Fitch Ratings has affirmed Gerdau S.A.'s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB'.
In addition, Fitch has affirmed Gerdau's National Scale Ratings at 'AAA (bra)', senior unsecured notes, and the senior unsecured notes issued by its related or subsidiary companies at 'BBB'. The Rating Outlook remains Stable.
Gerdau's rating affirmation reflects the continued strength of the company's market position, capital structure, long tenor maturity schedule, and liquidity profile. Gerdau's geographic operational diversification, and flexible operating structure of electric arc furnace (EAF) steel production, allows the company to swiftly respond to changing market conditions.
Gerdau's ratings are above Brazil's 'BB+' Country Ceiling based on the company's ability to service its debt with cash flow generated by its U.S. subsidiaries and/or the cash and marketable securities it holds outside of Brazil.
Key Rating Drivers
Robust Business Position: Gerdau is a leading long steel producer in the Americas with industrial presence in nine countries. The company's diversified portfolio of assets hedges the company against sharp downturns in key markets, such as Brazil or the U.S., and provides the company's cash flow a degree of stability. The company's EBITDA during 1H23 was comprised of North America at 50%, Brazil at 25%, South America (excluding Brazil) at 12% and Special Steel at 13%.
Flexible Operating Profile: Gerdau has a flexible production cost structure, with approximately 75% of output from electric arc furnaces mini-mills and 25% from integrated blast furnaces. Gerdau's numerous scrap collection facilities and direct mine operations undergird its raw material self-sufficiency. This allows the company to promptly react to changes in steel demand in Brazil and the U.S. Furthermore, a BRL3.2 billion investment program between 2023 and 2026 targets the development of high grade iron ore (65%) to reduce pellet consumption, and enable the potential for direct reduced iron and pellet production in the future.
Sound Capital Structure: Gerdau's commitment to maintaining a strong capital structure is a key rating consideration. The company's gross and net debt/EBITDA ratio reached 0.6x and 0.4x in LTM 2Q23. Fitch expects additional gross debt to be close to Gerdau's BRL 12.0 billion long-term target. The expected average gross and net leverage metrics between 2023 and 2025 are 1.0x and 0.2x. Gerdau's financial policy also includes keeping an average maturity term beyond six years and net leverage below 1.5x.
Steel Demand Softening: Apparent consumption of steel in Brazil fell by 0.7% in the first half of 2023, less than the 11.0% decrease in 2022. The decrease in 1H23 was attributable to a decrease in apparent consumption of long steel products while special steel sheets saw a partial recovery from their 2022 fall. Fitch projects the special steel segment for Gerdau will see lower shipments in 2023 as the Brazilian auto sector remains depressed and due to the expectation of decreased production in the US auto sector.
High FCF Generation: Continued high steel price dynamics in North America allowed EBITDA/tonne to reach BRL1,822 (USD380), compared with about BRL738 (USD154) in Brazil, keeping profitability in 1H23 above midcycle levels. Fitch forecasts Gerdau's EBITDA will decrease to BRL15.0 billion in 2023 from BRL21.1 billion in 2022 with average EBITDA/tonne at BRL1,400 (USD 277) in 2023. Gerdau targets a BRL 5.0 billion capex for 2023. The company is expected to generate BRL4.5 billion of FCF after capex and dividends in 2023.
North American Cash Flow: Gerdau's ratings are not constrained by a country ceiling. Fitch deems the company's applicable country ceiling is North America at 'AAA', as Fitch estimates its EBITDA from operations in the U.S. can comfortably cover its consolidated hard-currency interest expense by an average of 16.9x over the next 24 months.
Should the company's North American operations EBITDA fail to cover 12 months of hard-currency interest expense by at least 1.0x, the company's rating, per Fitch's 'Non-Financials Exceeding the Country Ceiling Criteria,' will be limited to three-notches above the next applicable country ceiling, which is that of Brazil at 'BB+'. Therefore, a multi-notch downgrade of Brazil coupled with deteriorating cash flows from its North American business division would have a negative impact on Gerdau's ratings.
Derivation Summary
Gerdau's diversified operational footprint, significant operating cash flows from its assets abroad, mainly in the U.S., and flexible business model that allows it to better withstand economic and commodity cycles, are all key competitive advantages. Gerdau has also met creditors' demands proactively by selling assets twice in the last six years, for total considerations of BRL7.4 billion, and raising equity three times with most of the proceeds reallocated to repay debt in the last 14 years.
Gerdau's vertical integration as a dominant competitor in the scrap market and downstream multiproduct distribution network compares with Companhia Siderurgica Nacional's (CSN; BB/Positive) and Usinas Siderurgicas de Minas Gerais S.A.'s (Usiminas; BB/Stable) integrated business profile. CSN and Usiminas are highly exposed to the local steel industry in Brazil, particularly to the flat steel sector, and have large iron ore exports.
