Executive Summary / Key Takeaways

• Gerdau S.A. ($GGB) is strategically reorienting its business, leveraging robust performance in North America to offset persistent challenges in the Brazilian market. North America contributed 61% of consolidated EBITDA in Q2 2025, its highest share ever, driven by strong demand in non-residential construction and favorable trade policies.
• The company is making significant investments in operational efficiency and cost reduction, particularly through the Miguel Burnier mining project and the Ouro Branco hot-rolled coil (HRC) mill expansion, which are expected to deliver substantial incremental EBITDA from 2026 onwards.
• Gerdau is implementing a disciplined capital allocation strategy, planning to reduce overall CapEx from 2026, with cuts primarily in Brazil, while maintaining investments in North America to capitalize on growth opportunities and enhance its competitive position.
• Despite a challenging competitive environment in Brazil due to excessive steel imports, Gerdau maintains a strong balance sheet with a net debt over EBITDA ratio of 0.85x in Q2 2025, well below its policy, enabling significant shareholder returns through share buybacks.
• Gerdau's commitment to sustainability is a key differentiator, with its GHG emissions at 0.85 tonnes of CO2 per tonne of steel, less than half the global average, and a high reliance on recycled materials, enhancing its brand reputation and cost competitiveness.

A Century of Steel: Evolution and Strategic Focus

Gerdau S.A., founded in 1901 in Porto Alegre, Brazil, has evolved from a small nail factory into a prominent global steel producer with operations spanning seven countries across the Americas. This 125-year history is marked by strategic transformations, including divesting non-core assets and focusing on internationalization and geographic diversification to mitigate regional economic risks. Today, Gerdau's overarching strategy centers on operational autonomy within its key regions and a disciplined approach to capital allocation, adapting to the unique dynamics of each market.

The global steel industry is characterized by intense competition, high capital requirements, and susceptibility to economic cycles. Gerdau competes directly with global giants like ArcelorMittal (MT), known for its vast scale, and efficient electric arc furnace (EAF) operators such as Nucor Corporation (NUE) and Steel Dynamics (STLD), primarily in North America. While ArcelorMittal's global footprint offers diversified revenue streams, Gerdau's strength lies in its established regional presence and deep customer relationships in Latin America, providing faster delivery and tailored products. Against Nucor and Steel Dynamics, which excel in U.S.-based efficiency and advanced technology, Gerdau differentiates itself through its diversified product portfolio and integrated value chain, from raw material sourcing to distribution, which enhances efficiency and cost competitiveness.

Broad industry trends, such as the increasing demand for steel in AI-driven infrastructure, data centers, and energy distribution, are significant market drivers. Gerdau is well-positioned to capitalize on these trends, particularly in North America, where its product mix and strategic investments align with these long-term demands.

Technological Edge and Operational Transformation

Gerdau's competitive advantage is increasingly rooted in its commitment to technological innovation and operational excellence, particularly in sustainability and cost efficiency. The company achieved an average GHG emissions of 0.85 tonnes of CO2 per tonne of steel in 2024, the lowest in its historical series and less than half the global average for the steel production sector. This achievement, coupled with 92% of its steel produced from recycled materials and over 10 million tons of scrap steel recycled annually, underscores its leadership in green steel production and significantly reduces its environmental footprint. This not only enhances its brand reputation but also contributes to long-term cost competitiveness by reducing reliance on virgin materials and energy consumption.

A cornerstone of Gerdau's operational transformation is the Miguel Burnier sustainable mining project in Minas Gerais, Brazil. This project, currently 72% complete and in the pre-operational planning phase, is slated to commence operations by the end of 2025. It is projected to add 5.5 million tonnes of high-quality iron ore, fundamentally altering the competitive landscape for Gerdau's Ouro Branco mill. Management anticipates this project will generate an incremental EBITDA of BRL 1.1 billion annually once its ramp-up is finalized in 2026-2027. This significant cost advantage from vertically integrated raw material sourcing is a critical moat against competitors, particularly in the Brazilian market.

Further enhancing its product portfolio and cost structure, Gerdau inaugurated the expansion of its hot rolled coil (HRC) production capacity in Ouro Branco in March 2025. This expansion aims to increase the share of flat steel in its Brazilian portfolio and offer higher-value-added products. The HRC mill is expected to contribute an additional 100,000 to 150,000 tonnes of production in 2025, with full ramp-up anticipated in 2026. This investment is strategic, as Gerdau currently has more demand for HRC than it produces, often purchasing from competitors. The new capacity will replace these third-party purchases, leveraging the cost advantages from the Miguel Burnier project.

