Gerdau S.A. — FY2018 Form 20-F summary
Reporting period: Year ended December 31, 2018; filed March 28, 2019. This is an annual report, not a standalone fourth-quarter filing, so Q4-only financial results are not clearly provided. Financial statements use IFRS and Brazilian reais (R$); amounts below are in R$ millions unless noted.
Business context
Gerdau produces and sells steel and iron ore, with operations across the Americas and a focus on long steel and special steel. It reported four operating segments: Brazil, North America, South America and Special Steel. Consolidated shipments fell to 14.56 million tonnes from 14.94 million tonnes in 2017. The company completed significant asset sales in 2018, including U.S. rebar assets, its Chilean operations, its India business and two Brazilian hydroelectric plants.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | R$46,159 | R$36,918 |
| Gross profit / margin | R$6,149 / 13.3% | R$3,605 / 9.8% |
| Operating income before financial result and taxes | R$4,047 | R$1,100 |
| Net income (loss) | R$2,326 | (R$339) |
| Operating cash flow | R$2,000 | R$2,076 |
| Cash and short-term investments, year-end | R$3,350 | R$3,377 |
| Gross debt | R$14,907 | R$16,510 |
| Net debt | R$11,557 | R$13,133 |
Net income attributable to Gerdau’s shareholders was R$2,304 million; basic earnings per share were R$1.35. The current ratio was 2.1. Year-end equity was R$25,939 million, total assets R$51,281 million and net working capital R$8,999 million. Cash flow from investing was positive R$2,383 million, mainly reflecting divestiture proceeds; capital expenditure was R$1,195 million. Financing activities used R$4,256 million, including debt repayments and R$599 million of dividends and interest on equity.
Changes versus prior year
- Sales grew 25.0% despite lower shipments, principally due to higher sales prices per tonne and currency translation. Gross profit rose 70.6%; operating income increased substantially, and the company returned to profitability.
- Net financial expense increased to R$1,890 million from R$1,143 million. The 2018 result included R$323 million of net exchange losses and R$224 million of bond-repurchase expense.
- Operating cash flow decreased 3.7%; inventory growth consumed working capital. Inventories rose to R$9,168 million from R$6,701 million.
- Net debt declined by R$1,576 million. In November, Gerdau issued R$1.5 billion of debentures and repurchased US$1 billion of bonds to rebalance maturities and reduce U.S.-dollar exposure.
Outlook, commentary, risks and unusual items
Management expected a gradual Brazilian recovery and forecast Brazilian domestic steel demand growth of 6.2% in 2019, U.S. long-steel consumption growth of 1.3%, and global steel consumption growth of 1.4%. These are forecasts, not assurances. The announced 2019–2021 capital expenditure plan totaled R$7.1 billion, subject to market expectations and free-cash-flow generation; management cited a target net-debt/EBITDA range of 1.0–1.5x. A planned 60-day shutdown of Ouro Branco Blast Furnace 1 was scheduled for 2019.
Key exposures include cyclical steel demand and prices, global overcapacity and trade restrictions, scrap and other input costs, energy availability, Brazilian economic and political conditions, currency and interest-rate movements, and environmental and operational risks. The filing reports gross debt as 73.3% U.S.-dollar denominated and a year-end exchange rate of R$3.8748 per U.S. dollar. Management’s BNDES covenant ratios were 5.5 for net interest coverage, 1.9 for net leverage and 2.1 for current ratio; the filing states covenant-test failures would trigger a remediation period and security renegotiation rather than an event of default.
There were no impairment losses in 2018, following R$1,115 million in 2017. Possible, unprovided tax claims include R$7,063 million relating to goodwill deductibility and R$1,201 million concerning profits generated abroad; management and counsel assessed these as possible, not probable. The SEC closed its inquiry into Operation Zelotes, but related proceedings in Brazil remained unresolved. Environmental liabilities were R$133 million. The auditor issued an unqualified IFRS opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether 2018 price and margin improvements persist after input-cost increases and changes in shipment volume.
- Debt currency exposure, maturity profile, refinancing costs and progress toward the stated leverage target.
- Cash generation excluding one-time divestiture proceeds, and the working-capital impact of elevated inventories.
- Outcome and potential cash consequences of the disclosed tax, antitrust and other legal proceedings, including the treatment of judicial deposits.
- Execution, funding and expected returns of the R$7.1 billion 2019–2021 investment plan and the 2019 furnace shutdown.