Management Report Message from Management

Transcription

1 Management Report 2015 We hereby submit the Management Report and the corresponding Consolidated Financial Statements of Votorantim Industrial S.A. (VID or Votorantim Industrial) for the fiscal year ended December 31, The Financial Statements were prepared in accordance with Brazilian accounting practices and International Financial Reporting Standards ( IFRS ), issued by the International Accounting Standards Board (IASB). Message from Management Further information and details of our operating and financial performance, together with the full Financial Statements, their respective Explanatory Notes and the Independent Auditor s Report, which supplement the information contained herein, can be found on our Investor Relations website ( It is worth noting that all projections and forward-looking statements in this report reflect the Company s expectations and beliefs, and, although reasonable, may differ from actual future events depending on various unpredictable internal and external factors. 0

2 Message from Management 2015 was marked by the slowdown of the Chinese economy, the appreciation of the U.S. dollar, and the market adjustment regarding the recovery of the European and American economies. In Brazil, we witnessed an economic recession, above-target inflation and political instability, which had a negative impact on domestic and international confidence in the country. As result, the country lost its investment-grade status with the leading risk rating agencies. Despite this scenario, we were able to mitigate the impact of the macroeconomic effects and achieve consistent results in 2015, thanks to our financial and operational discipline, geographic diversification and business portfolio. Annual investments totaled R$3.3 billion, excluding Fibria, most of which went to the operations of Votorantim Cimentos, which inaugurated a factory in Edealina (GO) at the end of the year and continued to expand the plants abroad (United States, Turkey and Bolivia). As a result, we consolidated our position as leader of the cement segment in Brazil and expanded our international presence. Another important investment was the Ventos do Piauí project, marking our entry into the wind power market. There will be seven wind farms in the Northeast of Brazil, with an installed generating capacity of 206 MW. Therefore, we expanded our business diversification and strengthened our presence in the energy sector. In the metals segment, we identified an opportunity to increase our interest in the mining company Milpo, in Peru, acquiring another 10% of the capital and raising our stake to 60%. We also began to deepen the Vazante zinc mine, a brownfield project, reinforcing our interest in this metal. Fibria, in which Votorantim owns a 29.4% share, began constructing the Horizonte 2 project, which will add output of 1.7 million tonnes per year, consolidating the company as the world s leading pulp producer. It also posted record operating results, allowing the payment of dividends totaling more than R$2.0 billion in We will celebrate our centenary in 2018, with a history of overcoming challenges and crises and generating consistent results along the years, always underpinned by respect and the highest ethical standards. In 2016, we will maintain our commitment to a long-term vision, but without losing our focus on the challenges that will arise throughout the year. Management 1

3 Macroeconomic and Sector Scenario According to the IMF, the global economy grew by 2.49% in 2015, 0.17p.p. less than the year before. The United States and the Eurozone proved incapable of retriggering their growth and continued to record exceptionally low inflation and interest rates, limiting investments in these regions. In addition, the strengthening of the dollar against the other currencies reconfigured the trade balances of several countries. In the specific case of the U.S. market, the last few years have seen modest, albeit consistent growth of around 2.5% p.a., also according to the IMF, with 2015 recording the biggest upturn since Given the uncertainty over a growth recovery, the country spent the year reassessing expectations regarding the level of interest rates, which only increased at the end of the year, edging up by 0.25%. In addition to the challenge of reactivating growth, Europe was marked by the conflicts triggered by the migration of refugees from the Middle East and continuity of the economic problems, such as near-zero inflation and interest rates and soaring unemployment in countries like Greece and Spain. China s slowdown affected the international markets by generating substantial market volatility and oscillations, especially in the case of commodity prices. The results were: low real estate market growth, reduced exports, currency depreciation, a stock market slump and reduced demand for imported goods and services. The Chinese government made adjustments to the domestic capital market and rerouted the economy in order to encourage production and consumption. One advance vis-à-vis the international scenario was the inclusion of its currency in the IMF s international currency basket together with the dollar, euro, pound sterling and yen. Strongly impacted by the Chinese deceleration and lower demand, LME metals prices fell to levels not seen for many years (in nominal terms) in the case of zinc and aluminum, similar to those of 2009 and, in the case of nickel, those of Apart from being strongly affected by the global situation, the Brazilian economy was also impacted by a series of domestic events, including the depreciation of the real, which fell by more than 45% against the dollar in the year, ending at US$/R$3.90, versus US$/R$2.66 at the close of 2014, as a result of the political turbulence, the fiscal deficit and the uncertainties regarding the government s ability to adjust it, the developments in the Operation Car Wash investigations, inflation of 10.7% p.a. (above the target of 6.5% p.a.) 2

