Gerdau(GGB) - 2022 Q2 - Quarterly Report

Financial Statements Consolidated Balance Sheets Gerdau S.A. reported BRL 77.66 billion in total assets and BRL 47.52 billion in equity as of June 30, 2022, driven by inventory and receivable growth Consolidated Balance Sheet Highlights (in thousands of BRL) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | 36,735,425 | 32,640,477 | | Total Non-Current Assets | 40,921,387 | 41,174,136 | | Total Assets | 77,656,812 | 73,814,613 | | Total Current Liabilities | 16,527,565 | 14,036,814 | | Total Non-Current Liabilities | 13,610,911 | 16,962,150 | | Total Liabilities | 30,138,476 | 30,998,964 | | Total Equity | 47,518,336 | 42,815,649 | | Total Liabilities and Equity | 77,656,812 | 73,814,613 | - Key changes in assets include a significant increase in Inventories to BRL 18.46 billion from BRL 16.86 billion and Trade accounts receivable to BRL 7.26 billion from BRL 5.41 billion[2] - Long-term debt decreased from BRL 10.88 billion at year-end 2021 to BRL 8.10 billion as of June 30, 2022[3] Consolidated Statements of Income Net sales increased 22.1% to BRL 43.30 billion for the six months ended June 30, 2022, with net income rising to BRL 7.21 billion Income Statement Summary (in thousands of BRL, except EPS) | Metric | Q2 2022 | Q2 2021 | 6 Months 2022 | 6 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 22,968,442 | 19,130,116 | 43,298,933 | 35,473,100 | | Gross Profit | 5,903,931 | 5,414,187 | 11,084,933 | 9,211,096 | | Net Income | 4,298,499 | 3,934,477 | 7,238,884 | 6,405,013 | | Net Income (Parent) | 4,282,123 | 3,916,551 | 7,207,041 | 6,367,890 | | Basic EPS (R$) | 2.51 | 2.30 | 4.23 | 3.74 | | Diluted EPS (R$) | 2.50 | 2.29 | 4.20 | 3.72 | Consolidated Statements of Comprehensive Income Total comprehensive income reached BRL 6.42 billion for the six months ended June 30, 2022, influenced by net income and negative translation adjustments Comprehensive Income Summary (in thousands of BRL) | Metric | 6 Months 2022 | 6 Months 2021 | | :--- | :--- | :--- | | Net income for the period | 7,238,884 | 6,405,013 | | Other comprehensive income (loss) | (819,408) | (635,735) | | Cumulative translation adjustment | (1,206,242) | (815,629) | | Unrealized Gains on net investment hedge | 468,250 | 310,665 | | Total comprehensive income | 6,419,476 | 5,769,278 | Consolidated Statements of Changes in Equity Parent company equity increased to BRL 47.33 billion by June 30, 2022, driven by net income despite share buybacks and dividends - Equity attributable to the parent company increased by BRL 4.73 billion during the first six months of 2022[6] Key Changes in Equity (in thousands of BRL) - 6 Months 2022 | Description | Amount | | :--- | :--- | | Balance as of January 1, 2022 | 42,604,282 | | Net income | 7,207,041 | | Other comprehensive income (loss) | (815,284) | | Effects of the share buyback program | (341,367) | | Dividends/interest on equity | (973,542) | | Balance as of June 30, 2022 | 47,333,225 | Consolidated Statements of Cash Flows Operating cash flow significantly increased to BRL 6.18 billion for the six months ended June 30, 2022, leading to a BRL 1.62 billion net increase in cash Cash Flow Summary (in thousands of BRL) | Cash Flow Activity | 6 Months 2022 | 6 Months 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | 6,177,675 | 2,119,112 | | Net cash used in investing activities | (1,591,000) | (1,069,040) | | Net cash used by financing activities | (2,903,571) | (2,549,466) | | Increase (Decrease) in cash and cash equivalents | 1,616,099 | (1,590,976) | | Cash and cash equivalents at end of period | 5,776,753 | 3,026,228 | Notes to the Financial Statements Note 1 & 2 - General Information and Accounting Practices Gerdau S.A., a leading steel producer, prepares its interim financial statements under IAS 34, with no material impact expected from new IFRS standards - The company is a leading producer of long steel in the Americas and one of the largest suppliers of special steel in the world[8] - Financial statements are prepared in accordance with IAS 34, Interim Financial Reporting[10] - The company is assessing the impact of new IFRS standards effective in 2023 but does not expect material impacts[13][14][15] Note 4, 5, 6 - Liquidity and Working Capital Liquidity improved with cash and