Gerdau: A More Bullish Outlook Ahead Of H2

Brazilian steelmaker Gerdau's 2Q25 results highlighted strong performance in North America, which contributed 61.4% of consolidated EBITDA and saw significant volume growth and margin improvement quarter-over-quarter, providing a critical counterbalance to its challenging but stabilizing Brazilian operations. While the company reported a free cash flow burn of R$773 million due to CapEx and working capital, its leverage remains manageable, and capital allocation plans support future dividends and buybacks. Despite the market's persistent discount on Gerdau due to steel cyclicality and Brazilian market exposure, the analyst expresses a more bullish outlook for H2, citing North American stability and emerging positive trends in Brazil.

Analysis

Gerdau's 2Q25 results present a bifurcated operational picture, with its North American division serving as a critical performance anchor. This segment, contributing 61.4% of consolidated EBITDA, demonstrated significant strength with a 5.4% year-over-year volume increase and a sequential EBITDA margin expansion to 17.9% from 13.7% in 1Q25. This performance provides a crucial buffer against the challenging Brazilian market, which accounts for one-third of EBITDA. While Brazil operations remain pressured by high domestic interest rates, they are showing signs of stabilization, evidenced by a 7.8% quarter-over-quarter rise in domestic shipments and a surprising 3% sequential price increase, aided by a more favorable product mix. Despite these positive operational signals, the company reported a free cash flow burn of R$773 million, an improvement from the prior quarter but still a headwind driven by R$1.6 billion in CapEx and a R$286 million use of working capital. The company's balance sheet remains solid, with leverage (Net Debt/EBITDA) at a manageable 0.85x. The market continues to price the stock at a discounted forward EV/EBITDA multiple of 4x, reflecting persistent concerns over steel cyclicality and Brazilian sovereign risk, although the outlook for the second half of the year appears more favorable.

Key Decisions for Investors

• Given the de-risked valuation at a 4x forward EV/EBITDA and a more bullish H2 outlook driven by North American stability and nascent recovery in Brazil, investors may consider this a tactical buying opportunity.
• Monitor key risk factors for the H2 thesis, particularly the sustainability of steel prices in Brazil's competitive market and the company's ability to reverse its working capital cash drain.
• For long-term holders, the planned reduction in CapEx post-2026 is a key catalyst to watch, as it could significantly boost free cash flow and enhance capital returns via dividends and buybacks.
• While leverage remains low, track the company's progress in curbing its free cash flow burn in subsequent quarters to ensure its investment cycle and working capital management are on a sustainable path.