FORM 6-K

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE

SECURITIES EXCHANGE ACT OF 1934

 

Dated February 19, 2020

 

Commission File Number 1-14878

 

GERDAU S.A.

(Exact Name as Specified in its Charter)

 

     N/A     

(Translation of Registrant’s Name)

 

Av. Dra. Ruth Cardoso, 8,501 – 8° andar

São Paulo, São Paulo - Brazil CEP 05425-070

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F x Form 40-F ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes ¨ No x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): Not applicable.

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date:  February 19, 2020

 

  GERDAU S.A.
   
  By: /s/ Harley Lorentz Scardoelli
  Name:  Harley Lorentz Scardoelli
 

Title:    Investor Relations Director

 

 

 

 

EXHIBIT INDEX

 

Exhibit Description of Exhibit
   
99.1 Quarterly Results Gerdau S.A. 4Q19
   
99.2 Management Report Gerdau S.A. 2019

 

 

 

 

Exhibit 99.1

 

  

 

 

 

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São Paulo, February 19, 2020 – Gerdau S.A. (B3: GGBR4 / NYSE: GGB) announces its results for the fourth quarter of 2019. The consolidated financial statements of the Company are presented in Brazilian real (R$), in accordance with International Financial Reporting Standards (IFRS) and the accounting practices adopted in Brazil. The information in this report does not include the data of associates and jointly controlled entities, except where stated otherwise.

 

CONSOLIDATED HIGHLIGHTS

 

● Free cash flow generation was R$ 2.3 billion in 4Q19, due to the robust release of working capital in the period.
Net debt of R$ 9.8 billion and net debt/EBITDA ratio of 1.67x in 4Q19, the best result since 2011.
Growth of 13% in shipments in the domestic market of the Brazil BD in 4Q19 compared to 4Q18, confirming the recovery in demand, especially in the construction industry.

 

 

Free Cash Flow (R$ million)

 

 

 

Net debt / EBITDA

 

 

 

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GERDAU’S PERFORMANCE IN 4Q19

 

Operating Results

 

CONSOLIDATED    4Q19   4Q18      3Q19       12M19  12M18   
Volumes (1,000 tonnes)                                    
Production of crude steel    2,952    3,221   -8.4%  2,733   8.0%   12,453   15,342   -18.8%
Shipments of steel    3,078    3,167   -2.8%  3,056   0.7%   12,090   14,561   -17.0%
Results (R$ million)                                    
Net Sales    9,533    10,900   -12.5%  9,931   -4.0%   39,644   46,159   -14.1%
Cost of Goods Sold    (8,857)   (9,596)  -7.7%  (8,946)  -1.0%   (35,441)  (40,010)  -11.4%
Gross profit    676    1,304   -48.2%  985   -31.4%   4,203   6,149   -31.6%
Gross margin (%)    7.1%   12.0%      9.9%       10.6%  13.3%    
SG&A    (353)   (400)  -11.8%  (372)  -5.1%   (1,430)  (1,652)  -13.4%
Selling expenses    (118)   (138)  -14.5%  (123)  -4.1%   (476)  (570)  -16.5%
General and administrative expenses    (235)   (262)  -10.3%  (249)  -5.6%   (954)  (1,082)  -11.8%
%SG&A/Net Sales    3.7%   3.7%      3.7%       3.6%  3.6%    
Adjusted EBITDA    1,132    1,404   -19.4%  1,457   -22.3%   5,712   6,657   -14.2%
Adjusted EBITDA Margin    11.9%   12.9%      14.7%       14.4%  14.4%    

 

Production and Shipments

 

In 4Q19, crude steel production decreased in relation to 4Q18, mainly due to the lower production volume at the Special Steel BD and to the divestment of the rebar operations in the North America BD. Compared to 3Q19, crude steel production increased, due to the resumption of operations at Blast Furnace 1 in Ouro Branco, Minas Gerais, even with the scheduled shutdown of the melt shops in Brazil.

 

Steel shipments decreased in 4Q19 compared to 4Q18, due to lower shipments in the Special Steel BD and to the divestment of rebar assets in the North America BD.

 

Operating result

 

The reduction in net sales and the lower consolidated costs of shipments in 4Q19 in relation to 4Q18 were mainly due to the decrease in net sales per tonne sold, which was affected by the lower prices in international markets and the decrease of the costs per tonne sold.

 

Consolidated gross profit and gross margin decreased, reflecting the lower shipments and lower international prices mentioned above.

 

Selling, general and administrative expenses decreased in 4Q19 in relation to 4Q18, given the ongoing operating efficiency gains and the digital innovation initiatives, as well as the divestments. Meanwhile, as a ratio of net sales, selling, general and administrative expenses remained stable at 3.7% in 4Q19.

 

In 2019, this ratio was 3.6%, in line with 2018.

 

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Breakdown of Consolidated EBITDA
(R$ million)
  4Q19   4Q18      3Q19      12M19   12M18    
Net income  102   389   -73.8%  289   -64.7%  1,217   2,326   -47.7%
Net financial result  273   392   -30.4%  562   -51.4%  1,509   1,890   -20.2%
Provision for income and social contribution taxes  193   (149)  -   (150)  -   458   (169)  - 
Depreciation and amortization  538   504   6.7%  502   7.2%  2,073   1,892   9.6%
EBITDA - Instruction CVM ¹  1,106   1,136   -2.6%  1,203   -8.1%  5,257   5,939   -11.5%
Gains and losses on assets held for sale and sales in subsidiaries  -   186   -   -   -   -   414   - 
Equity in earnings of unconsolidated companies  2   29   -93%  (9)  -   16   (10)  - 
Proportional EBITDA of associated companies and jointly controlled entities  86   53   62.3%  82   4.9%  320   314   1.9%
Maintanence stoppage / Impacts from refurbishment of BF 1  131   -   -   238   -45.0%  369   -   - 
Tax reversals/provisions  (193)  -   -   (57)  238.6%  (250)  -   - 
Adjusted EBITDA²  1,132   1,404   -19.4%  1,457   -22.3%  5,712   6,657   -14.2%
Adjusted EBITDA Margin  11.9%  12.9%      14.7%      14.4%  14.4%    

 

CONCILIATION OF CONSOLIDATED EBITDA
(R$ million)
   4Q19   4Q18   3Q19   12M19   12M18 
EBITDA - Instruction CVM ¹   1,106   1,136   1,203   5,257   5,939 
Depreciation and amortization   (538)  (504)  (502)  (2,073)  (1,892)
OPERATING INCOME BEFORE FINANCIAL RESULT AND TAXES³   568   632   701   3,184   4,047 

 

1 – Non-accounting measure calculated in accordance with CVM Instruction 527.

2 – Non-accounting measure calculated by the Company. The Company presents Adjusted EBITDA to provide additional information on cash generation in the period.

3 - Accounting measure reported in the consolidated Income Statement.

 

Adjusted EBITDA and adjusted EBITDA margin declined in 4Q19 compared to 4Q18, mainly due to the performance of the Special Steel BD and the lower international prices.

 

 

EBITDA (R$ million) and EBITDA Margin (%)

 

 

 

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CONSOLIDATED
(R$ million)
  4Q19     4Q18         3Q19         12M19     12M18      
Income before financial income expenses and taxes¹   568     632     -10.1 %   701     -19.0 %   3,184     4,047     -21.3 %
Financial Result   (273 )   (392 )   -30.4 %   (562 )   -51.4 %   (1,509 )   (1,890 )   -20.2 %
Financial income   85     82     3.7 %   49     73.5 %   223     204     9.3 %
Financial expenses   (404 )   (425 )   -4.9 %   (368 )   9.8 %   (1,470 )   (1,579 )   -6.9 %
Exchange variation, net (including net investment hedge)   94     181     -48.1 %   (193 )   -     (120 )   (346 )   -65.3 %
Exchange variation (other currencies)   (49 )   6     -     (41 )   19.5 %   (127 )   23     -  
Bonds repurchase expenses   -     (224 )   -     -     -     -     (224 )   -  
Gains (losses) on financial instruments, net   1     (12 )   -     (9 )   -     (15 )   32     -  
Income before taxes¹   295     240     22.9 %   139     112.2 %   1,675     2,157     -22.3 %
Income and social contribution taxes   (193 )   149     -     150     -     (458 )   169     -  
Exchange variation including net investment hedge   (81 )   (129 )   -37.2 %   211     -     (109 )   358     -  
Other lines   (91 )   (209 )   -56.5 %   (61 )   49.2 %   (526 )   (646 )   -18.6 %
Non-recurring items   (21 )   487     -     -     -     (40 )   457     -  
Consolidated Net Income ¹   102     389     -73.8 %   289     -64.7 %   1,217     2,326     -47.7 %
Non-recurring items   (41 )   (77 )   -46.8 %   119     -     78     181     -56.9 %
Gains and losses on assets held for sale and sales on interest in subsidiaries   -     186     -     -     -     -     414     -  
Maintanence stoppage / Impacts from refurbishment of BF 1   131     -     -     238     -45.0 %   369     -     -  
Bonds repurchase expenses   -     224     -     -     -     -     224     -  
Tax reversals/provisions   (193 )   -     -     (57 )   238.6 %   (250 )   -     -  
Income and social contribution taxes - non-recurring items   21     (487 )   -     (62 )   -     (40 )   (457 )   -91.2 %
Consolidated Adjusted Net Income²   61     312     -80.4 %   408     -85.0 %   1,295     2,507     -48.3 %

 

1 - Accounting measure disclosed in the consolidated Income Statement.

2 - Non-accounting measure calculated by the Company to show net profit adjusted by non-recurring events that influenced the result.

 

In 4Q19 compared to 4Q18, the variation in the financial result was basically due to the effects from exchange variation on liabilities contracted in U.S. dollar and in other currencies, which were practically offset by the line “Income Tax/Social Contribution – effects from exchange variation that include net investment hedge.” In addition, financial expenses decreased due to the ongoing efforts to reduce debt.

 

Adjusted net income in 4Q19 decreased in relation to 4Q18, in line with EBITDA in the period.

 

Dividends

 

Gerdau S.A. approved the payment of dividends in the amount of R$ 51 million (R$ 0.03 per share) in 4Q19, which was distributed as an advance on the minimum mandatory dividend stipulated in the Bylaws.

 

Payment date: March 11, 2020

Record date: shareholdings on February 28, 2020

Ex-dividend date: March 02, 2020

 

Working Capital and Cash Conversion Cycle

 

The cash conversion cycle (working capital divided by daily net revenue in the quarter) went from 78 days in September 2019 to 62 days in December 2019, due to the reduction in inventory.