In North America, Gerdau is also investing in its Midlothian plant in Texas, with plans to expand its capacity to nearly 2 million tonnes. The company strategically postponed Phase 1 of this expansion in Q2 2025 to maintain current production levels, capitalizing on robust market demand. These investments focus on adding capacity for higher-value-added products, such as processed shapes for solar power racks and steel for piling and foundations, aligning with the strong demand from non-residential construction and infrastructure projects.

The "so what" for investors is clear: these technological and operational advancements are not merely incremental improvements but represent a fundamental shift in Gerdau's competitive positioning. The mining project and HRC expansion are designed to secure lower-cost raw materials and higher-margin products in Brazil, while targeted investments in North America enhance its presence in resilient, high-growth segments. This dual strategy aims to bolster profitability, improve cash flow generation, and create a more resilient business model, even amidst challenging market conditions.

Financial Performance and Capital Discipline

Gerdau's recent financial performance reflects a tale of two regions, with North America driving consolidated results. In Q2 2025, adjusted EBITDA reached BRL 2.6 billion, a 6.6% increase from Q1 2025. This was largely propelled by the North American operations, which posted their highest-ever share in consolidated EBITDA at 61%. Net income for Q2 2025 stood at BRL 864 million, or BRL 0.43 per share, up 14% quarter-over-quarter. This strong performance in North America, characterized by higher volumes and better prices, effectively offset a reduction in operations in Brazil and South America.

Brazil's segment, however, faced headwinds. Q1 2025 profitability was impacted by increased costs associated with the implementation of the new HRC mill in Ouro Branco, a non-recurring event, and an oversupply of long steel in the domestic market. Management expects a production increase and a return to pace at Ouro Branco in the coming quarters, which should improve fixed cost dilution. For the full year 2025, Gerdau anticipates increasing profitability in Brazil compared to 2024, driven by ongoing cost reduction initiatives and market factors.

The company maintains a robust liquidity profile and a disciplined approach to capital. Its net debt over EBITDA leverage ratio was 0.85x at the end of Q2 2025, significantly below its established debt policy. While net debt increased by approximately BRL 5 billion from Q3 2024 to Q2 2025, over half of this was allocated to shareholder returns, totaling BRL 2.8 billion in dividends and share buybacks. The remaining portion funded strategic CapEx, which management views as a natural part of a cyclical industry's investment cycle. Gerdau strengthened its cash flow and extended debt maturity in Q2 2025 by issuing a USD 650 million bond and a BRL 1.4 billion debenture. The company expects positive cash generation in the second half of 2025, with North America's working capital consumption (due to higher volumes and prices) beginning to generate more cash in Q3. Gerdau is also actively working to improve its cash conversion cycle, targeting a reduction from 84-85 days to approximately 80 days.

Gerdau's capital allocation strategy is undergoing a notable shift. The company's CapEx for Q2 2025 was BRL 1.6 billion, primarily directed towards the Miguel Burnier mining project. The full-year CapEx guidance for 2025 stands at BRL 6 billion, split equally between competitiveness and maintenance investments. However, management has announced a decision to reduce global CapEx disbursements from 2026 onwards, with cuts primarily impacting Brazil, while investments in North America will be maintained. This strategic re-prioritization reflects the differing market attractiveness and competitive conditions in each region.

Shareholder returns remain a high priority. In Q2 2025, Gerdau approved dividends of BRL 0.12 per share, totaling BRL 239 million. The 2025 share buyback program is 68% complete, representing 2.2% of outstanding shares and totaling almost BRL 700 million. The combined payout ratio (dividends + buybacks) in Q2 2025 reached 90%, nearly three times the bylaws' requirement. Management explicitly favors share buybacks over extraordinary dividends, citing the current "depressed" share price, which they believe is significantly discounted from a balance sheet perspective (e.g., PPE at BRL 15 per share, working capital at BRL 8 per share) and in terms of multiples (P/E of 10.22, P/B of 0.61).

Regional Dynamics and Competitive Landscape

Gerdau's competitive standing is a function of its regional strengths and strategic responses to market forces.

North America: A Growth Engine

The North American segment is currently Gerdau's primary growth engine, experiencing its "best moment in 2025". Demand for steel remains high, with order backlogs exceeding historical levels, largely driven by the non-residential construction sector. This includes robust demand from long-term trends such as solar energy installations (steel for racks), transmission towers, energy distribution, data centers, and new industrial facilities (e.g., chip factories, naval industry). U.S. steel import tariffs have positively impacted Gerdau's capacity utilization and market outlook.

