experiencing the world - ri.gerdau.com · Board of Directors, Audit Board, Executive Board and each employee on our team. ... governance practices and rigorous controls of internal

INTEGRATED REPORT 2018

CONTENTS

1ABOUT THE REPORT

4

7

CORPORATE GOVERNANCE

CORPORATE INFORMATION

• Message from the Chairman of the Board

• Message from the CEO

6

MESSAGES

OPERATING & FINANCIAL PERFORMANCE

2

• Numbers

• Business Model

GERDAU

3• Human Capital

• Social & Relational Capital

• Intellectual Capital

• Natural Capital

• Manufacturing Capital

• Financial Capital

CAPITALS

5

NEW WAYS OF

experiencing the world

1ABOUT THE REPORT

4GERDAU CAPITALSCORPORATE GOVERNANCE

OPERATING & FINANCIAL

PERFORMANCE


ABOUT THE REPORT

MESSAGES

ABOUT THE REPORT

In this Integrated Report for 2018, Gerdau presents its financial performance for the fiscal year and the efforts its management has made in all business divisions to achieve the company’s goals and constantly build on past achievements. One of the highlights this year was to define the company’s corporate purpose at the global level: Empowering people who build the future. Gerdau’s new focus will take it yet another step further in its cultural transformation guided by the aspiration to become a more open and diverse and less hierarchical company. The year’s other highlights included the solid results achieved and the conclusion of the ongoing divestment program launched four years ago.

The report also covers initiatives involving the people management, social responsibility, digital innovation and environmental management teams. The document was prepared based on the framework suggested by the International Integrated Reporting Council (IIRC), marking the third year that Gerdau’s report adopts this model. Opting for this reporting format has proven the right decision, given the objective and transparent manner in which the corporate information is made available to its stakeholders, while showing how Gerdau creates value for its employees, clients, shareholders, suppliers and communities, since the world demands not only steel, but also new ways of living, building, cultivating and generating power. And Gerdau, in tune with all these changes, is constantly adapting to accompany the latest trends and help build the future.

MESSAGES

NEW WAYSof commuting

2



PERFORMANCE


ABOUT THE REPORT

MESSAGES

CLAUDIO JOHANNPETER

The year 2018 was a milestone in Gerdau’s history marked by important advances in our corporate governance. During the period, the fifth generation of the Gerdau Johannpeter family decided to dedicate themselves exclusively to Gerdau’s Board of Directors. The executive management of the company was entrusted to Gustavo Werneck, an executive with a successful career in the many areas of the company in which he has served.

With the close of this first year of the new governance model, it is clear that we have made the right decision. In 2018, Gerdau delivered excellent results and very important projects, such as its divestment plan, whose economic value now amounts to R$ 7 billion, which has improved the company’s financial health and better prepared it to weather the current and future challenges of the competitive global steel industry.

Accordingly, the Board will continue to focus on refining the strategies for the medium and long term and on developing the highest-performance executives to ensure a promising and profitable future for Gerdau. In closing, I want to congratulate our CEO and Gerdau’s teams on the excellent results delivered in 2018 and to thank the other members of the Board of Directors, Audit Board, Executive Board and each employee on our team. Your efforts and commitment without a doubt have advanced Gerdau in its purpose of empowering people to build the future.

Gerdau’s Chairman of the Board

“The Board’s work focuses on the strategies for the medium

to long term to ensure a promising and profitable

future for Gerdau.”

GOOD RESULTS REFLECT THE SUCCESSFUL TRANSITION IN GOVERNANCE



PERFORMANCE


ABOUT THE REPORT

MESSAGES

GUSTAVO WERNECK

FIRST YEAR OF GERDAU’S NEW GOVERNANCE MARKED BY STRONG PERFORMANCE AND CONCLUSION OF DIVESTMENT PLAN

In 2018, Gerdau delivered its highest EBITDA and net income of the last 10 years, following a period of major challenges for the global steel industry. This performance was driven by stronger sales volume in Brazil’s domestic market, higher profitability in the export market and exchange variation gains on the translation into Brazilian real of sales generated abroad.

We successfully concluded Gerdau’s divestment plan, which has generated more than R$ 7 billion over the past four years. We also reduced our leverage ratio, which now stands at 1.7 times EBITDA.

Other achievements include free cash flow of R$2.6 billion, the highest of recent years, and one of the lowest levels ever of selling, general and administrative (SG&A) expenses, which corresponded to 3.6% of net revenue. Another highlight was the improvement in EBITDA margin at the North America Division. Thanks to the dedication of our teams and a stronger market, this year Gerdau generated the highest return on capital invested by our shareholders of recent years.

In 2018, we also worked to launch Gerdau’s new purpose, in other words, defining the real reason why we exist Constructing our purpose (Empowering people who build the future), representing yet another step in the cultural

transformation that Gerdau has undertaken in recent years. This transformation has translated into greater autonomy and openness for people, less hierarchy and more flexibility and agility to adapt to our volatile world and the growing competition in the global steel industry. Our purpose now guides not only the day-to-day activities of our employees, but also the company’s business decisions and strategies for the coming years.

In 2019, we will focus on safety, creating value for our clients, operational excellence, generating free cash flow and digital transformation.

In closing, I want to thank our employees for their dedication and relentlessness drive to always surpass expectations. They are the people responsible for making Gerdau a better company. I also want to thank all our clients, reinforcing our commitment to continue contributing to the growth of their businesses, as well as our shareholders, communities and suppliers. I also want to express my special appreciation to Gerdau’s Board of Directors for their trust and partnership during this my first year at the helm of the company’s executive management.

“In 2018, we reported the highest EBITDA and net

income since 2008.”

Gerdau’s CEO

3GERDAU

NEW WAYS

of building



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Gerdau believes that the future can be shaped by many hands. That is why it works every day to contribute to a more collaborative, inclusive, digital and sustainable world. These concepts are clearly expressed in its purpose of empowering people who build the future, which permeates Gerdau’s relations with all its stakeholders: employees, local communities, clients, shareholders and suppliers.

In partnership with its thousands of clients, for example, Gerdau works to anticipate market trends and to develop solutions that support the future’s new forms of mobility, living, building, generate energy and cultivating. Regardless of the future path of our cities, Gerdau will always be a part of tomorrow by helping to improve people’s lives.