 

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Working Capital (R$ million) and Cash Conversion Cycle (days)

 

 

Financial Liabilities

 

Debt composition
(R$ Million)
  12.31.2019   09.30.2019   12.31.2018 
Short Term   1,562    2,262    1,825 
Long Term   14,488    13,232    13,082 
Gross Debt   16,050    15,494    14,907 
Cash, cash equivalents and short-term investments   6,295    3,432    3,349 
Net Debt   9,755    12,062    11,558 

 

On December 31, 2019, gross debt was 9,7% short term and 90.3% long term. Broken down by currency, 18.4% of gross debt was denominated in Brazilian real, 81.2% in U.S. dollar and 0.4% in other currencies.

 

On December 31, 2019, 52% of cash was denominated in U.S. dollar.

 

The evolution in key debt indicators is shown below:

 

Indicators  12.31.2019   09.30.2019   12.31.2018 
Gross debt / Total capitalization ¹   37%   36%   36%
Net debt² (R$) / EBITDA ³ (R$)   1.67x   1.96x   1.71x

 

1 - Total capitalization = shareholders' equity + gross debt – interest expenses
2 - Net debt = gross debt – interest on debt – cash, cash equivalents and financial investments.
3 - Adjusted EBITDA in the last 12 months.

 

The reduction in the net debt/EBITDA ratio from 1.96x on September 30, 2019 to 1.67x on December 31, 2019 is explained mainly by the free cash flow generation in the period.

 

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Payment schedule of gross debt (non-current)

 

 

On December 31, 2019, the nominal weighted average cost of gross debt was 5.5%, considering 4.7% for the portion denominated in Brazilian real, 5.6% plus exchange variation for the portion denominated in U.S. dollar contracted by companies in Brazil and 6.1% for the portion contracted by subsidiaries abroad. On December 31, 2019, the average gross debt term was 7.4 years, with the debt maturity schedule well balanced and well distributed over the coming years.

 

Investments

 

Capital expenditure amounted to R$ 1.746 million in 2019, with R$ 797 million allocated to general maintenance, R$ 424 million to maintenance of the Ouro Branco Mill and R$ 525 million to technological expansion and modernization. Of the total amount invested in the quarter, 49% was allocated to the Brazil BD, 24% to the Special Steel BD, 23% to the North America BD and 4% to the South America BD.

 

The Company reaffirms its investment plan for 2020 of R$ 2.6 billion, which is part of the CAPEX program of R$ 7 billion for the three-year period (2019-2021).

 

The investments in technological expansion and modernization will be made as expectations for the market’s recovery and for free cash flow generation in the period are confirmed.

 

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Gerdau S.A. announced to its shareholders and the general market that, on November 26, 2019, its subsidiary Gerdau Aços Longos S.A. entered into a final agreement with Hierros Añón, S.A. and Gallega de Mallas, S.L. for the acquisition of 96.35% of the shares issued by Siderúrgica Latino-Americana S.A. (“SILAT”), a company located in Caucaia, in the metropolitan area of Fortaleza, State of Ceará, for economic value of US$ 110.8 million, subject to the typical adjustments to the acquisition price.  The consummation of the transaction is subject to approval by Brazil’s antitrust agency CADE (Conselho Administrativo de Defesa Econômica) and to the fulfillment of conditions precedent typical to transactions of this type. SILAT has annual installed production capacity of 600,000 tonnes of rolled products. The acquisition is part of Gerdau’s strategy to improve service to its clients in the Brazilian market.

 

Free Cash Flow

 

Free cash flow generation increased significantly in 4Q19 compared to both 4Q18 and 3Q19, to R$ 2.3 billion, due to the robust release of working capital in the period, mainly due to the reduction in the inventories of raw materials and finished products given the shutdown of the melt shops in December.

 

Free Cash Flow (R$ million)

 

 

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Free Cash Flow - Quarterly (R$ million)

 

 

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PERFORMANCE BY BUSINESS DIVISION (BD)

 

The information in this report is divided into four Business Divisions (BD) in accordance with Gerdau’s corporate governance, as follows:

 

·Brazil BD (Brazil Business Division) – includes the operations in Brazil (except special steel) and the iron ore operation in Brazil;

 

·North America BD (North America Business Division) – includes all operations in North America (Canada, United States and Mexico), except special steel, as well as the jointly controlled entities and associate company, both located in Mexico;
   
·South America BD (South America Business Division) – includes all operations in South America (Argentina, Peru, Uruguay and Venezuela), except the operations in Brazil, and the jointly controlled entities in the Dominican Republic and Colombia;

 

·Special Steel BD (Special Steel Business Division) – includes the special steel operations in Brazil and the United States.

 

NET SALES

 

EBITDA & EBITDA MARGIN

 

 

 

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BRAZIL BD

 

BRAZIL BD   4Q19   4Q18       3Q19       12M19   12M18    
Volumes (1,000 tonnes)                                        
Production of crude steel   1,439    1,454    -1.0%   1,079    33.4%   5,563    5,845    -4.8%
Shipments of steel   1,493    1,311    13.9%   1,415    5.5%   5,609    5,535    1.3%
Domestic Market   1,004    887    13.2%   1,031    -2.6%   3,959    3,951    0.2%
Exports   490    424    15.6%   384    27.6%   1,650    1,585    4.1%
Shipments of long steel   1,059    921    14.9%   1,072    -1.2%   4,134    4,079    1.4%
Domestic Market   637    589    8.1%   698    -8.7%   2,633    2,683    -1.9%
Exports   423    332    27.4%   374    13.1%   1,500    1,396    7.5%
Shipments of flat steel   434    390    11.4%   343    26.5%   1,475    1,457    1.3%
Domestic Market   367    298    23.2%   333    10.2%   1,325    1,268    4.5%
Exports   67    92    -27.0%   10    570.0%   150    189    -20.6%
Results (R$ million)                                        
Net Sales¹   4,057    3,946    2.8%   4,198    -3.4%   16,122    15,745    2.4%
Domestic Market   3,175    3,023    5.0%   3,446    -7.9%   12,912    12,320    4.8%
Exports   882    923    -4.5%   752    17.3%   3,210    3,425    -6.3%
Cost of Goods Sold   (3,782)   (3,374)   12.1%   (3,835)   -1.4%   (14,363)   (13,044)   10.1%
Gross profit   275    571    -51.9%   363    -24.2%   1,759    2,701    -34.9%
Gross margin (%)   6.8%   14.5%        8.6%        10.9%   17.2%     
Adjusted EBITDA²   543    647    -16.0%   706    -23.1%   2,639    3,032    -12.9%
Adjusted EBITDA Margin (%)   13.4%   16.4%        16.8%        16.4%   19.3%     

 

1 – Includes iron ore sales.

2 – Adjusted EBITDA due to the impacts from refurbishment of Blast Furnace 1 at the Ouro Branco Mill, net of tax reversals/provisions in 4Q19, 3Q19 and 12M19.

 

Production and shipments

 

In 4Q19, crude steel production was stable in relation to 4Q18, a period when the shutdown of the melt shops was neutralized by the higher production of Blast Furnace 1 at the Ouro Branco Mill. Compared to 3Q19, production increased, since during that period Blast Furnace 1 at Ouro Branco was undergoing maintenance.

 

Shipments in Brazil’s domestic market increased in 4Q19 compared to 4Q18, confirming the stronger demand in the construction and manufacturing sectors. Note that shipments of reinforced concrete products (rebar and fabricated rebar) increased by 17%, while shipments of heavy plates increased by 36%. Export shipments grew in relation to both 4Q18 and 3Q19.

 

In 4Q19, 442,000 tonnes of iron ore were sold to third parties and 1,216,000 tonnes were consumed internally. In 4Q18, shipments to third parties amounted to 642,000 tonnes and 1,224,000 tonnes of iron ore were consumed internally. The lower iron ore shipments in the comparison period impacted the net sales of the Brazil BD.

 

Operating Result

 

Net sales increased in 4Q19 in relation to 4Q18, supported by the growth in shipments, which was influenced by the recovery in domestic demand. Compared to 3Q19, the decrease in net sales is explained by the worse mix of sales in the domestic and export markets (share of exports in total shipments increased from 27% to 33%), combined with the lower prices in international markets.

 

Cost of goods sold increased in 4Q19 in relation to 4Q18, due to the impacts of the refurbishment of Blast Furnace 1 at the Ouro Branco Mill and the shutdown of the melt shops.

 

The decreases in gross profit and gross margin in 4Q19 compared to 4Q18 and 3Q19 were due to the lower profitability of exports and to the impacts from the shutdowns of the melt shops, which resulted in a lower dilution of fixed costs.

 

In 4Q19, EBITDA and EBITDA margin decreased in relation to 4Q18 and 3Q19, accompanying the decrease in gross profit and gross margin, which was smoothed by excluding the effects from nonrecurring items associated with the refurbishment of Blast Furnace 1 at the Ouro Branco Mill and the shutdowns of the melt shops (-R$ 131 million), net of tax reversals/provisions in 4Q19 (+R$ 193 million).

 

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EBITDA (R$ million) and EBITDA Margin (%)

 

 

 

NORTH AMERICA BD

 

NORTH AMERICA BD   4Q19     4Q18         3Q19         12M19     12M18      
Volumes (1,000 tonnes)                                        
Production of crude steel   1,053    1,179    -10.7%   1,086    -3.0%   4,601    6,431    -28.5%
Shipments of steel   1,050    1,198    -12.4%   1,083    -3.0%   4,275    6,085    -29.7%
Results (R$ million)                                        
Net Sales   3,375    4,335    -22.1%   3,627    -6.9%   14,656    19,927    -26.5%
Cost of Goods Sold   (3,201)   (3,915)   -18.2%   (3,310)   -3.3%   (13,351)   (18,165)   -26.5%
Gross profit   174    420    -58.6%   317    -45.1%   1,305    1,763    -26.0%
Gross margin (%)   5.2%   9.7%        8.7%        8.9%   8.8%     
EBITDA   257    437    -41.2%   380    -32.4%   1,569    1,787    -12.2%
EBITDA margin (%)   7.6%   10.1%        10.5%        10.7%   9.0%     

 

Production and shipments

 

Production and shipments decreased in 4Q19 in relation to 4Q18, due to the deconsolidation of the rebar units as from November 2018. Excluding the effects from divestments, shipments grew by 4%. In relation to 3Q19, a slight seasonal effect was observed in the reduction in sales, indicating that demand remains at healthy levels.

 

Operating Result

 

Net sales and cost of goods sold decreased in 4Q19 in relation to 4Q18, due to the aforementioned divestments, as well as to the lower prices in the period. In relation to 3Q19, the reduction in net sales is explained by the seasonal reduction in shipments and by the lower prices practiced in the period.