Among the three Brazilian steel producers, Gerdau has consistently maintained the strongest balance sheet, most manageable debt amortization schedule, and has consistently made efforts to improve its capital structure through assets sales or equity issuances. Gerdau's Fitch adjusted gross debt (BRL 12.6 billion at YE 2022) is higher than Usiminas's (BRL6.2 billion), but lower than CSN's (BRL 43 billion). Gerdau's gross and net leverage of 0.6x and 0.3x, at YE 2022, and Usiminas's 1.2x and 0.2x are lower than CSN's at 3.1x and 2.2x.
Unlike the operating profile of blast furnace led North American peer's U.S. Steel (BB/Stable) or Cleveland-Cliffs (BB-/Stable), Gerdau's operation is more similar to Nucor (A-/Stable), Steel Dynamics (BBB/Positive), and, Commercial Metals Company (BB+/Positive), with Electric Arc Furnace facilities, scrap collection markets presence, long steel predominance and U.S. operations. Gerdau has a larger global production capacity (17 million tonnes of crude steel), but lower in the U.S. than that of Steel Dynamics (14 million tonnes) and Commercial Metals (10 million tonnes), as well as smaller capacity than Nucor (29 million tonnes).
Gerdau has obtained better profitability in 2022 with EBITDA/tonne of USD350 (USD253 is the last three years average), similar to Commercial Metals (USD354 in NA, USD201 in Europe), but lower than Steel Dynamics (USD455/tonne) and Nucor (USD 459/tonne), and has posted a higher three-year average EBITDA margin of 23.9% than Steel Dynamics' 22.1%, Commercial Metals' 11.2%, and Nucor's 22.8%. Gerdau's product diversification is larger than Commercial Metal's with its emphasis on the North American rebar, but lower than Steel Dynamics and Nucor.
Gerdau is more geographically diversified across the Americas compared with Commercial Metals U.S. and Poland operations or Steel Dynamics' and Nucor's sole North American focus.
Gerdau's leverage metrics (three-year average gross and net leverage of 1.2x and 0.7x) compare similarly to those of Commercial Metals (1.3x and 0.7x), Steel Dynamics (1.3x and 0.7x) and Nucor (1.2 and 0.5x).
Key Assumptions
Fitch's Key Assumptions Within The Rating Case for the Issuer:
Brazil's domestic steel volumes remain flat through the forecast horizon;
Brazilian export steel volumes grow by 13% in 2023, and remain elevated in 2024 and 2025;
Specialty steel volumes fall by 10% in 2023, and remain softened in 2024 and 2025;
North America steel volumes increase by 5% in 2023, and remain elevated in 2024 and 2025;
Combined EBITDA/tonne fall to BRL 1,400 in 2023, to BRL 869 in 2024 and BRL 648 in 2025;
Capex at BRL 5.0 billion in 2023, and averaging BRL 5.0 billion over the rating horizon;
Taxes at BRL 4.1 billion in 2023, BRL 2.1 billion in 2024 and BRL 1.4 billion in 2025;
An exchange rate of BRL5.1/USD1.00 at YE 2023, and BRL5.2/USD1.00 in average FX rate for the remainder of the forecast horizon.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Further geographic diversification in low risk operating environments;
Larger contribution to cash flows from higher value-added products;
Sustained adjusted total debt/EBITDA below 1.5x and/or adjusted net debt/EBITDA below 0.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustained adjusted total debt/EBITDA above 2.5x and/or adjusted net debt/EBITDA above 1.5x;
Persistent negative FCF;
EBITDA margins below 12% on a sustained basis.
Liquidity and Debt Structure
Plentiful Liquidity: Gerdau consistently has kept a conservative financial strategy resulting in the company terming out its debt and holding enough cash to cover upcoming maturities. The company had BRL4.2 billion of cash and marketable securities as of June 30, 2023. Gerdau's cash holdings are sufficient to cover amortizations until 2027. Its debt profile has an average term of 7.8 years.
Approximately 53% of Gerdau's cash was held in U.S. dollars as of June 2023. During the same period, the company kept its Brazilian reals denominated cash in time deposits and exclusive closed funds. Its U.S. dollar-denominated cash was kept in time deposits and interest-bearing accounts or sweep accounts. In addition to the cash it holds, Gerdau has a USD875 million global credit revolving facility till 2027, none of which has been used as of June 30, 2023.
Gerdau has strong access to local and international debt markets, as well as Brazilian and international banks. Gerdau's debt consists of cross-border issuances (66%), local Brazilian debentures (8%) and working capital lines (26%). Approximately 69% of the company's debt is U.S. dollar denominated.
Issuer Profile
Gerdau S.A. is a leading manufacturer of long steel in the Americas and has a strong presence in special steel in the U.S. and Brazil. It also produces flat steel and has iron ore operations in Brazil, and a strong presence in the scrap market.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
GERDAU S.A. 
