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.

26 24 GERDAU 2013 ANNUAL REPORT Recognition award from the World Steel Association, which honors successful programs implemented in the area of occupational health and safety. During the year, Gerdau also updated and expanded the mapping of critical operational risks of its production processes with a focus mainly on its mining activities. Specific guidelines were established toward this, accompanied with a training for employees and third-party service providers at the mines of Várzea do Lopes and Miguel Burnier, both located in the state of Minas Gerais in Brazil. As a result of these actions, the accident frequency rate per million hours worked (international index that measures the occurrence of accidents in the workplace) remained 1.10, which is lower than the world average for the steel industry, whose latest figure released by the World Steel Association is GLOBAL INTERNAL RECRUITMENT To meet the career development aspirations of its employees and to strengthen the engagement and retention of internal professionals, Gerdau created the Global Internal Recruitment program. In 2013, more than 500 positions were filled with employees through the internal disclosure of opportunities, including international openings. EMPLOYEE COMMUNICATIONS Gerdau is constantly seeking to improve its internal communication practices. Therefore, in 2013 the Company built a global intranet that makes it fast and easy to access global and local content from a single platform. The project, which was developed over one year by a team of 36 employees from all Business Divisions in the Company, was launched globally in early The initiative incorporated external benchmarks and already existing intranets used by several of Gerdau s operations. A global intranet enables fast and easy access to global and local content using a single interface. Trainees Program in North America and several countries in Latin America, including Brazil. For over two years, the trainees receive on-the-job training to learn the industrial and commercial processes. As part of the program, Gerdau trainees also participate in an individual mentoring program to develop a project about a strategic theme related to their work process or area of expertise. According to a survey conducted in 2013 to measure the degree of satisfaction of managers and participants, the favorability index to the program is quite high. In 2014, 127 new trainees will join the Company. MANAGEMENT OF HIGH POTENTIALS AND SUCCESSION One of the Company s challenges is the succession planning for professionals who will take on positions of leadership following Gerdau s corporate culture. It is with this objective that every year People Development Committees are held in the various Business Divisions to internally analyze and identify professionals with outstanding potential for career development in the Company. Gerdau held 240 of these committees in 2013, where division leaders analyzed and proposed career development actions for over 9,000 professionals. FUTURE GERDAU TRAINEES Gerdau continually invests in attracting and retaining new talent. The Company currently has 110 young professionals attending the Future Gerdau To support the development of these professionals, mentoring and external coaching programs were also conducted. The mentoring program is guided by a methodology developed internally and has mentors and

27 GERDAU 2013 ANNUAL REPORT 25 mentees meet regularly to enlarge the strategic vision of the business, disseminate the corporate culture, and develop individual skills. Currently, 22 executives participate in the program as mentees and are paired individually by 14 mentors with a high level of knowledge and experience, among them members of the Board of Directors and Executive Committee. The external coaching program seeks to develop skills typically pertaining to leadership, team management, communication, and influence, among others. Therefore, the external coaching consists of a structured, personalized, and individual process conducted by a professional from the market with training and specific experience and who has been previously accredited by the Company for the development of this program. INTERNAL CLIMATE In 2013, the favorability index of the Employee Opinion Survey, which is one of the main tools used for assessing the Company s internal environment, proved once again a high level of employee satisfaction. The indicator was 75% favorable, six percent higher than the world market average, which includes global companies with excellent financial performance and/or are ranked one of the companies most admired by Fortune magazine. In addition, Gerdau was featured in the category leadership in the magazine Guia Você S/A that assesses the best companies to work for in Brazil according to the perception of its professionals and evaluation of the management practices by people from the Company. Since 2008, the Company scored among the 150 organizations best positioned in the ranking. OUR CAUSE PROJECT Throughout 2013, Gerdau overcame important challenges in Brazil with the full integration of its long steel operations, the start-up of flat steel production, and the expansion of mining activities. To support the Company s growth, the Our Cause Project was created to seek greater integration and engagement from more than 24,000 employees who are involved in this project. To achieve the proposed results, the Company turned its efforts to strengthening its corporate culture among the leadership, as well as to work hard to define benchmarks and targets shared among the teams, and to streamline internal processes while encouraging the culture of innovation and meritocracy. By this, it is expected that the challenges imposed are well managed and absorbed by all, always seeking the achievement of its employees and their satisfaction in the workplace. COMPENSATION AND BENEFITS Gerdau s compensation systems are designed to enhance and encourage employees by recognizing their outstanding performance and contributions. In addition to a fixed salary, the professionals receive variable compensation based on reaching individual, team, unit, and operation goals. Gerdau also offers benefits in line with the needs of each region where it operates. In 2013, the Company changed the longterm compensation plan for its executives to make it even more efficient, besides contributing to the attraction and retention of talents. LABOR UNION AGREEMENTS BENEFITS (R$ million) Meals Transportation Health Retirement Plan* * Brazil, USA, Canada, and Chile. Gerdau s union negotiations are conducted with transparency and focus on the sustainability of the business as well as common interests. In 2013, the Company secured 15 mutually-satisfying agreements in Brazil, Canada, Chile, Colombia, Spain, the United States, and Mexico.

