Gerdau heads into its third-quarter report with an unusual mix of confidence and caution baked into the setup. Last quarter, management sounded more upbeat than it had in a long while, pointing to two early-August US price increases on special steel and beams that were not included in its outlook. Yet the same call also flagged a one-off charge of roughly R$150 million tied to idling the Midlothian melt shop this quarter. The report due after the close on October 26 is the first real chance to see which of those forces wins.
The Street is looking for earnings of $0.18 per share on revenue of about $3.58 billion. That would be an 80% jump from the $0.10 earned a year ago on sales growth of about 8.5%, so most of the improvement is expected to come from margins rather than volume. Sequentially, the bar is a step up from the $0.15 posted last quarter on $3.54 billion in revenue. Revenue is barely expected to move, so analysts are betting that pricing and mix in North America can more than absorb the Midlothian cost. There is no fresh formal guidance to measure that against. Management broadly reaffirmed its framework rather than raising it, which leaves the August price increases as the swing factor the consensus may or may not fully reflect.
North America is the heart of the story. Second-quarter EBITDA in that segment rose 15% from the prior quarter, volumes climbed 7% year over year, and the US backlog was sitting near 90 days, above its historical norm, supported by data centers, infrastructure, CHIPS Act fabs and renewables. Validation this quarter would look like stable or rising realized prices, a backlog that stays near those levels, and segment margins holding up despite the melt-shop idling and freight costs running about 8.5% higher. A challenge would show up as price increases that failed to stick, a shrinking backlog, or further softness in automotive and special bar quality steel. Management has already said affordability and an aging vehicle fleet are weighing on that business.
Brazil is the second test, and the bar there is lower. The domestic business improved only slightly last quarter and remains pressured by heavy, if moderating, import penetration. Anti-dumping decisions on long and flat steel were expected in the second half, so any commentary on whether they arrived, and how strong the protection is, matters for the 2027 outlook. Operationally, the Miguel Burnier mining startup was slated to begin this quarter after earlier delays, with a targeted benefit of about R$1.1 billion a year at full run rate. Another slip would dent credibility, and weaker iron ore prices could erode that math even if the ramp goes on schedule. Early contributions from the Pindamonhangaba recycling center and higher self-generated energy after the Dona Francisca stake increase would support the cost-reduction story.
Cash flow deserves attention too. Second-quarter free cash flow was just R$237 million, held back by working capital tied to price increases. A seasonal rebound would back management's argument that the weakness was temporary, especially with capex tracking below plan and leverage at a modest 0.69 times.
The market has not bought the improving narrative. Shares are down 2.1% since the last report, trailing the S&P 500 by about 2.5 points, and sentiment has swung from 41% bullish to 23.5% bearish. Still, at $5.02 the stock trades well above its 200-day average of $4.41 and sits in the upper half of its post-earnings range of $4.18 to $5.48. The central question is simple: did the August price increases flow through North American margins strongly enough to look past Midlothian? If they did, the skeptics may be underestimating Gerdau. If they did not, last quarter's confidence will look premature.