UPDATE 3-Gerdau sees Brazil recovery as profit beats estimates

* Profit jumps 38 pct sequentially, beats estimates

* Gains in EBITDA spurred by Brazil, specialty steel

* Pledges to resume $540 mln mill project in Mexico

* Signals recovery in local operations is underway

SAO PAULO, Aug 2 (Reuters) - Robust output and sales in Brazil helped steelmaking giant Gerdau post second-quarter net income that beat analysts' estimates, as the world's No. 2 producer of long steel products foresees a gradual recovery in its home market.

Operational results signaled that activity in the sector is recuperating despite the impact of high raw materials costs, mounting competition from imported steel and a year-long slowdown in Brazil. A recovery in homebuilding in Brazil should spur steel sales through 2013, Chief Executive André Gerdau-Johannpeter told reporters at a conference call on Thursday.

"We believe that the market is coming back and the company is getting prepared for that," Gerdau-Johannpeter said.

Gerdau, based in Porto Alegre, Brazil, earned 549 million reais ($269 million) in the quarter, compared with 503 million reais a year earlier, according to a securities filing on Thursday. A Reuters poll of 11 analysts had forecast average net income of 428.4 million reais for the period.

On a quarter-on-quarter basis, the most-widely used gauge of earnings performance by investors, profit soared 38 percent from 397 million reais in the first quarter. Revenue per tonne sold rose in the quarter, highlighting efficiency gains and the ability of Gerdau to keep expenses relatively at bay.

Production of raw steel gained 2.1 percent sequentially to 5.046 million metric tonnes, the highest level in a year, as the company's Brazilian unit and, to a lesser degree, the Latin American and specialty steel units experienced rising orders. Sales climbed 1.1 percent from the first quarter.

As a result, gross margins in the Brazil and specialty steel units rose, and will do so as demand for long steel, mostly used in construction projects, gains traction. Despite all that, revenue came in at 9.975 billion reais, below the poll's estimate of 10.008 billion reais.

"We highlight improvements in the Brazilian domestic market demand, which in our view is a positive sign for the second half of this year," said Ivano Westin, a senior mining and steel analyst for Credit Suisse Group in São Paulo.

Preferred shares of Gerdau rallied 2 percent to 18.40 reais on Thursday. The stock is up 29 percent this year.

Costs per tonne produced rose 3.4 percent, below the 6.2 percent gain in revenue per tonne produced. Expenses rose 6 percent on a sequential basis and 8 percent from the year-earlier period.

"We are taking all the steps to rein in the impact of costs and expenses in a very challenging environment," Gerdau-Johannpeter said in the call.

Still, the company borrowed more short-term debt to unload unwanted inventory. Working capital loans, or the money that Gerdau borrows to finance day-to-day operations, rose by 13 percent in the quarter to 10.3 billion reais, the filing added.

Working capital turnover rose by five days in the quarter, prompting management to "instruct all our units to reduce it," a move that could help enhance profitability, Chief Financial Officer Osvaldo Schirmer said in the same call.

INVESTMENT PLANS

Gerdau's investment totaled 850 million reais in the quarter as management exerted greater selectivity when assessing new projects. "This is a sign of discipline in capital allocation in a period of challenging environment," said JPMorgan Securities analyst Rodolfo de Angele.

Growing optimism over a potential recovery in the United States, where results disappointed for the first time in three quarters, led Gerdau to resume plans to build a $540 million plant in Mexico to produce profiles in cold-bended steel.

The new mill will have capacity to produce 1 million tonnes of steel and 700,000 tonnes of rolled products and should begin operations by 2014.

A hot rolled coil mill with the capacity to produce 770,000 tonnes of the product will begin operations by year-end, Gerdau-Johannpeter added. The company maintained its estimate for capital expenditures at 10.3 billion for the 2012-2016 period.

Earnings before interest, tax, depreciation and amortization, a gauge of profitability known as EBITDA, jumped 23 percent to 1.244 billion reais from the first quarter. EBITDA came slightly below analysts' average forecast of 1.270 billion reais.

The sequential gain in EBITDA was stoked by the robust results posted by the Brazilian steel and the specialty steel divisions. Both increases helped outweigh a 24 percent tumble in EBITDA at the Latin American steel division and a 1 percent decline at the North America unit.

EBITDA per tonne produced, a gauge of profitability per unit, rose 21 percent to 246.5 reais in the second quarter from the prior three months. EBITDA rose to 12.5 percent of revenue, compared with an 11 percent so-called EBITDA margin in the first quarter.

Net income rose 9.1 percent from the second quarter of last year after a drop in taxes and financial expenses helped offset a faster gain in production costs.