Gerdau(GGB) - 2022 Q3 - Quarterly Report

Condensed Consolidated Interim Financial Statements Consolidated Balance Sheets Gerdau's total assets grew to R$79.8 billion by September 2022, driven by higher inventories, while lower liabilities boosted total equity to R$49.4 billion Consolidated Balance Sheet Summary (in thousands of R$) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | 37,557,578 | 32,640,477 | | Total Non-Current Assets | 42,214,747 | 41,174,136 | | Total Assets | 79,772,325 | 73,814,613 | | Total Current Liabilities | 16,667,208 | 14,036,814 | | Total Non-Current Liabilities | 13,726,460 | 16,962,150 | | Total Liabilities | 30,393,668 | 30,998,964 | | Total Equity | 49,378,657 | 42,815,649 | | Total Liabilities and Equity | 79,772,325 | 73,814,613 | - The increase in current assets was mainly due to higher inventories, which rose to R$18.8 billion from R$16.9 billion, and an increase in trade accounts receivable to R$6.7 billion from R$5.4 billion[2] - The decrease in non-current liabilities was primarily driven by a reduction in long-term debt from R$10.9 billion to R$8.2 billion[3] Consolidated Statements of Income Net sales grew 13.5% to R$64.4 billion for the nine-month period, but net income fell to R$10.3 billion due to higher costs and the absence of prior-year one-time gains Nine-Month Income Statement Highlights (in thousands of R$) | Account | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Sales | 64,448,165 | 56,790,157 | | Gross Profit | 15,822,787 | 15,630,245 | | Income Before Taxes | 13,872,022 | 16,374,089 | | Net Income | 10,261,130 | 11,998,954 | | Net Income Attributable to Owners | 10,217,898 | 11,945,709 | | Basic EPS (R$) | 1.79 | 3.27 | - The third quarter of 2022 showed a significant decline in net income to R$3.0 billion compared to R$5.6 billion in Q3 2021, with net sales remaining relatively flat[4] - The 2021 results included a one-time Eletrobras compulsory loan recovery of R$1.39 billion, which was not present in 2022, contributing to the year-over-year decline in income[4] Consolidated Statements of Comprehensive Income Total comprehensive income for the nine-month period decreased to R$10.1 billion from R$12.5 billion year-over-year, impacted by lower net income and negative currency translation effects Comprehensive Income Summary (in thousands of R$) | Item | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net income for the period | 10,261,130 | 11,998,954 | | Other comprehensive income for the period, net of tax | (201,951) | 517,736 | | Cumulative translation adjustment | (507,926) | 945,601 | | Unrealized Gains (Losses) on net investment hedge | 303,928 | (447,163) | | Total comprehensive income for the period, net of tax | 10,059,179 | 12,516,690 | Consolidated Statements of Changes in Equity Shareholders' equity grew to R$49.4 billion by September 2022, as R$10.3 billion in net income more than offset R$2.2 billion in dividends and R$935 million in share buybacks Key Changes in Equity - 9 Months Ended Sep 30, 2022 (in thousands of R$) | Description | Amount | | :--- | :--- | | Balance as of January 1, 2022 | 42,815,649 | | Net income | 10,261,130 | | Other comprehensive income (loss) | (201,951) | | Effects of the share buyback program | (934,768) | | Dividends/interest on equity | (2,210,276) | | Balance as of September 30, 2022 | 49,378,657 | Consolidated Statements of Cash Flows Net cash from operations doubled to R$9.4 billion, driving a R$2.0 billion increase in total cash, despite higher spending on investments, dividends, and share buybacks Cash Flow Summary - 9 Months Ended (in thousands of R$) | Cash Flow Activity | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | 9,425,997 | 4,695,182 | | Net cash used in investing activities | (2,726,184) | (1,896,608) | | Net cash used by financing activities | (4,832,663) | (3,444,588) | | Increase (Decrease) in cash and cash equivalents | 2,024,997 | (641,127) | | Cash and cash equivalents at end of period | 6,185,651 | 3,976,077 | - Key uses of cash in financing activities included R$2.4 billion for dividends and interest on capital, and R$916 million for the purchase of treasury stocks[7] Notes to the Condensed Consolidated