2013 ANNUAL REPORT THE STRENGTH OF TRANSFORMATION

Transcription

1 2013 ANNUAL REPORT THE STRENGTH OF TRANSFORMATION

2 Gerdau THE STRENGTH OF TRANSFORMATION A strength that creates new paths is what drives Gerdau. It is manifested in its ability to overcome challenges, transform and expand business, and recycle millions of tons of scrap to produce quality steel. This strength has accompanied Gerdau since its inception in 1901 with the founding of a small nail factory. Today, Gerdau has industrial operations in 14 countries in the Americas, Europe, and Asia, with a total annual capacity of more than 25 millions metric tons, and is a leading producer of long steel in the Americas and one of the largest suppliers of special steel in the world. Recently, the Company also entered two new markets in Brazil with its own production of flat steel at its mill in Ouro Branco (state of Minas Gerais, Brazil) and the expansion of its iron ore mining activities. It is with this same strength that Gerdau continuously develops its relationship of respect, transparency, and mutual gains with customers, suppliers, communities, shareholders, and with its more than 45,000 employees worldwide. It also helps make people s dreams become a reality since its products are part of building homes and major infrastructure projects such as schools, hospitals, bridges, dams, and roads besides being present in cars, trucks, wind towers, among others. It also contributes to the development of communities through the support of more than 900 social projects in the world. Gerdau believes that it is this strength of transformation that makes it possible for it to be a better company today and in the future. 1 Gerdau s steel has the strength to transform. To decrease distances is a way to connect people and create more development. Gerdau s steel is transformed to create new paths. We recycle millions of tons of scrap steel to produce quality steel. Here are some applications of our products Railing in Bars: Round Bars Flat Bars Bridge Slab: Welded mesh Truss Frames Fabricated Rebars 3. Girders and Crossbeams: Structural Shapes 4. Truss Beams: Structural Shapes Angle Bars 5. Beams: Made of Flat Steel 6. Foundation: Fabricated Rebars

3 GERDAU 2013 ANNUAL REPORT 1 KEY INDICATORS* CONSOLIDATED FINANCIAL PERFORMANCE R$ million ENVIRONMENTAL MANAGEMENT Reuse of byproducts (% of total generated) ,000 40,000 30,000 39,863 37,982 Investments (R$ million) SOCIAL RESPONSIBILITY Investments (R$ million) ,000 10,000 4,784 4,176 1,694 1,496 Employee Volunteerism (% of workforce) PEOPLE Favorability index (internal environment) 75% 76% Net Revenue EBITDA * Net Profit * Represents earnings before interest, taxes, depreciation and amortization, also known as cash generation from operations. Accident frequency rate* Investments in training (R$ million) * Lost-time accident frequency rates per million hours worked, including employees and service providers. The data also includes restricted work and change of function (OSHA recordable treated as LTA accidents). CAPITAL MARKET Metalúrgica Gerdau S.A. FINANCIAL MARGINS Gross margin 12.9% 12.5% Net margin 4.2% 3.9% EBITDA margin 12.0% 11.0% Dividends (R$ per share) Dividend yield (%)* Gerdau S.A. Dividends (R$ per share) Dividend yield (%)* Production and shipments Steel production (thousand metric tons) 18,009 18,920 * Ratio between the dividend paid per share and the share price on the last day of the year. Shipments (thousand metric tons) 18,519 18,594 * The dollar exchange rate on December 31, 2013 was R$

4 2 GERDAU 2013 ANNUAL REPORT CANADA UNITED STATES MEXICO DOMINICAN REPUBLIC GUATEMALA HONDURAS VENEZUELA COLOMBIA PERU BOLIVIA BRAZIL CHILE URUGUAY ARGENTINA MISSION VALUES To create value for our customers, shareholders, employees, and communities by operating as a sustainable steel business. Be the CUSTOMER s choice SAFETY above all Respected, engaged and fulfilled EMPLOYEES Pursuing EXCELLENCE with SIMPLICITY VISION Focus on RESULTS To be a global organization and a benchmark in any business we conduct. Economic, social and environmental SUSTAINABILITY INTEGRITY with all stakeholders

5 GERDAU 2013 ANNUAL REPORT SPAIN INDIA GERDAU AROUND THE WORLD Steel mills Downstream operations Iron ore units Scrap collection and processing facilities * Power plants Retail facilities Private port terminals Gerdau Headquarters Countries where Gerdau has jointly controlled entities: Guatemala, Mexico, and the Dominican Republic. * Scrap collection and processing facilities, solid pig iron production facilities, and coal units. 3

6 4 GERDAU 2013 ANNUAL REPORT TABLE OF CONTENTS 05 Message from the Chairman of the Board 26 Customers 06 Message from the CEO 27 Suppliers 07 Corporate governance 28 Shareholders 11 Strategy and competitive advantages 29 Society 14 Business 30 Environment 14 Performance of operations 20 Finances 34 Timeline 40 Summarized financial statements 22 Relationships 44 Credits and contacts 22 Employees 2013 HIGHLIGHTS Gerdau started up its own production of flat steel in Brazil by opening a hot rolled coil mill at its plant in Ouro Branco (state of Minas Gerais, Brazil). expanding its annual installed capacity from 700,000 metric tons of rolled products to 1.2 million metric tons, which is a volume focused primarily to supply the automotive industry. A second iron ore processing unit is opened in Minas Gerais, increasing Gerdau s production capacity to 11.5 million metric tons per year. Gerdau continued its investments for modernization and expansion of its Monroe mill (Michigan), which will bring the annual installed capacity to 800,000 short tons. The construction of a new structural shapes mill in Mexico with an annual production capacity of 1 million metric tons of steel continues in full swing. In India, the rolling and first inspection line of bars comes into operation, improving the quality of products in special steel as part of a set of equipment being installed. A new special steel rolling mill started up its operation at the Pindamonhangaba mill (state of São Paulo, Brazil),