4 and demands for the impeachment of President Dilma Rousseff. As a result of all this, the country closed the year with GDP shrinkage of 3.8%. The construction industry was particularly badly hit by the scenario, recording an annual decline of 7.6%, according to the IBGE. As a result, the consumption of building materials, such as steel and cement, fell. The chief culprits were excessive real estate inventories, restrictions on lending and the reduced number of infrastructure works. The difficulties in realizing the fiscal adjustment and the ambiguity of Brazilian monetary policy led to an increase in the public debt and a primary deficit in the government s accounts. As a result of all these factors, Brazil lost its investment-grade status. The country also faced a severe water shortage, especially in the Southeast, which substantially increased energy costs. Business Overview Votorantim Industrial (VID) The challenging scenario had a significant impact on our businesses in Brazil, especially steel and cement, however this was offset by the devaluation of the real, which favored businesses abroad and the exporting companies. This did not stop us from fine-tuning our role defined in the governance model initiated in VID, whose executives are members of the Boards of Directors and Committees of the other subsidiaries, focused on defining the companies strategies and guidelines and on opportunities for new investments. This system, underpinned by financial discipline and effective debt management, as well as the operational efficiency of the businesses themselves, helped ensure a consistent performance despite the unfavorable environment. As for the excellence centers, which seek to capture synergies through information technology (CCTI) and shared solutions (CSC), it is particularly worth noting, in regard to the CCTI, the New Cycle Project, designed to renew all of Votorantim s datacenter infrastructure in order to take advantage of new technologies. The CSC, which provides support for the companies administrative and accounting processes, increased its scope during the year, in line with the strategy of optimizing services, reducing costs and gaining synergies among the Votorantim companies. Votorantim Cimentos 3

5 2015 was a year of major challenges for Votorantim Cimentos given the decline in cement consumption in Brazil, its biggest market. As a result of the unfavorable scenario, the company anticipated the sector s deterioration, demonstrating its resilience, and maintained its focus on preserving liquidity. The company continued with its long-term investment strategy, prioritizing markets that increase geographic diversification and consolidate its leading position, such as Brazil s North and Midwest, the United States, Bolivia and Turkey. It also implemented action plans to confront the worsening domestic scenario in the pursuit of greater operational efficiency, the streamlining of costs and the divestment of non-strategic assets, as was the case with its investees Mizu, Itambé and Polimix. Votorantim Metais Despite the unfavorable LME price scenario, Votorantim Metais invested throughout the year and redefined its strategic goals. One of the pillars adopted was the growth of zinc and copper mining, exemplified by the 10% increase in its share of Milpo, giving it a 60% interest, and its main investment in Brazil, the deepening of the Vazante mine, which will extend its working life to The aluminum business adopted distinct strategies for its two operational fronts upstream and downstream. The upstream segment focused on value creation, while the downstream segment focused on adapting to the new Brazilian reality, in particular the challenging scenario in the transportation land packaging sectors. The company also made further progress with its governance model, creating Finance and Audit Committees. Votorantim Siderurgia The steel industry, already suffering from global oversupply, was adversely impacted by Brazil s economic scenario in As a result, Votorantim Siderurgia consolidated its commercial strategy with initiatives focused on improving the efficiency of the sales force and pricing mechanisms, together with reducing costs and optimizing the cost structure. In Argentina, despite the economic instability, demand was steady and results benefited from the devaluation of the peso against the dollar. In Colombia, demand was strong, and imported product volume fell, mainly due to the country s wire rod safeguard measure against china. As a result, foreign operations increased their share of Votorantim Siderurgia s annual results, offsetting the weaker performance in Brazil. Votorantim Energia 4