28 26 GERDAU 2013 ANNUAL REPORT CUSTOMERS New products and unique solutions increase the competitiveness of Gerdau s customers Gerdau works to add value to the business of its more than 130,000 customers worldwide by developing new products, services, and applications for steel. This is because the Company believes that its sustainability is directly related to the strengthening of the steel business supply chain and helping their customers stand out before their competitors. One example of this is the Company starting up its own production of flat steel in Brazil in 2013, which made it possible to expand the product mix and meet the specific demands of each segment of steel. Before starting its own production and sales of hot rolled coils, the Company took the time to understand the needs of this new market segment by visiting customers and conducting external benchmarks with suppliers and international producers of flat steel. Gerdau also invested heavily in the training of more than 500 professionals, including technicians, managers, salespeople, and sales reps. to the reduction of vehicle emissions. In Spain, for example, a steel grade with high mechanical and corrosion resistance was designed to be used in diesel engine pistons, which experience high temperatures and pressure in the combustion chamber. Another way Gerdau contributes to increasing the competitiveness of its customers is by conducting courses and seminars that provide a deeper technical knowledge of the manufacturing process of special steel and their applications. Through the program, The World of Special Steel, for example, Gerdau holds lectures and technical visits at their mills in Brazil. Throughout the year, this initiative involved the participation of 11 companies and benefited more than 150 customers. Similarly, in Mexico, Gerdau sought to broaden the knowledge of its clients about methods for applying steel structures in construction projects. The focus of the initiative was to expand the market for selling structural shapes with the start-up of operations at a new Gerdau mill in the country (read more on this subject on p. 17). Some of the highlights of the actions taken are the 50 conferences organized for about 3,000 people, including engineers, students, and industry professionals, totaling 5,000 hours of activities. In the special steel sector, the focus is on innovation. In 2013, about 10% of the volume sold by Gerdau s special steel operations in the world corresponded to products created in the last three years by the Company s research and development centers, especially projects that contribute Gerdau provides opportunities for its customers to expand their knowledge of the production of special steel and their applications.

29 GERDAU 2013 ANNUAL REPORT 27 SUPPLIERS Building long-term relationships with suppliers contributes to increasing Gerdau s competitiveness Gerdau believes that building long-term relationships with its suppliers is critical to enhancing its efficiency practices, which translates to manufacturing products with better quality, optimizing processes, and reducing costs. In all countries in which it operates, Gerdau seeks to establish partnerships with large and small suppliers in order to gain the knowledge and innovation of global players, while also contributing to the economic development of the regions where it operates by supporting smaller suppliers that generate local income and jobs. In 2013, for example, the Company was able to reduce the cost of refractories, which is an important raw material used in electric furnaces that is resistant to high temperatures, contributing to a better operating cash flow (EBITDA). Carried out in partnership with its suppliers, the initiative helped to reduce the consumption of this material in mills located in nine countries. In 2014, the project should be implemented in other Gerdau mills around the world. The Company has also adopted a new practice in its business relationship with some market segments: the reverse auction. This initiative uses an online trading platform where the buyer announces his purchasing needs and invites suppliers to submit their sales proposals for the product, which brings opportunities for a greater number of companies to participate in the bids. This way the Company is benefited because it can count on a wider variety of prices, advantages, and terms that best align to its needs, as well as the supplier since it can measure the market demand and improve the proposals presented. In 2013, one-hundred and nineteen auctions were held in Brazil, Chile, Colombia, the United States, and Mexico, mostly for purchasing indirect materials, which are not connected to the steelmaking process. In 2014, this action should be extended to the other countries where the Company operates. Gerdau gives preference to suppliers that share its values of respect for people and the environment. In addition to requiring strict compliance with the laws in each country where it operates, the Company also performs periodic audits to ensure the compliance of its suppliers to Gerdau s levels of excellence. DEVELOPMENT OF MICRO AND SMALL ENTERPRISES With more than 30,000 suppliers worldwide, Gerdau invests in initiatives to improve the management practices of micro and small enterprises, which represent 60% of its network of suppliers. The Supplier Development Program (SDP), for example, offers more than 500 hours of training over 18 months by means of courses and on-site consulting services. This initiative also includes the planning and execution of action plans, participating in trade shows and business trade meetings, as well as visiting other companies to learn practices. Throughout 2013, more than 383 suppliers were trained in Argentina, Brazil, Mexico, Peru, and Venezuela. As a result, Gerdau increased the volume of business for these companies by 20% over the previous year. Because steel scrap is one of its main raw materials, Gerdau is also dedicated to the development and improvement of micro and small scrap dealers as well as recycling cooperatives in different countries. In 2013, it promoted projects of technical and managerial training to 150 scrap suppliers in Brazil, Chile, Peru, Uruguay, and Venezuela. During these training programs, good practices were shared relating to management, quality, and occupational health and safety, as well as sustainable initiatives in social and environmental areas. Ethical values were also shared in all these projects and in the case of micro and small enterprises, there was a significant social focus.