7 GERDAU 2013 ANNUAL REPORT 5 MESSAGE FROM THE CHAIRMAN OF THE BOARD I have confidence in Gerdau s strength and ability to respond to the challenges of a market that is constantly changing, creating the necessary conditions for improving the efficiency of our operations. Jorge Gerdau Johannpeter Chairman of the Gerdau Board of Directors Confidence in the ability to expand the efficiency of the operations Throughout 2013, the steel market showed improvements in different regions of the world, despite going through a time of lower profitability compared to historic levels. The global surplus of steel, the high cost of raw materials and a currency war continue to be the most important challenges for the industry. Despite this increasingly competitive environment, Gerdau has shown a good operational and financial performance. This is primarily due to the attitudes of our employees who continuously strive to turn these challenges into business opportunities. We work with a clear and consistent view of the paths the Company should follow in order to reach our long-term strategy of balancing profitability and growth with sustainability. The foundation for this is in Gerdau s corporate culture, which is one of our main competitive advantages in the global steel market. companies at a global level over the coming years, with the best ones coming out even stronger. I have confidence in Gerdau s strength and ability to respond to the challenges of a market that is constantly changing, creating the necessary conditions for improving the efficiency of our operations. Having more than a century of experience and the ability to manage our teams efficiently give us full assurance that Gerdau will continue building a successful path as it strives to generate outstanding returns from win-win relationships with customers, suppliers, shareholders, employees, and communities. To conclude, I would like to thank the Board of Directors, the Executive Committee, and all our employees for their continuous efforts to make Gerdau a better company. For 2014, the forecast is for improvement. Nevertheless, the challenging scenario that the sector will continue to face should promote a kind of natural selection among

8 6 GERDAU 2013 ANNUAL REPORT MESSAGE FROM THE CEO Though we are experiencing adversities from the global economic scenario, we continue to expand our operations in a significant way, especially in Brazil with the startup of production of flat steel and the expansion of our mining activities. André B. Gerdau Johannpeter Gerdau Chief Executive Officer Specialized management to increase profitability The year 2013 was marked by challenges and opportunities for Gerdau. Though we are experiencing adversities from the global economic scenario, we continue to expand our operations in a significant way, especially in Brazil with the startup of production of flat steel and the expansion of our mining activities. We also increased the global installed capacity of special steel, which are directed primarily to supply the automotive industry, with investments in Brazil and the United States, and we completed the first year of operations in India. Gerdau closed the year with a consolidated net revenue of R$ 39.9 billion, 5% higher than the previous year. Consolidated shipments remained stable at 18.5 million tons compared to 2012, while steel production was 18 million tons, a volume 4.8% lower due to efforts to reduce the Company s inventories, which resulted in the optimization of its working capital. The consolidated operating cash flow (EBITDA) grew 14.6% over the previous year, reaching R$ 4.8 billion, while the consolidated net profit reached R$ 1.7 billion with a 13.2% increase. Gerdau s increased performance in 2013 reflects our efforts to enhance the efficiency of our operations and the development of certain markets, even though they have been growing less than expected. This would not be possible without the dedication of our teams whose daily commitment makes Gerdau a unique company in the steel market. The results from these efforts can be observed, for example, by the almost R$ 1 billion reduction in the working capital for the year, excluding the exchange variation, which increased liquidity and improved the Company s indicators of indebtedness. We also carried out a full integration of long steel operations in Brazil, continued deploying a global IT platform, and we developed the EBITDA Breakdown project by our employees. In the area of safety in the workplace, we reinforced the concepts of safe behavior while striving for zero accidents at Gerdau. We also believe that Gerdau s development includes expanding the quality of life of the communities and the strengthening of the steel industry. That is why we participate in more than 900 social projects in 14 countries, counting on the volunteer work of over 11,000 employees for most of them. In the environmental area, in turn, we continued to make investments in technologies for the preservation of air, water, and soil, seeking to reduce the impact on the environment. For 2014, higher global economic activity is expected compared to 2013, which may cause a higher consumption of steel, despite the uncertainties. Because of that, Gerdau has maintained, in a selective manner, its investment plan for the execution of the Company s long-term strategy. I would like to thank our customers, suppliers, shareholders, and communities for the trust placed in our management. I would also like to give a special recognition to our more than 45,000 employees. We count on a partnership with all of you so that in 2014 we can reach even better results.