 

Cost of goods sold decreased in 4Q19 compared to 3Q19, due to lower volumes sold.

 

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Gross profit and gross margin decreased in 4Q19 compared to 4Q18 and to 3Q19, mainly due to the narrowing of the metals spread. In 4Q19, the spread was at US$ 426/st, compared to US$ 470/st in 4Q18 and US$ 456/st in 3Q19.

 

The reduction in EBITDA and EBITDA margin in 4Q19 compared to 4Q18 lagged the reduction in gross profit and gross margin, mainly due to the decrease in selling, general and administrative expenses in the period. In relation to 3Q19, the decrease in EBITDA followed a path similar to that of gross profit in the period.

 

EBITDA (R$ million) and EBITDA Margin (%)

 

 

 

SOUTH AMERICA BD

 

SOUTH AMERICA BD   4Q19     4Q18         3Q19         12M19     12M18      
Volumes (1,000 tonnes)                                        
Production of crude steel   161    144    11.7%   153    5.2%   609    746    -18.3%
Shipments of steel   274    262    4.4%   279    -1.8%   1,059    1,307    -18.9%
Results (R$ million)                                        
Net Sales   908    819    10.9%   771    17.8%   3,259    3,801    -14.3%
Cost of Goods Sold   (770)   (701)   9.8%   (643)   19.8%   (2,762)   (3,231)   -14.5%
Gross profit   138    118    17.2%   128    7.8%   497    570    -12.8%
Gross margin (%)   15.2%   14.4%        16.6%        15.3%   15.0%     
EBITDA   182    128    42.1%   165    10.3%   673    679    -0.9%
EBITDA margin (%)   20.0%   15.6%        21.4%        20.7%   17.9%     

 

Production and shipments

 

Steel production and shipments increased in 4Q19 in relation to 4Q18, supported by the higher shipments to Argentina and Peru, countries where the construction industry remains at healthy levels.

 

Operating Result

 

Net sales increased in 4Q19 compared to 4Q18, mainly due to the higher shipments.

 

The cost of goods sold increased in 4Q19 compared to 4Q18, reflecting the higher shipments.

 

13

 

 

 

 

Gross profit increased in 4Q19 compared to both 4Q18 and 3Q19. Gross margin expanded in 4Q19 compared to 4Q18, since the increase in net sales per tonne sold outpaced the increase in cost per tonne sold.

 

EBITDA and EBITDA margin increased in 4Q19 in relation to 4Q18, due to the growth in equity income, with the highlight the better performance of the joint venture in the Dominican Republic.

 

EBITDA (R$ million) and EBITDA Margin (%)

 

 

 

SPECIAL STEEL BD

 

SPECIAL STEEL BD   4Q19     4Q18         3Q19         12M19     12M18      
Volumes (1,000 tonnes)                                        
Production of crude steel   299    444    -32.6%   415    -28.0%   1,680    2,321    -27.6%
Shipments of steel   343    474    -27.6%   386    -11.1%   1,586    2,111    -24.9%
Results (R$ million)                                        
Net Sales   1,397    1,989    -29.8%   1,621    -13.8%   6,702    8,159    -17.9%
Cost of Goods Sold   (1,373)   (1,814)   -24.3%   (1,476)   -7.0%   (6,168)   (7,065)   -12.7%
Gross profit   24    175    -86.3%   145    -83.4%   534    1,094    -51.2%
Gross margin (%)   1.7%   8.8%        8.9%        8.0%   13.4%     
EBITDA   113    226    -50.1%   207    -45.4%   799    1,299    -38.5%
EBITDA margin (%)   8.1%   11.4%        12.8%        11.9%   15.9%     

 

Production and shipments

 

In Brazil, crude steel production decreased in 4Q19 compared to 4Q18, influenced by the shutdown of the mill in Mogi das Cruzes, São Paulo. Shipments decreased in the same period, despite the higher vehicle sales, reflecting the destocking trend in the automotive chain and the weaker vehicle exports.

 

In the United States, the reductions in crude steel production and in shipments is explained by the weaker demand in the oil and gas sector and the lower vehicle production in the period.

 

Operating Result

 

The reductions in net sales and cost of goods sold in 4Q19 compared to both 4Q18 and 3Q19 is due to the lower shipments in Brazil and the United States.

 

Gross profit and gross margin decreased significantly in 4Q19 due to the lower capacity utilization rate in the period, which reduced the dilution of fixed costs.

 

The reduction in EBITDA in 4Q19 compared to 4Q18 accompanied the performance of gross profit and gross margin in the period.

 

14

 

 

 

 

EBITDA (R$ million) and EBITDA Margin (%)

 

 

 

THE MANAGEMENT

 

This document contains forward-looking statements. These statements are based on estimates, information or methods that may be incorrect or inaccurate and that may not occur. These estimates are also subject to risks, uncertainties and assumptions that include, among other factors: general economic, political and commercial conditions in Brazil and in the markets where we operate, as well as existing and future government regulations. Potential investors are cautioned that these forward-looking statements do not constitute guarantees of future performance, given that they involve risks and uncertainties. Gerdau does not undertake and expressly waives any obligation to update any of these forward-looking statements, which are valid only on the date on which they were made.

 

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GERDAU S.A.      

CONSOLIDATED BALANCE SHEETS      

In thousands of Brazilian reais (R$)      

 

   December 31,
2019
   December 31,
2018
 
CURRENT ASSETS          
Cash and cash equivalents   2,641,652    2,890,144 
Short-term investments   3,652,949    459,470 
Trade accounts receivable - net   2,672,370    3,201,656 
Inventories   7,659,737    9,167,689 
Tax credits   504,302    527,428 
Income and social contribution taxes recoverable   483,088    445,561 
Unrealized gains on financial instruments   2,846    30,711 
Other current assets   618,769    780,423 
    18,235,713    17,503,082 
           
NON-CURRENT ASSETS          
Tax credits   465,549    32,065 
Deferred income taxes   4,071,219    3,874,054 
Unrealized gains on financial instruments   -    2,706 
Related parties   95,445    27,939 
Judicial deposits   1,991,715    2,135,414 
Other non-current assets   464,169    449,592 
Prepaid pension cost   45,381    17,952 
Advance for future investment in equity interest   -    375,456 
Investments in associates and jointly-controlled entities   1,812,399    1,367,802 
Goodwill   9,469,311    9,112,390 
Leasing   777,314    - 
Other Intangibles   673,262    836,096 
Property, plant and equipment, net   15,901,493    15,546,481 
    35,767,257    33,777,947 
           
TOTAL ASSETS  54,002,970   51,281,029 

 

16

 

 

 

 

GERDAU S.A.      

CONSOLIDATED BALANCE SHEETS      

In thousands of  Brazilian reais (R$)      

 

   December 31,
2019
   December 31,
2018
 
CURRENT LIABILITIES          
Trade accounts payable   3,762,768    4,335,054 
Short-term debt   1,544,211    1,822,183 
Debentures   18,015    2,755 
Taxes payable   432,988    351,545 
Income and social contribution taxes payable   205,092    395,682 
Payroll and related liabilities   479,693    588,627 
Dividends payable   50,968    169,616 
Leasing payable   202,536    - 
Employee benefits   495    157 
Environmental liabilities   60,913    60,419 
Unrealized losses on financial instruments   -    5,245 
Other current liabilities   666,858    772,970 
    7,424,537    8,504,253 
           
NON-CURRENT LIABILITIES          
Long-term debt   11,594,612    11,545,658 
Debentures   2,893,029    1,536,118 
Related parties   -    1,350 
Deferred income taxes   517,413    118,368 
Provision for tax, civil and labor liabilities   809,299    770,305 
Environmental liabilities   51,395    72,228 
Employee benefits   1,469,949    1,356,560 
Obligations with FIDC   1,018,501    938,526 
Leasing payable   601,733    - 
Other non-current liabilities   449,375    499,092 
    19,405,306    16,838,205 
           
EQUITY          
Capital   19,249,181    19,249,181 
Treasury stocks   (242,542)   (280,426)
Capital reserves   11,597    11,597 
Retained earnings   5,644,706    4,806,089 
Operations with non-controlling interests   (2,870,825)   (2,870,825)
Other reserves   5,163,584    4,814,988 
 EQUITY ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT   26,955,701    25,730,604 
           
NON-CONTROLLING INTERESTS   217,426    207,967 
           
EQUITY   27,173,127    25,938,571 
           
TOTAL LIABILITIES AND EQUITY  54,002,970   51,281,029 

 

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GERDAU S.A.                
CONSOLIDATED STATEMENTS OF INCOME                
In thousands of Brazilian reais (R$)  For the three-month period ended on   For the year ended on 
   December 31, 2019   December 31, 2018   December 31, 2019   December 31, 2018 
NET SALES   9,533,467    10,899,702    39,644,010    46,159,478 
                     
Cost of sales   (8,856,923)   (9,596,145)   (35,440,726)   (40,010,100)
                     
GROSS PROFIT   676,544    1,303,557    4,203,284    6,149,378 
                     
Selling expenses   (117,788)   (138,493)   (476,339)   (570,431)
General and administrative expenses   (234,806)   (262,000)   (954,117)   (1,082,449)
Other operating income   329,286    82,041    636,847    235,421 
Other operating expenses   (78,181)   (146,073)   (187,647)   (270,413)
Impairment of assets   -    -    -    - 
Impairment loss on trade receivables   (5,349)   7,402    (21,044)   (9,914)
Results in operations with subsidiaries and associate company   -    (185,559)   -    (414,507)
Equity in earnings of unconsolidated companies   (2,376)   (28,796)   (17,050)   10,141 
                     
INCOME (LOSS) BEFORE FINANCIAL INCOME (EXPENSES) AND TAXES   567,330    632,079    3,183,934    4,047,226 
                     
Financial income   85,566    81,580    223,213    204,000 
Financial expenses   (403,836)   (424,802)   (1,469,754)   (1,579,341)
Bonds repurchases   -    (223,925)   -    (223,925)
Exchange variations, net   45,299    187,052    (247,555)   (322,621)
Gain and losses on financial instruments, net   1,153    (11,959)   (15,118)   32,092 
                     
INCOME (LOSS) BEFORE TAXES   295,512    240,025    1,674,720    2,157,431 
                     
Current   52,012    (210,567)   (240,400)   (629,209)
Deferred   (245,319)   359,707    (217,433)   798,160 
Income and social contribution taxes   (193,307)   149,140    (457,833)   168,951 
                     
NET INCOME (LOSS)   102,205    389,165    1,216,887    2,326,382 
                     
(+) Maintenance Stoppage / Impacts of the Blast Furnace 1 reform of the Ouro Branco steel mill   131,110    -    368,813    - 
(-) Tax reversal/provisions   (193,083)   -    (250,311)   - 
(-)  Results in operations with subsidiaries and associate company   -    185,559    -    414,507 
(+) Bonds repurchases   -    223,925    -    223,925 
(+) Income tax of extraordinary items   21,071    (486,647)   (40,291)   (457,400)
(=) Total of extraordinary items   (40,902)   (77,163)   78,211    181,032 
                     
ADJUSTED NET INCOME*   61,303    312,002    1,295,098    2,507,414 

 

*Adjusted net income is a non-accounting indicator prepared by the Company, reconciled with the financial statements and consists of net income adjusted for extraordinary events that influenced the net income (loss), without cash effect.