THE FUTURE TAKES SHAPE



PERFORMANCE


ABOUT THE REPORT

MESSAGES

million tonnesof annual steel production capacity

countries

Industrial operations in

thounsandemployees worldwide

R$ 254 million in environmental investments

13 million tonnes of ferrous scrap recycled worldwide

ENVIRONMENT

R$ 16 million invested in social projects

380 social projects supported in local communities

6,500+ employees volunteering in 2018

SOCIAL RESPONSIBILITY

in Minas Gerais

iron ore mines

Flat steeland iron ore production in Brazil

Leading

long steel in the Americas

Stock listed on the

stock exchanges

São Paulo, Madrid and New York

special steel

One of the world’s largest suppliers of

Brazil’s largest steel producer

steel millsas well as commercial offices, conversion units and scrap collection centers

31

10 30,000

4

21,7

billionin 2018in net sales

46,2R$



PERFORMANCE


ABOUT THE REPORT

MESSAGES

PROD

UCT

S &

SER

VICE

S

RESOURCES USED IN

DUSTR

IES SERVED

Water ∙ Energy ∙ Iron ore ∙ Coal and

charcoal ∙ Natural gas

R$ 46.2 billion in net sales ∙ R$ 23.9 billion in

market capitalization ∙ R$ 51.3 billion in total assets ∙ R$ 25.9 billion in shareholders’ equity

100,000 clients ∙ 110,000 shareholders ∙ 380 social projects

supported ∙ Suppliers and business partners

Artificial intelligence ∙ Digital platforms to drive business ∙ Construction

of advanced base in Silicon Valley ∙ Innovation

in retail construction

INTELLECTUAL CAPITAL

Technological innovation in the steel

industry ∙ Enhanced performance of

business operations


30,000 employees worldwide

HUMAN CAPITAL

Empowering people who build the future

∙ Collaborative high-performance teams

HUMAN CAPITAL

CAPITAL SOCIAL

Social transformation in education, housing

and recycling ∙ Entrepreneurship

SOCIAL CAPITAL

MANUFACTURING CAPITAL NATURAL CAPITAL

Preservation of ecosystems and biodiversity near mills ∙

Transformation of scrap into new products ∙ Promoting the reuse of co-products ∙ Environmental education

Installed capacity to meet current

and future demand from the steel

industry in Brazil and North America

NATURAL CAPITALMANUFACTURING CAPITAL

FINANCIAL CAPITAL

Improvement in operating and financial performance ∙ Free cash flow generation ∙ Deleveraging ∙ Returns for investors and shareholders

FINANCIAL CAPITAL

Fabricated rebar

Long steel

Flat steel

Forged steel partsIron ore

Special long steel

Construction

Oil & gasWind power

Manufacturing

Sugar & ethanol

Agriculture

Highway

Automotive

Shipbuilding

VALUE GENERATED

BUSINESS MODEL

31 steel mills, as well as commercial offices,

conversion units and scrap collection centers ∙ 4 iron

ore mines in Minas Gerais ∙ 21.7 million tonnes of annual

steel production capacity

4CORPORATE

GOVERNANCE

NEWprocurement models



PERFORMANCE


ABOUT THE REPORT

MESSAGES

CORPORATE GOVERNANCE

ETHICS AND PROXIMITY GUIDE GERDAU’S STAKEHOLDER RELATIONS

Gerdau adopts international standards of corporate governance grounded in rigorous ethical principles. Active in the capital markets for over seven decades, its stock is listed on the São Paulo, New York and Madrid stock exchanges. Since its stock is listed in the U.S. market, Gerdau complies with the Sarbanes-Oxley Act, which establishes good corporate governance practices and rigorous controls of internal processes. In Brazil, its stock is traded on the Level 1 Corporate Governance segment of the São Paulo Stock Exchange (B3). It also adopts standards beyond those required by law, such as 100% tag-along rights for all stockholders and a minimum dividend payout of 30% of adjusted net income.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

In 2018, Gerdau’s investor relations team adopted innovative digital tools, such as apps to expand the shareholder base in North America, artificial intelligence platforms to collect data in its markets and new partnerships with startups.

Gerdau always strives to maintain transparent and close relations based on mutual gains with its stakeholders, which include employees, clients, suppliers and local communities. The relationship with each stakeholder is guided by the company’s values and complies with its Code of Ethics.

Click here for Gerdau’s Code of Ethics for Service Providers

Click here for Gerdau’s Code of Ethics

Every year, Gerdau employees must complete a training program on the Code of Ethics to reinforce the conduct expected from them. Gerdau also has a Code of Ethics for Service Providers with key guidance for stakeholders conducting business with it. Gerdau also has an anonymous and confidential communication channel that provides clarifications and for receiving and handling reports of suspected violations of its Code of Ethics or the law.

https://ri.gerdau.com/ptb/8532/codigo-de-etica-gerdau-port.PDF

https://ri.gerdau.com/ptb/8533/AF_Gerdau_CdigoTerceiros_Digital_2016.pdf



PERFORMANCE


ABOUT THE REPORT

MESSAGES

CORPORATE GOVERNANCE STRUCTURE

Gerdau’s Board of Directors is responsible for formulating the Company’s long-term strategies and for supervising the guidelines and targets defined for the business. The Board is formed by members of the Gerdau Johannpeter family and by independent directors.

Gerdau also has a Board of Auditors that oversees and monitors the activities of the officers and directors and the financial statements. Meanwhile, corporate management is the responsibility of the Executive Board and the leaders of the business operations.

1

4

5

2

6

3

7

Claudio Johannpeter Chairman of the Board of Gerdau S.A. and of Metalúrgica Gerdau S.A.

Guilherme Chagas Gerdau Johannpeter Vice-Chairman of the Board of Gerdau S.A. and of Metalúrgica Gerdau S.A.

André Bier Gerdau Johannpeter Vice-Chairman of the Board of Gerdau S.A. and of Metalúrgica Gerdau S.A.

Fernando Fontes Iunes Director of Gerdau S.A. and of Metalúrgica Gerdau S.A.

Richard Chagas Gerdau Johannpeter Director of Gerdau S.A. and of Metalúrgica Gerdau S.A.

Affonso Celso Pastore Director of Gerdau S.A. and of Metalúrgica Gerdau S.A.

Aod Cunha de Moraes Júnior Director of Gerdau S.A. and of Metalúrgica Gerdau S.A.

1

2

3

4

5

6

7

BOARDS OF DIRECTORS OF GERDAU S.A. AND OF METALÚRGICA GERDAU S.A.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

COMPLIANCE & RISK MANAGEMENT POLICIES

Gerdau’s compliance policy determines that the company has the moral and legal duty to act ethically in all its activities. As such, it demands the same conduct from its employees, regardless of their position, and from its stakeholders. Gerdau repudiates any unethical practice or violation to the laws of the countries where it operates. Ethical violations of any kind are considered a severe infraction and could result in disciplinary sanctions, including termination of employment or of the service agreement in the case of third parties.

In its risk management, Gerdau regularly monitors the operating and business risks that could adversely affect its activities. These risks are monitored by the company’s Risks Committee, which is an advisory body to the Board of Directors.

Gerdau also has a rigorous compliance program that strengthens its commitment to the code of ethics and to compliance with governing law and internal guidelines, and that works to identify and mitigate any internal and external risks that could adversely affect the business.

Click here to read our Compliance Policy

Click here to read our Risk Management Policy

https://ri.gerdau.com/ptb/8735/663839.pdf

https://ri.gerdau.com/ptb/8531/Poltica%20de%20Compliance-PT.pdf

NEW WAYSof connecting 5

CAPITALS



PERFORMANCE


ABOUT THE REPORT

MESSAGES

The year 2018 was marked by the construction of Gerdau’s purpose, which represents yet another step in the cultural transformation it has been undergoing since 2012, when it launched the Gerdau 2022 program, with the following question: “What company do we want to be in the future?”

Over the following years, Gerdau has conducted a comprehensive review of its organizational structures and culture, determined what was essential for the business, began to prioritize innovation and carried out a comprehensive asset divestment and optimization plan to enable it to focus on those assets with higher profitability potential.