9 GERDAU 2013 ANNUAL REPORT 7 CORPORATE GOVERNANCE Transparency and respect for all stakeholders characterize Gerdau s operations Gerdau has a sound governance structure whose conduct follows the Company s century-old values. In daily corporate practices, this is reflected in the ability to build new business opportunities and at the same time generate outstanding profitability, following the principles of transparency and respect for all stakeholders customers, suppliers, shareholders, employees, and communities. Gerdau currently has three publicly traded companies: Gerdau S.A., Metalúrgica Gerdau S.A., and Empresa Siderúrgica Del Perú S.A.A. (Siderperu). Gerdau S.A. shares are traded on BM&FBOVESPA (state of São Paulo, Brazil), New York Stock Exchange (NYSE), and on the Madrid Stock Exchange (Latibex). Because it operates in the capital markets of the United States, Gerdau S.A. follows the requirements of the Sarbanes-Oxley Act (SOX), which establishes good corporate governance practices, as well as strict control over internal processes. The shares of Metalúrgica Gerdau S.A., however, are traded on BM&FBOVESPA (state of São Paulo, Brazil) and Siderperú on the Lima Stock Exchange. CORPORATE GOVERNANCE STRUCTURE The Board of Directors of Gerdau S.A. is responsible for defining the Company s long-term strategies and monitoring the execution of the policies it establishes. In addition to naming the members of the Gerdau Executive Committee (CEG), this body makes decisions on relevant issues pertaining to the business and its operations. The nine members, including external representatives, meet between eight and ten times a year and are advised by the Strategy, Corporate Governance, Compensation & Succession, and Risks Committees. The Board of Directors of Metalúrgica Gerdau S.A., in turn, consists of eleven members, nine of whom are also part of the Board of Directors of Gerdau S.A. The term of office for each of its members in both companies is one year with the possibility of re-election. The corporate governance structure also includes the audit committees of Gerdau S.A. and Metalúrgica Gerdau S.A., which monitor and supervise the actions of the management, in addition to expressing opinions and advising on the financial statements. In each of the companies, the Board of Directors and the Board of Auditors members are appointed at the Annual General Meeting (AGM). Gerdau s corporate management is carried out by the Board of Directors, whose Gerdau Executive Committee (CEG) is composed of a Chief Executive Officer and six Vice Presidents. The CEG coordinates and supervises the Business Divisions and Functional Processes in accordance with the policies established by the Board of Directors. To do so, it has the support of subcommittees set up according to criteria of expertise. RISK MANAGEMENT AND COMPLIANCE A structured risk management system monitors all the internal and external variables that may impact the business and Gerdau s operational efficiency. This system is being constantly updated, and in 2013, under the guidance of the Risk Committee, studies were carried out on the risks arising from expanding activities in the area of mining. Furthermore, Gerdau has a clear compliance system that makes sure the current legislation is followed in all the countries where the Company operates. This system also detects and deals with any possible deviation or inconformity that might occur in relation to the Company s internal policies. INDEPENDENT AUDIT An external audit of the financial statements of Gerdau s publicly traded companies are regularly conducted. In case of contracting any services not related to external auditing by the independent auditor, the Company bases this on the principles that preserve the auditor s independence.

10 8 GERDAU 2013 ANNUAL REPORT CORPORATE GOVERNANCE STRUCTURE Shareholders Meeting Board of Auditors Board of Directors Corporate Governance, Strategy, Compensation & Succession, and Risks Committees Support Committees Gerdau Officers and Executive Committee Functional Processes Business Operations Brazil Special Steel North America Latin America Read more about the Gerdau governance structure at:

11 GERDAU 2013 ANNUAL REPORT 9 GERDAU S.A. BOARD OF DIRECTORS Jorge Gerdau Johannpeter Chairman Germano H. Gerdau Johannpeter Vice Chairman Klaus Gerdau Johannpeter Vice Chairman Frederico C. Gerdau Johannpeter Vice Chairman André B. Gerdau Johannpeter Board Member Claudio Gerdau Johannpeter Board Member Affonso Celso Pastore Board Member Alfredo Huallem Board Member Oscar de Paula Bernardes Neto Board Member

12 10 GERDAU 2013 ANNUAL REPORT GERDAU EXECUTIVE COMMITTEE 1. André B. Gerdau Johannpeter Chief Executive Officer (CEO) and Chairman of the Gerdau Executive Committee (CEG) 2. André Pires de Oliveira Dias Executive Vice President, Finance, Auditing, and Investor Relations 3. Claudio Gerdau Johannpeter Executive Vice President 4. Expedito Luz Executive Vice President of Legal Affairs and Compliance 5. Francisco Deppermann Fortes Executive Vice President of Human Resources, Management, and Organizational Development 6. Manoel Vitor de Mendonça Filho Executive Vice President, Brazil Business Operation Ricardo Giuzeppe Mascheroni Executive Vice President of Latin America Business Operation

13 GERDAU 2013 ANNUAL REPORT 11 STRATEGY AND COMPETITIVE ADVANTAGES Gerdau reviews its long-term strategy and enhances its management methodologies to ensure sustainable development Gerdau guides its action based on the sustainable growth of its operations and the quest to create value for its shareholders while following the vision to be a global organization and a benchmark in any business it conducts. In 2013, the Company reviewed its long-term strategy in order to better define the path to follow in the coming years to increase its competitiveness in the world market, even in challenging business environments. During this process, Gerdau confirmed choices that were already part of its strategy such as maintaining a focus on the steel industry, which includes opportunities for new business in this market. One example of this is the start-up of its own production of flat steel in Brazil and the expansion of mining activities. Additionally, the Company reaffirmed its management practices, which seek to involve all employees in the challenges ahead and Gerdau s vision of the future and, this way, bring superior results to the business. GERDAU CORPORATE CULTURE With 113 years of history, Gerdau s corporate culture is the foundation for the Company s sustainable growth and one of its main competitive advantages in the global steel market. The strengthening of this culture, a focus of the human resources department, has contributed to the integration of new business fronts and has also collaborated so that Gerdau can respond to the challenges posed by the current global economic scenario in an agile and integrated way. During the year, 3,100 leaders from various countries participated in meetings that were organized to disseminate and engage all leaders through stories, values, and attitudes that continue transforming the Company. Presenters at these meetings included members of the Board of Directors and the Gerdau Executive Committee. More of these meetings are being planned for 2014 in Brazil, Canada, and India. In addition, the Company has developed a training module on Gerdau Corporate Culture in line with the Company s values, which were updated in During 2013, 900 executives participated in these trainings. These executives have the mission to serve as multiplication hubs for spreading the Company s values to their teams through personal examples, besides enhancing the employees autonomy and showing respect to people. Another key factor of Gerdau s corporate culture is its strong focus on social responsibility and encouraging the practice of volunteering. GERDAU STRATEGY Profitability and Growth with Sustainability Relevance in the markets Business competitiveness Player in all segments Geographic diversification Integrated Organization