30 28 GERDAU 2013 ANNUAL REPORT SHAREHOLDERS Speed and quality characterize Gerdau s relationship with the capital market With over 65 years of experience in capital markets, Gerdau follows principles of transparency, agility and quality when disclosing information, which contributes to building a close and long-term relationship with its more than 120,000 shareholders worldwide. Throughout 2013, the Company sought to improve and intensify its activities with the capital markets. During 17 non-deal road shows, one deal road show (fixed income), and 16 conferences, 873 meetings were held with shareholders, investors, and market analysts. Gerdau also participated in two meetings with the Association of Capital Market Analysts and Professionals (APIMEC) in Brazil, one in Rio de Janeiro and one in São Paulo. The meeting held in São Paulo was recognized by the organization as one of the best meetings in 2013 based on the evaluation of the professionals who participated in events of publicly-held companies. Another important initiative was the improvement of the IR website ( which received the award for Best Investor Relations Website - Large Cap from the IR Magazine Awards Brazil The award recognizes Brazilian companies that stand out for their excellence in transparency and communication with shareholders. During the year, Gerdau was also ranked in eight categories of the Institutional Investor Magazine, which every year selects the best IR professionals in Latin America through a survey with 450 analysts and fund managers. PRACTICES RECOGNIZED BY THE MARKET In recognition of its management capacity and diversification of Gerdau s business, the major risk assessment agencies maintained Gerdau s investment grade in Standard & Poor s and Fitch Ratings kept their rating level at BBB-, while Moody s confirmed the investment grade of Baa3. Moreover, Gerdau S.A. and Metalúrgica Gerdau S.A. were placed for the eighth year in a row in the portfolio of BM&FBOVESPA s Corporate Sustainability Index (ISE) that highlights institutions with a high level of sustainability and commitment in the areas of governance, social responsibility, and environment. The Gerdau companies are also listed on the main indicator of BM&FBOVESPA, the Ibovespa, in which Gerdau S.A. holds the 11 th position among companies with the highest liquidity. SHAREHOLDER S DIVIDENDS Gerdau s three publicly listed companies Gerdau S.A., Metalúrgica Gerdau S.A., and Empresa Siderúrgica del Perú S.A.A have dividends policies aligned with industry standards. The shareholders of Metalúrgica Gerdau S.A. and Gerdau S.A. receive dividends and/or interest on capital of at least 30% of the adjusted net profit for the year as determined under Brazilian accounting practices, with quarterly payments. Siderúrgica del Peru S.A.A., however, pays dividends up to 33% of its adjusted net profit. In 2013, the distribution of dividends and interest on capital for shareholders of Gerdau S.A. totaled R$ million, representing R$ 0.28 per share. The dividends for those owning Metalúrgica Gerdau S.A. shares reached R$ million, which represented R$ 0.37 per share.

31 GERDAU 2013 ANNUAL REPORT 29 SOCIETY Gerdau makes special efforts to improve the quality of life in its communities and to strengthen the steel business supply chain In the social projects that it supports, Gerdau believes that one of its major contributions is to share knowledge in management. That is why it encourages the volunteer work of its employees worldwide. Currently, 11,000 employees devote part of their time to make it so that the social organizations are able to reach their objectives and remain sustainable. This is achieved by the application of management methodologies in the development of social projects. on p. 27). Moreover, because steel scrap is one of its main raw materials, the Company also focused its efforts on the scrap recycling industry through a partnership with the Agency for International German Technical Cooperation (GIZ). The project started in 2010 and has also prepared customers and suppliers of materials and services, along with professionals working with steel and civil construction. During this period, 9,000 people and 378 companies were benefited in Brazil, Chile, Peru, and Uruguay. In 2013, Gerdau invested R$ 62.4 million in social projects. The definition of these investments is determined by the Gerdau Institute, which is responsible for the policies and guidelines of the Company s social responsibility efforts. The practices of social responsibility permeate the Company s entire 100-year history and began in the late 19th century, a legacy of the Gerdau Johannpeter family. In the 60s, the Company innovated when it created the Gerdau Foundation, offering benefits to employees and their families and continuing to support the community social projects. Today, the Gerdau Institute has developed approximately 900 social responsibility initiatives in more than 205 communities in 14 countries. At every plant location, the Company seeks to create value for the communities, the business supply chain, and society as a whole. Leaders and local teams organized into Gerdau Institute Committees guide the various initiatives supported by thousands of volunteer employees. Gerdau has also expanded its role in the development of micro and small entrepreneurs who are part of the steel business supply chain. In 2013, this initiative benefited more than 3,500 customers, suppliers, and professionals who use products in steel, contributing to improving the management of these businesses. During the year, for example, Gerdau consolidated one more cycle in the Supplier Development Program, which is aimed at improving the management of micro and small enterprises, which represent 60% of Gerdau s network of suppliers (read more on this subject In the state of Minas Gerais in Brazil, the most important region of Gerdau s growth, the Company became a sponsor of the Museum of Mining and Metal located in Belo Horizonte. With a monthly average of 5,000 visitors, the museum houses an important collection on mining and metallurgy and records the relationship between the history and culture of Minas Gerais with its natural wealth. Gerdau also expanded its partnership with the Flávio Gutierrez Cultural Institute, which contributes to the training of young people in areas of social risk through courses in conservation and restoration of historical heritage. In 2013, the program trained more than 120 students, 85% of whom have already been emerged into the job market. Gerdau also has partnerships with key institutions that promote transformative actions in society, such as Todos pela Educação, the Competitive Brazil Movement, and the World Childhood Foundation (WCF). A highlight during the year was the launch of the National Observatory of the National Plan of Education, sponsored by Todos pela Educação in Brazil. The online platform ( was designed based on about 300 performance indicators and makes it possible to monitor the evolution of the 20 targets set by the Federal Government to expand people s education, improve the quality of education, and thereby reduce social inequalities in the country.