6 In 2015, Votorantim Energia announced its first investment in wind power, marking its debut in this market. It will build seven wind farms in the Northeast of Brazil, with a joint installed capacity of 206MW. Operational start-up is scheduled for Around 90% of the energy from this project has already been sold in the regulated market (ACR). The company also consolidated its electricity trading activities, making its expertise and knowledge regarding industrial consumers energy management, making it the third largest trader in Brazil, with a portfolio of more than 120 clients. Fibria In 2015, Fibria began a new phase in its history, seeking a higher level of competitiveness, which envisages an increase in operating capacity of 1.7 million tonnes per year. The project, called Horizonte 2, refers to the expansion of the Três Lagoas unit (MS) and is budgeted at more than R$8 billion, the biggest private investment announced in Brazil last year. Fibria also recorded its lowest leverage since its creation in 2009, created value for its stakeholders and consolidated its position as a corporate governance benchmark. In August 2015, the Board of Directors approved the distribution of extraordinary dividends totaling R$2 billion. Corporate Governance Votorantim is owned by the Ermírio de Moraes family and has adopted a solid corporate governance model that underpins relations between family members, the Boards of Directors of Votorantim Participações and Votorantim Industrial and their companies and establishes defined and structured succession procedures, thereby gaining the confidence of all stakeholders. The governance model introduced in 2013 was improved. The new model gives the companies greater autonomy, allowing in-depth discussions in each company and streamlining decision-making. In 2015, the Company announced the inclusion of independent members Oscar de Paula Bernardes Neto and José Luiz Majolo on the Board of Directors of Votorantim Participações, followed by Sérgio Eraldo de Salles Pinto in January Votorantim will be celebrating its 100 th anniversary in 2018 and the management practices developed throughout its history are adopted and observed by each company, preserving its DNA, management model, values and culture. Transparency and Ethics 5

7 Votorantim conducts its business with integrity and transparency, always seeking the highest ethical standards, as well as with responsibility, aiming to ensure the sustainability of the businesses, based on the values solidity, ethical behavior, respect, entrepreneurship and unity that permeate all its activities, decisions and relations with stakeholders. In 2013, Votorantim created the Compliance Program, based on these values and beliefs and on the Code of Conduct, which establish the essential elements governing relations between the companies, their employees and their various stakeholders. In 2015, the pillar of the Anti-Corruption Compliance Program continued its evolution, consolidating the commitment to the constant search for best practices, encouraging the fight against corruption and the damage caused by it in the political, economic and social sphere. The objective is to disseminate the scope and importance of the issue among all the company s employees, ensuring that its effectiveness results in the protection of the companies and in the creation of value for them. Votorantim encourages the reporting of any suspected illicit acts through the Ouvidoria Line, a channel open to all employees through which any such acts can be reported confidentially and anonymously, all of which are analyzed and routed to the appropriate area in accordance with internal policies and the prevailing legislation. Votorantim s programs and policies are in a state of constant evolution, fueling its good practices and adapting to changing situations. Risk Management Votorantim aims to ensure the longevity and sustainability of its businesses. In order to do so, it maintains a structure for managing risks of all types: regulatory, social, environmental, territorial, logistic, financial and political, among others. This structure is absolutely crucial for business management, reputation and the promotion of opportunities to create value for the company in both the short and long term. Risk management activities were transferred to the respective companies and a Risk Management and Compliance area was set up in the holding company which operates through the Audit Committees, influencing and strengthening the uniformity of criteria. In regard to the contracting of insurance, the Votorantim companies are governed by the Insurance Management Policy, which ensures that they maintain insurance policies that are compatible with their operations in the countries where they operate Economic and Financial Performance 6

8 The company recorded consistent results in 2015, despite the challenging global and domestic scenarios. Consolidated net revenues totaled R$31,521 million in 2015, a new record. Despite the impact of the Brazilian economic shrinkage on cement and long steel operations, higher metals prices in reais and the beneficial impact of the depreciation of the real on the consolidation of overseas operations helped fuel growth. These consolidated effects led to an 11% revenue upturn. The cost of goods sold (COGS) increased by 14% over 2014, chiefly due to higher costs denominated in foreign currencies, higher electricity charges and inflation in Brazil. Operating expenses remained stable, edging up by only 2% over 2014, thanks to the efforts of all the companies to control costs and ensure operational excellence. EBITDA totaled R$7.0 billion, 2% down on the year before. The main positive factors were the healthy performance of the operations abroad, the receipt of extraordinary dividends from Fibria and the sale of assets (rural properties amounting to 34,000 hectares in Capão Bonito/SP), the latter two in the final quarter. In addition, we had the impact of the 13 th energy auction (in April 2014), in which Votorantim sold energy until December As this is a firm commitment, the result of the auction was recognized at its fair value under EBITDA on the date of the sale (April 2014). However, the operations associated revenues and costs will be recognized during the period of the contract. 7