equivalents rising to BRL 5.78 billion, alongside increases in trade receivables and inventories Key Working Capital Accounts (in thousands of BRL) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | 5,776,753 | 4,160,654 | | Short-term investments | 1,977,982 | 2,626,212 | | Trade accounts receivable | 7,261,198 | 5,414,075 | | Inventories | 18,464,285 | 16,861,488 | Note 12 & 13 - Debt and Financing Total loans and financing decreased to BRL 9.50 billion with a 5.70% weighted average interest cost, primarily USD-denominated debt - Total loans and financing decreased from BRL 11.11 billion to BRL 9.50 billion, with the weighted average interest cost at 5.70% p.a.[38] - In Q2 2022, the company redeemed all bonds with maturity in 2024, settling a principal amount of US$158.7 million[42] Debt by Currency (in thousands of BRL) | Currency | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Brazilian Real (R$) | 463,636 | 461,187 | | U.S. Dollar (US$) | 8,752,514 | 10,535,532 | | Other currencies | 282,712 | 113,067 | | Total | 9,498,862 | 11,109,786 | Note 14 - Financial Instruments and Risk Management The company manages financial risks using derivatives, targeting a 1.0-1.5x Net Debt/EBITDA ratio, with currency fluctuations impacting income - The company uses derivative and non-derivative instruments to hedge against exchange rate and interest rate fluctuations[46] - Key capital management targets include a Net Debt/EBITDA ratio of 1.0 to 1.5 times and a gross debt limit of BRL 12 billion[53] Sensitivity Analysis Highlights (Impact on Income) | Assumption | Change | Impact (R$ thousands) | | :--- | :--- | :--- | | Foreign currency (BRL/USD) | 5% | 96,996 | | Interest rate | 10 bps | 41,124 | | Product prices | 1% | 229,684 | | Raw material prices | 1% | 145,971 | - The company designated US$0.9 billion of its Ten/Thirty Years Bonds as a hedge of its net investments in foreign subsidiaries[71] Note 15 - Provisions and Contingencies Provisions for probable losses total BRL 1.81 billion, while unprovisioned contingent liabilities exceed BRL 13 billion, mainly from tax disputes Provisions for Probable Losses (in thousands of BRL) | Provision Type | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Tax provisions | 1,311,211 | 1,270,473 | | Labor provisions | 459,223 | 435,803 | | Civil provisions | 39,246 | 34,750 | | Total | 1,809,680 | 1,741,026 | - Significant unprovisioned tax contingencies (possible loss) include disputes over goodwill amortization totaling BRL 8.50 billion and BRL 493 million[89][91] - The company has judicial deposits of BRL 1.74 billion, of which BRL 1.42 billion relates to a favorable court ruling on the exclusion of ICMS from the PIS/COFINS tax base[103] Note 18 - Equity Total capital was BRL 19.25 billion as of June 30, 2022, with a new share buyback program acquiring 14.1 million preferred shares - A new share buyback program was approved in May 2022 to acquire up to 55 million preferred shares over 18 months[133] - As of June 30, 2022, the company had acquired 14,065,700 preferred shares under the new program for BRL 341.4 million[133] Dividends and Interest on Equity - 2022 | Period | Nature | R$/share | Amount (in thousands BRL) | | :--- | :--- | :--- | :--- | | 1st Quarter | Interest on income | 0.57 | 973,542 | Note 23 - Segment Reporting Brazil and North America operations led net sales, with North America generating the highest operating income for the first six months of 2022 Net Sales by Business Segment (6 Months 2022, in thousands of BRL) | Segment | Net Sales | | :--- | :--- | | Brazil Operation | 17,609,961 | | North America Operation | 16,794,996 | | Special Steels Operation | 6,875,956 | | South America Operation | 3,646,839 | Operating Income by Business Segment (6 Months 2022, in thousands of BRL) | Segment | Operating Income* | | :--- | :--- | | North America Operation | 4,977,677 | | Brazil Operation | 3,541,982 | | Special Steels Operation | 1,364,519 | | South America Operation | 1,053,597 | Before financial income (expenses) and taxes Note 25 - Subsequent Events A dividend payment of BRL 1.2 billion (BRL 0.71 per share) was approved on August 2, 2022, for payment later that month - A dividend of BRL 1.2 billion (BRL 0.71 per share) was approved on August 2, 2022, for payment on August 25, 2022[164]