Gerdau S.A.

Earlier this year, we assumed that volumes and margins would improve pronouncedly, but this didn't occur due to still very weak infrastructure and real estate investments in Brazil. At the same time, Gerdau's U.S. operations suffered from oversupply and high scrap prices (its main raw material) that pressured spreads. We still expect the company to generate about R$2 billion in free operating cash flow (FOCF) this year by releasing working capital, although this might delay margins' rebound in the short term. In our view, metrics will remain near 2x in 2019 and below 2x in 2020. Brazilian steelmakers are running at low capacity utilization rates (near 60%) to protect pricing power, but it could be challenging to raise prices in

...Commitment to contain debt despite sluggish earnings. Even during very weak volume demand in Gerdau's main market, Brazil, the company was able to reduce net debt by R$3 billion from 2016 to 2018 by selling non-core assets, cutting investments, and optimizing the working capital cycle. To illustrate, during Brazil's recent multi-year recession, domestic volumes dropped by about 30%. Earlier this year, we assumed that volumes and margins would improve pronouncedly, but this didn't occur due to still very weak infrastructure and real estate investments in Brazil. At the same time, Gerdau's U.S. operations suffered from oversupply and high scrap prices (its main raw material) that pressured spreads. We still expect the company to generate about R$2 billion in free operating cash flow (FOCF) this year by releasing working capital, although this might delay margins' rebound in the short term. In our view, metrics will remain near 2x in 2019 and below 2x in 2020....

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