14 12 GERDAU 2013 ANNUAL REPORT Business Divisions with the possibility of it being replicated in the following years to all operations. The program will also keep its focus on special steel, seeking to develop products and services with greater added value for its customers. The Company will also expand its Ideas program, which is currently focused on mills and factories, to other processes to include the Organization s managerial levels. Over 3,000 leaders participated in meetings about Gerdau s corporate culture with members of the Board of Directors. EBITDA BREAKDOWN Since 2012, Gerdau has developed the EBITDA Breakdown Project, which is an innovative initiative where each employee begins to get to know exactly what his or her role is and their contribution in reaching the Company s targets of cash from operations (EBITDA). Throughout 2013, the Company involved all its employees worldwide, both in industrial units as well as those in nonindustrial processes. They also began to work on identifying opportunities for gains in EBITDA and building action plans to support reaching the targets within each Business Division. In 2014, Gerdau plans to further consolidate this method of action, emphasizing the impact employees have on increasing profitability and ensuring the sustainability of its operations in the short, medium, and long term. INNOVATION PROGRAM In 2013, Gerdau made a significant move to strengthen its innovation efforts. The Company launched the Innovation Program globally to identify new and long lasting opportunities to create value for its business using innovative solutions for products and services, internal processes, management, or business models. During the year, for example, specific methodologies were developed to strengthen Gerdau s innovative capacity and technological expertise on four fronts: flat steel, special steel, information technology, and energy efficiency. In 2014, the program will develop a long-term planning process that will include identifying opportunities for innovation and differentiation in each of the Company s GERDAU BUSINESS SYSTEM (GBS) Gerdau has implemented the Gerdau Business System (GBS) for over 10 years now. It is a single management system that identifies, consolidates, and shares the Company s best practices throughout all its processes. Currently all of Gerdau s operations located in 14 countries are using the system in an integrated and aligned way, enabling the Company to reach higher levels of productivity and quality in everything it does. GERDAU TEMPLATE Gerdau is in the process of implementing a single, global information technology platform in order to better manage its operations around the world. Currently, units responsible for 48% of the Company s production volume are already working using this tool. The initiative will be expanded to other plants and reach 87% of the produced steel volume by Due to this, the Company will be able to extend the efficiency, safety, and agility when sharing internal information, as well as enhance its customer service in all the countries where it operates. OUR CAUSE PROJECT Gerdau works diligently to increase the efficiency of its operations, which has resulted in more than R$ 500 million worth of operating synergies in Brazil within a period less than two years. Through Our Cause Project, which began in 2012, a team of more than 1,000 employees worked together to consolidate the production management process for long steel, iron ore, and solid fuels, as well as their respective support areas in Brazil. The gains achieved by the end of 2013 account for more than half of the target set at the beginning of the project, which was R$ 1 billion by That is why the deadline for reaching the target was anticipated to the end of 2014, which should contribute to the Company s increased liquidity during the year.

15 GERDAU 2013 ANNUAL REPORT 13 PARTICIPATIVE PROGRAMS Gerdau encourages creativity and teamwork from its employees to build continuous improvement of its processes. Quality Improvement Story (QIS) Groups, for example, bring together three to seven people who use management tools to solve everyday problems in the processes. In 2013, 688 QIS groups participated in the initiative to find improvements, which generated gains of US$ 184 million for Gerdau. The Ideas program, where employees identify opportunities to improve the results in their areas, resulted in more than 107,000 suggestions that netted gains worth US$ 44 million. NUMBER OF IDEAS SUGGESTED BY EMPLOYEES 120, ,000 80,000 60,000 40,000 20, , , , SIX SIGMA PROGRAM In 2013, the 181 projects developed with the Six Sigma methodology generated US$ 179 million of the Company s financial return. The use of this management tool by especially trained professionals enables increased productivity and improvement of processes and products, leveraging results faster. MANAGEMENT FOCUSED ON THE OPERATOR To further stimulate the autonomy and development of its teams around the world, Gerdau continues deploying the Management Focused on the Operator (MFO) program. Through this initiative, employees help in managing their work cell and controlling its processes with safety, quality, costs, maintenance, and the environment. Already implemented in several of the Company s units in eight countries, the MFO was expanded in 2013 to other industrial plants in Brazil, the United States, and Venezuela. In 2014, it will be implemented in mills in Spain and Peru, as well as additional mills located in the United States. KNOWLEDGE MANAGEMENT One of the tools used most in Gerdau s everyday operations is the Communities of Practice, an internal virtual network where employees from all of the Company s units around the world share best practices and find solutions to problems by sharing experiences. In 2013, a total of 5,700 professionals from 14 countries participated in this initiative, which is part of the Knowledge Management program-a set of strategies developed to maximize the use of existing knowledge in Gerdau. Gerdau teams that achieved the most significant results are recognized annually at the global meetings for Quality Improvement Story (QIS) groups.