HUMAN CAPITAL

GERDAU ADVANCES ITS CULTURAL TRANSFORMATION BY DEFINING ITS PURPOSE



PERFORMANCE


ABOUT THE REPORT

MESSAGES

aspirations for the future, an assessment of its past, present and future, as well as the needs of society. The effort involved interviews of hundreds of employees, clients, capital market analysts and citizens. The entire process of developing the purpose was based on the concepts of collaboration and openness, on hearing what different people and organizations had to say and advance genuinely.

In 2014, another step was taken in this transformation, with the definition of the new attributes of Gerdau’s culture: openness, autonomy with responsibility, leaders developing leaders and simplicity with austerity. In practice, this has translated into more autonomy and openness for people and greater flexibility and agility to adjust to a VUCA world (i.e., volatile, uncertain, complex and ambiguous) and an ever more competitive global steel industry.

Gerdau’s transformation gave rise to another question: “What is Gerdau’s true reason for existing?” This question guided the construction of Gerdau’s purpose, which, launched globally in September 2018, combines the company’s



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Accordingly, Gerdau’s purpose is centered on people, given the company’s belief that its role transcends steel, given its impact on the lives of all of those who interact with it in any way. Accordingly, working with the prospect of empowering people to build the future means believing in

the transformational power of people, starting with Gerdau’s employees in ten countries across the Americas. This means giving people greater autonomy in a structure not encumbered by hierarchy and the conditions for each one to work towards a common dream, while always being treated with great respect.

It means always being close to clients, understanding their challenges and building innovative solutions, while empowering communities to take charge of their development. It means connecting with new technologies, testing new ways of doing things, playing a lead role in your own story. To Gerdau, this mean building the future, a better future for everyone.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Since 2017, Gerdau has been developing a structured project to foster diversity in the workplace. Given the topic’s broad scope, the effort began with gender equality, with the first milestone on this journey the undertaking of a commitment with the United Nations by signing the Women Empowerment Principles (WEPs), through which Gerdau undertook to reinforce policies and initiatives that promote gender equality and the empowerment of women.

In this effort, it organized workshops to raise awareness among senior

executives and administered training to over 1,000 leaders at its operations on unconscious bias to foster this culture and a more inclusive workplace. The result of this effort to foster gender equality already has had an impact by increasing the percentage of women working at Gerdau in 2018. The year also registered a significant increase in the percentage of persons with disabilities working at Gerdau.

Gerdau believes that managing diversity not only leverages performance and innovation, but also supports employee engagement and talent recruiting. To Gerdau, diversity is grounded in one of its core values – respecting people – and is associated with the journey of social transformation that it is promoting in local communities.

DIVERSITY

30,000EMPLOYEES, INTERNS AND APPRENTICES



PERFORMANCE


ABOUT THE REPORT

MESSAGES

17%

7%

14%

18%

34%

44%

2%

31%

11%

100%

83%

93%

86%

82%

66%

56%

98%

69%

89%

Board of Directors

Board of Auditors

Executive Board

Managers

Specialists/Coordinators

Administrative

Interns

Operational

Apprentices

Total

Women Men

9%Yellow

32%Black

0%Indigenous

White59%

ETHNICITY41%

41%Y

1%Z

6%Baby Boomers

X52%

GENERATION

White Yellow Black Indigenous

100%

100%

100%

86%

80%

70%

66%

54%

51%

59%

4%

6%

11%

10%

14%

9%

12%

15%

24%

24%

37%

36%

32%

1%2%

11%Women

Men89%

GENDER

MAP OF DIVERSITY AT GERDAU’S UNITS IN BRAZIL

Breakdown of positions by gender in Brazil Breakdown of positions by ethnicity in Brazil



PERFORMANCE


ABOUT THE REPORT

MESSAGES

MANAGEMENT AND TRAINING OF PEOPLE BASED ON AUTONOMY AND ENTREPRENEURSHIP

G.Start is a university internship program targeting students who want to accelerate their professional development and help build the Gerdau of the future. During the program, interns improve their technical knowledge in their fields of study and develop competencies such as entrepreneurship, collaboration, openness to innovation, safety attitude and focus on results. The program helps to develop new professionals with the capacity to propose simple and agile solutions collaboratively and in increasingly

dynamic business environments, with a development plan that encourages the young professionals to play a lead role in their careers. This is achieved through challenge-projects, which are conducted jointly with the leaders of areas. In addition to incorporating Gerdau’s culture, the students learn about the business (production process, products, applications and clients) and gain exposure to agile methodologies. Applications for openings are accepted semiannually.

As part of its transformation, Gerdau’s recruiting and training programs were reviewed and adopted a new format and new content to support even more the career advancement of its professionals. The training programs encourage intra-entrepreneurship, foster a collaborative and diverse workplace, and promote the adoption of agile methodologies and a digital mindset. As a result, employees now deliver superior results and innovative solutions. Learn more about Gerdau’s development programs:

G.Start



PERFORMANCE


ABOUT THE REPORT

MESSAGES

G.Next G.Lead G.Makers

G.Next targets employees who want to prepare for their first leadership positions at Gerdau. Over the course of one year, they participate in a robust development path with technical and behavioral content to accelerate their development in subjects such as business, safety, routine management and leadership projects. The group is usually formed by around 40 employees from various teams and regions.

G.Lead, the step after G.Next, develops professionals who have held lower management positions in industrial and sales areas for more than two years. Employees who join the program are ready to take on bigger challenges to impact the business in increasingly challenging environments. For one year, participants follow a development path with content on business vision, people leadership and management, digital mindset and industry 4.0. The group consists of 42 coordinators and specialists selected from inside and outside of Gerdau and from various teams and regions.

G.Makers is a development program for professionals who already work at Gerdau or who come from the market to become part of a robust and diverse team with different backgrounds and with the energy to transform Gerdau and how it conducts business. The professionals participate in a training program on digital mindset and innovation from one of the best innovations schools in Brazil and apply what they learn to high-impact projects and non-conventional solutions to modernize Gerdau’s culture and maximize its results. The first edition was held in 2018, and the program’s second edition started in May 2019 with 35 professionals.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

INTERNAL RECRUITING RECOGNIZING EXCEPTIONAL PERFORMANCE

Gerdau adopts internal recruiting practices to fill job openings, which encourages employee’s to develop and gives them an opportunity to gain experience in various areas of the company. Every year, hundreds of openings are filled using this system, which has proven efficient and effective.

To recognize exceptional performance, Gerdau uses a profit-sharing system based on meritocracy. The program seeks to reward employees who deliver superior results aligned with Gerdau’s culture attributes.

INTERNAL SOCIAL NETWORK

Gerdau has an internal social network (Yammer) with global coverage that promotes the exchange of ideas, greater integration among employees, innovation and the replication of good practices in various areas.

Employee performance assessments are conducted by each manager and discussed collectively by the People Development Committees of the various business divisions.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

The safety of employees and third-party service providers is Gerdau’s utmost priority, which is why it continually invests in improving its management system. In 2018, Gerdau further strengthened its efforts in workplace health and safety by conducting actions targeting physical, systemic and behavioral aspects. This strengthened the culture of identifying situations that could lead to severe accidents and fatalities. By creating a sense of urgency in resolving these conditions, the accident severity rate decreased significantly this year.

