2014 ANNUAL REPORT THE STRENGTH OF TRANSFORMATION

Transcription

1 2014 ANNUAL REPORT THE STRENGTH OF TRANSFORMATION

2 Gerdau THE STRENGTH OF TRANSFORMATION The strength to transform challenges into opportunities has been a part of Gerdau for more than 100 years. Since the beginning of its history as a small nail factory in Porto Alegre (state of Rio Grande do Sul), this power has driven the Company to continually be more agile and efficient at adapting its business to the new market dynamics. With an installed capacity exceeding 25 million metric tons of steel per year, Gerdau currently has industrial units in 14 countries in the Americas, Europe, and Asia. It is the leader in the segment of long steel in the Americas and one of the largest special steel suppliers in the world. In Brazil it also produces flat steel and iron ore. As the largest scrap recycler in Latin America, Gerdau transforms millions of metric tons of this raw material into new steel products each year. Its products touch the lives of millions of people because steel is an essential raw material for the construction of homes, roads, bridges, telephones and wind power towers, as well as cars, trucks, agricultural machinery and household appliances, among other applications. The strength of Gerdau s employees is an outstanding advantage to meet the challenges of the global steel market. Professionals from all countries where Gerdau has operations participated in a global meeting to launch the Project 2022 and to recognize the Quality Improvement Story (QIS) Groups that generated significant gains for the Company in 2014.

3 1 MAIN INDICATORS Consolidated Financial Performance ,546 39, ,126 4,784 4,784 4,828 1,488 1, Net sales EBITDA* Adjusted EBITDA** Net profit * Represents earnings before interest, taxes, depreciation and amortization, also known as generation of cash from operations. ** Represents earnings before interest, taxes, depreciation, and amortization excluding nonrecurring items. Financial margins Gross margin 12.1% 12.9% EBITDA Margin 12.0% 12.0% Adjusted EBITDA Margin 11.3% 12.0% Net margin 3.5% 4.2% Output and shipments Steel production (thousand metric tons) 18,028 18,009 Shipments (thousand metric tons) 17,869 18,519 Environmental management Reuse of by-products (% of total generated) Investments (R$ million) Reuse of water (% of total used) Social Responsibility Investments (R$ million) Volunteers (% of workforce) People Favorability index (work environment) 75% 75% Accident frequency rate* Investments in occupational health & safety (R$ million) Investments in training (R$ millions) *Lost-time accident (LTA) 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 LT accidents). Capital market Metalúrgica Gerdau S.A. Dividends (R$ per share) Dividend yield (%)* Gerdau S.A. Dividends (R$ per share) Dividend yield (%)* *Ratio between dividend paid per share and the share price on the last day of the year.

4 02 03 CANADA UNITED STATES SPAIN MEXICO DOMINICAN REPUBLIC GUATEMALA HONDURAS VENEZUELA COLOMBIA INDIA PERU BOLIVIA BRAZIL CHILE GERDAU AROUND THE WORLD URUGUAY ARGENTINA Steel mills Downstream operations Iron ore extraction areas Scrap collection and processing facilities* Power plants Retail facilities Private port terminals Gerdau Headquarters MISSION VALUES To create value for our customers, shareholders, employees, and communities by operating as a sustainable steel business. Be the CUSTOMER s choice companies or joint ventures: Guatemala, Mexico and the Dominican Republic. 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 Countries in which Gerdau has affiliated * Scrap collection and processing units, solid pig iron production facilities, and coal plants. INTEGRITY with all stakeholders

5 4 TABLE OF CONTENTS 05 MESSAGE FROM THE CHAIRMAN OF THE BOARD 34 CUSTOMERS 06 MESSAGE FROM THE CEO 36 SUPPLIERS 10 CORPORATE GOVERNANCE 37 SHAREHOLDERS 11 STRATEGY & COMPETITIVE ADVANTAGES 38 SOCIETY 14 BUSINESS 40 ENVIRONMENT 16 PERFORMANCE OF OPERATIONS 46 TIMELINE SUMMARIZED 25 FINANCE 50 FINANCIAL STATEMENTS 28 RELATIONSHIPS 52 CREDITS & CONTACTS 30 EMPLOYEES HIGHLIGHTS 2014 Gerdau began hot testing in the melt shop of its new structural shapes mill in Mexico, whose installed capacity will be 1 million metric tons per year. The rolling mill, with an annual production capacity of 700,000 metric tons, will start producing in Gerdau s operations in the flat steel market in Brazil was expanded with the start-up of a finishing line for hot rolled coils in the Ouro Branco mill (state of Minas Gerais). In conjunction, the installation of a rolling mill for heavy plates continues to move forward and is expected to start up operations in Gerdau merged its operations in the Dominican Republic with the Company Metaldom, creating Gerdau Metaldom, which is focused on serving markets in Central America and the Caribbean. In the segment of special steels, the Monroe mill (USA) expanded production capacity with the start-up of a new rolling mill and reheating furnace. egerdau, an e-commerce platform that provides customers with gains in efficiency, agility, accuracy, and productivity, as well as cost reduction and ease of doing business, was launched in North America. Gerdau implemented a new corporate structure and started extensive work to modernize its corporate culture to maintain the sustainability of its business.

6 5 We are convinced that the current challenges are transforming Gerdau into an increasingly competitive Company. Jorge Gerdau Johannpeter Chairman of Gerdau s Board of Directors MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS Commitment to create long-term value We faced the challenges of the global steel market during 2014 with agility and flexibility, and we were able to mitigate their impacts on our performance. We are passing through a cyclic time of increased volatility of steel companies results, mainly due to the excess of installed capacity, and hence, the pressure on operating margins. Furthermore, in some markets there is the practice of unfair competition using imported steel, impacting the generation of income and jobs in those places. In this difficult environment we count on Gerdau s centennial experience and we are convinced that the current challenges are transforming Gerdau into an increasingly competitive Company in the global steel industry. We have a consistent corporate governance structure, an outstanding management capacity, and a consolidated strategy. We also have our constant objective to create long-term value as a clear path to be followed in the coming years. We would also like to make very clear that the confidence we have in the future of Gerdau is the same that we place in steel as a factor of transforming society. We are convinced it will continue to be a durable and renewable resource with an essential role in developing countries, generating wealth and contributing to improving the quality of life for millions of people. And finally, we would like to thank the members of the Board of Directors, the Board of Auditors, the Executive Committee, and all employees for their commitment and dedication to face the difficulties imposed by the economic environment and by the increasing global competitiveness.