 

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GERDAU S.A.                
CONSOLIDATED STATEMENTS OF CASH FLOWS                
In thousands of  Brazilian reais (R$)                
   For the three-month period ended on   For the year ended on 
   December 31, 2019   December 31, 2018   December 31, 2019   December 31, 2018 
Cash flows from operating activities                    
Net income (loss) for the year   102,205    389,165    1,216,887    2,326,382 
Depreciation and amortization   539,672    503,926    2,074,295    1,891,814 
Equity in earnings of unconsolidated companies   2,376    28,796    17,050    (10,141)
Exchange variation, net   (45,299)   (187,052)   247,555    322,621 
(Gains) Losses on financial instruments, net   (1,153)   11,959    15,118    (32,092)
Post-employment benefits   46,437    45,251    165,487    189,603 
Stock based remuneration   9,469    6,734    43,895    41,186 
Income tax   193,307    (149,140)   457,833    (168,951)
Losses (Gains) on disposal of property, plant and equipment   3,819    (13,236)   2,129    (41,109)
Results in operations with subsidiaries and associate company   -    185,559    -    414,507 
Impairment loss on trade receivables   5,349    (7,402)   21,044    9,914 
Provision for tax, labor and civil claims   43,692    (127,690)   38,417    (56,409)
Reversal of contingent liabilities, net   (280,133)   -    (402,499)   - 
Interest income on investments   (28,438)   (15,173)   (72,784)   (49,745)
Interest expense on loans   181,893    296,861    938,120    1,177,686 
Interest on loans with related parties   (2,110)   (351)   (4,767)   (545)
Reversal of net realisable value adjustment in inventory   (27,438)   1,637    24,665    8,228 
    743,648    969,844    4,782,445    6,022,949 
Changes in assets and liabilities                    
Decrease (Increase) in trade accounts receivable   770,250    1,186,732    656,831    71,631 
Decrease (Increase) in inventories   1,219,552    (40,994)   1,556,713    (2,427,473)
(Decrease) Increase in trade accounts payable   (42,071)   278,640    (642,699)   900,388 
(Increase) Decrease in other receivables   (25,707)   4,997    146,825    (118,988)
Decrease in other payables   (20,936)   (449,415)   (462,906)   (1,160,626)
Present value adjustment portion on leases   (77,799)   -    (83,620)   - 
Dividends from jointly-controlled entities   5,085    6,218    44,037    55,357 
Purchases of trading securities   (2,506,136)   (448,737)   (3,676,744)   (1,512,123)
Proceeds from maturities and sales of trading securities   12,418    655,292    521,616    1,629,595 
Cash provided by operating activities   78,304    2,162,577    2,842,498    3,460,710 
                     
Interest paid on loans and financing   (261,928)   (363,442)   (945,027)   (1,162,364)
Income and social contribution taxes paid   (33,750)   (81,840)   (254,679)   (298,663)
Net cash (used) provided by operating activities   (217,374)   1,717,295    1,642,792    1,999,683 
                     
Cash flows from investing activities                    
Purchases of property, plant and equipment   (485,960)   (360,100)   (1,746,600)   (1,194,934)
Proceeds from sales of property, plant and equipment, investments and other intangibles   1,498    2,244,925    21,805    4,021,251 
Purchases of other intangibles   (35,872)   (25,241)   (100,313)   (67,388)
Advance for future investment in equity interest   -    (375,456)   (94,687)   (375,456)
Capital decrease in joint venture   20,344    -    20,344    - 
Net cash (used) provided in investing activities   (499,990)   1,484,128    (1,899,451)   2,383,473 
                     
Cash flows from financing activities                    
Purchase of treasury shares   -    (93,685)   -    (243,396)
Dividends and interest on capital paid   (67,954)   (220,756)   (484,173)   (599,099)
Proceeds from loans and financing   2,112,754    1,596,573    5,585,573    2,560,789 
Repayment of loans and financing   (1,014,210)   (4,294,202)   (4,885,083)   (6,000,433)
Leasing payment   (3,202)   -    (161,824)   - 
Intercompany loans, net   52,466    13,794    (64,089)   25,755 
Net cash provided (used) in financing activities   1,079,854    (2,998,276)   (9,596)   (4,256,384)
                     
Exchange variation on cash and cash equivalents   (12,254)   (108,199)   17,763    208,034 
                     
Increase (Decrease) in cash and cash equivalents   350,236    94,948    (248,492)   334,806 
Cash and cash equivalents at beginning of period   2,291,416    2,795,196    2,890,144    2,555,338 
Cash and cash equivalents at end of period   2,641,652    2,890,144    2,641,652    2,890,144 

 

19

 

 

 

 

APPENDIX I – PRO FORMA RESULTS

 

To present the results of the business divisions excluding the effects from the divestment program, the pro forma Business Division and Consolidated results for 2018 follow:

 

 

Brazil BD - Pro forma   1Q18   2Q18   3Q18   4Q18   2018 
Volumes (1,000 tonnes)                         
Production of crude steel   1,532    1,381    1,479    1,454    5,846 
Shipments of steel   1,438    1,364    1,422    1,311    5,535 
Results (R$ million)                         
Net Sales   3,611    3,798    4,390    3,946    15,745 
Cost of Goods Sold   (2,929)   (3,139)   (3,602)   (3,374)   (13,044)
Gross profit   682    659    786    571    2,700 
Gross margin (%)   18.9%   17.4%   17.9%   14.5%   17.2%
Adjusted EBITDA   751    743    891    647    3,032 
Adjusted EBITDA Margin   20.8%   19.6%   20.3%   16.4%   19.3%

 

North America BD - Pro forma   1Q18   2Q18   3Q18   4Q18   2018 
Volumes (1,000 tonnes)                         
Production of crude steel   1,328    1,297    1,221    1,008    4,854 
Shipments of steel   1,061    1,125    1,027    1,003    4,216 
Results (R$ million)                         
Net Sales   2,933    3,818    4,030    3,705    14,486 
Cost of Goods Sold   (2,693)   (3,376)   (3,516)   (3,325)   (12,910)
Gross profit   240    442    514    380    1,576 
Gross margin (%)   8.2%   11.6%   12.8%   10.3%   10.9%
Adjusted EBITDA   239    437    522    406    1,604 
Adjusted EBITDA Margin   8.1%   11.4%   13.0%   11.0%   11.1%

 

South America BD - Pro forma   1Q18   2Q18  3Q18   4Q18  2018 
Volumes (1,000 tonnes)                         
Production of crude steel   146    169    142    144    601 
Shipments of steel   262    275    284    262    1,083 
Results (R$ million)                         
Net Sales   691    808    907    819    3,225 
Cost of Goods Sold   (533)   (667)   (762)   (701)   (2,713)
Gross profit   108    141    145    118    512 
Gross margin (%)   15.6%   17.5%   16.0%   14.4%   15.9%
Adjusted EBITDA   154    174    185    128    641 
Adjusted EBITDA Margin   22.3%   21.5%   20.4%   15.6%   19.9%

 

Special Steel BD - Pro forma   1Q18   2Q18   3Q18   4Q18   2018 
Volumes (1,000 tonnes)                         
Production of crude steel   522    568    578    444    2,112 
Shipments of steel   445    502    494    474    1,915 
Results (R$ million)                         
Net Sales   1,557    1,931    2,116    1,989    7,593 
Cost of Goods Sold   (1,321)   (1,633)   (1,819)   (1,814)   (6,587)
Gross profit   236    298    297    175    1,006 
Gross margin (%)   15.2%   15.4%   14.0%   8.8%   13.2%
Adjusted EBITDA   283    351    342    226    1,202 
Adjusted EBITDA Margin   18.2%   18.2%   16.2%   11.4%   15.8%

 

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Consolidated - Pro forma   1Q18   2Q18   3Q18   4Q18  2018 
Volumes (1,000 tonnes)                         
Production of crude steel   3,527    3,412    3,421    3,051    13,411 
Shipments of steel   3,060    3,117    3,124    2,971    12,272 
Results (R$ million)                         
Net Sales   8,443    9,937    10,927    10,270    39,577 
Cost of Goods Sold   (7,167)   (8,397)   (9,177)   (9,006)   (33,747)
Gross profit   1,276    1,540    1,750    1,264    5,830 
Gross margin (%)   15.1%   15.5%   16.0%   12.3%   14.7%
Adjusted EBITDA   1,410    1,657    1,899    1,373    6,339 
Adjusted EBITDA Margin   16.7%   16.7%   17.4%   13.4%   16.0%

 

Divestments   1Q18   2Q18   3Q18   4Q18   2018 
Volumes (1,000 tonnes)                         
Production of crude steel   638    575    548    170    1,931 
Shipments of steel   811    718    564    196    2,289 
Results (R$ million)                         
Net Sales   1,946    2,097    1,909    630    6,582 
Cost of Goods Sold   (1,883)   (1,993)   (1,797)   (590)   (6,263)
Gross profit   63    104    112    40    319 
Gross margin (%)                         
Adjusted EBITDA   74    99    114    31    318 
Adjusted EBITDA Margin                         

 

Consolidated   1Q18   2Q18   3Q18   4Q18   2018 
Volumes (1,000 tonnes)                         
Production of crude steel   4,165    3,987    3,969    3,221    15,342 
Shipments of steel   3,871    3,835    3,688    3,167    14,561 
Results (R$ million)                         
Net Sales   10,359    12,034    12,836    10,900    46,159 
Cost of Goods Sold   (9,050)   (10,390)   (10,974)   (9,596)   (40,010)
Gross profit   1,339    1,644    1,862    1,304    6,149 
Gross margin (%)   12.9%   13.7%   14.5%   12.0%   13.3%
Adjusted EBITDA   1,484    1,756    2,013    1,404    6,657 
Adjusted EBITDA Margin   14.3%   14.6%   15.7%   12.9%   14.4%

 

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APPENDIX II – ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) FACTORS

 

ESG Scorecard

 

The meeting of the Board of Directors held on February 18, 2020 approved, in addition to the ESG scorecard, the materiality matrix, the sustainability policy, the adjustments to internal regulations to reflect the new duties related to ESG and the monitoring of the activities for adhering to the Carbon Disclosure Project (CDP) and to System B.