HEALTH & SAFETY

2016

616

2017

2018

76*The accident severity rate was calculated based on million man-hours of exposure to risk in a period of one year.

722

Accident severity rate*



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Gerdau believes that entrepreneurship leverages the capacity of people who are committed to social transformation, which in turn materializes its proposition to empower people who build the future. That is why it works to strengthen entrepreneurship for social transformation in education, housing and recycling.

SOCIAL & RELATIONAL CAPITAL

ENTREPRENEURSHIP AND SOCIAL TRANSFORMATION TO EMPOWER PEOPLE WHO BUILD THE FUTURE



PERFORMANCE


ABOUT THE REPORT

MESSAGES

GERDAU’S LINES OF SOCIAL ACTION:

Through its institute, Gerdau develops and supports projects across Brazil in the communities where it operates and in its business chain in the following lines of action:

ENTREPRENEURSHIP & HOUSING:Development of initiatives to strengthen entrepreneurship to drive new solutions for housing challenges

ENTREPRENEURSHIP & RECYCLING:Participation in projects focused on entrepreneurship to stimulate the recycling of materials

ENTREPRENEURSHIP & EDUCATION:Support for projects that promote and train current and future entrepreneurs



PERFORMANCE


ABOUT THE REPORT

MESSAGES

In addition to these three lines of action, the company will continue to support initiatives in other areas through 2020, as it has been doing for more than one hundred years. However, the transition to a new governance model for Gerdau’s social actions will end in two years, when its initiatives will focus entirely on developing social transformation projects in Education, Housing and Recycling.

380SOCIAL PROJECTS SUPPORTED WORLDWIDE

R$16 MILLION IN SOCIAL

INVESTMENTS IN 2018

6,500 EMPLOYEES VOLUNTEERED

IN 2018



PERFORMANCE


ABOUT THE REPORT

MESSAGES

2018 HIGHLIGHTS

In Entrepreneurship & Housing, a key project is the Housing Lab: Innovation and Housing coordinated by Artemisia (an NGO that fosters the development of businesses with social impact in Brazil) and Gerdau, in partnership with Vedacit Institute, Tigre Group and Eternit Group. The program brings together large organizations in the construction industry with the shared purpose of strengthening a new generation of social impact startups, with solutions that respond to the challenges facing low-income housing. Housing influences quality of life, health, safety, education and the conditions for human development, making it a topic of critical importance for achieving the UN Sustainable Development Goals (SDGs). To give you an idea, Brazil’s housing deficit stands at 7.7 million units, which affects the lives of 33 million Brazilians. Moreover, 40% of Brazilian homes are considered inadequate, i.e., they lack trash collection, access to

water and basic sanitation system and minimum ventilation and lighting. Given these challenges, the company mapped nationwide entrepreneurs who are founders of innovative businesses that generate social impact and are engaged in topics such as promoting access to good-quality housing; access to housing microcredit; housing renovations; employability in the construction industry; management of low-income housing condominiums; water and basic sanitation; energy; Infrastructure and improvement of public spaces; and innovation in construction.

During the year, Gerdau supported 380 social

projects in the ten countries where it operates, with

investments of R$ 16 million.

ENTREPRENEURSHIP & HOUSING



PERFORMANCE


ABOUT THE REPORT

MESSAGES

After mapping them, the company selected 14 social impact businesses to be part of the Housing Lab for a five-week acceleration journey. The participants included Digna Engenharia, Diosa and Ecolar, which won R$10,000 in seed capital and received mentorship.

In the housing industry, Gerdau also partners with TETO, an international organization that works to protect people in situations of social vulnerability by supporting the construction of emergency housing in impoverished communities.

In 2018, this joint effort resulted in the construction of 472 low-income homes in the states of São Paulo and Rio de Janeiro. All of the houses were built with nails supplied by Gerdau, which benefitted 1,900 people in Brazil, and with 70 Gerdau employees volunteering to help build the homes.

472 LOW-INCOME HOUSING

BUILT WITH GERDAU’S SUPPORT

1,900PEOPLE BENEFITTED IN BRASIL

2018 HIGHLIGHTS



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Concrete blocks made from iron ore tailings

Mortar made from tailings used to lay the blocks

Metabasic rock used to produce cement and pigments

ENTREPRENEURSHIP & RECYCLING

In Minas Gerais state, Gerdau joined the forces of Entrepreneurship and Recycling to build a sustainable home made from raw materials produced from iron ore tailings. The model home, which qualifies for the federal government-housing program My Home, My Life (MVMC), has been opened to the public under the Gerdau Germinar Project, in the city of Ouro Branco. The prototype, which was developed in partnership with Federal University of Minas Gerais (UFMG), demonstrated the viability of using, on a commercial scale, iron ore tailings as a construction input, while eliminating the dams used for their disposal. Given the project’s success, Gerdau is assessing the industrial investments needed to continue the project.

2018 HIGHLIGHTS



PERFORMANCE


ABOUT THE REPORT

MESSAGES

In the line of action Entrepreneurship & Recycling, a highlight was the support for the PROLATA Reciclagem association, a non-profit organization created by the Brazilian Steel Packaging Association (ABEAÇO) and the Brazilian Paint Manufacturers Association (ABRAFATI) to encourage recycling and the proper disposal of materials made from steel. The project also supports the development of cooperatives and of income generation for recycling professionals. Today, 58 cooperatives are associated with the project and, to ensure worker safety, Gerdau donated R$60,000 for the acquisition of personal protective equipment (PPEs).

58 COOPERATIVES ASSOCIATED WITH

THE PROJECT

60,000DONATED FOR THE ACQUISITION OF PPES

2018 HIGHLIGHTS

R$



PERFORMANCE


ABOUT THE REPORT

MESSAGES

ENTREPRENEURSHIP & EDUCATION

In the Entrepreneurship & Education segment, Gerdau continued its initiatives with Junior Achievement to prepare youth for the job market, foster an entrepreneurial business vision and train students in effective financial management. In 2018, projects were developed in the states of Ceará, Espírito Santo, Minas Gerais, Pernambuco, Rio de Janeiro, Rio Grande do Sul and São Paulo that benefited 1,200 students and for which hundreds of Gerdau employees volunteered, with 921 hours donated by the company’s professionals. During the year, around 6,500 Gerdau employees volunteered in social transformation actions conducted in local communities.

Gerdau also has two technical schools, one in Argentina and another in Peru, to prepare youth for the job market. The students receive technical training in the classroom, which is combined with practical training at Gerdau units.

After graduating, many of the professionals are hired by Gerdau itself or by other companies operating in the region.

The company also invests in preserving the history and tradition of mining and metallurgy in the state of Minas Gerais, where its largest steel mill and iron ore mines are located. Since 2013, Gerdau is the organization responsible for MMGerdau, Mines and Metal Museum, which has an extensive collection and features a diversified cultural and educational calendar of events for local schools and the public.

6,500VOLUNTEERS FROM GERDAU JOINED SOCIAL PROJECTS WORLDWIDE

1,200 STUDENTS

BENEFITTED IN 7 BRAZILIAN STATES

2018 HIGHLIGHTS



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Gerdau works to support the entire steel chain, while keeping in mind the needs of its clients and their end consumers. The company believes that its role is as an ally in building the future of cities and of mobility by adapting to the needs of its business partners. Gerdau constantly monitors the latest market developments and trends, builds lasting relations and develops unique solutions for the entire steel chain.