7 6 We managed to mitigate the effects of the difficult global steel scenario through Gerdau s operating performance, improving the results of our operations, and carrying out divestments of nonstrategic assets, while continuing to be selective in capital expenditure (CAPEX). André B. Gerdau Johannpeter Gerdau Chief Executive Officer MESSAGE FROM THE CEO Searching for greater competitiveness in a challenging environment The year 2014 was a period of many challenges for Gerdau and for the steel industry as a whole, especially due to the excess installed capacity worldwide and lower demand in the markets of Brazil and other Latin American countries. On the other hand, we managed to mitigate the effects of this scenario through the Company s operational performance, improving the results of our operations, and carrying out divestments of non-strategic assets, while continuing to be selective in capital expenditure (CAPEX). The consolidated net sales for the year increased 6.7%, reaching R$ 42.5 billion, mainly driven by the expansion of the revenue generated in the North American market and the positive foreign exchange impact on the conversion into the Brazilian currency of the revenue obtained from its operations abroad. The consolidated shipments in turn totaled 17.9 million metric tons of steel (-3.5%). During this period, steel production remained constant at 18 million metric tons. Operating cash flow (EBITDA) reached R$ 5.1 billion in 2014, a 7.1% expansion in relation to 2013, influenced positively by a gain in the sale of a stake in the North American Company Gallatin Steel, and impacted by the impairment of assets in Latin America. Excluding both effects, the adjusted EBITDA was R$ 4.8 billion, presenting a 0.9% increase compared to Net income on the other hand had a 12.2% reduction to R$ 1.5 billion. To meet our long-term strategy, we initiated various work fronts in 2014, seeking a modernization of Gerdau s corporate culture, the review of the organizational structure, and the development of high performance leadership. Furthermore, we focused our efforts on innovative initiatives in order to anticipate market trends, add

8 7 more value to products and services, and enhance the preference of our customers. We also continued social projects for the development of our business chain and the communities where our facilities are located. In addition, we invested in environmental protection technologies in order to reduce the impacts of our operations on the environment even more. The outlook for 2015 is of continued pressure on margins in the international market and the increase of steel imports in virtually every market where we operate. Because of this, we will continue to adjust our operations to market movements, continue the work of increasing operational efficiency and seek to ensure the sustainability of the business. Finally, I would like to stress that we are convinced the initiatives being taken will transform Gerdau into an even safer and an economically, socially, and environmentally sustainable Company, constantly seeking to have one of the best teams in the global steel industry. I would also like to thank the partnership and dedication of our employees, as well as our customers, shareholders, suppliers, and communities for their trust.

9 8 BOARD OF DIRECTORS OF GERDAU S.A. Jorge Gerdau Johannpeter Chairman Germano H. Gerdau Johannpeter Vice-President Klaus Gerdau Johannpeter Vice-President Frederico C. Gerdau Johannpeter Vice-President André B. Gerdau Johannpeter Board Member Claudio Gerdau Johannpeter Board Member Affonso Celso Pastore Board Member Oscar de Paula Bernardes Neto Board Member

10 9 GERDAU EXECUTIVE COMMITTEE 1. André B. Gerdau Johannpeter Chief Executive Officer (CEO) and President of the Gerdau Executive Committee (CEG) 2. André Pires de Oliveira Dias Financial Executive Vice-President and Controller 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 People, Innovation, and Management 6. Guilherme C. Gerdau Johannpeter Executive Vice-President of the Special Steel Business Division 7. Manoel Vitor de Mendonça Filho Executive Vice-President, Brazil Business Division Ricardo Giuzeppe Mascheroni Executive Vice-President of Latin America Business Division

11 10 CORPORATE GOVERNANCE Century-old values guide the search for greater efficiency and business competitiveness Gerdau has a solid corporate governance structure based on its century-old values. In addition, it has modern management systems to achieve greater efficiency and competitiveness of its operations. Currently Gerdau is listed on the BM&FBOVESPA (São Paulo), the New York Stock Exchange (NYSE), and the Madrid Stock Exchange (Latibex). Because it operates in the capital markets of the United States, Gerdau follows the standards set by the Sarbanes-Oxley Act (SOX), which establishes good corporate governance practices and controls over its internal processes. In addition, all of Gerdau s financial statements are audited by internationally recognized companies with a solid reputation. CORPORATE GOVERNANCE STRUCTURE Gerdau s Board of Directors, assisted by its committees, sets and monitors the implementation of its long-term strategies and appoints the members of the Gerdau Executive Committee (CEG). The term of the Board members is one year with reelection permitted. Gerdau s Board of Auditors, furthermore, operates in accordance with its legal and statutory duties, among other actions, while monitoring and overseeing the actions of its management and the financial statements. Its members have one year term and can be reelected. Gerdau s corporate management is performed by its Executive Officers consisting of one CEO and seven Vice-President Officers, who have one-year terms and reelection is permitted. The CEG directs, coordinates, and supervises the performance of the Executive Officers, the Business Divisions, and corporate areas, in accordance with the policies established by the Board of Directors. In addition, Gerdau has a clear compliance system that makes sure legislation is being followed and internal guidelines are in place in all the countries where Gerdau operates. It also has a structured risk management system that continuously monitors the internal and external variables that may impact the business and operation.

12 11 STRATEGY AND COMPETITIVE ADVANTAGES Gerdau expands the autonomy of its operations Gerdau is constantly working to overcome the challenges posed by the global steel market. To facilitate this path, in 2014, the Company sought to give more autonomy and agility to its operations, in addition to the geographic diversification strategy that has already been executed. It also established three priorities for its business: define self-sustaining business models that generate cash, enhance the development of outstanding global leaders with highperformance teams, and be globally competitive in costs and productivity. The Company is developing various work fronts in line with these priorities in order to expand the efficiency and competitiveness of its operations, and thus achieve its long-term strategy. COMPETITIVE ADVANTAGES Management methodologies for high performance The focus on reducing costs and expenses and the quest to give greater competitiveness to Gerdau s operations through continuous improvement involves applying management methodologies with the active participation of employees. The Quality Improvement Story (QIS) Groups, for example, are made up of teams with three to seven members who develop solutions for common problems in their plants. In addition to generating profits for the Company, the initiative encourages the commitment, creativity, and teamwork of Gerdau s professionals. The groups are recognized at the Gerdau Teams are recognized at the Quality Improvement Story (QIS) global annual meeting.