Interim Financial Statements Note 1 - General Information Gerdau S.A. is a leading global steel producer and the largest recycler in Latin America, with listings on the São Paulo, New York, and Madrid stock exchanges - Gerdau S.A. is a leading producer of long steel in the Americas and one of the largest suppliers of special steel in the world[8] - The company is also a major producer of flat steel and iron ore in Brazil and is described as the largest recycler in Latin America[8] Note 2 - Summary of Significant Accounting Practices The interim financials comply with IAS 34, maintain consistent accounting policies with the 2021 annual report, and identify the war in Ukraine as a key macroeconomic risk - The financial statements are prepared in accordance with IAS 34 and should be read with the 2021 annual financial statements[10] - The company identifies the Russian invasion of Ukraine as a significant risk that could have a material adverse effect on the macroeconomic environment, steel demand, prices, and energy costs[20] Note 3 – Investments in Subsidiaries, Joint Ventures, and Associates The company details its interests in other entities, including the sale of its Venezuelan subsidiary and its rationale for not consolidating certain majority-owned joint ventures - In March 2022, the company sold its 100% interest in the Venezuelan subsidiary, Sizuca - Siderúrgica Zuliana C.A[21] - The company does not consolidate Gerdau Corsa S.A.P.I. de C.V. (75% ownership) and Gerdau Summit (58.73% ownership) because joint control agreements prevent it from controlling their business decisions[23] Combined Net Sales of Joint Ventures (in thousands of R$) | Period | Net Sales | | :--- | :--- | | Nine-month period ended Sep 30, 2022 | 11,559,656 | | Nine-month period ended Sep 30, 2021 | 8,827,737 | Note 6 - Inventories Inventories rose to R$18.8 billion by September 2022 from R$16.9 billion at year-end 2021, with a notable increase in the allowance for adjustments to net realizable value Inventory Breakdown (in thousands of R$) | Category | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Finished products | 8,097,722 | 7,209,379 | | Work in progress | 4,821,906 | 3,453,948 | | Raw materials | 3,785,135 | 3,994,655 | | Total Inventories | 18,811,541 | 16,861,488 | Note 9 – Property, Plant and Equipment (PPE) Capital expenditures on PPE for the first nine months of 2022 increased significantly to R$2.61 billion, with R$20.5 million in borrowing costs capitalized during the period - Acquisitions of PPE for the nine-month period ended September 30, 2022, amounted to R$2,607,753 thousand, compared to R$1,811,078 thousand for the same period in 2021[41] - Borrowing costs capitalized during the nine-month period of 2022 were R$20,452 thousand[42] Note 12 – Loans and Financing Total debt decreased to R$9.8 billion from R$11.1 billion, with the majority denominated in U.S. Dollars, and the company renewed an undrawn US$875 million credit line Loans and Financing by Currency (in thousands of R$) | Currency | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Brazilian Real (R$) | 487,650 | 461,187 | | U.S. Dollar (US$) | 8,890,445 | 10,535,532 | | Other currencies | 427,087 | 113,067 | | Total | 9,805,182 | 11,109,786 | - The company renewed a Global Credit Line of US$875 million in September 2022, with a maturity in September 2027; as of the reporting date, no amount of this credit line was used[50] Note 14 – Financial Instruments and Risk Management The company details its management of financial risks, capital management targets like a Net Debt/EBITDA ratio of 1.0-1.5x, and its use of derivatives for hedging - The company's capital management targets include a Net Debt/EBITDA ratio of 1.0 to 1.5 times, a gross debt limit of R$12 billion, and an average debt maturity of over 6 years[61] - The company designates its Ten/Thirty Years Bonds (US$1.1 billion) as a hedge of its net investments in foreign subsidiaries, with exchange rate effects recognized in Other Comprehensive Income[79] Sensitivity Analysis on Statements of Income (Impacts) | Assumption | Change | Impact on Sep 30, 2022 (R$) | | :--- | :--- | :--- | | Foreign currency sensitivity | 5% | 