ARTIFICIAL INTELLIGENCE AND DIGITAL INNOVATION TRANSFORM GERDAU’S RELATIONS WITH ITS CLIENTS



PERFORMANCE


ABOUT THE REPORT

MESSAGES

On its cultural transformation journey, digital innovation has been guiding Gerdau in a process of continuous improvement. Since 2016, it has invested over R$80 million in digital solutions to capture productivity and operating efficiency gains, to implement artificial intelligence tools and various new technologies and to encourage a digital mindset throughout the company.

One of its key work fronts in 2018 was the Client Journey. The project involved listening to hundreds of clients from various segments in Brazil to understand their level of satisfaction with the Company’s customer service and digital platforms. Based on these workshops, priorities were defined and clients participated in the testing of the new channels under development to ensure that the digital platforms ultimately launched effectively meet their needs. In 2019, the Client Journey will be conducted in the North America and Latin America divisions.

DIGITAL CUSTOMER SERVICE PLATFORMS

CLIENT JOURNEY

eGerdau Portal Fabricated Rebar Portal

Gerdau has advanced platforms for digital customer service adapted to its specific business segments. In 2018, over 1,300 clients accessed these platforms and placed 17,000 purchase orders. Learn more about Gerdau’s main digital channels:

The portal allows customers to place orders, manage their portfolio and obtain financial information. In 2018, around 24,000 consultations were made on the platform and over 70% of direct-selling customers in Brazil used the channel.

This portal serves clients in the construction industry, which is one of Gerdau’s key markets. Around 90% of orders for fabricated rebar placed in Brazil are made through the portal.

Click here to access eGerdau portalClick here to acess the Fabricated Rebar portal

https://br.egerdau.com/eGerdaustorefront/login

https://www.gerdau.com.br/corteedobra/



PERFORMANCE


ABOUT THE REPORT

MESSAGES

ARTIFICIAL INTELLIGENCE

Chatbot João Intelligent Steel Analisys (ISA)

Christened with the name of Gerdau’s founder from over one hundred years ago, Chatbot João uses deep-learning tools to provide price quotes, product data, corporate information and more. In 2018, João interacted over 90,000 times with clients to resolve their needs. In December 2018, a new version of the chatbot was launched that is more intuitive and integrated with Google’s artificial intelligence platform. The new version improves the virtual customer service by expanding the responses to the specific needs of customers and other publics.

ISA was a project developed by the Special Steel Business Division to make the customer experience more agile and simple. ISA can calculate in seconds the feasibility of requests for new special long steel goods used in the automotive industry. Before, this evaluation took around 10 days. The enhancement was made possible by algorithms that cross check dozens of consultations with over 40 technical variables and 8,000 references stored in the database. This result is accurate evaluations made quickly, securely and with quality.

With the automation, Gerdau helps to improve the experience of the entire special steel production chain. The project is yet another example of Gerdau’s digital transformation and implementing a mindset focused on the customer’s needs. The initiative led Gerdau to win the Rei Award 2018 sponsored by the magazine Automotive Business, in the Inputs category, which recognizes leading companies associated with the automotive industry.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

In 2018, Gerdau also was featured in the digital maturity ranking compiled by the consulting firm McKinsey & Company in partnership with the business newspaper Valor Econômico, which recognized the innumerous digital transformation developments that the company is implementing. The recognition cited the use of artificial intelligence in the mills in Brazil with the installation of 40,000 sensors on equipment. The installation of sensors expanded the useful life of equipment by up to 20%, while increasing worker safety and reducing maintenance costs.

Artificial intelligence also was adopted to find differentiated solutions to business challenges. Because of this, Gerdau invests regularly in improving its data lake. With the use of algorithms, Gerdau’s massive non-structured big data is transformed into market intelligence.

DIGITAL MATURITY

DIGITAL INNOVATION IN THE INDUSTRIAL AREA

39 initiatives developed in 2018

Lower costs

Internet

Monitoring

of Things

via images

Higher operating

efficiency

Artificial

Algorithms

Intelligence

RFIDSensors for

and predictive maintenance

controlling performance

by substituting human presence in critical positions for industrial automation

Improvement in worker safety

RESULTS:

to track and manage product shipments



PERFORMANCE


ABOUT THE REPORT

MESSAGES

INNOVATION IN RETAIL CONSTRUCTION

In 2018, Gerdau expanded its retail construction operations with the startup of the company Juntos Somos +, whose shareholders also include Votorantim Cimentos and Tigre. The three companies joining forces in a new business resulted in Brazil’s largest loyalty program in the retail construction materials industry, which works as a benefits plan for construction stores, sellers and professionals with the aim of developing and modernizing the retail construction industry. Construction stores and professionals win points by purchasing goods from partner companies, which can be redeemed for prizes, such as equipment (e.g., forklifts, computers, etc.) management systems, vocational programs and social responsibility tools and actions in local communities. This entire ecosystem is accessed digitally via a website and smartphone application.

End consumers also benefit, since the Juntos Somos + platform helps to make their lives easier. For example, on small renovations projects it can be difficult to decide which materials to buy and which professionals to perform the services. Through the platform, consumers will be able to find complete solutions for their construction and renovations projects that come with guarantees of product quality and specialized service. By 2020, Juntos Somos + plans to invest R$ 50 million to expand the program and improve the ecosystem to strengthen Brazil’s retail construction chain, as well as add new functionalities and improve rewards for participants.

Até 2020, a Juntos Somos + planeja investir

R$ 50 milhões na expansão do

programa



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Votorantim Cimentos, Gerdau and Tigre (founders), Santander, Linx, Vedacit, Eternit, Suvinil, Stam, Bosch, Casa do Construtor, Ciser, Ourolux and Cozimax.

40PROFESSIONALS

60,000PROFESSIONALS REGISTERED

1BILLION POINTS ISSUED

R$30MILLIONALREADY INVESTED

300,000 PRIZES REDEEMED

R$50MILLION IN INVESTMENT BY 2020

14COMPANIES PARTICIPATING IN THE LOYALTY PROGRAM:

45,000 STORES REGISTERED

JUNTOS SOMOS + IN NUMBERS:



PERFORMANCE


ABOUT THE REPORT

MESSAGES

GERDAU’S CONSOLIDATION IN BRAZILIAN RETAILING

Comercial Gerdau, a chain of commercial branch offices, has 75 units in 24 states nationwide. In the last two years, it has expanded its concept stores by opening three stores in Maceió, Alagoas; Recife, Pernambuco; and São José do Rio Preto, São Paulo.

In the concept store, products are arranged in a showroom with QR codes to enable a detailed consultation of the technical specifications on a smartphone.

The store also have interactive totems for accessing the product catalog and 360° glasses that customers can use for an immersive experience of the production process via a video on steel production. In 2019, another concept store is slated to be opened, this time in Salvador, Bahia.

PRESENT IN

24STATES OF BRASIL

75 COMMERCIAL

OFFICES



PERFORMANCE


ABOUT THE REPORT

MESSAGES

In 2018, Gerdau opened an advanced base near Silicon Valley, in San Francisco, California that is staffed by Gerdau employees. The goal is to discover high-impact, scalable solutions in the company to capture efficiency gains for it and its clients. The local team also analyzes market trends and potential investments in new businesses.