13 12 Company s QIS Global Meeting. In 2014, 4,800 employees from 12 countries participated in the QIS program with 530 projects. QUALITY IMPROVEMENT STORY GROUPS 4,798 employees 12 countries 530 projects The management tools applied by Gerdau to improve its results also include the Ideas program, which encourages employees to search for innovative solutions individually or in groups and promotes everyone s commitment to overcome the Organization s challenges. Gerdau s Working Cells program develops the autonomy of teams by providing the means for employees to actively participate in managing their work cells and controll processes such as safety, quality, costs, maintenance, and the environment. Gerdau also permanently develops projects through Six Sigma methodology in order to leverage results quickly and consistently, reaching more challenging targets. Furthermore, since 2012 the Company has managed its operations through an EBITDA breakdown methodology where each employee gets to know exactly their role and their contribution in trying to reach the Company s operating cash flow (EBITDA) goals. IDEAS PROGRAM 16,056 employees 64,246 ideas Innovation Program Gerdau is constantly looking for new opportunities to generate more value for its business through innovative solutions in products, services, internal processes, and management practices. This movement is organized globally by the Innovation program, which seeks to develop specific methodologies and processes to strengthen and expand the Company s innovative capacity and technological expertise. Among the initiatives taken in 2014 were the innovation programs that were implemented in the various segments that Gerdau operates to anticipate market trends in order to develop innovative products and services. These actions resulted, for example, in reducing energy consumption and improving the customized service for the special steel segment. Another action taken during the year was implementing the IThink program, which encourages executives to suggest ideas and solutions for

14 13 the Company s strategic challenges. The program has been successfully implemented in some plants in Brazil, with the participation of more than 480 professionals who proposed 449 ideas. In 2015, IThink should be expanded to other plants in the Company. ITHINK 480 professionals 449 ideas Gerdau Template In 2014, Gerdau completed another step in the process of deploying a single, global information technology platform to expand the capacity to manage its operations, this time in Brazil. This global IT system is now present in 80% of the Company, covering nine countries: Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, the United States, and Uruguay. In the next two years, the system will be extended to Gerdau s special steel plants located in Brazil, the United States, Spain, and India. The global IT system is now present in 80% of the Company, covering nine countries

15 New finishing line for hot rolled coils in Ouro Branco mill will allow Gerdau to enter into new market segments. BUSINESS

16 16 PERFORMANCE OF OPERATIONS Management efforts and flexibility of operating assets reduce impacts from the challenging global steel scenario The global steel industry has experienced a period of constant challenges, mainly due to the issue of excess installed capacity of steel in the world and the slower pace of growth of the economies in some regions. Faced with this, in 2014 Gerdau sought to adjust its operations in order to mitigate the impacts from the global steel scenario on its performance. Among the main initiatives were the optimization of assets, divestments in non-strategic activities, and the selection of capital expenditure (CAPEX) while maintaining levels of financial leverage. For the year, the consolidated shipments totaled 17.9 million metric tons, 3.5% lower than in 2013, mainly due to a lower demand for steel in Brazil s markets and the other Latin American countries. Steel production in turn reached 18 million metric tons, which is in line with the previous year. During the year, Gerdau invested R$ 2.3 billion in fixed assets (CAPEX), mainly for projects already underway. The amount was 21% lower than the initial plan for 2014, due to the Company s position of continuing to be selective in the evaluation of CAPEX. EBITDA BY BUSINESS DIVISIONS R$ 5.1 billion 9.2% Latin America Except Brazil 17.5% North America Includes long steel operations in the United States and Canada 52.2% Brazil Except special steel mills 18.0% Special Steel Includes special steel operations in Brazil, Spain, the United States, and India 3.1% Iron Ore Includes iron ore operations in Brazil

17 17 PERSPECTIVES: WORLD The expectation is that the installed excess capacity of approximately 690 million metric tons per year will continue to impact the global steel industry over the coming years. In relation to the countries where Gerdau operates, it can be seen that the developed markets have a positive outlook. BRAZIL (except special steel mills) In 2014, the low economic activity in Brazil impacted the demand for steel and the industry s profitability as a whole. In order to reduce the impacts of this scenario, the Company made significant adjustments to its operations, such as the temporary transfer of steel production of the Araucaria (state of Paraná) and Simões Filho (state of Bahia) mills, which were using only 40% of their capacity, to other mills of the Company in Brazil. It also made the transfer of the production of long rolled steel products from the Curitiba (state of Paraná) and Água Funda (state of São Paulo) mills. With this, the Ouro Branco mill (state of Minas Gerais), Gerdau s largest industrial plant, began to absorb most of the production from these units, generating scale gains and benefiting from the lower cost of its main raw materials, especially iron ore for its geographical proximity to the Company s own operation in this area. These initiatives did not impact the sales of long steel products, or the market share in the scrap recycling segment. Gerdau s shipments to the Brazilian domestic market saw a 5.8% reduction compared to 2013, reaching 5.5 million metric tons. Exports from Brazil, which also showed a decrease, reached 1 million metric tons (-25.4%). Thus, the operating cash flow (EBITDA) was R$ 2.7 billion, 10.9% less compared to the previous year. In relation to investments currently being made in Brazil, a highlight is the Company s production of flat steel at its Ouro Branco mill (state of Minas Gerais). Gerdau has been operating the finishing line for hot rolled coils since 2013, which has an annual capacity of 800,000 metric tons, and in 2014 it started up the operation of the finishing line in order to expand the product s quality and to increase the possibilities of complying with various specifications and customer demands. With the new finishing line, the Company also entered markets Gerdau continues to invest in the installation of a rolling mill of heavy plates in the Ouro Branco mill with an operational start up scheduled for 2016

18 18 The new heavy plate mill at the Ouro Branco mill (state of Minas Gerais) will start operations in late not covered before, such as auto parts, compressors, packaging, and containers. In conjunction with this project, Gerdau continues to invest in the installation of a heavy plate mill at its Ouro Branco mill (state of Minas Gerais), with a forecast to start operations in The Company is currently in the process of constructing the buildings and of the assembly of electromechanical equipment. The two flat steel rolling mills, one for hot rolled coils and the other for heavy plates, together have an annual capacity of 1.9 million metric tons. PERSPECTIVES: BRAZIL In Brazil, the scenario continues to look challenging due to the systemic problems facing the country, such as a high tax burden, tax cascading, and cost of electricity, among others. These factors, along with the risk of an economic recession, should continue to have an impact on the main sectors that consume steel.

19 19 NORTH AMERICA (Includes long steel mills in the United States and Canada) The continuous improvement of the US economy in 2014 increased demand in major steel consuming sectors in the region, such as industry and non-residential construction. On the other hand, the North American market continued to be a large importer of steel in the world, which also influenced the performance of local producers. Gerdau, in turn, worked to increase synergies and to streamline activities. In light of this scenario, Gerdau s shipments reached 6.2 million metric tons in the United States and Canada, which is in line with the previous year. In the period, operating cash flow (EBITDA) was R$ 888 million, a growth of 54.4% compared to Throughout the year, Gerdau made some divestments in the United States in line with the strategy to focus on the markets of long steel and special bar quality (SBQ), strengthening the Company s cash. Gerdau s 50% stake in Gallatin Steel, a flat steel plant in the state of Kentucky, was sold and generated gains of R$ 637 million. In addition, Gerdau sold a railway line that served the plant of Sand Springs located in the state of Oklahoma (USA). In the third quarter of 2014, Gerdau completed the installation of a new continuous casting plant in St. Paul, Minnesota (USA). The equipment significantly increases the quality of special bar quality (SBQ) steel, in addition to increasing the mill s productivity. Gerdau made some divestments in the United States, in line with the strategy to concentrate efforts on the long steel and special bar quality (SBQ) markets, strengthening the Company s cash PERSPECTIVES: NORTH AMERICA The growth of the economy in the United States is expected to continue on into 2015, increasing the consumption of steel in the country. The evolution of the non-residential construction segment should be significant, considering the expansion of private investment in the country. However, investments in infrastructure will be more moderate due to the slow growth in the availability of financing from the public sector. The large volume of imports, however, will continue to impact margins in North America.