9 Financial Result 2015 vs R$ million (1) R$ % Financial income % Financial expenses (1,814) (1,584) (230) 15% Exchange variation (729) (85) (644) 758% Net hedge result 517 (107) % Other financial expenses net (572) (894) % Net financial result (2,012) (2,296) % (1) Includes China s cement operations, previously classified as " assets available por sale" Financial income totaled R$586 million in 2015, 57% up on the previous year, reflecting higher cash and cash equivalents and the increase in the CDI interbank rate from 10.77% to 13.18% p.a. In the same period, financial expenses increased by 15%, impacted by the upturn in the CDI and the higher balance of foreign-currency debt due to the depreciation of the real. Exchange variation expenses came to R$729 million, due to the depreciation of the real (Dec/15: R$3.90/US$ Dec/14: R$2.66/US$) and the higher volume of loan from Resolution 4131, not hedge accounted. Although the FX effect impacted a substantial portion of total debt, the fact that the company had adopted the hedge accounting - through the net investment hedge, matching assets abroad with foreign currency debt, meant that an important part of the exchange variation effect on debt was not booked under the financial result. 8

10 Derivative financial instruments recorded a gain of R$517 million in 2015, due to the higher volume of swaps arising from dollar loans, which were converted to reais through the swaps regarding the loan from Resolution Other financial expenses totaled R$572 million, 36% down on 2014, primarily due to lower expenses with bond buybacks. Net Income Net Income (R$ million) 1,673 (150) 284 (183) (407) (882) Net income Operating profit Financial results Current income taxes Deferred income taxes Result in 2014 energy auction Others 2015 Net income Annual net income amounted to R$382 million, 77% less than the year before, due to the write-down of the nickel operation s deferred taxes in 2015 and the impact of the 2014 energy auction result. Expenses with current income tax and social contribution totaled R$714 million, 34% up on the year before mainly due to the larger calculation base for taxes on profits earned abroad. Expenses with deferred income tax and social contribution came to R$258 million in 2015, R$109 million up on 2014, explained by the write-down of accumulated deferred tax balances in the nickel segment, resulting from the temporary suspension of operations. Investments 9

11 Capex totaled R$3.3 billion (excluding Fibria), 47% of which allocated to expansion projects, mostly in the cement segment, which absorbed 80% of the expansion investments. Fibria s capex, which is not consolidated in Votorantim s financial statements in accordance with IFRS rules, amounted to R$2.4 billion, 48% more than in 2014, mainly due to industrial expansion as a result of the Horizon 2 project and higher land purchases. Votorantim Metais launched in 2015 the expansion of its zinc ore production mine in Vazante, in Minas Gerais state. The project s total investment is around R$600 million and the mine s life will be extended by more than ten years, ensuring the competitiveness of Votorantim Metais in zinc supply for the next upcoming years. In 2015, we announced our entry into the wind power segment through the Ventos do Piauí project, comprising seven wind farms in the Northeast of Brazil with a joint generating capacity of 206MW as of This project will absorb investments of R$1.1 billion over three years. Results by Company Votorantim Cimentos 10

12 According to SNIC, the National Cement Industry Association, cement consumption in Brazil fell by 9.5% in 2015, due to frustrated expectations in the construction, industrial and infrastructure works sectors. Consolidated net revenues climbed by 6% over the year before to R$14 billion, largely due to the depreciation of the real against the dollar and the euro, which contributed positively to the consolidated results of the operations in North America, Europe, Asia and Africa. COGS came to R$10 billion, 14% up on 2014, due to higher electricity costs in Brazil and the impact of fuel and raw materials, influenced by the increase in sales volume. Consolidated EBITDA totaled R$3.2 billion, 9% less than in the previous year. The unfavorable scenario in the Brazilian market was partially offset by the good operating performance of the companies in North America. Given the shrinkage of the Brazilian market, a plan was put into effect to sell non-strategic assets such as the sale of Polimix companies, Mizu and Itambé; operational efficiency, with the temporary shutdown of furnaces and factories adjusting to current demand in Brazil; and, finally, reducing operating costs. Votorantim Metais Aluminum 11

13 The aluminum industry is energy-intensive, therefore, highly dependent on energy in its production process, and since its inception it has sought to meet its energy needs by incorporating energy assets. This ensures greater flexibility in times of weak aluminum demand, since the surplus energy can be sold on the market. The global aluminum market was marked by a decline in the annual LME average price to US$1.660/t, its lowest level since 2009, due to the Chinese economic slowdown, new capacity start-ups, especially in China, and the postponement of certain capacity closures. Annual sales volume totaled 316 tonnes, 10% down on 2014, reflecting reduced industrial activity in Brazil, especially in the transportation and construction sectors. In the case of transportation, for example, ANFAVEA (the National Vehicle Manufacturers Association) estimated that production of vehicles (cars, trucks and buses) fell by 23% over the previous year to 2.4 million units, comparable to 2006 levels. Net revenues amounted to R$4.6 billion, 26% up on 2014, thanks to higher prices in reais and increased energy revenues in COGS totaled R$3.6 billion, 29% more than in the previous year, due to higher maintenance and energy sale costs. Other operating results totaled an expense of R$194 million, versus a gain of R$182 million in 2014, thanks to the energy auction in the latter year. EBITDA came to R$800 million, 43% less than in 2014, due to weaker aluminum market conditions in 2015 and energy sales in the 2014 auction. 12