The advanced base is expected to contribute US$ 10 million in revenue for the company within three year. Increases of at least 35% in productivity and the optimization of processes are expected on the fronts defined by the working team. The Silicon Valley office established three areas with high potential for capturing benefits:

�� Commercial, which involves solutions for improving customer service, client segmentation and integral management of the customer experience.

�� Industrial, focusing on increasing safety, productivity, equipment utilization, yields and optimizing operating costs.

�� Procurement, seeking to integrate platforms, optimize funds and simplify processes.

ADVANCED BASE IN SILICON VALLEY



PERFORMANCE


ABOUT THE REPORT

MESSAGES

PARTNERSHIPS SIGNED BY SILICON VALLEY OFFICE

In 2018, two partnerships were signed with startups. The first is the startup Apis Cor, one of the winners of a NASA competition to build a 3D-printed home on Mars in the future. By sharing experiences, Gerdau wants to continually acquire knowledge for optimizing its business, encourage a culture of entrepreneurship and focus on digital innovation to leverage its purpose of empowering people who build the future.

The other startup is 3D Robotic, which has a digital platform of drones that capture topographic images to replace traditional topography. The digital platform also uses drones to conduct inventories of ore piles. 3D Robotic’s platform resulted in savings of R$500,000 per year, as well as productivity gains in ore inventory activities.

DIGITAL GOVERNANCE

To help manage the digital portfolio and formulate strategies for expanding initiatives, we created the Global Digital Committee in which leaders from all of Gerdau’s business divisions participate. The committee meets every two months to accompany projects and define priorities aligned with the needs of Gerdau’s businesses.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Caring for the environment to ensure a sustainable today and tomorrow has always been a core concern at Gerdau. That is why its environmental management system is based on the principles of the circular economy, which include optimizing the use of natural resources, stimulating the use of recyclable raw materials (mainly ferrous scrap) and encouraging the reuse of waste, the so-called co-products.

The system captures efficiency gains in the production process and improves the sustainable management of natural resources. It also helps to reduce greenhouse gas emissions and to create hundreds of jobs in ferrous scrap collection and processing.

NATURAL CAPITAL

SUSTAINABLE MANAGEMENT OF NATURAL RESOURCES TO IMPROVE ENVIRONMENTAL PRESERVATION



PERFORMANCE


ABOUT THE REPORT

MESSAGES

12.6 MILLION TONNES OF SCRAP RECYCLED ANNUALLY BY GERDAU WORLDWIDE

R$302 MILLION IN REVENUE FROM SALES OF CO-PRODUCTS

73% OF STEEL PRODUCED AT GERDAU MILLS IS FROM CRAP

ENERGYEFFICIENCY

RENEWABLE ENERGY SOURCES (bioreducer, biocoke and wind power)

97.7% OF WATER USED IN PRODUCTION IS REUSED

77% OF CO-PRODUCTS REUSED

ELIM

INATIO

N

RAW STEELAN

D RE

USE

MATERIALS PRODUCTIO

N

IRON ORE SCRAP

CHARCOAL ENERGY

RECYCLING AND

MATERIAL CONSUMPTION

REDUCING RAW

REMANUFACTURING

Steel is 100% recyclable, in an endless cycle, without losing any

of its properties. That is why it is reused as a

raw material for making new steel goods.

Creation of hundreds of new jobs in

scrap collection.

STEEL LIFE CYCLE AND CIRCULAR ECONOMY AT GERDAU



PERFORMANCE


ABOUT THE REPORT

MESSAGES

ENVIRONMENTAL MANAGEMENT INITIATIVES

EM 2018 A GERDAU RECICLOU

12,6 MILHÕES DE TONELADAS DE SUCATA EM SUAS USINAS NO MUNDO

In 2018, Gerdau recycled 12.6 million tonnes of scrap in its mills around the world, which means that 73% of all the steel it produced was made from scrap, with obsolete objects transformed into new steel goods. The company’s mills also feature modern water recycling systems and reuse 97.7% of the water consumed in their production process. The small percentage of water not reused mainly corresponds to losses due to evaporation. The company also has dust removal systems to protect the air, which capture the solid particles generated during the steel production process, as well as systems for reusing blast furnace gases for own power generation.

Recycling and reducing raw material consumption

Energy efficiency

In the steel industry, as well as at Gerdau, electricity is an important input for production. As such, reducing energy consumption is a key priority of the company, which carries out innumerous initiatives to increase its energy efficiency. One example is the project at the Araçariguama Mill in São Paulo state that reduced energy consumption at the melt shop by an amount equivalent to around 100,000 electric showers functioning for half an hour. This result was achieved by implementing adjustments in the production process to increase energy efficiency and productivity.

In the United States, the Saint Paul Unit in Minnesota adapted its production process to enable the installation of wind farms, in partnership with the U.S.-based company Xcel Energy. These initiatives reinforce the importance of circular economy concepts, in which the company’s practices and market demands converge to drive the transition from a linear economy to a circular economy.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Energy Efficiency

Gerdau also uses a bioreducer as a renewable energy source, namely charcoal from planted forests, which substitutes coal at some of company’s units that use blast furnaces in their production process. The charcoal is produced in Minas Gerais state, where Gerdau has 310,000 hectares of planted forests for energy applications, 90,000 hectares of which are set aside for biodiversity conservation.

PLANTED FORESTS

REUSE OF BLAST FURNACE GASES

REDUCTION IN ENERGY CONSUMPTION AND

CO2 EMISSIONS

MITIGATION OF CLIMATE CHANGE CONSEQUENCES

WIND POWER

The company’s forest stewardship practices also include maintaining biodiversity corridors to facilitate the roaming of wildlife among the forests, which contributes to the environmental stability of the properties and helps to control natural pests and disease. These reforested areas also respect the concepts of minimum soil tilling, combined with best practices in resources conservation, to ensure sustainable production.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Concern with mitigating the consequences of climate change is incorporated into Gerdau’s environmental management initiatives, which is why it participates annually in the Emissions Trading System Simulation organized by the Getúlio Vargas Foundation (FGV), jointly with several other Brazilian companies.

The goal is to produce knowledge on how to support carbon-pricing instruments to achieve the targets for reducing of greenhouse gas emissions. The collective effort also aims to better understand the potential effects of mitigation policies on businesses and investments in anticipation of a future scenario of mandatory pricing.

CLIMATE CHANGE CLIMATE CHANGE

Another way in which Gerdau contributes significantly to mitigating the impacts from climate change is by using metallic scrap as its main raw material. Around 73% of its total production is derived from scrap, which reduces demand for natural resources and consequently reduces energy consumption and greenhouse gas emissions. According to the Worldsteel Association, 1 tonne of recycled scrap avoids 1.5 tonnes in greenhouse gas emissions, 740 kg in coke consumption and 120 kg in limestone consumption.

73%OF PRODUCTION DERIVED FROM SCRAP



PERFORMANCE


ABOUT THE REPORT

MESSAGES

REMANUFACTURING (CO-PRODUCTS)

Gerdau’ units also makes steel using an integrated production route and reuses around 92% of the gases generated in the steel manufacturing process. These gases are used to generate electric and thermal power for the mills, which contributes to their energy efficiency.