 

The ESG Scorecard will be assessed by the Board of Directors and Strategy & Sustainability and Disclosure committees at a predefined frequency.

 

 

Risk management

 

Gerdau, through its existing processes and instruments, works on mitigating corporate, compliance and operating risks. Corporate risks are those associated with the Company’s strategy, its market and competition, the political and social environment, mergers and acquisitions and the availability of raw materials. Compliance risks are those related to compliance with the rules to which the Company and its employees are subject. Operating risks are related to internal processes, people or technology.

 

Risk factors include workplace safety, environmental, financial, tax, labor, operational, strategic, social, reputational, organizational climate, commercial and regulatory risks.

 

The Risk Management strategy is decentralized, capitalizes on and leverages the technical knowledge and profile of the professionals of each Business Division (Brazil BD, North America BD, South America BD and Special Steel BD). These divisions have controls in place to mitigate the risks identified and hold regular meetings to report results.

 

To act on material risks, the Company has established three lines of defense. The first line is the internal controls established in critical activities, procedures and guidelines with clear definitions of responsibilities, automated and manual controls and others.

 

The second line is related to management activities, including the monitoring, evaluation and improvement of processes and accountability. In addition to the work of the managers in the process to monitor their risks, the Internal Controls and Compliance areas support the Business in improving the control environment. The Compliance area is independent and reports to the Board of Directors. The Internal Controls area continuously assesses the control environment related to compliance with Sox Certification.

 

The third level is composed of the activities of the Internal Audit, which regularly conducts independent assessments of processes, supported by risk assessment, and reports periodically to the Audit Board and the Board of Directors.

 

The Internal Audit uses the annual plan to define the material risks and processes to be reviewed. Then it conducts a review to determine if the business areas comply with all laws and regulations, the Company’s policies and best practices. It also periodically monitors the action plans to ensure that corrective actions are being implemented to mitigate risks.

 

The Company structured its committees to ensure a network for protecting and monitoring its relevant risks and processes. To advise the Board of Directors, the Corporate Governance Comittee, Strategy and Sustainability Comittee, Compensation Comittee and Finance Comittee were created. To support the executive line in mitigating risks, there are the Risk Comittee, Disclosure Committee and other committees in the business divisions.

 

The Company also has a code of ethics for employees and another document for third parties, in addition to a Risk Management and Compliance Policy in place.

 

All employees undergo training and comply with the code of ethics, and everyone involved in sales activities has been trained in competition practices. All of our executives have completed training in anti-corruption practices.

 

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Moreover, the code of ethics for third parties was submitted to all active suppliers and clients through e-mail, declarations of acceptance, purchase orders and/or formal contracts.

 

Gerdau’s ethics channel, which supports its risk management is a tool for complaints / ethical doubts and is available to employees and to external stakeholders on the internet, via e-mail, telephone or by contacting the Audit Board and intranet. The ethics channel also is promoted through regular campaigns and accountability via e-mails, posters, banners, intranet, is mentioned in various guidelines and is permanently included in presentations on Compliance and ethics.

 

The website https://ri.gerdau.com/en provides the market, regulatory agencies (CVM and SEC) and stock exchanges (B3, NYSE and Latibex), through the 20-F Form and Reference Form, all details on risk management and key factors to which the organization is exposed.

 

Overall compensation of management

 

The objectives of Gerdau’s compensation policy are: to attract and retain high performance executives based on competitive compensation practices; to encourage the achievement and surpassing of challenging goals; and to leverage short- and long-term results consistently and sustainably.

 

The Reference Form (FR), in addition to such definition, provides on item 13.1.b.iii: “All elements of the compensation of the Directors and Officers, as well as the policies that determine them, are proposed and managed by the Human Resources area and are subject to approval by the Board of Directors with the support of the Compensation Committee. Meanwhile, the Human Resources area draws on support from a specialized compensation consulting firm with global operations to determine the relative value of the positions (evaluation of position) and to seek reference values in the market. The reference market is formed by Brazilian companies similar in scale to Gerdau that operate at in the local and international markets, by foreign companies also similar in scale to Gerdau operating in the steel or related industries and by companies that compete for the same professionals.

 

Item 13.1.e also determines that: “Compensation is structured in a way to balance the short-, medium- and long-term incentives. In the short team, the base compensation aligned with best market practices should be sufficient to retain talent. For performance to create value in the short and medium term, the Short-Term Incentive (ICP) is structured in a way to reflect the selected indicators in the determination of executive compensation levels (EBITDA and Net Income), seeking to align management performance with the Company’s overall objectives and targets. In the long term, the objective is to promote alignment by structuring the granting of stock options and/or restricted shares and/or shares conditioned upon results and/or deferred shares and/or a combination thereof, which can be converted into long-term gains as the shares appreciate in the market, also considering that the exercise of part of the grants is dependent on the achievement of performance targets that currently are linked to Return on Capital Employed (ROCE).”

 

As described in item 12.1 of the FR, the Compensation Committee is responsible for defining the overall compensation amounts; revising the compensation and general salary adjustment practices; and examining and determining compensation plans and granting stock options, as well as benefits and retirement packages for officers and strategic executives. The Compensation Committee is responsible for participating in the establishment of evaluation criteria, as well as in the performance review of the Company’s key executives.

 

In terms of the Compensation Committee, procedures are adopted to ensure its independence. As described in item 12.5/6 of the FR, the Compensation Committee is composed of five members, two of whom are independent directors and one of whom is the coordinator of such body.

 

To ensure the independence of decisions related to compensation, the Company maintains a flow of analyses and deliberations that includes the people area, the Compensation Committee and the Board of Directors. One of the mechanisms for ensuring no conflicts of interest is prohibiting the participation of members affected by conflicts of interest with the matter on the agenda. The compensation of the Board of Directors is submitted for analysis only by its independent members.

 

The Compensation Committee holds three meetings per year to present matters related to the compensation and benefits of all employees. All meetings have an agenda and the minutes containing its recommendations are reported to the Board of Directors.

 

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Throughout its 118 years, Gerdau has carried out four successions of generations, demonstrating the solidity of its governance and management process. On January 1, 2018, the Company took yet another step in this governance process, in which the members of the Gerdau Johannpeter family began to dedicate themselves exclusively to the Board of Directors. To lead this new phase of the Company, the Board of Directors chose Gustavo Werneck as the new CEO. 

 

The three members of the Gerdau Johannpeter family, through December 31, 2017, were members of the executive committee and also members of the Board of Directors, receiving wages only as statutory executive officers, as described in item 13.1.b.v of the FR: “We inform that the members that accumulate the function of statutory officers and members of the Board of Directors are compensated only as statutory officers.” The same rule is currently applied to the CEO, which, as of April 2019, also was elected a member of the Board of Directors.

 

By dedicating themselves exclusively to the Board of Directors, their compensation was reduced in line with the new function.

 

In addition to the movement of the members of the Gerdau Johannpeter family, with the new governance, executive officers who previously were part of the Company’s management bodies were elected statutory officers. With this, their compensation now reported to the Securities and Exchange Commission of Brazil (CVM). Note that because these officers already were part of the Company’s executive team, there was no increase in costs.

 

The compensation of management, which follows market practices and is based on surveys conducted by various global compensation consulting firms, represents approximately 0.5% of EBITDA, which represents a ratio lower than that of most companies listed on the B3, according to issue no. 7 of the corporate governance yearbook published by Revista Capital Aberto.

Available at: https://capitalaberto.com.br/edicoes/especial/anuario-2019-2020/.

 

The Company also has performance review processes and the Statutory Officers are assessed by the Board of Directors. The Governance Committee is responsible for assessing the Board of Directors, using an individual questionnaire aligned with the best practices of the Brazilian Corporate Governance Institute (IBGC). The assessment also includes the adherence of each member and of the body as a whole with the business principles and purpose.

 

As described, Gerdau monitors market practices and trends in compensation. The Board of Directors, supported by the Compensation Committee, approved in October 2019 a new performance assessment and short-term incentive program valid as of 2020. The new model is aligned with the cultural transformation, focusing on collaboration, simplicity, value creation and meritocracy.

 

Moreover, starting in 2020, the maximum limit for variable compensation was reduced from 20% to 15% of Gerdau’s overall net income. The decision, which aims to align the payment of variable compensation with the interests of shareholders, was based on Gerdau’s historical data and on market references.

 

The long-term compensation plan (ILP) is the plan in which the executives, directors and officers are eligible to receive shares in the Company. As described in item 13.4.e of the FR: “The Plan aims to align the interests of the Company and its executives and shareholders over the medium and long term, especially by the granting of restricted shares and/or linked to the achievement of future results. Therefore, the gains for participants are heavily linked to the consistent delivery of results and to the appreciation in value of the Company over time. Furthermore, the possibility of becoming a shareholder attracts and retains the executives sought by the Company, making a positive contribution to the perpetuity of the business.”

 

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Exhibit 99.2

 

 

 

 

 

 

Dear Shareholders:

 

In 2019, shipments amounted to 12.1 million tonnes, a 17.0% reduction in relation to 2018, due to the deconsolidation of assets resulting from the Company’s divestments in 2018. Steel shipments in 2019 generated consolidated net sales of R$ 39.6 billion, a 14.1% decrease compared to 2018.

 

Consolidated Adjusted EBITDA came to R$ 5.7 billion in 2019, down in relation to 2018, mainly due to the weaker performance of the Special Steel and Brazil Business divisions, as well as the divestments mentioned above.

 

Consolidated net income amounted R$ 1.2 billion, declining in relation to 2018, mainly due to the lower adjusted EBITDA. In 2019, Gerdau S.A. allocated R$ 356 million (R$ 0.21 per share) to the payment of dividends.

 

Profile

 

Gerdau is Brazil's largest steel producer, a leading producer of long steel in the Americas and one of the world’s leading suppliers of special steel. In Brazil, it also produces flat steel and iron ore, activities that expand its product mix and leverage the competitive advantages of its operations.

 

It also is the largest ferrous scrap recycler in Latin America and, around the world, transforms each year millions of tonnes of scrap into steel, underlining its commitment to the sustainable development of the regions where it operates. The shares of Gerdau companies are listed on the São Paulo (B3), New York (NYSE) and Madrid (Latibex) stock exchanges.