32 30 GERDAU 2013 ANNUAL REPORT Environment Gerdau s Germinate Program, which has helped more than 250,000 people, is one of the Company s most important environmental education initiatives. Gerdau contributes to reducing the consumption of natural resources by recycling scrap and reusing byproducts Based on the development of sustainable practices at its industrial operations, Gerdau continually invests in measures to reduce the environmental impact of its processes. At its mills, the concept of recycling is present in different stages of the steel production cycle, thus reducing the consumption of natural resources. In 2013, about 75% of the steel produced by Gerdau was made from recycled steel scrap, which are materials deemed no longer useful by society. This means that approximately 15 million metric tons of scrap was removed from landfills and transformed into useful products. The use of scrap also helps to reduce energy consumption, as well as minimize the emission of carbon dioxide into the atmosphere. Gerdau has been developing projects in partnership with the public sector, mainly in Latin America, in order to further expand the collection of this raw material in the regions where it operates, and to promote the proper disposal of cars, trucks and buses that are no longer in use. Since the implementation of this project in 2010, more than 28,000 vehicles have already been recycled. The concept of recycling is also part of the management of byproducts resulting from the steelmaking process. In 2013, 82.5% of byproducts generated by Gerdau were reused internally and by different segments of the economy, a growth of 10% over the previous year. Currently, the byproducts represent an alternative of sustainable raw material for the civil construction, cement, and ceramics industries. These materials are used in railroad ballasts and foundries, as well as for manufacturing cement and ceramics, producing ferro-alloy, building roads, and paving streets, among other applications. Furthermore, they contribute to a cost savings of 30% to 50% over traditional materials, while reducing energy consumption and carbon emissions. The sale of these byproducts in 2013 generated revenue of R$ 255 million for Gerdau. Moreover, to improve

33 GERDAU 2013 ANNUAL REPORT 31 the processes that enable the recycling of these materials, the Company has invested in the expansion and processing of its wastes, which should further expand its eco-efficiency indexes over the coming years of these by products. REUSE OF BYPRODUCTS % of total generated materials to delivery of the final product, including the recycling of byproducts. Gerdau s care for the environment also includes ongoing investments in upgrading the efficiency of its units. For example, the Company allocated more than R$ 160 million for environmental efficiency upgrades in ENERGY Gerdau s contribution to the preservation of natural resources also includes the improvement and optimization of its industrial processes. The Company aims to reduce the total energy consumption for steel production in Brazil by 2.5% by the end of 2014, which should also generate savings of around R$ 40 million. 20 To reach this goal, the Company started developing a pilot 0 project in 2012 to increase energy savings on auxiliary equipment to the steel production process, which represents approximately 40% of the consumption of its operations. By the end of 2013, the energy efficiency project resulted in savings of R$ 36 million. The project is also being implemented in Gerdau s units in the United States and will be expanded to other countries, starting with its operations in Mexico and Colombia. Gerdau s byproducts are used on roads and pavements, among other applications. ENVIRONMENTAL MANAGEMENT Gerdau s production processes follow the guidelines set by the Environmental Management System (EMS), a set of strict practices aligned with the ISO standard. The EMS evaluates all of Gerdau s activities from an environmental perspective, everything from receiving raw AIR Gerdau s mills have modern baghouse gas systems that helps to protect the atmosphere. These systems capture solid particles generated during the production of steel and turns them into byproducts. Since these systems are essential for the mill s operation and require highly specialized knowledge to be used properly, Gerdau initiated a pilot project to train operators and its engineering and environmental teams on how to work with the dust removal systems on electric furnaces. In the first stage of the project, the Company will focus its efforts on the mills located in Brazil and other Latin American countries, then it will shift focus to the operations in North America and Spain. The goal is to train more than 1,000 employees in 12 countries by WATER In 2013, the index of water reused in Gerdau s mills was 97.5%, one of the best results in the steel industry worldwide. This percentage is a result of constant