20 20 At the end of 2014, Gerdau began to run hot tests for the production of steel at its new plant in Mexico LATIN AMERICA (Except Brazil) The lower-than-expected performance of economies in Latin American countries in 2014 impacted the demand for steel in the region. Moreover, there is a high level of steel imports, especially from China. Currently, Latin America is China s second largest market of rolled steel according to studies from the Latin American Steel Association (Alacero). Even with a 6.6% reduction in the volume of steel sold, which reached 2.6 million metric tons, the operation was able to present an increase of 9.8% in EBITDA compared to 2013, reaching R$ 470 million, influenced by the exchange rate. Considering the opportunities for growth in the Mexican economy and other NAFTA countries, at the end of 2014, Gerdau started to run hot tests for the production of steel at its new plant in Mexico, which has an installed capacity of 1 million metric tons per year. The rolling area, with an annual production capacity of 700,000 metric tons of structural shapes, will start production in The new plant in Mexico will produce structural shapes for civil construction and industrial applications.

21 21 The new plant is a project being carried out by a Gerdau-Corsa joint venture for both the civil construction (metal construction, foundations, and retaining walls) and industrial (industrial building projects and manufacturing) segments. Furthermore, Gerdau joined its Dominican Republic operations with the Company Metaldom in order to reduce costs and enhance productivity and the Company s competitiveness in the Caribbean and Central American markets. The Gerdau Metaldom joint venture will meet the needs of the civil construction and agribusiness sectors, as well as maintain operations of metallics and PVC. Gerdau is also building a new melt shop in Argentina that will have an installed capacity of 650,000 metric tons per year. This investment should start up operations in 2016 and will allow the Company to replace imports by producing steel in the country. SPECIAL STEELS (includes special steel operations in Brazil, the United States, Spain, and India) Gerdau is one of the world s largest producers of special steel, with a focus on supplying to the automotive industry. It has operations in Brazil, the United States, Europe, and India, which together represent an installed capacity of 4 million metric tons per year. In Brazil, the automotive industry fell in production and sales in 2014, impacting the entire segment s chain. Considering this scenario, Gerdau had to adjust its operation to this demand, moving the production of its rolling mill plant in Sorocaba (state of São Paulo) to the other special steel plants in the country, mainly to its Mogi das Cruzes mill (state of São Paulo). In contrast, the automotive market in North America recorded a strong growth during the year. Because of A new special steel rolling mill started up operations at the Monroe mill (USA), increasing its production capacity PERSPECTIVES: LATIN AMERICA The major economies of Latin America (except Brazil) should present a growth at different levels in According to the World Steel Association s forecast, the steel consumption in the region (except Brazil) should follow the growth of the economies of these countries.

22 22 The new special steel rolling mill expands the production capacity of the Monroe mill in the United States. this, Gerdau continued investing to expand the production capacity, quality, and productivity of its special steel plants in the region. Its mill in Monroe (Michigan), for example, began operating a new special steel rolling mill, expanding the mill s production capacity. In January 2015, it began operating a new walking beam reheat furnace at the same mill. In Europe, demand continued at a gradual recovery pace. During the year, Gerdau sold its automotive forged products operation, which was based in Villalba, Spain, in alignment with the strategy to concentrate efforts on core activities. In India, on the other hand, the economy entered a new growth phase with positive effects on the automotive industry. Gerdau s operations in the country followed the growth curve and produced special steels as planned. It also started to sell to customers in the automotive industry with more complex applications.

23 23 Because of this, Gerdau s shipments of special steels increased 1.3% compared to 2013, reaching 2.9 million metric tons. The Business Division s operating cash flow (EBITDA) was R$ 918 million (+1%). PERSPECTIVES: SPECIAL STEELS In Brazil, the opportunities for growth in the automotive industry are low, impacting the consumption of special steel in the country. North America should continue its recovery process in the automotive industry with expansion in the production of light and heavy vehicles, thus increasing the total demand for special steels in the region. The drop in oil price, however, is already impacting the oil & gas industry, which is another major consumer of special steels. The slow and gradual recovery of the European market should result in a higher production of light and heavy vehicles in For India, the forecast is to increase the production of light and heavy vehicles, increasing the consumption of special steel in the country. IRON ORE Considering the global oversupply of steel and falling iron ore prices, Gerdau s focus became the production for its own consumption, which has increased the competitiveness of the Ouro Branco mill (state of Minas Gerais). Because of this scenario, the rate of carrying out investments in mining is being reviewed. Nevertheless, the Company maintained the implementation of sustainability projects and those for increasing the operational efficiency of the business. Gerdau s mines are located in Itabirito (Várzea do Lopes), Miguel Burnier, and Barão de Cocais, all in the state of Minas Gerais. Currently, the Company has an annual installed capacity to produce 11.5 million metric tones of iron ore. In 2014, iron ore shipments reached 8 million metric tons, an increase of 58.9% over the same period Gerdau s focus in the mining sector became the production for its own consumption, which has increased the competitiveness of the Ouro Branco mill

24 24 the previous year. Of this total, 4.4 million metric tons were sent to Gerdau s mills and 3.6 million metric tons to other companies. The operating cash flow (EBITDA) was 35.6% less than in the year 2013, reaching R$ 161 million. PERSPECTIVES: IRON ORE The global oversupply of iron ore in 2014 impacted the market price of this raw material, which will most likely continue in Considering this scenario, Gerdau should continue its iron ore production strategy to meet the need of raw material for steel production at its Ouro Branco mill (state of Minas Gerais), benefiting from lower costs.