 

CONSOLIDATED INFORMATION

 

GERDAU’S PERFORMANCE IN 2019

 

Operating Results

 

CONSOLIDATED   12M19    12M18     
Volumes (1,000 tonnes)               
Production of crude steel   12,453    15,342    -18.8%
Shipments of steel   12,090    14,561    -17.0%
Results (R$ million)               
Net Sales   39,644    46,159    -14.1%
Cost of Goods Sold   (35,441)   (40,010)   -11.4%
Gross profit   4,203    6,149    -31.6%
Gross margin (%)   10.6%   13.3%     
SG&A   (1,430)   (1,652)   -13.4%
Selling expenses   (476)   (570)   -16.5%
General and administrative expenses   (954)   (1,082)   -11.8%
%SG&A/Net Sales   3.6%   3.6%     
Adjusted EBITDA   5,712    6,657    -14.2%
Adjusted EBITDA Margin   14.4%   14.4%     

 

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Production and Shipments

 

Consolidated crude steel production and shipments decreased in 2019 compared to 2018, mainly due to the deconsolidation of assets resulting from Company’s divestments.

 

Operating Result

 

Consolidated net sales decreased in 2019 compared to 2018, mainly due to the divestments in the North America and Special Steel BDs. Cost of goods sold decreased in 2019 in relation to 2018, below the rate of decrease in sales volumes, due to the higher cost per tonne in the Special Steel and Brazil BDs.

 

On a consolidated basis, gross profit and gross margin in 2019 decreased in relation to 2018, which is explained by the increase in net sales per tonne sold outpacing the increase in net sales per tonne sold, and by the lower production in the period. In 2019, the Company carried out a scheduled maintenance shutdown of Blast Furnace 1 at the Ouro Branco Mill (Minas Gerais) and of the melt shops in Brazil, which resulted in higher production costs and lower dilution of fixed costs.

 

Selling, general and administrative expenses decreased in 2019 compared to 2018, reflecting the Company’s ongoing efforts to streamline operations and to implement its digital innovation over the past few years, and remained stable as a ratio of net sales at 3.6%, which is the Company’s best percentage ever.

 

Breakdown of Consolidated EBITDA
(R$ million)
   12M19    12M18     
Net income   1,217    2,326    -47.7%
Net financial result   1,509    1,890    -20.2%
Provision for income and social contribution taxes   458    (169)   - 
Depreciation and amortization   2,073    1,892    9.6%
EBITDA - Instruction CVM ¹   5,257    5,939    -11.5%
Gains and losses on assets held for sale and sales in subsidiaries   -    414    - 
Equity in earnings of unconsolidated companies   16    (10)   - 
Proportional EBITDA of associated companies and jointly controlled entities   320    314    1.9%
Maintanence stoppage / Impacts from refurbishment of BF 1   369    -    - 
Tax reversals/provisions   (250)   -    - 
Adjusted EBITDA²   5,712    6,657    -14.2%
Adjusted EBITDA Margin   14.4%   14.4%     

 

CONCILIATION OF CONSOLIDATED EBITDA
(R$ million)
   12M19    12M18 
EBITDA -  Instruction CVM ¹   5,257    5,939 
Depreciation and amortization   (2,073)   (1,892)
OPERATING INCOME BEFORE FINANCIAL RESULT AND TAXES³   3,184    4,047 

 

 

1 – Non-accounting measure calculated in accordance with CVM Instruction 527.

2 – Non-accounting measure calculated by the Company. The Company presents Adjusted EBITDA to provide additional information on cash generation in the period.

3 - Accounting measure reported in the consolidated Income Statement.

 

Adjusted EBITDA in 2019 declined in relation to 2018, accompanying the performance of gross profit. Meanwhile, EBITDA margin remained stable in 2019 compared to 2018, excluding the effects of non-recurring items: impact of the scheduled maintenance shutdown of Blast Furnace 1 at Ouro Branco (Minas Gerais) and of the melt shops (-R$ 369 million), net of tax reversals/provisions in 2019 (+R$ 250 million).

 

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Financial result and net income

 

CONSOLIDATED
(R$ million)
   12M19    12M18     
Income before financial income expenses and taxes¹   3,184    4,047    -21.3%
Financial Result   (1,509)   (1,890)   -20.2%
Financial income   223    204    9.3%
Financial expenses   (1,470)   (1,579)   -6.9%
Exchange variation, net (including net investment hedge)   (120)   (346)   -65.3%
Exchange variation (other currencies)   (127)   23    - 
Bonds repurchase expenses   -    (224)   - 
Gains (losses) on financial instruments, net   (15)   32    - 
Income before taxes¹   1,675    2,157    -22.3%
Income and social contribution taxes   (458)   169    - 
Exchange variation including net investment hedge   (109)   358    - 
Other lines   (526)   (646)   -18.6%
Non-recurring items   (40)   457    - 
Consolidated Net Income ¹   1,217    2,326    -47.7%
Non-recurring items   78    181    -56.9%
Gains and losses on assets held for sale and sales on interest in subsidiaries   -    414    - 
Maintanence stoppage / Impacts from refurbishment of BF 1   369    -    - 
Bonds repurchase expenses   -    224    - 
Tax reversals/provisions   (250)   -    - 
Income and social contribution taxes - non-recurring items   (40)   (457)   -91.2%
Consolidated Adjusted Net Income (loss)2   1,295    2,507    -48.3%

 

 

1 - Accounting measure disclosed in the consolidated Income Statement.

2 - Non-accounting measure calculated by the Company to show net profit adjusted by non-recurring events that influenced the result but did not produce any cash effects.

 

Compared to 2019, the lower negative financial result in 2019 was mainly due to the net effects from exchange variation on liabilities contracted in U.S. dollar (average depreciation of the Brazilian real against the U.S. dollar of 4% in 2019, compared to 17% in 2018), which were offset under “IR/CS - Income Tax/Social Contribution – effects from exchange variation that include net investment hedge.” The better performance of the financial result also was influenced by lower financial expenses resulting from the strategy to reduce the Company’s debt.

 

Consolidated net income, adjusted by non-recurring items in 2019, decreased in relation to 2018, mainly due to the lower adjusted EBITDA.

 

Dividends

 

In 2019, Gerdau S.A. allocated R$ 356 million (R$ 0.21 per share) for the payment of dividends.

 

Working Capital and Cash Conversion Cycle

 

In December 2019, the cash conversion cycle measured in days (working capital divided by the quarter’s daily net sales) was lower compared to December 2018, due to the reduction in inventories, influenced by maintenance shutdowns of the melt shops and higher exports in the end of 2019.

 

4

 

 

 

 

 

 

Financial liabilities

 

Debt composition         
(R$ Million)  12.31.2019    12.31.2018 
Short Term   1,562     1,825 
Long Term   14,488     13,082 
Gross Debt   16,050     14,907 
Cash, cash equivalents and short-term investments   6,295     3,349 
Net Debt   9,755     11,558 

 

On December 31, 2019, gross debt was 9.7% short term and 90.3% long term. Broken down by currency, 18.4% of gross debt was denominated in Brazilian real, 81.2% in U.S. dollar and 0.4% in other currencies. On December 31, 2019, 52% of cash was held by Gerdau companies abroad and denominated mainly in U.S. dollar. The reduction in net debt from R$ 1.8 billion in December 31, 2018 to December 31, 2019 was mainly due to a reduction in working capital in the end of 2019.

  

The evolution in key debt indicators is shown below:

 

Indicators  12.31.2019   12.31.2018 
Gross debt / Total capitalization ¹   37%   36%
Net debt² (R$) / EBITDA ³ (R$)   1.67x   1.71x

 

1 - Total capitalization = shareholders' equity + gross debt – interest expenses

2 - Net debt = gross debt – interest on debt – cash, cash equivalents and financial investments.

3 - Adjusted EBITDA in the last 12 months.

 

The reduction on net debt/EBITDA ratio was due to the efforts to reduce net debt in the periods compared, even with the decrease on EBTIDA.

 

5

 

 

 

 

Payment schedule of gross debt (non-current)

 

 

  

In November 2019, the Company carried out a bond issue in the aggregate amount of US$ 500 million, with maturity in 2030 and compensatory interest of 4.250% per year, priced at 98.973% of their face value.

 

In April, 26 of 2019, Gerdau S.A. announced to the market about the 16th issue by the Company of unsecured, non-convertible debentures in two series, in the aggregate amount of R$ 1.4 billion, with the first-series debentures amounting to R$ 600 million (“1st Series Debentures”) and the second-series debentures amounting to R$ 800 million (“2nd Series Debentures”), with unit par value of R$ 1,000.00..

 

On December 31, 2019, the nominal weighted average cost of gross debt was 5.5%, or 4.7% for the portion denominated in Brazilian real, 5.6% plus exchange variation for the portion denominated in U.S. dollar contracted by companies in Brazil and 6.1% for the portion contracted by subsidiaries abroad. On December 31, 2019, the average gross debt term was 7.4 years.

 

The Board of Directors established, in 2019, as the Company’s financial policy the implementation and maintenance in the long term of the following parameters, admitting occasional variations in the short term:

 

Maximum net debt/EBITDA ratio of between 1x and 1.5x;

 

Average debt term of over six years;

 

Maximum gross debt of US$ 12 billion.

 

These parameters will enable the Company to pursue a balanced financial situation while successfully executing an investment plan to meet the market’s demands and the industry’s challenges.

 

Investments

 

Investments 2019

 

Capex came to R$ 1.7 billion in 2019, which was allocated to productivity gains and maintenance. Of the total capex in the year, 49% was allocated to the Brazil BD, 23% to the North America BD, 24% to the Special Steel BD and 4% to the South America BD.

 

Investments 2019-2021

 

Gerdau announced its three-year CAPEX plan (2019-2021), amounting to R$ 7 billion, broken down into three categories:

 

General maintenance: focused on improving the operational excellence of existing assets.

 

Ouro Branco Maintenance (Minas Gerais): series of initiatives related to the scheduled shutdown to modernize the mill, which is estimated for 2022, subject to schedule review.

 

Technological expansion and updating: investments to expand installed capacity and to update technology in product lines with higher profitability potential. The execution of these investments will be flexible, since they will be made as the expected market growth and free cash flow for the period are confirmed, while simultaneously observing Gerdau's new financial policy to reach a net debt/EBITDA ratio of 1x to 1.5x.

 

6

 

 

 

 

 

 

Gerdau S.A. announced to its shareholders and the general market that, on November 26, 2019, its subsidiary Gerdau Aços Longos S.A. entered into a final agreement with Hierros Añón, S.A. and Gallega de Mallas, S.L. for the acquisition of 96.35% of the shares issued by Siderúrgica Latino-Americana S.A. (“SILAT”), a company located in Caucaia, in the metropolitan area of Fortaleza, State of Ceará, for economic value of US$ 110.8 million, subject to the typical adjustments to the acquisition price. The consummation of the transaction is subject to approval by Brazil’s antitrust agency CADE (Conselho Administrativo de Defesa Econômica) and to the fulfillment of conditions precedent typical to transactions of this type. SILAT has annual installed production capacity of 600,000 tonnes of rolled products. The acquisition is part of Gerdau’s strategy to improve service to its clients in the Brazilian market.

