UPDATE 3-Gerdau cuts 5-year investment plan, misses profit view

Thu Feb 21, 2013 12:29pm EST

* Net income at 143 mln reais misses poll estimate

* Decision to cut investments follows weak outlook

* Output, sales, revenue underperform in quarter

* Shares up 1.3 pct in afternoon

By Guillermo Parra-Bernal and Alberto Alerigi

SAO PAULO, Feb 21 (Reuters) - Gerdau SA cut its five-year investment plan by 17 percent, as the world's No. 2 maker of steel for builders faces global economic uncertainty and slumping profit.

Planned capital expenditures for its steel and mining units were trimmed to 8.5 billion reais ($4.3 billion) for the 2013-2017 period, from 10.3 billion reais for the 2012-2016 period, the Porto Alegre, Brazil-based company said on Thursday in a securities filing along with fourth-quarter results.

"We revised this plan to cushion the company from uncertainties hurting the global economy," Chief Executive Officer Andre Gerdau-Johannpeter told reporters on a conference call to discuss earnings. "We are picking our future capital expenditure plans more selectively."

Steel mills in Brazil are facing their worst crisis in years as a strengthening local currency, the rising cost of wages and raw materials and competition from imports hampered their ability to stay competitive. Two years of sub-par economic growth in Latin America's largest economy have added to the sector's woes.

The company's decision is a setback for Brazilian President Dilma Rousseff's efforts to jump-start the ailing economy. Business leaders blame a weak global economy, Rousseff's sometimes-confusing economic policy and her tendency to interfere in the private economy for the drop in fixed investment.

Declining output and stagnant sales drove fourth-quarter profit at Brazil's largest steelmaker down about 65 percent from the prior three months. Net income tumbled 70 percent from the year-earlier period to 143 million reais, missing the 242 million-reais estimate in a Thomson Reuters poll of five analysts.

Profit fell for the second straight quarter, along with operational profitability and other efficiency indicators.

SHARES RISE

Shares recouped early losses, and were up 1.3 percent at 15.90 reais in midafternoon. The stock, which is down 4.2 percent this year, had declined for five straight sessions.

The company's decision to cut planned investments signaled a commitment by Gerdau-Johannpeter to maintain a healthy debt profile and cash-generation discipline, and stay focused on delivering a higher return on assets, traders said.

"We believe the market was already expecting weak results," JPMorgan Securities analyst Rodolfo de Angele wrote in a client note.

Gerdau slashed capital expenditures by 24 percent in the fourth quarter. Among the projects untouched by the revision to the investment plan are a plant to manufacture section and profile steel in Mexico, the iron ore mining unit and a hot-rolled coil factory in Brazil, and a facility in India.

Expansion of the iron ore mining unit is key for Gerdau to lower its dependence on scrap for raw material. The company expects to export between 1 million and 1.5 million tonnes of iron ore this year. It could produce up to 16 million tonnes by 2016, Gerdau-Johannpeter added.

"Investments in flat steel, primarily the rolled steel plants, had a significant weighting in the previous investment plan - we don't have such a pressing outlook for investments in one specific segment," he said.

Gerdau, which is diversifying from production of rods and other products used in the construction industry toward flat steel, plans to gradually win market share in the latter sector. Production of flat steel, such as plates and rolled steel, could range between 300,000 and 400,000 tonnes by the end of this year, Chief Financial Officer André Pires said on the call.

Output of raw steel fell for a second straight quarter to 4.186 million tonnes, down 12 percent from the prior three months, as the company sought to reduce inventory. Sales dropped 9.6 percent as its Brazil, Latin America, North America and specialty steel segments posted disappointing results.

Net revenue fell to the lowest level in five quarters, tumbling 8.5 percent to 8.99 billion reais. The cost of goods sold slipped 7.6 percent, underscoring efforts by Gerdau-Johannpeter to tame the impact of rampant cost and raw material inflation in Brazil as well as rising wages on the company's home turf.

Earnings before interest, taxes, depreciation and amortization dropped about 14 percent to 891 million reais, below the analysts' estimate of 928.8 million reais. EBITDA, as the indicator of operational profitability is known, fell to 9.9 percent of revenue, the lowest margin in at least three years.

EBITDA per tonne produced, a measure of operational profitability at steel mills, fell to 213 reais in the fourth quarter from 218 reais in the preceding quarter and 217 reais a year earlier.