25 25 FINANCE Gerdau s net sales reached R$ 42.5 billion NET SALES Gerdau closed the year 2014 with a consolidated net sales of R$ 42.5 billion, which is 6.7% higher than last year s performance. This growth was mainly due to the expansion of revenue generated in the US market and the positive exchange rate effect in the translation to the Brazilian currency for revenue earned by its operations abroad. COSTS OF SALES & OPERATING EXPENSES In consolidated terms, cost of sales was R$ 37.4 billion, which is a 7.7% growth over Selling, general, and administrative expenses, however, grew 4.4%, reaching R$ 2.7 billion. In 2014, these expenses represented 6.4% of the consolidated net sales compared to 6.6% in CONSOLIDATED NET SALES R$ 42.5 billion 19.8% Special Steel IIncludes special steel operations in Brazil, Spain, the United States, and India 13.0% Latin America Except Brazil 32.2% North America Includes long steel operations in the United States and Canada 2.2% Iron Ore Includes iron ore operations in Brazil 32.8% Brazil Except special steel mills Consolidated Statement of Income - Summarized Gerdau S.A. and subsidiaries (R$ millions) /2013 Net sales 42,546 39,863 7% Cost of sales (37,406) (34,728) 8% Gross profit 5,140 5,135 0% Operating expenses (2,241) (2,380) -6% Income before financial income and taxes 2,899 2,754 5% Financial result (1,561) (1,302) 20% Income before taxes 1,338 1,453-8% Income and social contribution taxes % Net income 1,488 1,694-12%

26 26 EBITDA Operating cash flow (EBITDA) reached R$ 5.1 billion in 2014, a 7.1% increase compared to the previous year. This performance was positively influenced by the gain from the sale of a stake in the North American Company Gallatin Steel of R$ 637 million, and impacted by the impairmand of assets in Latin America in the amount of R$ 339 million. When excluding both these transactions, the adjusted EBITDA was R$ 4.8 billion, presenting a 0.9% increase compared to NET INCOME The net income dropped by 12.2%, reaching R$ 1.5 billion in 2014, mainly due to the increase in net financial expenses. FINANCIAL LIABILITIES On December 31, 2014, the gross debt (principal) of R$ 19.2 billion was comprised of 8.8% short-term and 91.2% long-term. The exposure of gross debt (principal + interest) in foreign currency was 78.7% on December 31, The increase in gross debt by R$ 2.8 billion from December 2013 to December 2014 was mainly due to the effect of the exchange rate changes during the period (R$ 2.3 billion) and the assumption of new debts in Reais. Cash (cash, cash equivalents, and short term investments), which was R$ 4.2 billion in 2013, reached R$ 5.8 billion in 2014 mainly due to receiving resources from selling Gallatin Steel. On December 31, 2014, 40.7% of the cash was held by the Gerdau companies abroad, mainly in U.S. dollars. The increase in net debt was a result of the increase in gross debt, partially offset by the Company s increase of cash in the period. The average nominal cost of the gross debt (principal) on December 31, 2014 was 6.5%, of which 9.4% for the portion denominated in Reais, 5.9% plus exchange rate variation for the portion in US dollars taken from Brazil, and Composition of consolidated EBITDA* (R$ million) Net income 1,488 1,694 Net financial result 1,561 1,302 Provision for income and social contribution taxes (150) (241) Depreciation and amortization 2,227 2,030 EBITDA 5,126 4,784 Adjusted EBITDA 4,828 4,784 EBITDA Margin 12.0% 12.0% Adjusted EBITDA Margin 11.3% 12.0% *Includes the results of associate companies and jointly controlled entities according to the income equity method.

27 27 Debt (R$ million) December 31, 2014 December 31, 2013 Current 2,038 1,838 Non-current 17,484 14,869 Gross debt 19,522 16,707 Interest on debt (344) (391) Cash, cash equivalents, and financial short term investments 5,849 4,222 Net debt 13,329 12, % on the amount taken by the subsidiaries abroad. On December 31, 2014, the average payment maturity of gross debt was 7.1 years. Both transactions made the important step to lengthen the debt profile possible, thus improving the Company s capital structure. The ratio between net debt and EBITDA showed a slight reduction in the year, going from 2.4 times in 2014 against 2.5 times in ISSUANCE OF 30-YEAR BONDS In April 2014, Gerdau placed bonds of US$ 500 million maturing in 30 years and a coupon of 7.25% per year whose resources were used for debt extension. Half of these funds were used for making a Tender Offer of securities maturing in 2017 and Gerdau also held an Exchange Offer for part of its securities maturing in 2017 and 2020 by issuing new bonds maturing in 2024 and a coupon of 5.893% in the amount of US$ 1.2 billion. SUBSEQUENT EVENTS On January 19, 2015, Gerdau S.A. announced a share buyback program of up to 30 million of preferred shares (GGBR4) or American Depositary Receipts - ADRs (GGB) representing in aggregate approximately 3.4% of the preferred shares comprising the free-float, which on December 31st, 2014 totaled 875,443,630 shares. The initiative aims to meet the needs of the Long-Term Incentive Program of the Company and its subsidiaries, to hold in treasury, for cancellation, or for subsequent sale on the market. The program will have a maximum period of three months beginning from January 19, 2015 until April 17, 2015.

28 28 29 Gerdau works to create value for its stakeholders employees, customers, suppliers, shareholders and communities. RELATIONSHIPS

29 30 EMPLOYEES The commitment of employees is critical when dealing with market challenges The commitment of about 45,000 employees is one of Gerdau s main competitive advantages. In 2014, for example, the commitment and dedication of these professionals were critical for adjusting the Company s operations to meet the challenges of the global steel market. This strong team of employees also contributed to developing an extensive business model to modernize Gerdau s corporate culture, to review aspects of organizational structure and to develop high-performing leadership. These structural changes initiated in 2014 will be continued in the years ahead, and will support Gerdau s strategic plan for the future. HEALTH AND SAFETY Ensuring the safety of employees and service providers is a top priority for Gerdau. All the Company s operations adopt a strict set of practices called the Safety Management System, which is complemented by permanent investments in technology, equipment and global management methodologies. In 2014, for example, the allocation of resources directed to this area was R$ million, which is 7.4% more than the previous year. Gerdau continuously registers accident frequency rates at levels below the world average, however, the Company believes that it is essential to improve its safety results even more. One of the main initiatives to achieve this goal is the Behavioral Management program, which enables leaders to understand attitudes that instill safe environments, facilitating the day-today decision making process. The structured check methodology within the Behavioral Management program developed by Gerdau as the main indicator of this program makes it possible to check the level of behavioral evolution of employees, as well as identify opportunities for improvement. As a result, a culture of safety occurs with more conscious understanding by teams. To date, 87% of the Company s leaders have been trained on the Behavioral Management program in different countries where Gerdau operates. The results achieved with the program have also led Gerdau to receive for the fifth time the World Steel Association s Safety & Health Excellence Recognition Award given annually in recognition of successful programs in the area of occupational safety. DEVELOPMENT & TRAINING Gerdau invests continuously in improving its teams. In 2014, each employee dedicated an average of 48 hours to training, which represents investments of R$ 32.8 million.