16 14 GERDAU 2013 ANNUAL REPORT Business Gerdau starts its own production of hot rolled coils at its mill in Ouro Branco (state of Minas Gerais, Brazil). PERFORMANCE OF OPERATIONS Gerdau improves management to expand operating results Throughout 2013, Gerdau s consolidated shipments remained stable compared to 2012, reaching 18.5 million metric tons. At the same time, steel production was 18 million metric tons, 4.8% lower. During the year, Gerdau invested R$ 2.6 billion in fixed assets (CAPEX), mainly for projects already underway. Shipments Per Business Division 18.5 million metric tons Latin America 15% Except Brazil Special Steel 15% Includes special steel operations in Brazil, Spain, the United States, and India Brazil 38% Except special steel mills North America 32% Includes long steel operations in the United States and Canada PERSPECTIVES: WORLD The estimates of the International Monetary Fund (IMF) for the global GDP point to a growth of 3.7% in Therefore, there is an expectation of increased global economic activity this year compared to 2013, which may be reflected in a higher consumption of steel. Given this scenario, the World Steel Association estimates a 3.3% growth in steel consumption in 2014, reaching a level of 1.52 billion metric tons. Despite the uncertainties in the global economic market, Gerdau has maintained its strategic investment plan for the execution of its long-term plan.

17 GERDAU 2013 ANNUAL REPORT 15 BRAZIL (excluding special steel mills) During the year, sales to the Brazilian market (excluding special steel mills) totaled 5.9 million tons, 10.6% over 2012, which included the sales of semi-finished products (slabs and billets) and rolled products. Exports from Brazil were 1.4 million tons and 29.4% lower because of lower demand in the international market and excess installed capacity of steel in the world. Added to this are the impacts of the Brazil cost and the exchange variation, which are factors that limit the competitiveness of Brazil s industry. The operating cash flow (EBITDA) in Brazil, however, was R$ 3.2 billion, up 34.8% year-over-year. will go into operation, which will expand the surface quality of the products. The second stage of the investment plan in flat steel is installing a plate mill in this same plant. Another highlight was the continuity of Gerdau s investments in the mining segment. Shipments of iron ore to the international market, for example, were expanded from 325,000 metric tons in 2012 to 1.2 million metric tons in In addition, the Company opened the second iron ore processing unit (UTM II) located in Miguel Burnier (state of Minas Gerais, Brazil), which made it possible to expand the Company s production capacity from 6.5 million to 11.5 million metric tons of iron ore. Gerdau operates in the Brazilian market with 11 mills that produce steel and rolled products, 3 downstream operations, 39 fabricated reinforcing steel facilities, 5 flat steel service centers, 9 scrap collection and processing units, and 4 iron ore units. It is one of the largest distributors of steel in the country with 90 branches located in several states, which ensures an efficient and fast supply to its customers. In order to constantly improve its management of costs and increase its efficiency, the Company consolidated the production management operations for long steel, iron ore, and solid fuels, as well as its respective areas of support in Brazil. During the year, Gerdau was also awarded the environmental permit to increase the rate of production from 1.5 million to 6 million tons at its Várzea do Lopes mine, therefore expanding the Company s iron ore mining capacity. In the coming years, investments in this segment include building a rail terminal to streamline the transportation of products to the port terminals in the southeastern region of the country, the implementation of a private road to facilitate the transportation of the raw ore mineral (ROM) from the Várzea do Lopes mine to Miguel Burnier, and a 9-kilometer long conveyor belt system to transport the processed iron ore to the Ouro Branco mill. As for the long steel segment, Gerdau continues to invest in expanding the Cosigua (state of Rio de Janeiro, Brazil) mill with the intent of expanding sales to industrial and civil construction sectors. To support this, a new rolling mill with an annual installed capacity of 600,000 metric tons, that could be expanded in a second phase, will be installed for wire rod and rolled rebar. Gerdau announced investments focused mainly on the expansion of its iron ore mining activities to the Government of the state of Minas Gerais. The search for greater profitability in the business also included the Company s start up of its own production of flat steel in the country. The rolling mill for hot rolled coils started operations in August with the annual capacity of 800,000 metric tons at the Ouro Branco (state of Minas Gerais, Brazil) mill. In 2014, a line of finishing hot rolled coils The Company is also building a new melt shop with an annual capacity of 650,000 metric tons of steel at the Riograndense mill located in Sapucaia do Sul (state of Rio Grande do Sul, Brazil). Those undertaking will replace the existing melt shop and will add 200,000 metric tons to the mill s annual capacity. The investment will also increase productivity, operational safety, product quality, and environmental protection, while reducing the mill s energy consumption.