14 Nickel In 2015, the LME nickel price averaged US$11,807/t, 30% less than the previous year s average. The Chinese slowdown and the weakening of the global steel market pulled prices down to below US$9,000/t in the fourth quarter, their lowest level since According to the ISSF (International Stainless Steel Forum), global output of stainless steel, which is the main market for nickel, dipped by 0.5% year-on-year in the first nine months. Net revenues totaled R$1,115 million, 16% up on 2014, chiefly due to increased sales volume and higher prices in reais. COGS climbed by 23% over 2014 to R$1,043 million, as a result of increased consumption of imported nickel concentrate and higher fuel costs. EBITDA was R$86 million negative, versus a positive R$40 million in At the beginning of 2016, the Niquelândia (GO) and São Miguel Paulista (SP) units were shut down temporarily, as detailed in the Additional Remarks section of this report. Zinc & Byproducts 13

15 This segment comprises zinc operations in Brazil and Milpo and Cajamarquilla s operations in Peru. In 2015, LME zinc prices averaged US$1,928/t, 11% down on the 2014 average. According to Wood Mackenzie estimates, Chinese zinc demand grew by only 3.7% in 2015, the lowest level since Global production of galvanized steel, which is the main market for zinc, fell by 0.9% year-on-year in the first half. On the supply side, expected mine closures should have led to a price upturn; however the working life of certain mines was extended, avoiding a supply shortage. Electrolytic zinc sales volume edged up by 2% over 2014 to 690,000 tonnes. In Brazil, the depreciation of the real fueled exports of galvanized steel, offsetting the weak domestic performance in such sectors as infrastructure, construction and transportation. Operational improvements in the Brazilian plants pushed up electrolytic zinc output in 2015, in turn increasing sales. Milpo s operational stability also helped to maintain sales volume at 2014 levels. Net revenues came to R$6.7 billion, 22% more than in 2014, due to higher production in the Brazilian units and the impact of the depreciation of the real against the dollar on the consolidation of operations in Peru and the United States. COGS totaled R$5.1 billion, 27% up on 2014, chiefly due to increased zinc concentrate prices in reais and higher electricity costs in the Brazilian operations. Votorantim Siderurgia 14

16 According to the World Steel Association, global steel output totaled 1,622.8 million tonnes in 2015, 2.8% down on the previous year. Excess capacity, together with the decline in raw material prices, led to an international price slide. In addition, the imposition of antidumping measures against Chinese steel in 2015 by countries such as the United States may further impact Chinese steel production, as well as encourage exports of Chinese output to other countries. Between 2009 and 2014, Brazilian steel imports moved up as a result of the reduction in international prices triggered by excess installed capacity. In 2015, this effect was weakened by the depreciation of the real, which reduced the import premium and, consequently, partially inhibited imports. According to the IABR (Brazilian Steel Institute), domestic long steel sales fell by 16.1% over Net revenues totaled R$4.2 billion, 6% up on the year before, due to increased demand from the Colombian construction industry and higher prices Argentina and Colombia the latter being the result of the safeguard measure against China that benefited our business. COGS came to R$3.3 billion, 6% more than in 2014, mainly due to the higher cost of iron ore in Colombia and increased payroll costs in Argentina as a result of inflation. Other operating results were negatively impacted by the provision for fair value of biological assets - eucalyptus forests, the main raw material for pig iron production - totaling R$76 million in EBITDA amounted to R$464 million, 8% up on 2014, representing growth of 0.2 p.p. 15

