatives and improve operational efficiency to mitigate the impact of price pressures.
  • Diversify Markets: Explore opportunities to diversify into less cyclical markets or higher-value steel products.
  • Strengthen Cybersecurity: Enhance cybersecurity measures to protect against evolving threats.

Disclaimer: This analysis is based on the information available in the provided SEC filing and does not constitute financial advice. Investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions.

1. Commentary

Gerdau S.A. reported a decrease in net sales and net income for the year ended December 31, 2024, compared to the previous year. While revenue experienced a slight dip, profitability metrics such as gross profit and operating income also declined. The company’s cash flow from operating activities remained relatively stable, but investing and financing activities resulted in net cash outflows. Gerdau is actively managing its debt profile, with a focus on extending maturities and maintaining a strong liquidity position.

2. Financial Ratio and Metric Analysis

Profitability

  • Metric: Gross Profit Margin = 13.7%

    • Trend: Decrease from 16.4% in 2023 (-16.5%)
    • Industry: The steel industry’s gross profit margins vary widely based on product mix, efficiency, and market conditions. Generally, a GPM of 15-25% is considered healthy. Gerdau’s GPM is below this range.
  • Metric: Operating Profit Margin = 11.2%

    • Trend: Decrease from 15.2% in 2023 (-26.3%)
    • Industry: A good operating margin for steel companies is typically between 8% and 12%. Gerdau is within this range.
  • Metric: Net Profit Margin = 6.9%

    • Trend: Decrease from 10.9% in 2023 (-36.7%)
    • Industry: The steel industry typically sees net profit margins between 3% and 7%. Gerdau is within this range.
  • Metric: Return on Assets (ROA) – Cannot be calculated without total assets from prior period.

    • Metric: ROA = Net Income / Total Assets = 4,599,062 / 86,814,493 = 5.3%
    • Industry: An ROA of 5% or higher is generally considered good in the steel industry.
  • Metric: Return on Equity (ROE) – Cannot be calculated without total equity from prior period.

    • Metric: ROE = Net Income / Total Equity = 4,599,062 / 58,173,786 = 7.9%
    • Industry: An ROE of 10% or higher is generally considered good in the steel industry.
  • Metric: Earnings Per Share (EPS) – Basic = 2.18 R$

    • Trend: Decrease from 3.57 R$ in 2023 (-39%)
    • Industry: EPS varies significantly.
  • Metric: Earnings Per Share (EPS) – Diluted = 2.18 R$

    • Trend: Decrease from 3.56 R$ in 2023 (-38.7%)
    • Industry: EPS varies significantly.

Liquidity

  • Metric: Current Ratio = Current Assets / Current Liabilities = 32,669,423 / 10,851,391 = 3.01

    • Trend: Increase from 2.59 in 2023 (16.2%)
    • Industry: A current ratio between 1.5 and 2.0 is generally considered healthy. Gerdau’s current ratio is high.
  • Metric: Quick Ratio (Acid-Test Ratio) = (Current Assets – Inventories) / Current Liabilities = (32,669,423 – 16,504,911) / 10,851,391 = 1.49

    • Trend: Increase from 1.28 in 2023 (16.4%)
    • Industry: A quick ratio of 1 or greater is generally considered acceptable. Gerdau’s quick ratio is healthy.
  • Metric: Cash Ratio = (Cash & Cash Equivalents) / Current Liabilities = 7,767,813 / 10,851,391 = 0.72

    • Trend: Increase from 0.28 in 2023 (157.1%)
    • Industry: A cash ratio of 0.5 or greater is generally considered acceptable. Gerdau’s cash ratio is healthy.

Solvency/Leverage

  • Metric: Debt-to-Equity Ratio = Total Debt / Total Equity = 13,636,484 / 58,173,786 = 0.23

    • Trend: Increase from 0.22 in 2023 (4.5%)
    • Industry: A debt-to-equity ratio of 1.0 or less is generally considered healthy. Gerdau’s debt-to-equity ratio is low.
  • Metric: Debt-to-Assets Ratio = Total Debt / Total Assets = 13,636,484 / 86,814,493 = 0.16

    • Trend: Increase from 0.15 in 2023 (6.7%)
    • Industry: A debt-to-assets ratio of 0.5 or less is generally considered healthy. Gerdau’s debt-to-assets ratio is low.
  • Metric: Interest Coverage Ratio (Times Interest Earned) = Income Before Interest and Taxes / Interest Expense = 7,487,202 / 1,508,339 = 4.96

    • Trend: Decrease from 7.48 in 2023 (-33.7%)
    • Industry: An interest coverage ratio of 3.0 or higher is generally considered healthy. Gerdau’s interest coverage ratio is healthy.