18 16 GERDAU 2013 ANNUAL REPORT A second iron ore processing unit goes into operation, expanding the Company s production capacity. PERSPECTIVES: Brazil The expectation for 2014 is for continued growth in the Brazilian market, which should be reflected in steel consumption that is expected to reach 27.4 million metric tons, an increase of 3.2% over 2013 according to the Brazil Steel Institute. In relation to the construction industry, which is a major consumer of Gerdau steel, the forecast for the GDP is 2.4% in 2014 according to IBGE, driven by the continued growth of real wages, the supply of housing credit, the completion of infrastructure projects in the country, and initiatives related to the World Cup and the Olympics. Due to this, Gerdau continues to actively supply steel for important building projects in Brazil, such as airports, urban mobility projects, and projects related to energy. Considering the future growth potential of the Brazilian market, Gerdau continues to be fully prepared to meet the needs of its customers, with whom it has a close relationship, and to continuously improve the efficiency of its operations. NORTH AMERICA (includes long steel operations in the United States and Canada) In 2013, the U.S. economy continued its gradual recovery process. However, the steel market was mainly impacted by the growing share of imported products due to the appreciation of the U.S. dollar and the global oversupply of steel. During the year, Gerdau s sales in the United States and Canada (excluding special steel mills), totaled 6.1 million metric tons, 5.1% less compared to The EBITDA of the Business Division, on the other hand, was 37.6% lower compared to the previous year impacted by the lower dilution of fixed costs due to the lower utilization of our units installed capacity in the region. Due to the decrease in demand, the Company made the difficult decision to cease operations of its small unit in Joliet (Illinois) that had a rolling capacity of 70,000 metric tons per year. The Company also decided to temporarily suspend the melt shops activities of its Cambridge steel mill located in Canada, which can begin to operate again when the demand in the region improves. Given this scenario, Gerdau continued seeking to improve its management processes in order to operate the business in an increasingly efficient manner. To

19 GERDAU 2013 ANNUAL REPORT 17 do this, the Company implemented a new management software system in all of its units in the region to optimize its internal processes and further qualify its customer service. In 2013, Gerdau also started up the operations of a new reheating furnace at its mill in Calvert City (Kentucky). The investments made in the implementation of a new continuous casting plant in St. Paul (Minnesota) continue strong. It will replace the existing one with an annual production capacity of 550,000 metric tons. The equipment is designed to produce special bar quality (SBQ) steel and will begin operations in PERSPECTIVES: NORTH AMERICA In 2014, the U.S. economy is expected to show growth, which should increase the consumption of steel. The non-residential construction activity, for example, has already shown some signs of recovery. According to the U.S. Department of Commerce, investments in this segment increased 4.6% in The Purchasing Managers Index (PMI) of the Institute for Supply Management, the main indicator of U.S. industrial production, achieved the best result of the year in December with 56.5 points, anything above 50 represents growth. Despite the country s harsh winter, the indicator reached 51.3 points in January 2014, thus remaining on a positive trend. The outlook for the U.S. economy in 2014 is optimistic. The IMF estimates that the United States should have a 2.8% growth in its GDP. According to the World Steel Association, the steel consumption in the country should increase 3% during the year, reaching 99.8 million metric tons, mainly influenced by the automotive, energy, heavy equipment, and non-residential construction sectors. LATIN AMERICA (excluding Brazil) In 2013, Gerdau s sales in Latin America (excluding Brazil) rose 3.7%, reaching 2.8 million metric tons, which reflects the region s economic growth. However, it is important to point out that the global surplus of steel, plus the impact of the exchange rate variation of the dollar against local currencies, caused a high level of imports in the region. Due to this scenario, market developments and the Company s initiatives to improve its management processes contributed to greater efficiency and increased the Company s margins. The operating cash flow (EBITDA) of this Business Division, for example, grew 137.8% compared to 2012, reaching R$ 428 million due to higher sales volumes and consequently higher dilution of fixed costs along with cost optimization efforts. Despite this scenario, Gerdau continued its investments in Latin America. In Mexico, the Company continues the construction of a new mill for producing structural shapes, with its joint venture Gerdau Corsa. Most of the equipment has already been delivered by the manufacturers and the construction is fully underway. The new unit should become fully operational in 2015 and will have an annual production capacity of 1 million metric tons of steel and 700,000 metric tons of rolled products. The venture will cater primarily to the metal construction and industrial sectors in the country. In Guatemala, Gerdau has joint ownership in Corporación Centro Americana del Acero, where a new rolling mill for rebars and light commercial profiles was opened in The annual capacity of this operation is 200,000 metric tons. Investments are also being made in the technological upgrading of its mills in Tocancipá and Tuta, both in Colombia. PERSPECTIVES: LATIN AMERICA According to the IMF, most Latin American countries where Gerdau has operations should show growth in their GDP in 2014, especially Peru (5.7%), Chile (4.5%), and Colombia (4.2%). Steel consumption in this region (excluding Brazil) should grow 5.9% in 2014, reaching 44.9 million metric tons according to data from the World Steel Association. The Company continues to heavily monitor the high level of steel imports into the region.