17 Fibria (100%) Fibria recorded net revenues of R$10.1 billion in 2015, 42% more than in the previous year, thanks to the higher average net pulp price in dollars and the appreciation of the dollar against the real, partially offset by the period decline in sales volume. EBITDA came to R$5.3 billion, with a margin of 53%, a 91% improvement. In 2015, Fibria announced the beginning of the Horizonte 2 project, which will expand production capacity to 7 million tonnes per year, with investments of R$8.7 billion, making it the year s largest private sector investment. Fibria closed the year with net debt of R$11,015 million, 46% more than at the end of 2014, primarily due to the investment in the Horizonte 2 project. The average term of total debt was 4.3 years, while the net debt/ebitda ratio in dollars narrowed from 2.40x to 1.78x. Votorantim retains a 29.42% interest in Fibria and is a signatory to the Shareholders Agreement together with the BNDES, which retains a 29.08% stake. Jointly, Votorantim and BNDES form the controlling block. The shareholder agreement allows Votorantim to manage Fibria's operations. Although it is an important part of the company s portfolio, its results are not consolidated in Votorantim s financial statements in accordance with IFRS rules. 16

18 Liquidity and Debt Dec/15 Dec/14 Dec/15 vs Dec/14 Sep/15 Dec/15 vs Sep/15 Gross debt R$ million ,2% ,6% Gross debt in BRL (1) R$ million ,4% ,1% Gross debt in foreign currency R$ million ,6% ,1% Average maturity years 7,4 7,3-7,8 - Short-term debt % 7,4% 6,4% 1 p.p. 5,8% 1,6 p.p. Cash, cash equivalents and investments R$ million ,0% ,2% Cash, cash equivalents and investments in BRL R$ million ,8% ,7% Cash, cash equivalents and investments in foreign currency R$ million ,6% ,4% Fair value of derivative instruments R$ million ,0% ,1% Net debt R$ million ,7% ,0% Net debt/ebitda (in BRL) X 2,78 2,32 0,46 3,23-0,45 (1) 4131 bilateral loan considered as BRL due to the cross-currency swap. At the close of 2015, consolidated gross debt stood at R$30.5 billion, 27.2% up on December 2014, chiefly due to the R$6.5 billion exchange variation, reflecting the 46.7% annual depreciation of the real against the dollar, and the consolidation of the debt of the Chinese cement operation (R$530 million), which had been classified as available for sale. Cash, cash equivalents and financial investments ended 2015 at R$10.6 billion, an increase of R$3.2 billion over Net debt totaled R$19.4 billion, 17.7% more than in 2014, while financial leverage, measured by the net debt/ebitda ratio, came to 2.78x, 0.47x higher than the 2.31x recorded at the end of the previous year. Net Debt evolution (R$ billion) 6,5 0,4 30,5 (11,1) 16,5 7,5 24,0 (0,3) (1,8) 1,8 19,4 Net debt 2014 Cash (*) Gross debt 2014 Borrowings/ Payments Principal Payments interest Interest FX China cement operation Gross debt 2015 Cash (*) Net debt 2015 (*) Cash includes cash, cash equivalents, financial investments and derivative financial instruments 17

19 Votorantim undertook a series of operations in 2015 to reduce refinancing risk in the coming years. The average term of debt closed at 7.4 years. In 2015, the company contracted two revolving credit facilities totaling US$1.2 billion with 14 banks due in 2020, replacing the previous facility of US$1.5 billion. Cash, cash equivalents and financial investments ended the year at R$10.6 billion, R$3.2 billion higher than at the close of Operating cash flow totaled R$3,947 million, 11% down on 2014, due to higher income taxes and increased investments in expansion projects. The upturn was partially offset by a working capital divestment in 2015, due to extended payment terms with suppliers. 18

20 Free cash flow totaled R$3,549 million, R$1,920 million up on 2014, due to the impact of the exchange variation on cash abroad and reduced financial expenses as a result of the bond buyback. Risk Rating Brazil s political and economic scenario throughout 2015 was exceptionally complex and the country consequently lost its investment-grade status with Standard & Poor's (S&P) and Fitch Ratings. As a direct impact of the sovereign risk downgrade, Votorantim s own rating was reduced from BBB to BBB- by S&P. Votorantim closed the year with ratings of BBB- with a negative outlook, Baa3 with a stable outlook, and BBB with a negative outlook by Standard & Poor s, Moody s and Fitch Ratings, respectively. For alterations in 2016, please see the Additional Remarks section. Sustainability Votorantim encourages initiatives that optimize the assets of its companies in order to create value for shareholders and meet the legitimate requirements of society. Management of this process is based on macro issues identified as being common to all the companies during the strategic planning process. These are: (i) assets assessing risks and identifying opportunities for our processes, thereby generating long-term value, integrity and transparency; (ii) people developing people and keeping them engaged and motivated; (iii) resources ensuring the availability and stability of resources and our surrounding environments; (iv) relationships engagement with our adjoining communities goes 19