 

Free Cash Flow (FCF)

 

Free cash flow generation in 2019 was R$ 4.4 billion compared to R$ 2.6 billion in 2018, mainly due to the higher working capital consumption in the period.

 

Free Cash Flow 2019 (R$ million)

 

 

A well-defined but flexible investment program for the next three years combined with the leverage and indebtedness parameters established by the Board of Directors for the long term will enable the Company to continue aspiring to generate positive free cash flow in the coming years, which is extremely important for an intensive capital business whose main products and inputs have significant exposure to international prices.

 

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BUSINESS DIVISIONS (BDs)

 

The information in this report is divided into four Business Divisions (BD) in accordance with Gerdau’s corporate governance, as follows:

 

Brazil BD (Brazil Business Division) – includes the operations in Brazil (except special steel) and the iron ore operation in Brazil;

 

North America BD (North America Business Division) – includes all operations in North America (Canada, United States and Mexico), except special steel, as well as the jointly controlled entities and associate company, both located in Mexico;

 

South America BD (South America Business Division) – includes all operations in South America (Argentina, Peru, Uruguay and Venezuela), except the operations in Brazil, and the jointly controlled entities in the Dominican Republic and Colombia;

 

Special Steel BD (Special Steel Business Division) – includes the special steel operations in Brazil and the United States.

 

BRAZIL BD

 

BRAZIL BD   12M19    12M18     
Volumes (1,000 tonnes)               
Production of crude steel   5,563    5,845    -4.8%
Shipments of steel   5,609    5,535    1.3%
Domestic Market   3,959    3,951    0.2%
Exports   1,650    1,585    4.1%
Shipments of long steel   4,134    4,079    1.4%
Domestic Market   2,633    2,683    -1.9%
Exports   1,500    1,396    7.5%
Shipments of flat steel   1,475    1,457    1.3%
Domestic Market   1,325    1,268    4.5%
Exports   150    189    -20.6%
Results (R$ million)               
Net Sales1   16,122    15,745    2.4%
Domestic Market   12,912    12,320    4.8%
Exports   3,210    3,425    -6.3%
Cost of Goods Sold   (14,363)   (13,044)   10.1%
Gross profit   1,759    2,701    -34.9%
Gross margin (%)   10.9%   17.2%     
Adjusted EBITDA²   2,639    3,032    -12.9%
Adjusted EBITDA Margin (%)   16.4%   19.3%     

 

1 – Includes iron ore sales.

2 – Adjusted EBITDA due to the impacts from refurbishment of Blast Furnace 1 at the Ouro Branco Mill, net of tax reversals/provisions in 12M19

 

Crude steel production decreased in 2019 in relation to 2018, due to the scheduled maintenance shutdown of Blast Furnace 1 in Ouro Branco, Minas Gerais and of the melt shops. Meanwhile, steel shipments decreased slightly in 2019 compared to 2018, due to the decline in exports. On the other hand, a highlight was the growth in flat steel shipments in the domestic market, especially the higher penetration in the oil, gas and wind power sectors.

 

In 2019, 1.8 million tonnes of iron ore were sold to third parties, a decrease when compared to the 2.9 million tonnes sold in 2018, impacting the net sales of the Brazil BD.

 

The increase in net sales in 2019 compared to 2018 was mainly due to increase in net sales per tonne sold in the domestic market, which was partially neutralized by the decrease in export prices in the international market.

 

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Cost of goods sold increased in 2019 compared to 2018, due to the aforementioned maintenance shutdowns and to the higher costs of iron ore and coal in the period.

 

Gross income and gross margin decreased in 2019 compared to 2018, since the cost per tonne sold increased by 9%, while net sales per tonne sold increased by 1%.

 

EBITDA and EBITDA margin decreased in 2019 compared to 2018, accompanying the performance of gross profit and gross margin, the decreases in which were smoothed after excluding nonrecurring effects: impacts from the refurbishment of Blast Furnace at the Ouro Branco Mill and the shutdowns of the melt shops (-R$ 369 million), net of tax reversals/provisions in 2019 (+R$ 250 million).

 

NORTH AMERICA BD

 

NORTH AMERICA BD   12M19   12M18    
Volumes (1,000 tonnes)               
Production of crude steel   4,601    6,431    -28.5%
Shipments of steel   4,275    6,085    -29.7%
Results (R$ million)               
Net Sales   14,656    19,927    -26.5%
Cost of Goods Sold   (13,351)   (18,165)   -26.5%
Gross profit   1,305    1,763    -26.0%
Gross margin (%)   8.9%   8.8%     
EBITDA   1,569    1,787    -12.2%
EBITDA margin (%)   10.7%   9.0%     

 

The decrease in crude steel production and steel shipments in 2019 compared to 2018 was mainly due to the deconsolidation of the wire-rod operations as of April 2018 and of the rebar operations as of November 2018 in the United States. Excluding these effects, shipments remained relatively stable, confirming the view of a still robust market for construction and industry.

 

Net sales and cost of goods sold decreased in 2019 compared to 2018, mainly due to the aforementioned divestments.

 

Gross profit declined, accompanying the performance of revenue, while gross margin remained unchanged due to the stability in the metals spread, considering the new portfolio for this division: commercial bars and structural profiles.

 

The decrease in EBITDA at a slower pace than the decrease in gross profit was due to the significant improvement in SG&A expenses, which also contributed to the expansion in EBITDA margin, which reached its highest level since 2011.

 

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SOUTH AMERICA BD

 

SOUTH AMERICA BD   12M19   12M18    
Volumes (1,000 tonnes)               
Production of crude steel   609    746    -18.3%
Shipments of steel   1,059    1,307    -18.9%
Results (R$ million)               
Net Sales   3,259    3,801    -14.3%
Cost of Goods Sold   (2,762)   (3,231)   -14.5%
Gross profit   497    570    -12.8%
Gross margin (%)   15.3%   15.0%     
EBITDA   673    679    -0.9%
EBITDA margin (%)   20.7%   17.9%     

 

Crude steel production and steel shipments decreased in 2019 compared to 2018, mainly due to the deconsolidation of the operation in Chile. Excluding this effect, crude steel production and steel shipments were relatively stable.

 

Gross profit declined mainly due to the above-mentioned deconsolidation. However, gross margin remained stable in 2019 compared to 2018, since the increase in net sales per tonne sold was in line with the cost per tonne sold.

 

The EBITDA in 2019 were stable when compared to 2018. The EBITDA margin, however, increased due to the deconsolidation already mentioned.

 

SPECIAL STEEL BD

 

SPECIAL STEEL BD   12M19   12M18    
Volumes (1,000 tonnes)               
Production of crude steel   1,680    2,321    -27.6%
Shipments of steel   1,586    2,111    -24.9%
Results (R$ million)               
Net Sales   6,702    8,159    -17.9%
Cost of Goods Sold   (6,168)   (7,065)   -12.7%
Gross profit   534    1,094    -51.2%
Gross margin (%)   8.0%   13.4%     
EBITDA   799    1,299    -38.5%
EBITDA margin (%)   11.9%   15.9%     

 

Crude steel production and shipments decreased in 2019 compared to 2018, due to the deconsolidation of the operation in India, the slowdown in the oil and gas industry in the United Stated and the weaker demand in Argentina for vehicles exported from Brazil. In addition, the Brazilian auto industry underwent a destocking trend in late 2019.

 

Net sales decreased in 2019 compared to 2018, due to the decline in shipments, which was partially neutralized by the increase in net sales per tonne sold.

 

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Cost of goods sold decreased due to the lower shipments. On the other hand, the strong increase in the cost per tonne sold, mainly due to the lower capacity utilization rate, which reached levels below 50%, affected the division’s gross profit and gross margin. In addition, the series of declines in steel prices in the United States, accompanying the performance of scrap prices, resulted in margin compression.

 

EBITDA and EBITDA margin decreased in 2019 compared to 2018, accompanying the decline in gross margin.

 

ESG (ENVIRONMENTAL, SOCIAL AND GOVERNANCE) FACTOS

 

ESG Scorecard

 

The meeting of the Board of Directors held on February 18, 2020 approved, in addition to the ESG scorecard, the materiality matrix, the sustainability policy, the adjustments to internal regulations to reflect the new duties related to ESG and the monitoring of the activities for adhering to the Carbon Disclosure Project (CDP) and to System B.

 

The ESG Scorecard will be assessed by the Board of Directors and Strategy & Sustainability and Disclosure committees at a predefined frequency.

 

Risk management

 

Gerdau, through its existing processes and instruments, works on mitigating corporate, compliance and operating risks. Corporate risks are those associated with the Company’s strategy, its market and competition, the political and social environment, mergers and acquisitions and the availability of raw materials. Compliance risks are those related to compliance with the rules to which the Company and its employees are subject. Operating risks are related to internal processes, people or technology.

 

Risk factors include workplace safety, environmental, financial, tax, labor, operational, strategic, social, reputational, organizational climate, commercial and regulatory risks.

 

The Risk Management strategy is decentralized, capitalizes on and leverages the technical knowledge and profile of the professionals of each Business Division (Brazil BD, North America BD, South America BD and Special Steel BD). These divisions have controls in place to mitigate the risks identified and hold regular meetings to report results.

 

To act on material risks, the Company has established three lines of defense. The first line is the internal controls established in critical activities, procedures and guidelines with clear definitions of responsibilities, automated and manual controls, etc.

 

The second line is related to management activities, including the monitoring, evaluation and improvement of processes and accountability. In addition to the work of the managers in the process to monitor their risks, the Internal Controls and Compliance areas support the Business in improving the control environment. The Compliance area is independent and reports to the Board of Directors. The Internal Controls area continuously assesses the control environment related to compliance with Sox Certification.

 

The third level is composed of the activities of the Internal Audit, which regularly conducts independent assessments of processes, supported by risk assessment, and reports periodically to the Audit Board and the Board of Directors.

 

The Internal Audit uses the annual plan to define the material risks and processes to be reviewed. Then it conducts a review to determine if the business areas comply with all laws and regulations, the Company’s policies and best practices. It also periodically monitors the action plans to ensure that corrective actions are being implemented to mitigate risks.