20 18 GERDAU 2013 ANNUAL REPORT Gerdau continues investing in a new structural shapes mill in Mexico. SPECIAL STEEL (includes special steel operations in Brazil, the United States, Spain, and India) Gerdau s Special Steel Business Division includes 13 mill located in Brazil, Spain, the United States, and India. This geographic diversification allows the Company to meet the specific needs of its global clients and ranks it as the world s largest supplier of special steel for the automotive industry. In addition, Gerdau provides special steel to the oil & gas, wind energy, agricultural machinery, and mining industries, among others. In 2013, the sales of special steel grew by 7.5%, totaling 2.9 million metric tons. This good performance was due to improvements in the heavy vehicle market in Brazil and the sales made by the plant in India in its first year of operation. EBITDA, however, was R$ 909 million, 15.3% lower compared to 2012, primarily due to higher costs related to the learning curve of the start of operations in India and Europe s economic situation. In Brazil, the heavy vehicles market recorded a significant recovery after a weak performance in 2012 with the Euro 5 legislation coming into force. Despite the drop in sales of light vehicles, production progressed substantially well with the substitution of imports and the expansion of exports. The production of light and heavy vehicles in 2013 increased 10% compared to 2012, reaching 3.7 million units. Gerdau continued to invest heavily in its special steel units in Brazil. In its Pindamonhangaba (state of São Paulo, Brazil) mill, for example, a new rolling mill began operating in December 2013 with an annual capacity of 500,000 metric tons. Thus, the plant s installed capacity, which distributes 80% of its products to the automotive sector, rose from 700,000 to 1.2 million metric tons per year. The mill in Mogi das Cruzes (state of São Paulo, Brazil) will also expand its rolling capacity from 216,000 to 276,000 metric tons per year beginning in In North America, demand for special steel increased with the recovery of light vehicle sales, which slightly offset the decline in the production of heavy trucks and lower activity in oil & gas exploration. During the year there was a 4.5% increase in total production of vehicles, reaching 15.5 million units. Due to this, Gerdau decided to continue various investments, such as the modernization and expansion of the Monroe mill (Michigan), whose annual production capacity will reach 800,000 metric tons upon completion.

21 GERDAU 2013 ANNUAL REPORT 19 Meanwhile, the main markets for special steel in Europe showed a recovery in the fourth quarter of The registration of automobiles, for example, increased by 6% compared to the same period in However, 2013 was still a difficult year for the light and heavy vehicle markets, resulting in a 2% decline. Despite the recovery that began in the fourth quarter of 2013 in India, the main markets for special steel (light and heavy vehicles) decreased over the year due to the slower pace of economic growth. This slower rate of growth was caused by rising interest rates and a drop in the mining activity, which primarily affected the segment of heavy vehicles. Despite this, Gerdau began operating its new bar inspection line in 2013, which has an annual capacity of 300,000 metric tons. The installation of a second line of bar inspection is fully underway in order to ensure superior quality in the products. Also in progress is the implementation of a coke mill with an annual capacity of 200,000 metric tons that is integrated into a 15 MW power generation mill. PERSPECTIVES: SPECIAL STEEL The outlook in 2014 is positive for most of the regions where Gerdau operates. In Brazil, Anfavea s projections indicate that the production of light and heavy vehicles should reach 3.8 million units, which is 1.4% higher than In the United States, the recovery of the heavy truck market and the continued growth in light vehicle sales should reflect positively on the portfolio of orders at Gerdau s special steel units in In Europe, the recovery should continue occurring gradually with the improvement of the economy and the need for replenishing inventory levels, which may increase the sales of special steel. In India, the recovery that started in the last quarter of the year should continue into 2014 supported also by the prospect of higher volume of public spending. A new special steel rolling mill with an annual capacity of 500,000 metric tons is opened in Pindamonhangaba (state of São Paulo, Brazil).

22 20 GERDAU 2013 ANNUAL REPORT FINANCES Gerdau s net revenue grows 5% in 2013 NET REVENUE Gerdau s consolidated net revenue reached R$ 39.9 billion, 5% increase over OPERATING EXPENSES In consolidated terms, cost of sales were R$ 34.7 billion, 4.5% above However, selling, general, and administrative expenses, grew 5.7%, reaching R$ 2.6 billion. In 2013, operating expenses represented 6.6% of the consolidated net revenue compared to 6.5% in EBITDA The consolidated operating cash flow (EBITDA) grew 14.6% over the previous year, reaching R$ 4.8 billion, influenced mainly by the increased participation of Brazil. The EBITDA margin also improved, reaching 12% against 11% the previous year. SOURCE OF NET REVENUE R$ 39,9 bilhões Special Steel 19% Includes special steel operations in Brazil, Spain, the United States, and India Latin America 13% Except Brazil Brazil 37% Except special steel mills North America 31% Includes long steel operations in the United States and Canada Note: The above information does not include data from affiliated companies or jointly-owned subsidiaries. CONSOLIDATED STATEMENT OF INCOME - SUMMARIZED* Gerdau S.A. and subsidiaries (R$ millions) % 2013/2012 Net sales revenue 39,863 37, % Cost of sales (34,728) (33,234) 4.5% Gross income 5,135 4, % Operating expenses (2,381) (2,400) -0.8% Income before financial income and taxes 2,754 2, % Net financial income (1,301) (789) 64.9% Income before taxes 1,453 1, % Income and social security taxes % Net income for the year 1,694 1, % * Years ended on December 31, 2013 and COMPOSITION OF CONSOLIDATED EBITDA* (R$ MILLION) Net Income 1,694 1,496 Net financial income 1, Provision for income tax and social contribution (241) 63 Depreciation and amortization 2,030 1,828 EBITDA 4,784 4,176 EBITDA Margin 12.0% 11.0% *Includes the results of affiliated companies and jointly owned subsidiaries according to the equity method.