Constantly innovating, Gerdau developed at its largest plant, the Ouro Branco Mill in Minas Gerais state, an alternative raw material: biocoke. The innovation is a metallurgical coke produced by incorporating charcoal, a renewable energy source, to substitute a portion of the fossil-based fuel. The main environmental contribution achieved by the substitution is to reduce the greenhouse gas effect. In this way, the use of biocoke helps to mitigate environmental impacts by reducing greenhouse gases in the air, with significant potential to help combat climate change.

Gerdau adopts modern methods for reusing the waste and materials generated as secondary products during steel production, which transforms them into new goods with innumerous applications. Called co-products, they are used in various industries, including for road paving, railroad ballast, casting, cement and ceramics. In 2018, the Company reused 77% of its co-products globally, which generated revenue of R$302 million in the year.

Despite its high rate of co-product reuse, Gerdau is always pursuing

new applications for these materials. In Colombia, for example, the company developed a project to use metallurgical aggregates, a secondary material resulting from the steel manufacturing process, to produce construction blocks. The use of aggregates in blocks reduces the consumption of natural resources, such as sand. The project reused 9,200 tonnes of co-products, which were transformed into 3,500 concrete blocks. These blocks were used to build a 2.4-meter high wall with a perimeter equivalent to 5.5 football fields.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

In Brazil, the metallurgical aggregates produced at Riograndense and Charqueadas mills in the state of Rio Grande do Sul were transformed into fertilizers for farming. The co-product was developed in partnership with the universities that accompanied the tests

conducted for the use the fertilizer ATTIVE for seed production on the various farms of the project’s partner rural producers. The fertilizer is indicated for the cultivation of crops, such as tomatoes, corn and wheat, and for the production of flowers, grass and trees.

ATTIVE is used to prepare the soil to correct acidity and provides balanced nutrition for plants while imparting greater resistance to pests and disease. The product is certified by the Ministry of Agriculture, which attests to its safety, and has been sold in Brazil since 2016. Due to the project’s success, the methodology for making this new co-product is being tested at various Gerdau’s mills in the Americas.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

85,300 hectares of legal reserves or permanent preservation areas

14,000 hectares de matas conservadas

8.3 million mudas plantadas

9,600 people trained in environmental education

ENVIRONMENTAL PRESERVATION

Gerdau’s work to empower people also involves supporting environmental education for local communities and employees. In 2018, more than 9,600 people received 33,000 hours of training on environmental education.

A highlight is the Gerdau Germinar Program, which the company has conducted in Minas Gerais since 1990. The 48-hectare environmental preservation area is used to sponsor educational programs and awards with the aim of encouraging local residents to act responsibly and to become actively engaged in the preservation of natural resources. The program also organizes dozens of environmental education actions for students and teachers at public schools in the cities of Ouro Branco, Congonhas, Conselheiro Lafaiete, Moeda, Itabirito and in the district of Ouro Preto.

INVESTMENTS IN ENVIRONMENTAL PROTECTION

R$ 254million

ENVIRONMENTAL EDUCATION



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Gerdau is Brazil’s largest producer of steel, 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. One of the largest recyclers in Latin America, each year it transforms millions of tonnes of ferrous scrap into new steel goods. Gerdau stock is listed on the São Paulo, Madrid and New York stock exchanges.

With the conclusion of its asset divestment program in 2018, Gerdau’s operations are now concentrated in the Americas, with Brazil and the United States its priority markets, and focused on its more profitable assets.

MANUFACTURING CAPITALPRESENCE IN THE AMERICAS



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Argentina Uruguay

BrazilPeru

Colombia Venezuela

Dominican Republic

Canada

USA

Mexico

The company currently operates industrial facilities in 10 countries:

GERDAU UNITS

WORLDWIDEindustrials unitis globally

31

commercial units

75

private port terminals

2

iron ore units

4

BOOK VALUE OF FIXED ASSETS:

GLOBAL INSTALLED CAPACITY:

R$ 15.5billion in 2018

21.7million tonnes of steel annually

17.5million tonnes of rolled steel annually



PERFORMANCE


ABOUT THE REPORT

MESSAGES

FINANCIAL CAPITAL

R$ 46.2 billion2018

2017

Net sales

up 25% compared to 2017

R$ 6.7billion2018

2017

Consolidated EBITDA

up 54% compared to 2017

14.4%2018

2017

EBITDA margin

compared to 11.7% in 2017

R$ 2.5 billion2018

2017

Consolidated adjusted net income

growing fourfold from 2017

Cash Flow

the highest of recent years

R$2.6billion

SG&A expenses

down 4.5% in 20173.6%

ratio of net sales of

Profitability at the North America Division increased

up from 5.2% in 2017

9.0% EBITDA margin

Dividends at Gerdau S.A the highest dividend distribution of the last 10 years

R$765million

FINANCIAL PERFORMANCE IN 2018

RESULTS FROM THE ASSET DIVESTMENT PROGRAM IN THE LAST FOUR YEARS

Economic value generated:

Exit from four countries and

contraction in installed capacity

25%

Significant deleveraging:

1.7x

net debt/EBITDA ratio has fallen to

40%EBITDA growth in the period, reflecting the focus on more profitable assets

R$7Over

billion

MANAGEMENT PRIORITIES IN 2019

OPERATIONAL PROFITABILITY

SAFETY

FREE CASH FLOW

DIGITAL TRANSFORMATION

CREATING VALUE

FOR CLIENTS



PERFORMANCE


ABOUT THE REPORT

MESSAGES

NET SALES

Gerdau concluded fiscal year 2018 with R$ 46.2 billion in net sales, 25% higher than in the previous year, driven by growth in shipments to the domestic market, higher profitability in exports and a positive effect from exchange variation in the translation to Brazilian real of sales generated abroad. Shipments came to 14.6 million tonnes in 2018, decreasing 3%, reflecting the divestment of certain rebar and wire-rod units in the United States, as well as of the operations in Chile and India. Gerdau’s divestments also affected its production volume in the period, which came to 15.3 million tonnes, down 5% from 2017.

CONSOLIDATED NET SALES

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.

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.

NORTH AMERICA

42%

SOUTH AMERICA

8%

Includes the special steel operations in Brazil and United States.

SPECIAL STEEL

17%

Includes the operations in Brazil (except special steel) and the iron ore operation in Brazil.

BRAZIL33%



PERFORMANCE


ABOUT THE REPORT

MESSAGES

EBITDA

SELLING, GENERAL & ADMINISTRATIVE EXPENSES

ADJUSTED NET INCOME

DIVIDENDOS

EBITDA (operating cash generation) posted strong growth of 54% in 2018, to R$ 6.7 billion, representing the best annual result of the last 10 years.

Selling, general and administrative (SG&A) expenses corresponded to 3.6% of net sales in 2018, compared to 4.5% in 2017, representing the lowest ratio ever.

Adjusted net profit, which grew to R$ 2.5 billion in 2018, was more than four times higher than in 2017.

In 2018, R$ 765 million was distributed to the shareholders of Gerdau S.A. (R$ 0.45 per share), the highest dividend distribution of the last 10 years, and R$ 244 million to the shareholders of Metalúrgica Gerdau S.A. (R$ 0.25 per share).