 

The Company structured its committees to ensure a network for protecting and monitoring its relevant risks and processes. To advise the Board of Directors, the Corporate Governance Comittee, Strategy and Sustainability Comittee, Compensation Comittee and Finance Comittee were created. To support the executive line in mitigating risks, there are the Risk Comittee, Disclosure Committee and other committees in the business divisions.

 

The Company also has a code of ethics for employees and another document for third parties, in addition to a Risk Management and Compliance Policy in place.

 

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All employees undergo training and comply with the code of ethics, and everyone involved in sales activities has been trained in competition practices. All of our executives have completed training in anti-corruption practices.

 

Moreover, the code of ethics for third parties was submitted to all active suppliers and clients through e-mail, declarations of acceptance, purchase orders and/or formal contracts.

 

Gerdau’s ethics channel, which supports its risk management is a tool for complaints / ethical doubts and is available to employees and to external stakeholders on the internet, via e-mail, telephone or by contacting the Audit Board and intranet. The ethics channel also is promoted through regular campaigns and accountability via e-mails, posters, banners, intranet, is mentioned in various guidelines and is permanently included in presentations on Compliance and ethics.

 

The website https://ri.gerdau.com/en provides the market, regulatory agencies (CVM and SEC) and stock exchanges (B3, NYSE and Latibex), through the 20-F Form and Reference Form, all details on risk management and key factors to which the organization is exposed.

 

Overall compensation of management

 

The objectives of Gerdau’s compensation policy are: to attract and retain high performance executives based on competitive compensation practices; to encourage the achievement and surpassing of challenging goals; and to leverage short- and long-term results consistently and sustainably.

 

The Reference Form (FR), in addition to such definition, provides on item 13.1.b.iii: “All elements of the compensation of the Directors and Officers, as well as the policies that determine them, are proposed and managed by the Human Resources area and are subject to approval by the Board of Directors with the support of the Compensation Committee. Meanwhile, the Human Resources area draws on support from a specialized compensation consulting firm with global operations to determine the relative value of the positions (evaluation of position) and to seek reference values in the market. The reference market is formed by Brazilian companies similar in scale to Gerdau that operate at in the local and international markets, by foreign companies also similar in scale to Gerdau operating in the steel or related industries and by companies that compete for the same professionals.

 

Item 13.1.e also determines that: “Compensation is structured in a way to balance the short-, medium- and long-term incentives. In the short team, the base compensation aligned with best market practices should be sufficient to retain talent. For performance to create value in the short and medium term, the Short-Term Incentive (ICP) is structured in a way to reflect the selected indicators in the determination of executive compensation levels (EBITDA and Net Income), seeking to align management performance with the Company’s overall objectives and targets. In the long run, the objective is to promote alignment by structuring the granting of stock options and/or restricted shares and/or shares conditioned upon results and/or deferred shares and/or a combination thereof, which can be converted into long-term gains as the shares appreciate in the market, also considering that the exercise of part of the grants is dependent on the achievement of performance targets that currently are linked to Return on Capital Employed (ROCE).”

 

As described in item 12.1 of the FR, the Compensation Committee is responsible for defining the overall compensation amounts; revising the compensation and general salary adjustment practices and examining and determining compensation plans and granting stock options, as well as benefits and retirement packages for officers and strategic executives. The Compensation Committee is responsible for participating in the establishment of evaluation criteria, as well as in the performance review of the Company’s key executives.

 

In terms of the Compensation Committee, procedures are adopted to ensure its independence. As described in item 12.5/6 of the FR, the Compensation Committee is composed of five members, two of whom are independent directors and one of whom is the coordinator of such body.

 

To ensure the independence of decisions related to compensation, the Company maintains a flow of analyses and deliberations that includes the people area, the Compensation Committee and the Board of Directors. One of the mechanisms for ensuring no conflicts of interest is prohibiting the participation of members affected by conflicts of interest with the matter on the agenda. The compensation of the Board of Directors is submitted for analysis only by its independent members.

 

The Compensation Committee holds three meetings per year to present matters related to the compensation and benefits of all employees. All meetings have an agenda and the minutes containing its recommendations are reported to the Board of Directors.

 

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Throughout its 118 years, Gerdau has carried out four successions of generations, demonstrating the solidity of its governance and management process. On January 1, 2018, the Company took yet another step in this governance process, in which the members of the Gerdau Johannpeter family began to dedicate themselves exclusively to the Board of Directors. To lead this new phase of the Company, the Board of Directors chose Gustavo Werneck as the new CEO.

 

The three members of the Gerdau Johannpeter family, through December 31, 2017, were members of the executive committee and also members of the Board of Directors, receiving wages only as statutory executive officers, as described in item 13.1.b.v of the FR: “We inform that the members that accumulate the function of statutory officers and members of the Board of Directors are compensated only as statutory officers.” The same rule is currently applied to the CEO, which, as of April 2019, also was elected a member of the Board of Directors.

 

By dedicating themselves exclusively to the Board of Directors, their compensation was reduced in line with the new function.

 

In addition to the movement of the members of the Gerdau Johannpeter family, with the new governance, executive officers who previously were part of the Company’s management bodies were elected statutory officers. With this, their compensation now reported to the Securities and Exchange Commission of Brazil (CVM). Note that because these officers already were part of the Company’s executive team, there was no increase in costs.

 

The compensation of management, which follows market practices and is based on surveys conducted by various global compensation consulting firms, represents approximately 0.5% of EBITDA, which represents a ratio lower than that of most companies listed on the B3, according to issue no. 7 of the corporate governance yearbook published by Revista Capital Aberto.

Available at: https://capitalaberto.com.br/edicoes/especial/anuario-2019-2020/.

 

The Company also has performance review processes and the Statutory Officers are assessed by the Board of Directors. The Governance Committee is responsible for assessing the Board of Directors, using an individual questionnaire aligned with the best practices of the Brazilian Corporate Governance Institute (IBGC). The assessment also includes the adherence of each member and of the body as a whole with the business principles and purpose.

 

As described, Gerdau monitors market practices and trends in compensation. The Board of Directors, supported by the Compensation Committee, approved in October 2019 a new performance assessment and short-term incentive program valid as of 2020. The new model is aligned with the cultural transformation, focusing on collaboration, simplicity, value creation and meritocracy.

 

Moreover, starting in 2020, the maximum limit for variable compensation was reduced from 20% to 15% of Gerdau’s overall net income. The decision, which aims to align the payment of variable compensation with the interests of shareholders, was based on Gerdau’s historical data and on market references.

 

The long-term compensation plan (ILP) is the plan in which the executives, directors and officers are eligible to receive shares in the Company. As described in item 13.4.e of the FR: “The Plan aims to align the interests of the Company and its executives and shareholders over the medium and long term, especially by the granting of restricted shares and/or linked to the achievement of future results. Therefore, the gains for participants are heavily linked to the consistent delivery of results and to the appreciation in value of the Company over time. Furthermore, the possibility of becoming a shareholder attracts and retains the executives sought by the Company, making a positive contribution to the perpetuity of the business.”

 

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INFORMATION ON THE PARENT COMPANY

 

Gerdau S.A. is a publicly traded corporation with registered office in the city of São Paulo. The Company holds interests in other companies and also produces and markets steel goods in the special steel segment.

 

Earnings

 

A substantial part of the results of Gerdau S.A. comes from investments in subsidiaries and associate companies. In 2019, these investments generated equity income of R$ 1.5 billion. On December 31, 2018, the value of these investments amounted to R$ 30.5 billion.

 

In 2019, the Company sold 678,000 tonnes of steel products, which generated net revenue of R$ 2.8 billion and cost of goods sold of R$ 2.4 billion. Gross margin in the year stood at 14.1%.

 

In fiscal year 2019, the financial result (financial income, financial expenses, net exchange variation and losses from financial instruments) was negative R$ 0.8 billion, compared to negative R$ 1.5 billion in 2018. This variation in the financial result was mainly due to the effect from exchange variation on related-party debt (depreciation in the price of the Brazilian real against the U.S. dollar of 4% in 2019, compared to depreciation of 17% in 2018).

 

Gerdau S.A. recorded net income of R$ 1.2 billion in 2019, which corresponds to R$ 0.71 per share outstanding, compared to the net income of R$ 2.3 billion in 2018. The reduction in net income was basically due to the lower equity income (loss).

 

On December 31, 2019, the shareholders’ equity of the Company amounted to R$ 27.0 billion, representing book value of R$ 15.92 per share.

 

Net debt (loans and financing, plus debentures, less cash, cash equivalents and financial investments) plus related-party debt amounted to R$ 7.4 billion on December 31, 2019 and R$ 8.3 billion on December 31, 2018. The increase is explained by the issue of new debentures.

 

Dividends

 

In 2019, Gerdau S.A. allocated R$ 356.5 million (R$ 0.21 per share) for the payment of dividends.

 

  Dividends   Per share  
Period  (R$ million)   (R$)   Payment
1Q19   118.8    0.07   05/29/2019
2Q19   118.8    0.07   08/28/2019
3Q19   67.9    0.04   11/25/2019
4Q19   51.0    0.03   11/3/2020
Total   356.5    0.21    

 

RELATIONSHIP WITH INDEPENDENT AUDITOR

 

The Company’s policy for hiring any services from the independent auditor unrelated to external audit is based on the principles that preserve the independence of the auditor, namely: (a) auditors must not audit their own work; (b) auditors may not hold management positions at their clients; and (c) auditors must not promote the interests of their clients.

 

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Audit fees refer to professional services rendered in the audit of the Company's consolidated financial statements, quarterly reviews of the Company's consolidated financial statements, corporate audits and interim reviews of certain subsidiaries, in accordance with applicable legislation. Audit fees comprise due diligence services commonly performed by the external auditors in the event of an acquisition and advisory services on accounting standards and transactions. All fees unrelated to audit services refer primarily to services rendered to the Company's subsidiaries abroad to comply with tax requirements.

 

In compliance with CVM Instruction 381/2003, Gerdau S.A. informs that KPMG Auditores Independentes, the Company’s independent auditor, did not render any services other than those related to the external audit that represented more than five percent (5%) of all audit fees during fiscal year 2019.

 

ACKNOWLEDGMENTS

 

Lastly, the Company thanks its clients, shareholders, suppliers, financial institutions, government agencies and all other stakeholders for their important support, and especially our team of employees for their hard work and dedication.

 

DECLARATION OF THE OFFICERS

 

In accordance with article 25 of CVM Instruction 480 of December 7, 2009, the Board of Executive Officers declares that it has reviewed, discussed and is in agreement with the Financial Statements for the fiscal year ended December 31, 2019 and with the opinions expressed in the Independent Auditor’s report on the Financial Statements, issued on this date.

 

São Paulo, February 18, 2020

 

THE MANAGEMENT

 

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