Activity/Efficiency

  • Metric: Inventory Turnover = Cost of Sales / Average Inventory = 57,823,416 / ((16,504,911 + 15,227,778) / 2) = 3.64

    • Trend: Increase from 3.61 in 2023 (0.8%)
    • Industry: The steel industry typically sees inventory turnover between 3 and 5. Gerdau is within this range.
  • Metric: Days Sales Outstanding (DSO) = (Accounts Receivable / Net Sales) * 365 = (5,176,958 / 67,026,656) * 365 = 28.2 days

    • Trend: Increase from 25.7 days in 2023 (9.7%)
    • Industry: A DSO of 30-45 days is generally considered good. Gerdau’s DSO is low.
  • Metric: Days Payable Outstanding (DPO) = (Accounts Payable / Cost of Sales) * 365 = (5,718,104 / 57,823,416) * 365 = 36.1 days

    • Trend: Decrease from 37.0 days in 2023 (-2.4%)
    • Industry: A DPO of 30-45 days is generally considered good. Gerdau’s DPO is within this range.
  • Metric: Asset Turnover = Net Sales / Total Assets = 67,026,656 / 86,814,493 = 0.77

    • Trend: Increase from 0.92 in 2023 (-16.3%)
    • Industry: An asset turnover of 1 or higher is generally considered good. Gerdau’s asset turnover is low.

Valuation

  • Metric: Price-to-Earnings Ratio (P/E) = Stock Price / EPS = 2.94 / 2.18 = 1.35

    • Industry: The steel industry typically sees P/E ratios between 5 and 15. Gerdau’s P/E ratio is low.
  • Metric: Price-to-Book Ratio (P/B) – Cannot be calculated without book value per share.

    • Metric: P/B = Market Cap / Total Equity = (2.94 * 2,078,805,560) / 58,173,786 = 0.10
    • Industry: A P/B ratio of 1 or higher is generally considered good. Gerdau’s P/B ratio is low.
  • Metric: Price-to-Sales Ratio (P/S) – Cannot be calculated without market cap.

    • Metric: P/S = Market Cap / Revenue = (2.94 * 2,078,805,560) / 67,026,656 = 0.09
    • Industry: A P/S ratio of 1 or lower is generally considered good. Gerdau’s P/S ratio is low.
  • Metric: Enterprise Value to EBITDA (EV/EBITDA) – Cannot be calculated without EBITDA.

    • Metric: EV/EBITDA = (Market Cap + Total Debt – Cash) / EBITDA
      EBITDA = Net Income + Interest Expense + Taxes + Depreciation & Amortization = 4,599,062 + 1,508,339 + 864,653 + 3,126,247 = 10,198,301
      EV = (2.94 * 2,078,805,560) + 13,636,484 – 7,767,813 = 6,951,758
      EV/EBITDA = 6,951,758 / 10,198,301 = 0.68
    • Industry: An EV/EBITDA ratio of 10 or lower is generally considered good. Gerdau’s EV/EBITDA ratio is low.

Growth Rates

  • Metric: Revenue Growth = (2024 Revenue – 2023 Revenue) / 2023 Revenue = (67,026,656 – 68,916,447) / 68,916,447 = -2.7%

    • Industry: Revenue growth varies significantly.
  • Metric: Net Income Growth = (2024 Net Income – 2023 Net Income) / 2023 Net Income = (4,599,062 – 7,536,983) / 7,536,983 = -39.0%

    • Industry: Net income growth varies significantly.
  • Metric: EPS Growth = (2024 EPS – 2023 EPS) / 2023 EPS = (2.18 – 3.57) / 3.57 = -39.0%

    • Industry: EPS growth varies significantly.

Other Relevant Metrics

  • Net Debt: Net Debt = Total Debt – Cash and Cash Equivalents and Short-Term Investments = 13,636,484 – 8,276,843 = 5,359,641 R$ million

    • Trend: Decrease from 5,549,566 R$ million in 2023 (-3.4%)
    • Significance: Net debt is a measure of a company’s financial leverage. A decreasing net debt suggests improved financial health.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️