116,385 | | Interest rate sensitivity | 10 bps | 31,138 | | Product price sensitivity | 1% | 211,492 | | Raw material price sensitivity | 1% | 138,900 | Note 15 – Provisions and Contingencies The company has provisioned R$1.86 billion for probable legal losses while disclosing over R$13 billion in significant contingent liabilities deemed possible, mainly from tax disputes - Provisions for probable losses from tax, civil, and labor claims totaled R$1,856,351 thousand as of September 30, 2022[90] - The company faces significant tax contingencies classified as 'possible loss' and not provisioned, including R$8.6 billion related to goodwill amortization from a 2004/2005 corporate restructuring[102] - Investigations by Brazilian authorities into CARF proceedings and political contributions are ongoing, and while the U.S. SEC has closed its related inquiry, the company cannot predict the outcome or need for a provision[105] Note 18 – Equity A share buyback program for up to 55 million preferred shares was approved, with R$934.8 million spent to acquire 39.2 million shares by September 30, 2022 - On May 4, 2022, the Board approved a new Share Buyback Program for up to 55,000,000 preferred shares over 18 months[148] - As of September 30, 2022, the company had acquired 39,162,900 preferred shares under the new program for a total cost of R$934,768 thousand[148] Dividends and Interest on Equity Credited in 2022 (in thousands of R$) | Period | Nature | Amount | | :--- | :--- | :--- | | 1st Quarter | Interest on income | 973,542 | | 2nd Quarter | Dividends | 1,199,713 | | Total | | 2,173,255 | Note 19 – Earnings Per Share (EPS) For the nine months ended September 30, 2022, basic EPS decreased to R$6.02 and diluted EPS fell to R$5.98, down from R$7.01 and R$6.97 in the prior year Earnings Per Share (in R$) | EPS Type | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Basic EPS | 6.02 | 7.01 | | Diluted EPS | 5.98 | 6.97 | Note 22 – Net Financial Result The net financial expense for the nine-month period increased tenfold to R$1.4 billion, driven by higher interest costs, negative exchange variations, and no repeat of prior-year tax credit updates Net Financial Result Breakdown (in thousands of R$) | Item | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Financial income total | 388,360 | 162,120 | | Financial expenses total | (1,200,114) | (1,011,606) | | Exchange variations, net | (603,439) | (94,074) | | Tax credits monetary update | - | 788,741 | | Gains and Losses on derivatives, net | 20,536 | 19,562 | | Financial result, net | (1,394,657) | (135,257) | Note 23 – Segment Reporting The North America Operation's gross profit doubled to R$7.0 billion, offsetting a sharp decline in the Brazil Operation and driving overall sales growth Gross Profit by Business Segment - 9 Months Ended (in thousands of R$) | Business Segment | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Brazil Operation | 5,285,744 | 9,734,039 | | North America Operation | 7,042,298 | 3,586,415 | | South America Operation | 1,328,323 | 1,114,805 | | Special Steels Operation | 2,026,773 | 1,157,836 | Total Assets by Geographic Area (in thousands of R$) | Geographic Area | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Brazil | 32,185,295 | 31,740,469 | | Latin America | 10,904,027 | 8,959,237 | | North America | 36,683,003 | 33,114,907 | | Consolidated | 79,772,325 | 73,814,613 | Note 25 – Subsequent Events Post-period end, the company proposed a R$3.6 billion dividend payment, approved the cancellation of over 46 million treasury shares, and finalized a leasing partnership with Randon - On November 7, 2022, the company proposed dividend and interest on equity payments totaling R$3.58 billion (R$2.88 billion in dividends and R$0.70 billion in interest on equity), to be paid on December 14, 2022[182] - On November 8, 2022, the Board approved the cancellation of 1,697,538 common shares and 44,564,000 preferred shares held in treasury, without reducing the capital value[183] - On November 3, 2022, the company's subsidiary Gerdau Next S.A. finalized a strategic partnership with Randon to create a new company focused on leasing services for trucks and semi-trailers[181]