23 GERDAU 2013 ANNUAL REPORT 21 NET INCOME Gerdau s net income in 2013 was R$ 1.7 billion, 13.2% higher compared to 2012 due to improved operating performance. Value Added Breakdown In 2013, Gerdau companies generated in consolidated terms R$ 11.2 billion in value added products, 12.7% higher than in This good performance is a result of revenues from products and services net of discounts, which reached R$ 42.1 billion, net of costs of R$ 30.9 billion related to raw materials and consumer goods, outsourced services, depreciation and amortization, equity in earnings, and financial income, among other items. Despite the devaluation of the Real by 14.6% against the U.S. Dollar between 2012 and 2013, the exposure of the gross debt in a foreign currency showed a slight decrease, going from 80.3% in 2012 to 79.5% in This lower exposure is a result of the Company s financial management initiatives to minimize the foreign exchange risk in a period of the Brazilian Real s volatility. The increase in cash (cash, cash equivalents, and investments), which was R$ 2.5 billion in 2012 and reached R$ 4.2 billion in 2013, occurred due to the reduction of working capital in the period and the higher generation of cash from operations. In 2013, 49.3% of the cash was held by the Gerdau companies abroad, mainly in U.S. Dollars. VALUE ADDED BREAKDOWN R$ 11.2 billion Taxes and social contributions 24% Interest on financing 14% Reinvestments of profits 10% Salaries, benefits, profit sharing, and training 47% Dividends and interest on shareholder s equity 5% The 1.9% increase in net debt is a result of the increase in gross debt, partially offset by the Company s increase of cash in the period. Furthermore, the average nominal cost of the gross debt (principal) was 6.5%, and 8.6% was the amount denominated in Reais, 5.9% plus exchange rate variation on the total amount in US Dollars taken from Brazil, 6.1% on the amount taken by the subsidiaries abroad. On December 31, 2013, the average payment maturity of gross debt was 5.3 years. The ratio between net debt and EBITDA showed an improvement in the year, reaching 2.5 times in 2013 compared to 2.8 times in 2012, a result from the Company s efforts to reduce working capital and improve the generation of cash from its businesses. FINANCIAL LIABILITIES On December 31, 2013, the gross debt (principal) of R$ 16.3 billion was comprised of 8.9% short term and 91.1% long term. The increase in the gross debt in relation to the previous period was primarily due to the effect of the exchange rate on the loans denominated in different currencies. INDEBTEDNESS (R$ MILLION) December 31, 2013 December 31, 2012 Current 1,838 2,583 Non-current 14,869 12,086 Gross debt 16,707 14,669 Interest on debt (391) (309) Cash, cash equivalents, and financial investments 4,222 2,497 Net debt 12,094 11,863

24 22 GERDAU 2013 ANNUAL REPORT Relationships Gerdau continually invests in training, new technologies, and equipment to ensure safety in the workplace. EMPLOYEES Investments in training contribute to reaching the Company s challenging goals Gerdau encourages its more than 45,000 professionals to surpass their own goals and transform their expertise into superior results for the business. To achieve this, the Company believes it is essential to continuously develop its employees at all levels within the Organization. In 2013, each employee dedicated an average of 48 hours to training, resulting in a total investment of R$ 34.3 million. During the year, Gerdau restructured its internal education and training initiatives for employees to expand their skill set and to encourage innovation that will promote a performance improvement for the business. Today, Gerdau s Corporate Education is organized into four main areas of training and development: basic training, technical training of operations, training in support processes, and leadership training. Within this new structure, and with a focus on Technical Training of Operations, the Technical School project was developed to reorganize the company s technical development initiatives and accelerate the dissemination of knowledge, especially among the operators and facilitators in the melt shop, rolling mill, quality, procurement and recycling departments. This is why more than 250 employees from nine countries where Gerdau operates participated in developing 150 new training courses in 2013, each of which are available in three languages (Portuguese, Spanish, and English). To broaden access to this and other training programs to its employees, Gerdau developed a Corporate Education portal. The portal was made available to more than 20,000 employees in Argentina, Canada, Chile, Colombia, the United States, Mexico, and Uruguay. In 2014, it will be available to another 23,000 employees in Brazil and Peru.

25 GERDAU 2013 ANNUAL REPORT 23 To accomplish the task of training global leaders, Gerdau has created the Gerdau Business Program (GBP), which is a customized two-year MBA that meets the needs of the Company. The program is conducted in partnership with the Institute of Education and Research (Insper) from São Paulo and also involves world-renowned universities, such as Insead in France and Darden in the United States, which increases the international exposure of the participants. The third edition of the GBP was completed in August 2013 and had participation from 32 executives in Brazil, Chile, Mexico, Peru, and the Dominican Republic. INVESTMENTS IN OCCUPATIONAL SAFETY AND HEALTH R$ million During the year, Gerdau also continued its Accelerated 20 Training of Engineers program, which is an initiative aimed to accelerate and strengthen the technical capacity of its participants. With the participation of 19 engineers, the program guided the development of professionals in the implementation and management of investments in the Company s capital goods (CAPEX). The program included 484 hours of classroom training, technical visits to areas, and the study of investments, along with the individual follow-up of mentors and of internal coaches. TRAINING AND DEVELOPMENT Investments (R$ million) Number of training hours per employee HEALTH & SAFETY All of Gerdau s operations in the world follow the Safety Management System, which is a strict set of practices that involve continuous investments in new technologies, equipment, and global management systems. In 2013, this area received R$ million, a 10% increase from the previous year. To further enhance safety in the workplace, Gerdau pursues continuous improvement of the attitudes and behaviors of its employees in relation to safety. Since 2012, the company has been training its leaders through the Handbook on Behavioral Management in Occupational Safety, which is a material that has been customized and aligned with best practices worldwide. Implementation of this training earned the Company the 2013 Safety and Health Excellence For the third year in a row, Gerdau is recognized for its initiatives in safety.