21 beyond the social license, it is a competitive lever; (v) customers building long-term relationships, qualified by trust, shared values, innovation and choice. Fully aware of the impacts of its companies activities, Votorantim seeks to maintain permanent channels of dialogue with society, as well as to adopt a preventive approach to environmental issues. Partnerships were also entered into with universities and research centers. It is especially worth mentioning the association with the Sorocaba Science Park, an organization which houses technology-intensive companies, teaching and research institutions, consulting firms and other organizations that can offer technical support and market services. Environmental Management and Biodiversity Votorantim is absolutely convinced that environmental issues must be integrated into its businesses. In the pursuit of this goal, in 2015 it invested R$628 million in environmental management, 42.8% of which in Capex and 56.2% in Opex. Our operations result in generation of waste and its management is an ongoing Votorantim concern. The company has 27 tailings dams, as well as 25 deposits for storing part of production waste, which are managed by system developed in 2004, based on the environmental laws and in line with the most advanced systems in the world. The information stored in the system is monitored and audited by an independent firm, which assesses the controls covering all the pertinent documentation, risk management procedures, emergency plans, monitoring, and the suitability of the structures, as well as the planning of their useful life. These controls are part of routine factory operations, and the dams have priority status when evaluating risks. In 2015, a new company, Reservas Votorantim Ltda., was created to promote the management and handling of activities in the areas protected by Votorantim in various Brazilian biomes. The first such area is the Legado das Águas, one of the biggest private Atlantic Forest reserves in the country, covering 31,000 hectares. The area has been maintained by Votorantim since the 1950s in order to protect the headwaters of the rivers of the Rio Juquiá basin, where the company has seven hydropower plants. For further information, please go to Community Relations The Votorantim Institute is jointly responsible - in partnership with all our companies - for the social initiatives with our surrounding communities. It is present in more than 114 municipalities throughout Brazil and is fully aware that the presence of Votorantim s 20

22 operations provides ample opportunities for local social and economic development by creating jobs, generating income, offering job training, paying taxes and attracting other companies, as well as supporting or developing projects focused on education, production chains and other issues. These activities help increase the competitiveness of the businesses and provide solutions for more active social involvement. All in all, the Institute invested R$72 million in social initiatives in 2015, R$50.4 million of which from its own resources, R$6.2 million through investment incentives, R$13 million in third-party resources and R$2.3 million in social sub-loans. The year s main initiatives were: ReDes Program - a partnership with the BNDES to promote inclusive business initiatives in 28 Brazilian municipalities. In 2015, the Program was recognized as a social business benchmark by the United Nations Development Programme (UNPD) and as a Latin American local development benchmark by the international organization RedEAmerica. Investments in 2015 totaled R$10 million in technical and managerial support for 48 projects. RedDes generated monthly revenue of R$275,000 for 23 organizations, exceeding target revenue by 63% in 11 projects. In addition to monitoring the ongoing projects, two new municipalities took part in project development and four new organizations will receive support in Public Administration Support Program - another partnership with the BNDES designed to modernize public administration and reduce infrastructure deficits in the municipalities benefiting from the initiative. Local officials and public servants are trained in methods and tools to help them increase revenues and improve the management of municipal resources. It also facilitates physical and territorial planning by preparing plans and projects to obtain federal funding for sanitation, mobility, housing and other projects. The program currently benefits 23 municipalities and raised around R$25 million in Votorantim Partnership for Education (PVE) - a program comprising social engagement and public administration support initiatives focusing on improving the quality of education. Introduced in 2009, the PVE implemented several programs for children aged between 4 and 15 in 13 municipalities and evaluated teaching quality in 234 municipal public schools in People Management The people management initiatives implemented throughout 2015 reflected the evolution of Votorantim s high-performance culture and the engagement and mobilization of its employees, especially those in positions of leadership, in the initiatives adopted and in the generation of the company s results. It is particularly worth noting the following: 21