34 32 GERDAU 2013 ANNUAL REPORT Gerdau has modern dust removal systems at its mills in order to make sure the atmosphere is protected. investments in closed systems of water treatment and recirculation. In Peru, for example, the water reuse index reached 100%, which caused this operation to receive the Corporate Eco-Efficiency Award 2013 in the category Eco- Efficiency in Water Management granted by the country s Ministry of Environment, the Scientific University of the South (UCSUR), and by the National Confederation of Private Business Institutions (CONFIEP). BIODIVERSITY Gerdau helps to improve air quality and maintain local biodiversity by preserving green belts around its industrial units. From a total of 17,000 hectares of its own property, the Company maintains 3,000 hectares of preserved forests made up of legal reserves or permanent preservation areas. Another 4,000 hectares are forests preserved voluntarily. In 2013, more than 33,100 seedlings were planted near its units around the world. WATER RECIRCULATION RATE % ENVIRONMENTAL EDUCATION Gerdau promotes awareness campaigns, lectures, and training on environmental preservation for employees, their families, and in the surrounding communities. In 2013, the activities involved 24,600 people in 51,800 hours of training. One of the Company s most important environmental education initiatives is the Gerdau Germinate Program, which has benefited more than 250,000 people since In addition to courses for educators, the project provides technical visits, lectures, workshops, and other social-environmental actions for students and teachers of public schools in Ouro Branco (state of Minas Gerais, Brazil) and region.

35 GERDAU 2013 ANNUAL REPORT 33 SUSTAINABLE PRODUCTS Gerdau s products contribute so that contractors can receive environmental certifications for their building projects because the products are 100% recyclable and meet one of the requirements included in the evaluations of these ventures. The Leadership in Energy and Environmental Design (LEED) seal, a benchmark in the world, was awarded to several green buildings that used Gerdau steel. These buildings include the New Central Library in San Diego (United States), the Eldorado Business Tower in São Paulo (Brazil), and the Transoceânica Business Park building in Santiago (Chile). HONORS Gerdau s eco-efficiency practices were recognized in In Brazil, the Company was one of the honorees for the Hugo Werneck award for Sustainability & Love to Nature granted by the Government of Minas Gerais in partnership with business entities in the state. The award recognizes the best social-environmental actions of individuals, companies, educational institutions, and the NGO s. Furthermore, Gerdau s Germinate Program ranked 5 th in the list of Benchmarking Brazil 2013, which highlights the managerial excellence of sustainable practices in Brazilian companies. In Chile, the Center for Research, Development, and Innovation of Structures and Materials honored Gerdau s pioneering spirit in Latin America in preparing the Environmental Product Declaration (EPD) for rebars and rolled shapes, which helped to make the life cycle of these products and their impacts on the environment even more transparent. Students and teachers of public schools from Ouro Branco (state of Minas Gerais, Brazil) and region participate in the Gerdau Germinate Program aimed at social-environmental education.

36 34 GERDAU 2013 ANNUAL REPORT TIMELINE Learn about the important events that mark Gerdau s history The business started by João Gerdau is divided into two independent companies: Hugo runs the nail factory and his brother Walter assumes responsibility for the Gerdau Furniture Factory, both in Porto Alegre (state of Rio Grande do Sul, Brazil). Later, in 1930, Hugo and Walter Gerdau take part in the creation of the State center for the Manufacturing industry, future Federation of industries of the State. The Nail Factory is expanded with the construction of a new plant in Passo Fundo (state of Rio Grande do Sul, Brazil), active until The Nail Factory today Metalúrgica Gerdau S.A. becomes a public company and begins trading on the Porto Alegre stock exchange João Gerdau and his son Hugo lay the foundation of Gerdau with the Pontas de Paris Nail Factory in Porto Alegre (state of Rio Grande do Sul, Brazil). Hugo Gerdau becomes a founding member of the Cia Geral de Indústrias (state of Rio Grande do Sul, Brazil), which later becomes Fogões Geral. He later assumes control of the company and in 1947 leaves the business. Curt Johannpeter, son-in-law of Hugo, takes control of the company and expands the business oversees.

37 GERDAU 2013 ANNUAL REPORT 35 Steel production begins with The Gerdau Foundation The São Judas Gerdau acquires the Riograndense known as Usina is created, with health, Tadeu Wire Factory Açonorte steel plant (state Farrapos (UFa) in Porto Alegre education, housing is established in of Pernambuco, Brazil), (state of Rio Grande do Sul, Brazil), and social assistance São Paulo (state whose facilities were being with forward-thinking conception of the programs, reinforcing of São Paulo, transferred from Tição (in mini-mill, a model based on the use the culture of social Brazil), marking the the city of Iguarassu) to the of scrap and regional sales, enabling responsibility within company s expansion industrial district of Curado more competitive operational costs. the Organization. into southeast Brazil. (in the city of Recife) The second Riograndense unit starts up operation in Sapucaia do Sul (state of Rio Grande do Sul, Brazil). The mill was also known as Rio dos Sinos mill. Germano, Klaus, and Jorge Gerdau Johannpeter take on leadership positions in the Company, and in 1971 Frederico Gerdau Johannpeter also becomes part of the board. Siderúrgica Riograndense publicly launches shares on the Rio de Janeiro and São Paulo stock exchanges.