30 31 One of the main initiative in this area is the Technical School Project that organizes technical development activities and accelerates the development and dissemination of knowledge, especially among the operators and facilitators in the industrial areas. Additionally, the Corporate Education Portal aims to introduce employees to new learning methodologies. Available to employees in Argentina, Canada, Chile, Colombia, the United States, Mexico and Uruguay since 2013, the project was made available to employees in Brazil in To develop its leadership, Gerdau also has the Executive Education matrix that is aligned with the Organization s strategic objectives. Organized into four pillars (culture, business theory, leadership and management system), the program has 21 courses and a total of 220 class hours. Company back in the high performing ranking with the HayGroup, an organization that surveys companies with the best work climates globally. Beginning in 2015, the Opinion Survey will be conducted every two years due to the good results achieved in the last five years. Once again, Gerdau was recognized in the Guia Você S/A Exame - Best Companies to Work For. In 2014, the Company was at the top of the list of the best companies in the steel and metallurgy industry, repeating the result of previous years. Held annually by Você S/A and Exame Magazine in partnership with the Administration Institute Foundation (FIA), the survey considers the level of satisfaction of teams, along with the consistency and scope of people management actions. GLOBAL INTERNAL RECRUITMENT Gerdau received for the fifth time the Safety and Health Excellence Recognition Award given annually by the World Steel Association in recognition of successful programs in the area occupational safety WORK CLIMATE Even with the challenges in the global steel industry, the result of the Opinion Survey, one of the main tools to measure Gerdau s work climate, reached a level of 75% favorable in This result puts the For Gerdau, one of the ways to recognize talent is to offer new opportunities for professional development to employees. The Global Internal Recruitment, for example, fosters professional development and career opportunities by transferring employees to Development & Training Investments (R$ million) Number of training hours per employee 48 48

31 32 other plants, whether inside or outside the country of origin. In 2014, this project filled over 600 positions in all countries where Gerdau has operations. TALENT MANAGEMENT AND SUCCESSION IN 2014, THE FUTURE GERDAU TRAINEE PROGRAM ATTRACTED 145 young people Gerdau continuously prepares new leaders to fill strategic positions of high responsibility within the Company. EMPLOYEE COMMUNICATIONS This process is done by the People Development Committees (PDCs), which assess the performance and potential of executives. Currently, the forms of evaluation and the structure of PDCs are being revised to adapt to Gerdau s new standard of people Gerdau maintains an ongoing dialog with its employees through a global employee communication system that is constantly improved in order to become more transparent and effective. management, and to ensure they are in line with the modernization of COMPENSATION AND BENEFITS Gerdau s corporate culture. Gerdau s compensation and benefits FUTURE GERDAU TRAINEES policy values commitment and performance in reaching superior The Future Gerdau Trainee Program attracted 145 young talents in 2014 in North America, Brazil, and other Latin American countries. During a period of two years, they undergo training and are directly involved in the Company s industrial and results for the Company. Employees receive variable compensation in addition to their fixed salary according to individual, team, unit and operation targets. Gerdau also offers benefits in line with the needs of each region where it operates. commercial processes. Trainees also participate in a mentoring program LABOR UNION AGREEMENTS and develop projects on strategic issues with a focus on innovation and process improvements. Gerdau s relationship with unions is based on transparency with

32 33 the interest of sustainability of the business. In 2014, the Company signed 14 agreements in Brazil, the United States, Mexico and Venezuela. Benefits (R$ million) Food Transportation Health Insurance Private Pension Plan Gerdau continuously invests in training to improve its teams.

33 34 CUSTOMERS Gerdau strives to anticipate market trends in order to increase the competitiveness of its customers Gerdau works hard to anticipate market trends in order to develop and provide innovative products and services that help to stimulate growth for more than 130,000 customers around the world. This initiative seeks to make customers more competitive in their market segments, while contributing to the sustainability of the steel supply chain. Currently, important initiatives are being developed to add more value to products and services and enhance the customer s experience. One example of this was the 2014 launch of an e-commerce platform in Canada and the United States called egerdau. It is easy to navigate and is an important element in Gerdau s strategy to provide its customers with tools that enable increased efficiency, agility, accuracy, productivity, cost reduction and ease of doing business. Customers can use egerdau to create purchase orders, manage the delivery status, check information about products and services, download invoices and quality certificates, and more. Beginning in 2015, the new system will be extended to the other countries where Gerdau operates, making it a global platform for customer relationships. With research and development centers in Brazil, Spain and the United States, the Company invests in the creation of specific and innovative products in special steels. This is the case of a new special steel produced in Brazil for the first time to manufacture pin-balls, which are an important component of a vehicle s steering system. This solution provides increased productivity and reduces metal lost in manufacturing the component. In addition, the solution decreased the manufacturing process from seven to four stages and contributed to a reduction of about 20% of the production costs. In the segment of long steel in Brazil, Gerdau launched in 2014 the Gerdau Pre-Made Structure that is mostly used in foundations of buildings Gerdau launches in North America a new online platform for customer relations.

34 35 and infrastructure projects. With this, the Company adds more value to its processes, offering not only fabricated rebar, but also assembled steel for its customers. This enables cost savings and increases the speed of executing building projects, offering to customers an important solution for their business. Gerdau also took the opportunity to further strengthen its relationship with customers when the World Cup was held in Brazil in With a special relationship strategy, the Company invited customers from eleven countries to watch the 64 soccer matches of the competition, which provided a unique experience to all. The Gerdau Pre-Made Structure is one of the new products launched in Brazil during 2014.

35 36 SUPPLIERS Gerdau seeks to maintain long-term relationships with suppliers that add value to the business Gerdau believes that cultivating long-term relationships and always looking for mutual gains with its suppliers is essential for ensuring its competitiveness in the global steel market. In recent years the Company has strengthened its relationships with suppliers that demonstrate innovation and share new practices. In addition, the overall management of its major suppliers is one of Gerdau s main competitive advantages, which enables the exchange of practices and information in a more active way and enables process optimization and cost reduction. Additionally, the Company works hard on the sustainable development of micro and small suppliers that work close to Gerdau s industrial units located in 14 countries. One example is the Gerdau Excellence program, which seeks to increase competitiveness and reduce the degree of dependence of suppliers that partner with Gerdau. During the cycle, 330 companies in Argentina, Brazil, Colombia, Mexico and Peru will be involved in activities to improve their performance in delivery, reliability, flexibility, innovation, cost, quality and customer service. In 2014, Gerdau to partner closer with its scrap suppliers since the qualified performance of this segment is essential for the sustainability of the steel business. Throughout the year, the Company promoted a training in partnership with the Brazil Steel Institute and the National Institute of Non-ferrous and Iron and Steel Scrap Preparation Companies (Inesfa), and other companies for increasing awareness of safety at work. More than 120 professionals from the segment of scrap recycling and carriers participated, and one of the key outcomes of the meeting was a Safety Guidelines booklet for steel scrap suppliers distributed throughout Brazil. Additionally, Gerdau tries to increase and streamline its relationship with suppliers through initiatives such as the reverse auction, which allows the Company to share its purchasing needs on an online trading platform and invites suppliers to submit their proposals for selling the product. In 2014, 300 auctions were conducted in 11 countries. These auctions occur primarily for the purchase of indirect materials that are not linked to the steelmaking process. GERDAU EXCELLENCE SUPPLIERS cycle 330 companies involved