Gerdau operates as a U.S. company in the United States, producing steel 100% locally without relying on imports from Brazil, which enhances its responsiveness to domestic demand. Its focus on specific niches like beams and merchant bars, rather than pure commodities, provides a more protected market position. The special steel business in North America has also improved, benefiting from reduced imports and operational efficiencies stemming from past investments in the Monroe mill. While competitors like Nucor and Steel Dynamics are known for their efficient EAF technology, Gerdau's strategic investments and product mix are allowing it to capture market share and maintain a healthy competitive position in this favorable environment.

Brazil: A Battleground of Imports

In stark contrast, the Brazilian domestic market remains a significant challenge due to "excessive imports of steel". The import penetration rate reached an alarming 23.4% in the first half of 2025, demonstrating the "ineffectiveness of the current quota system with tariffs". This scenario has led management to "decide to reduce investments in Brazil" from 2026 onwards and adjust current production capacity.

Gerdau's management has voiced strong disappointment with the government's "slowness" in implementing effective trade defense measures, highlighting the BRL 6 billion in taxes the federal government foregoes by accepting nearly 30% Chinese imports. The company points to "holes in the wall" of current trade defenses, including tax benefits in free trade zones like Manaus and bilateral agreements with countries like Egypt, which facilitate the entry of low-cost steel.

Despite these challenges, the civil construction market in Brazil remains resilient, though the automotive and agricultural sectors are being impacted by high interest rates. Gerdau is committed to maintaining its market share in the rebar segment, despite acknowledging a "difficult fight" and price pressure. The company's strategy here is to leverage its optimized cost curve and commercial reach, believing that its current position is "comparable to our size". Cost reductions are a critical lever for improving results in Brazil, with efforts underway to bring the Ouro Branco operation's cost level down. The company has also undertaken structural adjustments, including the dismissal of 1,500 people in 2025, in response to the challenging market.

South America: Gradual Recovery

The South America segment experienced a reduction in operations in Q2 2025, particularly in Argentina, where economic adjustments led to a 40% to 50% reduction in shipments compared to the previous year. Management anticipates long-term EBITDA margins for this segment to vary between 15% and 25%, influenced by equity income. The company aims to mitigate these challenges through efficiency gains, expecting a gradual recovery in the mid-range.

Outlook and Key Risks

Gerdau's outlook is characterized by a strategic pivot towards its stronger North American operations and a disciplined approach to capital allocation globally. The company's CapEx guidance for 2025 remains BRL 6 billion, with ongoing strategic projects like Miguel Burnier mining and the Ouro Branco HRC mill proceeding as planned. These projects are fundamental for future competitiveness and cost reduction, with their benefits expected to materialize significantly in 2026 and 2027. Management projects positive cash generation in the second half of 2025, with North America's working capital beginning to contribute more cash in Q3.

However, significant risks persist. The primary concern remains the "ineffectiveness" of trade defense mechanisms in Brazil, which could lead to "new import records" if not improved. This scenario directly impacts the economic returns of investments in Brazil, prompting Gerdau's decision to reduce future CapEx in the region. Macroeconomic factors, such as high interest rates, continue to impact the automotive and agricultural sectors in Brazil. There is also a cautious monitoring of potential impacts from U.S. tariffs on Brazil, particularly affecting the automotive and auto parts industry, which accounts for 15% of Gerdau's Brazilian deliveries. Geopolitical uncertainties, as evidenced by the cancellation of a planned investment in Mexico, highlight the need for adaptability in capital deployment.

Conclusion

Gerdau S.A. stands at a pivotal juncture, strategically reorienting its operations to capitalize on the robust demand and protective trade environment in North America while confronting the structural challenges of excessive imports in Brazil. The company's core investment thesis hinges on its ability to leverage its technological advancements in sustainable production and cost-efficient raw material sourcing, particularly through the Miguel Burnier mining project and the Ouro Branco HRC mill, to drive future profitability. These initiatives, alongside a disciplined capital allocation strategy favoring shareholder returns through buybacks and targeted investments in high-growth North American segments, underscore a proactive approach to value creation.

While the Brazilian market presents a "difficult fight" against unfair competition, Gerdau's commitment to maintaining market share through cost optimization and its strong balance sheet provide resilience. The company's strategic shift in CapEx, prioritizing North American growth and efficiency over Brazilian expansion, reflects a pragmatic response to regional market realities. Investors should recognize Gerdau's dual-market strategy, its commitment to operational excellence and sustainability, and its strong financial health as key drivers for long-term value, even as it continues to advocate for more effective trade policies in Brazil.