38 36 GERDAU 2013 ANNUAL REPORT Gerdau s executive Gerdau wins its leadership begins to be first privatization of Laisa in Uruguay. in the hands of Jorge auction in Brazil Gerdau Johannpeter and acquires Cosigua begins to have (CEO), Germano, the Barão de Become an international Steel distribution activities start company with the acquisition with the first Comercial Gerdau in the state of São Paulo (Brazil). its shares traded on the Klaus, and Frederico Cocais steel mill Stock Exchanges in São Gerdau Johannpeter (state of Minas Paulo and Rio de Janeiro. (Vice Chairmen). Gerais, Brazil) Gerdau assumes control of the Guaíra plant, a steel production pioneer in the state of Paraná (Brazil) Construction of Cosigua mill Germano, Klaus, Operations begin at Cosigua shares (state of Rio de Janeiro, Brazil) Jorge, and Frederico the Cearense plant are publicly traded, begins in the Industrial District Gerdau Johannpeter in Maracanaú (state of Santa Cruz, which was become part of completed in record time (14 the Gerdau Board months), in partnership with of Directors. Thyssen ATH, and was funded by the World Bank through the International Financial Corporation (IFC), among other financing institutions. which gains of Ceará, Brazil). over 60,000 new Second Gerdau shareholders for plant in the state of Paraná (Brazil) begins operation, in Araucária. the Company.

39 GERDAU 2013 ANNUAL REPORT Gerdau acquires Usiba (state of Bahia, Brazil) at a privatization auction. Gerdau enters Gerdau acquires Siderúrgica Pains, currently Divinópolis mill. North America with the acquisition of Gerdau expands to the Courtice Steel, Gerdau acquires part of which later took Gerdau on the name of acquires MRM the capital stock of Sipar Cambridge in in the province rolling mill in Argentina. the province of of Manitoba Ontario (Canada). (Canada) In 2005, Gerdau takes a controlling stake The Company acquires AZA in Gerdau becomes a Chile and Aços Finos Piratini (state partner of Açominas with of Rio Grande do Sul, Brazil). a small ownership stake. The GG 50 rebar, a Gerdau flagship product in Brazil, is released. United States with the acquisition of Ameristeel. Gerdau S.A., a public company in Brazil, is listed on the New York Stock Exchange (NYSE)

40 38 GERDAU 2013 ANNUAL REPORT André B. Gerdau Johannpeter takes over as Chief Executive Officer (CEO) and Claudio Gerdau Johannpeter becomes Chief Operating Officer (COO). Gerdau acquires Chaparral Steel, one of the largest producers of structural shapes in the United States, thus marking the greatest acquisition in the history of the Company. Gerdau celebrates 100 years in business with an installed steel production capacity of 8.4 million metric tons per year. Gerdau takes a controlling stake in Gerdau Açominas (state of Minas Gerais, Brazil), its largest mill. Gerdau acquires the Cartersville plant (United States). Diaco (Colombia) and North Star Steel (United States) are acquired. The Company enters Mexico (Siderúrgica Tultitlán) and Venezuela (Siderúrgica Zuliana). The Organization also acquires a stake in the Dominican Republic (Industrias Nacionales - Inca) and in Aceros Corsa (Mexico); signs agreement for purchase of Macsteel (United States), and starts the Kalyani Gerdau joint venture (India). Gerdau Açominas (state of Minas Gerais, Brazil) increases its production capacity by 50% to 4.5 million metric tons per year The merger of Gerdau and Co-Steel, in North America, creates Gerdau Ameristeel. Gerdau expands to Europe, acquiring 40% of Sidenor. As a result of this acquisition, the Company takes an indirect stake in Aços Villares (Brazil). The Gerdau Institute, responsible for coordinating the Company s social responsibility policies and guidelines, is created, broadening the scope of the Gerdau Foundation, which was established in Gerdau acquires Siderperu (Peru), Sheffield Steel (United States), Callaway Building products (United States), and GSB (Spain). The Company announces its joint venture Pacific Coast Steel (United States). Gerdau São Paulo mill (state of São Paulo, Brazil) commences operations.