36 37 SHAREHOLDERS Good management practices are recognized by the capital market The world s leading risk rating agencies maintained Gerdau s investment grade in 2014 Gerdau s geographical diversification of business, financial soundness, experience in corporate governance management and practices are recognized by the capital market. Thus, even when the world steel industry was faced with an adverse scenario during 2014, the world s leading risk rating agencies have maintained Gerdau s investment grade. Standard & Poor s and Fitch Ratings maintained their level BBBand Moody s ratified to grade Baa3. Additionally, Gerdau S.A. and Metalúrgica Gerdau S.A. were part of BM&FBOVESPA s Corporate Sustainability Index (ISE) for the ninth consecutive year. In Ibovespa, the main indicator of BM&FBOVESPA, Gerdau S.A. was ranked 25 th among the most liquid companies. Furthermore, for the 15 th consecutive time, the Company was awarded the Transparency Trophy by the National Association of Finance, Administration, and Accounting Executives (Anefac). Gerdau also received an honorable mention in three categories of the IR Magazine Awards Brazil 2014 for its relationship with investors. The Company was also highlighted in nine categories of the ranking given by the Institutional Investor Magazine that ranks the best IR professionals of Latin America based on the evaluation of 450 analysts and fund managers. LONG-TERM RELATIONSHIP With over 120,000 shareholders, Gerdau participated in 25 investor conferences and organized 12 nondeal road shows in the Americas and Europe. It also participated in two meetings of the Association of Capital Market Analysts and Professionals (APIMEC). In addition, in 2014 the Company promoted Gerdau Day held in Minas Gerais. The two-day meeting was attended by 58 buy and sell-side analysts, which had the opportunity to visit the Ouro Branco mill operations, which is Gerdau s largest industrial plant. They also visited the iron ore mines in Miguel Burnier and Várzea do Lopes. SHAREHOLDER S DIVIDENDS The compensation policies of Gerdau s publicly listed companies are in line with market standards. The shareholders of Metalúrgica Gerdau S.A. and Gerdau S.A. receive quarterly dividends and/or interest on capital of at least 30% of the adjusted net profit for the year. In 2014, dividend payment and interest on capital of Gerdau S.A. totaled R$ million at R$ 0.25 per share. The shareholders dividends of Metalúrgica Gerdau S.A. reached R$ million at R$ 0.29 per share.

37 38 SOCIETY Volunteering actions benefit communities close to Gerdau s plants GERDAU VOLUNTEER CUP Gerdau believes that encouraging employees to participate in volunteer work is one way it can make a positive impact on society. When employees volunteer in social projects, they expand their personal skills and develop a culture of citizenship and caring about others, creating a partnership between the Company and the communities where Gerdau operates. In 2014, Gerdau held the Gerdau Volunteer Cup, which occured when the World Cup was ongoing. The initiative engaged more than 16,000 volunteers divided into 967 teams from 14 countries. Under the slogan With Good Management, We Transform Results, the contest encouraged the sharing of management methodologies with 771 institutions including public schools, charities, or micro and small enterprises. The teams shared their knowledge through lectures, games, group dynamics, workshops, plays and practical education programs. In total, the activities benefited more than 200,000 people. 16, volunteers teams 14 countries 200,000 people benefited In addition to the Gerdau Volunteer Cup, more than 12,000 volunteers engaged in other social activities promoted by the Company, especially in the themes of education and quality management. One of the highlights of the year was the 5S Program in schools, which takes 5S concepts and practices to educational institutions, encouraging a culture of quality in the school environment. Gerdau was able to contribute to improving the studying area, expand the use of materials and physical space, and reduce costs. In 2014, more than 15,000 students were benefited in 82 schools. Gerdau also promotes projects for developing the steel business chain. Since 2007, for example, the Company has worked with scrap collectors and cooperatives to train and increase their income, in addition to increasing the volume and quality of the material sold. These initiatives have trained over 1,200 recyclers in Brazil, Chile, Peru, and Uruguay, and have grown the volume of scrap collected by 339% and the profits recorded by the participants evolved by an average of 167%. Due to these results, Gerdau was awarded a Steelie Award in the Excellence in Sustainability category. The project was also recognized by Brazil Benchmarking program as one of the best social-environmental practices in the country. For the year, Gerdau supported over a thousand social actions globally totaling R$ 63 million. Among the

38 39 highlights is the support given to initiatives that transform society such as the Everyone for Education Movement and the Competitive Brazil Movement. The Company also sponsors the Museum of Mining and Metal located in Belo Horizonte (state of Minas Gerais), which received more than 108,000 visitors throughout the year, including meetings with educators, plays and guided tours. Of the schools helped, 88.5% belong to the public system in Brazil. DEVELOPMENT OF THE BUSINESS CHAIN 1,200 recyclers growth of 339% of scrap collected Gerdau volunteers engaged in various social activities in 2014.

39 40 41 The Gerdau Germinate Program (state of Minas Gerais) is one of the Company s most important environmental education initiatives. ENVIRONMENT

40 42 Gerdau is recognized for the efficiency of its environmental protection practices Gerdau respects the environment and continually invests in technology upgrades of its industrial units. In 2014, more than R$ 172 million was invested in this area, which is 7% more than the previous year. In addition, all the Company s units follow a set of rigorous practices aligned with the ISO standard as defined by the Environmental Management System (EMS). The EMS evaluates all of Gerdau s activities from an environmental point of view, from receiving the raw material until the final delivery of the product, including the recycling of by-products. RECYCLING Currently, about 75% of the steel produced by Gerdau is made from recycled scrap steel. With this, the Company transforms about 14 million metric tons of scrap steel per year globally, ranking it as the largest recycler in Latin America. Several recycling initiatives gained prominence in In the United States, for example, Gerdau provided the steel for the construction of the new Henley Bridge, originally built in the 1930s in Knoxville, Tennessee. Part of the steel supplied by Gerdau was taken from the old bridge, recycled, and used again in the new bridge project. In Canada, Gerdau participated in a project in partnership with local organizations to recycle vehicles no longer in circulation that were left in landfills in the most northern part of the country. The Company was responsible for the entire process of decontamination, compacting and the transportation of the vehicles to the Whitby mill located in Ontario, where they were recycled and transformed into steel. Gerdau provided the steel for the construction of the new Henley Bridge in the state of Tennessee (USA).