23 Votorantim Development System (SDV) - starting from the management DNA, common to all the Votorantim companies, the SDV was subjected to an improvement process including a unique employee assessment format, with multidisciplinary committees and the involvement of leaders. A total of 6,144 employees were evaluated in more than 300 committees. In line with the belief that a flexible culture is based on trust and open dialogue, the process also involved the transparent disclosure of the evaluation results to senior management, the preparation of individual employee development plans and succession mapping. Votorantim Academy - the company s corporate university. In 2015, the number of participants reached the record level of around 5,000, divided among more than 20 modules, as well as the Potenciar Program a youth development acceleration program. Structuring of the Relationship Platform with young people and universities, ensuring more than 20,000 applicants for the trainee program, a new record. Launch of the Volunteer Challenge Program, created by the Votorantim Institute in 2015, it involved 2,000 employees, 5,000 initiatives, 88,000 items collected and 14,000 hours of voluntary work. Health and Safety Management Health and physical integrity of its employees and partners is a priority and strategic issue for Votorantim. Therefore, the Thematic Team of Security and Health developed a management system, used in all companies, and based on four pillars: (i) leadership and responsibility; (ii) system; (iii) behavior and performance; (iv) synergy and knowledge. We had important initiatives in 2015, such as the Movement Alert, a security communication tool designed to reduce accidents in the workplace and applied in all Votorantim companies through campaigns and training workshops. There was also the Health and Safety School, which offers courses to reinforce health and safety management practices among leaders and professionals. In addition, each company held its own projects. At Votorantim Siderurgia, for example, they have developed a dengue prevention program and workshops on the damage caused by alcohol, tobacco and drugs, and preventive healthy campaigns and check up monitoring of employees. At Votorantim Cimentos, the highlight was the Global Safety Day, security awareness program in all units of VC, including plants outside Brazil. Fibria has put in place several projects, mainly microplanning forest operation, focused on the management and care of African bees, as well as mapping allergic employees. 22

24 Outlook Brazil began 2016 surrounded by political and economic instability. The political crisis deepened with the developments in the Operation Car Wash investigations, while, on the economic front, there are expectations of further GDP shrinkage, above-target inflation, increased unemployment and foreign exchange and stock market volatility. The global scenario is marked by uncertainties regarding the pace of China s slowdown, doubts surrounding the recovery of the U.S. economy, the absence of relevant growth in Europe and shrinking demand in the emerging nations. According to the IMF, the United States will maintain its growth pace (estimate of 2.5% in 2016). The country s job market is showing signs of heating up, as is domestic consumption, although this may well be limited by the industrial sector, chiefly as a result of the decline in exports due to the appreciation of the dollar against the other leading currencies and weak global demand. In the case of China, there is still uncertainty regarding the pace of growth and, therefore, the possible resulting impacts. China itself estimates growth of between 6.5% and 7% this year, but there are doubts over the government s capacity to deliver. Against this background, Brazil lost its investment-grade status with the three risk rating agencies, which will make it more difficult for Brazilian companies to access the international debt market. Brazilian bank ratings were also adversely affected by the local and international scenarios. These effects will raise corporate refinancing costs. Conscious of this scenario, we will remain focused on and committed to preserving our liquidity and our already low financing risk, as well as the constant improvement of operational and cost management. With our eye on the future, but without neglecting the present, we will continue to invest in our businesses, while respecting people and the environment, convinced of our capacity to overcome increasingly complex challenges. Additional Remarks (i) In continuation of the corporate simplification process designed to improve the conduct of its operations, in January 2016 Votorantim changed the structure of its holding companies. Votorantim Industrial (VID) merged Votorantim Participações (VPAR) and was renamed Votorantim S.A. (Votorantim). As a result: (i) the investment in Citrosuco, previously recognized under the equity method by VPAR, is now recognized under the same system by Votorantim; (ii) Votorantim Finanças (VFIN) is now a direct subsidiary of Votorantim, while Banco Votorantim will continue to be recognized under the equity 23

25 accounting method by VFIN; and (iii) Votorantim will succeed VPAR as the guarantor of all the companies financial contracts. (ii) In January 2016 new members were appointed to the Board of Directors of Votorantim Participações: Sergio Eraldo de Salles Pinto (independent member) and Antonio Ermírio de Moraes Filho. (iii) Also in January 2016, as a result of market conditions, Votorantim Metais announced the temporary suspension of its Brazilian nickel operations (the mine in Niquelândia and the refinery in São Miguel Paulista). (iv) Votorantim S.A. s investment-grade status was revised at the beginning of 2016 by Moody s and Standard & Poor s. Moody s downgraded the rating to Ba2 and Standard & Poor s to BB+. In march 2016, Fitch Ratings downgraded the rating to BBB-. All agencies gave the company a negative outlook. S&P Moody s Fitch Ratings BB+ Ba2 BBB- outlook negative outlook negative outlook negative (v) In March 2016, Votorantim Cimentos announced the buyback of eurobonds in the maximum amount of 350 million maturing in 2021 and The value of the repurchased principal was 122 million. 24