41 GERDAU 2013 ANNUAL REPORT 39 Gerdau enters Central America, with a 30% stake in Corporación Centroamericana del Acero, in Guatemala. The Company acquires a 50.9% stake in Cleary Holdings (Colombia), a metallurgical coke producer and holder of coking coal reserves. Gerdau takes over Macsteel operations (United States), a producer of special steel. Gerdau invests to expand its own production of iron ore. Gerdau acquires Tamco (United States), a leading producer of rebars on the west coast. Gerdau gains 100% ownership of Gerdau Ameristeel, with the acquisition of approximately 34% of the company s minority shares. As a result, the company is no longer traded on the Toronto and New York stock exchanges. An additional stake of 49.1% is acquired in Cleary Holdings (Colombia), granting Gerdau 100% ownership of the company s capital. Gerdau announces new investments in mining to increase its annual installed capacity to 18 million metric tons by Later, it celebrates the first shipment of iron ore, marking its entry into the international mining market. The Company completes 20 years of experience in the special steel sector. Production of special steel in India begins, in order to supply the region s market The Várzea do Lopes mine (state Gerdau celebrates 110 years in business, of Minas Gerais, Brazil) is started with an installed steel production capacity of with the production of iron ore. 25 million metric tons of steel per year. The Company also updates the design of its logo. The Company reveals it is entering into the flat steel sector in Brazil. The Mission, Vision, Values, and Code of Gerdau announces new Ethics are revised and unified at a global level, investments in India. strengthening Gerdau s corporate culture. Gerdau begins studies for commercial exploration of part of its iron ore resources located in Minas Gerais. The first phase for implementing the Gerdau Template is completed, which aims to deploy a single system of information technology using SAP in all countries where the Company operates. Gerdau announces investments to increase the installed capacity at its special steel mills in Brazil and the United States. Gerdau starts up its own production of hot rolled coils in Brazil by opening a hot rolled coil mill at its plant in Ouro Branco (state of Minas Gerais, Brazil). Gerdau s second iron ore processing unit starts to operate at Miguel Burnier (state of Minas Gerais, Brazil), making it possible to expand the total production capacity of iron ore from 6.5 million to 11.5 million metric tons per year. Gerdau completes its first year of operations in India and starts selling special steel in the country.

42 40 GERDAU 2013 ANNUAL REPORT SUMMARIZED FINANCIAL STATEMENTS METALÚRGICA GERDAU S.A. As of December 31, 2013 and 2012 CONSOLIDATED BALANCE SHEETS (In thousands of Brazilian reais) Current assets Cash and cash equivalents 2,099,638 1,437,724 Short-term investments 2,123,168 1,059,605 Trade accounts receivable 4,078,806 3,695,381 Inventories 8,499,691 9,021,542 Other current assets 1,407,037 1,213,403 18,208,340 16,427,655 Non-current assets Deferred income taxes 2,220,085 2,376,709 Other non-current assets 2,122,788 1,959,459 Investments in associates and jointly-controlled entities 1,590,031 1,425,605 Goodwill and other intangible assets 12,942,977 11,489,825 Property, plant and equipment 21,419,743 19,690,863 40,295,624 36,942,461 TOTAL ASSETS 58,503,964 53,370,116 Current liabilities Trade accounts payable 3,271,449 3,059,814 Short-term debt and debentures 1,901,679 3,888,232 Taxes payable 671, ,631 Payroll and related liabilities 655, ,634 Other current liabilities 805,250 1,088,177 7,305,656 9,129,488 Non-current liabilities Long-term debt and debentures 16,107,308 12,073,867 Deferred income taxes 1,187,251 1,844,731 Employee benefits 942,319 1,187,621 Other non-current liabilities 2,791,891 2,316,057 21,028,769 17,422,276 Shareholder's equity Attributable to the equity holders of parent 11,116,909 9,965,945 Non-controlling interests 19,052,630 16,852,407 30,169,539 26,818,352 Total liabilities and equity 58,503,964 53,370,116

43 GERDAU 2013 ANNUAL REPORT 41 CONSOLIDATED STATEMENTS OF INCOME (In thousands of Brazilian reais) Net sales 39,863,037 37,981,668 Cost of sales -34,728,460-33,234,102 Gross profit 5,134,577 4,747,566 Selling, general and administrative expenses -2,617,786-2,477,894 Other operating income (expenses), net 200,720 50,783 Income before financial income and taxes 2,717,511 2,320,455 Net financial income (expenses) -926, ,573 Exchange variations, net -544, ,128 Income before taxes 1,246,690 1,350,754 Income and social contribution taxes 273,790-18,077 Net income 1,520,480 1,332,677 Attributed to: Owners of the parent 505, ,731 Non-controlling interests 1,015, ,946 Earnings per share - common and preferred CONSOLIDATED STATEMENTS OS CASH FLOWS (In thousands of Brazilian reais) Net income 1,520,480 1,332,677 Adjustments to reconcile net income with net cash 3,426,066 3,184,771 Changes in assets and liabilities (net of interest and income tax) -990, ,475 Net cash provided by operating activities 3,955,631 4,272,973 Net cash used in investing activities -2,703,565-3,438,025 Net cash used in financing activities -661, ,152 Effect of exchange rate variation on cash and cash equivalents 71,675 90,908 Increase (decrease) in cash and cash equivalents 661,914-39,296 Cash and cash equivalents at beginning of year 1,437,724 1,477,020 Cash and cash equivalents at end of year 2,099,638 1,437,724