41 43 Gerdau participates in a project to recycle vehicles no longer in circulation in Canada. In Chile, environmental initiatives focused on gathering and recycling hundreds of tons of scrap removed from Easter Island. For this project, Gerdau received the award of being the greenest Company in the country for the third time in a row, according to a study released by GFK Adimark consulting and the newspaper La Segunda. In 2014, 84% of the by-products generated during the steel production process at Gerdau were reused internally or by different 84% of reuse of byproducts generated R$ 309 mi in gains for the Company segments of the industry, generating R$ 309 million in revenues for the Company globally. The materials were used for building roads, paving, production of ferroalloys, manufacturing of cement and ceramics, among other applications. GREEN AREA Gerdau helps to improve air quality and maintain and preserving green areas around its industrial units. From a total of 17,000 hectares of its own property, the Company maintains 5,000 hectares of preserved forests made up of legal reserves or permanent preservation areas. Another 4,000 hectares are forests preserved voluntarily. In 2014, 29,000 seedlings were planted near its steel mills and the Company s mining operations around the world. About 75% of the steel produced by Gerdau in the world is made from the recycling of scrap

42 44 Gerdau also invests in the recovery of land along river springs, like the Permanent Preservation Areas (PPA) located around its hydroelectric dams of Caçu and Barra dos Coqueiros (state of Goiás). The area has 1,700 hectares and belongs to Gerdau. The Company adopted traditional planting techniques used by Ikpengs Indians of Mato Grosso for planning the seedlings. The process, given the name Muvuca, has been used by Gerdau since 2012 and has already enabled the planting of 12 million seedlings in the area. which combines activities of education, environmental preservation and promotion of environmental citizenship. About 8,500 people benefited from the program in Among the main initiatives are technical visits, awareness seminars, food and heritage education workshops, and other social-environmental actions involving communities, employees, and the school system of six municipalities in the State of Minas Gerais. AIR ENVIRONMENTAL EDUCATION To educate employees, their families and communities about the importance of preserving the environment, Gerdau regularly promotes communication campaigns, lectures and training courses. In 2014, these activities involved 16,800 people in 49,900 hours of training. One of the Company s most important initiatives in the environmental area is the Gerdau Germinate Program, 5,000 hectares of legal reserves or permanent preservation 4,000 hectares of forests preserved voluntarily Gerdau also invests continuously in dust removal systems that make sure the atmosphere is protected. To increase the capturing of particulate matter generated in the production process of its mills, Gerdau held specific trainings about the operation and maintenance of these systems for employees in its plants located in Brazil, Chile, Colombia, Spain and Peru. The training aimed to highlight the close link between the furnace operation and the control of greenhouse gas emissions, as well as to evaluate the economic gains resulting from appropriate dust removal performances. In 2015, the initiative will continue in the other plants in Brazil, Mexico, Uruguay and the United States. WATER In 2014, the index of water reused in Gerdau s mills was 97.6%, which is one of the steel industry s best worldwide. The Company is

43 45 Gerdau has modern dust removal systems in order to make sure the atmosphere is protected. continuously making investments in closed systems of water treatment and recirculation in its plants. ENERGY Gerdau s energy strategy is defined by a long-term vision through a portfolio of self-production along with long and medium term contracts. Furthermore, Gerdau is capable of generating itself approximately 40% of the energy it consumes in Brazil, which is produced in its hydroelectric plant Caçu, Barra dos Coqueiros (state of Goiás), and Dona Francisca Energética (state of Rio Grande do Sul), as well as for the cogeneration at the Ouro Branco mill (state of Minas Gerais). This diversified portfolio allows Gerdau to be flexible in allocating energy resources for its industrial units and ensures meeting the demand of its customers. In addition, Gerdau has developed an extensive energy efficiency program since 2012 in order to reduce its consumption in Brazil. To reach this result, a pilot project was developed in all its industrial units in the country so as to increase energy savings on auxiliary equipment to the steel production process, which represents approximately 40% of the consumption of its operations. In 2014, the index of water reused in Gerdau s mills reached 97.6%, one of the best in the steel industry in the world.

44 46 47 TIMELINE Learn about the important facts that marked Gerdau s history João Gerdau and his son Hugo lay the foundations of Gerdau with the Pontas de Paris Nail Factory in Porto Alegre (state of Rio Grande do Sul). The Nail Factory today Metalúrgica Gerdau S.A. - becomes a public Company and begins trading on the Porto Alegre stock exchange. The second Riograndense steel production unit starts up operation in Sapucaia do Sul (state of Rio Grande do Sul) Steel production begins in Porto Alegre (state of Rio Grande do Sul) with forward-thinking conception of the mini-mill, a model based on the use of scrap and regional sales, enabling more competitive operational costs. Curt Johannpeter, son-in-law of Hugo, takes the helm of the Company and oversees a decisive phase of business expansion 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 The Company s internationalization began with local production in Uruguay. The 80s also marks a significant expansion of operations in Brazil, mainly through acquisition of mills Gerdau enters North America with the acquisition of a mill in the province of Ontario (Canada) Gerdau starts to produce steel in the Northeast and Southeast regions of Brazil, and enters into the steel distribution business with the first Comercial Gerdau store in São Paulo Gerdau s executive leadership begins to be in the hands of Jorge (CEO), Germano, Klaus, and Frederico Gerdau Johannpeter (Vice-Presidents) Acquisition of an operation in Chile and a producer of special steel in Brazil.

45 Acquisition of part of the capital stock of a rolling mill in Argentina, whose share control becomes Gerdau s in The Company celebrates 100 years in the business and takes on a controlling stake in the Ouro Branco mill (state of Minas Gerais), its largest industrial plant in the world. Gerdau makes its entry into Europe, with the acquisition of a stake in a Spanish Company focused on the special steel segment. It also takes on an indirect stake in a Company producing special steel in Brazil. The Gerdau Institute is created, which is responsible for coordinating the Company s social responsibility policies and projects, broadening the scope of the Gerdau Foundation that was created in Entrance into the US market with the acquisition for controlling a US Company. Over the following decades Gerdau significantly expands its operations in the United States by acquiring mills in the major markets in the country, becoming the second largest mini mill producer in the US. Gerdau S.A., a public Company in Brazil, is listed on the New York Stock Exchange (NYSE). Gerdau becomes the main steel producer in Colombia, through the acquisition of a local Company The Company Siderperu (Peru) is acquired Start up of its own production of iron ore in Minas Gerais state, Brazil Gerdau starts its own production of flat steel in Brazil A new Executive Committee (CEG) is created under the leadership of André B. Gerdau Johannpeter, who takes on the position of Chief Executive Officer (CEO). Gerdau enters Mexico, Venezuela, and the Dominican Republic. It also acquires a leading producer of special steel in the United States and starts up its operations in India, both initiatives with a focus on the automotive market. The following year it starts to produce also in Guatemala Gerdau celebrates 110 years in business with installed steel production capacity of 25 million metric tons per year Gerdau merged its operations in the Dominican Republic with the Company Metaldom, creating Gerdau Metaldom, which is focused on meeting markets in Central America and the Caribbean.