44 42 GERDAU 2013 ANNUAL REPORT SUMMARIZED FINANCIAL STATEMENTS GERDAU S.A. As of December 31, 2013 and 2012 CONSOLIDATED BALANCE SHEETS (In thousands of Brazilian reais) Current assets Cash and cash equivalents 2,099,224 1,437,235 Short-term investments 2,123,168 1,059,605 Trade accounts receivable 4,078,806 3,695,381 Inventories 8,499,691 9,021,542 Other current assets 1,376,333 1,196,634 18,177,222 16,410,397 Non-current assets Deferred income taxes 2,056,445 2,210,300 Other non-current assets 2,121,304 1,958,863 Investments in associates and jointly-controlled entities 1,590,031 1,425,605 Goodwill and other intangible assets 12,850,964 11,397,812 Property, plant and equipment 21,419,074 19,690,181 40,037,818 36,682,761 Total assets 58,215,040 53,093,158 Current liabilities Trade accounts payable 3,271,419 3,059,684 Short-term debt and debentures 1,838,367 2,582,353 Taxes payable 651, ,698 Payroll and related liabilities 655, ,634 Other current liabilities 819,675 1,093,813 7,236,630 7,823,182 Non-current liabilities Long-term debt and debentures 14,868,408 12,086,202 Deferred income taxes 1,187,252 1,795,963 Employee benefits 942,319 1,187,621 Other non-current liabilities 1,959,674 1,402,273 18,957,653 16,472,059 Shareholder's equity Attributable to the equity holders of parent 30,339,079 27,245,604 Non-controlling interests 1,681,678 1,552,313 32,020,757 28,797,917 Total liabilities and equity 58,215,040 53,093,158

45 GERDAU 2013 ANNUAL REPORT 43 CONSOLIDATED STATEMENTS OF INCOME (In thousands of Brazilian reais) Net sales 39,863,037 37,981,668 Cost of sales -34,728,460-33,234,102 Gross profit 5,134,577 4,747,566 Selling, general and administrative expenses -2,611,876-2,471,675 Other operating income (expenses), net 231,722 72,314 Income before financial income and taxes 2,754,423 2,348,205 Net financial income (expenses) -757, ,615 Exchange variations, net -544, ,128 Income before taxes 1,452,646 1,559,462 Income and social contribution taxes 241,056-63,222 Net income 1,693,702 1,496,240 Attributed to: Owners of the parent 1,583,731 1,425,633 Non-controlling interests 109,971 70,607 Earnings per share - common and preferred CONSOLIDATED STATEMENTS OS CASH FLOWS (In thousands of Brazilian reais) Net income 1,693,702 1,496,240 Adjustments to reconcile net income with net cash 3,288,367 3,048,240 Changes in assets and liabilities (net of interest and income tax) -883, ,433 Net cash provided by operating activities 4,098,412 4,344,047 Net cash used in investing activities -2,703,565-3,438,025 Net cash used in financing activities -804,533-1,036,294 Effect of exchange rate variation on cash and cash equivalents 71,675 90,908 Increase (decrease) in cash and cash equivalents 661,989-39,364 Cash and cash equivalents at beginning of year 1,437,235 1,476,599 Cash and cash equivalents at end of year 2,099,224 1,437,235

46 44 GERDAU 2013 ANNUAL REPORT INFORMATION AND CONTACTS CREDITS Gerdau Av. Farrapos, 1811 Porto Alegre RS Brazil CEP Phone: (+55 51) Shareholders Relations Itaú Corretora de Valores S.A. Phone: (Capital Cities) Phone: (Other Regions) Custodian Bank in Brazil Itaú Corretora de Valores S.A. Phone: (Capital Cities) Phone: (Other Regions) Phone: (Hearing and speech impaired) Depositary Bank Overseas JpMorgan Chase Bank N.A. Phone: (800) (from the United States) Phone: (651) (outside the United States) Investor and Analyst Service Av. Farrapos, 1811 Porto Alegre RS Brazil CEP Phone: (+55 51) Fax: (+55 51) Independent Auditor PriceWaterhouseCoopers Coordination Gerdau Corporate Communications and Public Affairs Editing and production supervision Gerdau Corporate Communications and Public Affairs and Odin Arte & Comunicação Graphic Design Néktar Design Printing Gráfica Comunicação Impressa Paper and ink Couché Matte 240g (cover) and Couché Matte 120g (content). Printed with soy-based inks. Circulation 300 copies in Portuguese and 150 in English. Photo credits and illustrations Ana Fuccia (page 13), Gerdau File (page 32), Duda Bussolin (page 31), Eduardo Colesi (page 22), Eduardo Rocha (pages 11, 14, 16, 30, and 33), Emmanuelle Bernard (page 9), Foguinho/ Save the image (page 26), Ivson Miranda (pages 6, 9, 10, and 19), Saúl Lugardo Pérez (page 17), WorldSteel (page 23), and Vinícius Vogel (page 12). We would like to thank all of those who contributed by supplying information and images for this publication. Gerdau believes in the importance of seeking continuous improvement in all its processes, products and services. Therefore, we would like to hear your opinion about the 2013 annual report. Evaluate its scope, relevance, quality of information, and graphic presentation. Your opinion is very important to us. To submit your feedback, visit and answer the opinion survey or send an to with suggestions for improvement. We thank you in advance for your participation.

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