6.7billion

in 2018

R$

2.5billion

in 2018

R$



PERFORMANCE


ABOUT THE REPORT

MESSAGES

INVESTIMENTS

In 2019, the company will start reporting its investment program (CAPEX) for a three-year period (2019-21) as one of the measures to improve its governance. Planned investments amount to R$ 7.1 billion and will be classified into three categories: general maintenance, maintenance of the Ouro Branco Mill (Gerdau’s largest) and technological expansion and upgrade.

Investments in general maintenance refer to recurring activities focused on improving the operational excellence of existing assets. Maintenance investments at Ouro Branco comprise a series of initiatives related to the scheduled stoppage to modernize the mill in 2022. In 2019, a 60-day stoppage is scheduled for Blast Furnace 1 at Ouro Branco, with various gradual refurbishments to be carried out in 2020 and 2021. During this period, strategic inventories will be built to ensure normal supply to clients. Investments in expansion and technological updating involve expanding installed capacity and innovating product lines or processes with higher profitability potential.

Gerdau invested R$ 1.2 billion in fixed assets (CAPEX) in 2018. Of this amount, R$ 560 million was invested in Brazil, R$ 388 million in North America, R$ 194 million in the Special Steel BD (including the mills in Brazil and United States) and R$ 53 million in Latin America’s other countries (excluding Brazil).

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 of maintaining a net debt/EBITDA ratio of 1x to 1.5x.

The main expansion investments involve expanding the installed capacity of rolled steel products by 530 thousand tonnes at the various mills of North America (R$ 456 million), expanding the installed capacity of special steel products at Pindamonhangaba (SP) and Monroe (USA) for R$ 798 million, and expanding the installed capacity of hot-rolled coils at Ouro Branco (MG) to 230 thousand tonnes (R$ 380 million). Gerdau also will invest in its mining area, seeking the world’s best existing technologies in environmental protection and operational safety.R$1.2

BILLIONINVESTIDED IN CAPEX



PERFORMANCE


ABOUT THE REPORT

MESSAGES

INVESTIMENTS DESINVESTIMENTS

NEXT THREE YEARS (2019–2021):R$ 7.1 BILLION

Annual CAPEX(R$ million)

2019 2.2191.015441764

684

722

562

593

1.163

1.132

2020 2.409

2021 2.447

Technological expansion and updating

Ouro Branco maintenance

Maintenance

In 2018, Gerdau concluded its asset divestment program that had been ongoing for the last four years. The economic value of the assets divested by the company since 2014 surpassed R$ 7 billion, in line with the program’s purpose of enabling the company to focus on its more profitable operations in the Americas and to deleverage, which have been accomplished. Despite the company’s exit from four countries and the 25% contraction in its installed capacity between 2014 and 2018, its operational cash generation (EBITDA) grew 40%, to R$ 6.7 billion in 2018, marking the best annual EBITDA of the last 10 years.

The divestment program was concluded with the sale of assets in India and of certain rebar units in the United States during the fiscal year. In October 2018, the Company concluded the sale of 100% of its operations and assets in India, including the special steels unit, with annual installed capacity of 250,000 tonnes of steel, to Blue Coral Investment Holdings Pte. Ltd and Mountainpeak Investment Holdings Ltd, for US$ 120 million. In addition, in November 2018, Gerdau concluded the sale of four rebar units and of fabricated rebar units in the United States to Commercial Metals Company (CMC). The agreement included the mills in Jacksonville (FL), Knoxville (TN), Rancho Cucamonga (CA) and Sayreville (NJ), as well as all Gerdau’s fabricated rebar units in the United States. The economic value of the transaction was US$ 600 million.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

FINANCIAL LIABILITIES

Evolution in debt indicatorsIn 2018, Gerdau reduced its net debt/EBITDA ratio significantly, from 3.0x in December 2017 to 1.7x in December 2018. The reduction in the leverage ratio reflects the consistent growth in EBITDA and the proceeds generated by the asset divestment program.

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

INDICATORS 12.31.2018 09.30.2018 12.31.2017

Gross debt / Total capitalization¹ 36% 40% 41%

Net debt² (R$) / EBITDA³ (R$) 1.7x 2.2x 3.0x

On December 31, 2018, gross debt was 12.2% short term and 87.8% long term. Broken down by currency, 26.2% of gross debt was denominated in Brazilian real, 73.3% in U.S. dollar and 0.5% in other currencies. For comparison purposes, on December 31, 2017, 80.8% of gross debt was denominated in U.S. dollar, which demonstrates the Company’s strategy to reduce its exposure to the dollar and consequently better align the currency profile of its debt with that of its cash generation. On December 31, 2018, 61% of cash was held by Gerdau companies abroad and denominated mainly in U.S. dollar.

In 4Q18, the Company carried out the 15th issue of debentures of Gerdau S.A., in the amount of R$ 1.5 billion, and repurchased US$ 1 billion in bonds (distributed among bonds coming due in 2020, 2021, 2023 and 2024), with the aim of reducing its gross debt, restructuring and rebalancing its debt maturity schedule and reducing its exposure in U.S. dollar.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Gross debt (non-current) payment timeframeOn December 31, 2018, the nominal weighted average cost of gross debt was 6.7%, or 6.8% for the portion denominated in Brazilian real, 5.7% plus foreign exchange variation for the portion denominated in U.S. dollar contracted by companies in Brazil, and 10.7% for the portion contracted by subsidiaries abroad. On December 31, 2018, the average gross debt term was 7 years.

After concluding the asset divestment program and deleveraging, the Board of Directors established as the company’s financial policy the implementation and maintenance in the long term of the following parameters:

�� 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 Gerdau to pursue a balanced financial situation while successfully executing an investment plan in the coming years to meet the market’s demands and the industry’s challenges.

2,3

1,2 1,6

1,2

2,4

4,3

2020 2021 2022 2023 2024 2025 and after



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Free cash flow, one of the priorities of Gerdau’s financial management, came to R$ 2.6 billion in 2018. The result was supported by EBITDA generation, which was more than sufficient to honor all capital expenditure, income tax and interest commitments, as well as the freeing up of working capital.

FREE CASH FLOW

Cash Flow by quarter in 2018 (R$ million)

1.028

4T17

65

1T18

86

2T18

405

3T18

2.038

4T18

For the future, Gerdau believes that the combination of well-defined investment plan with the flexibility to adapt to market fluctuations and the new long-term parameters for its leverage ratio and debt defined by the Board of Directors is essential for it to continue generating positive free cash flow in the coming years.

6OPERATING

& FINANCIAL PERFORMANCE

NEW WAYSof living



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Gerdau reports its financial results by Business Division, as established in its corporate governance.

EBITDA and EBITDA Margin by Business Division

Brazil BD

19,6%20,8% 20,3%16,4%

891

3T18

743

2T18

751

1T18

647

4T18

44,6%

South America BD

187 179 185 128

20,4%16,2%19,4%

15,6%

10,0%

Special Steel BD

372315 386226

16,1%18,2% 18,1%

11,4%

1T18 3T182T18 4T18

19,1%

North America BD

248

497605

437

10,5%9,2%

5,6%

10,1%

1T18 3T182T18 4T18 1T18 3T182T18 4T18

26,3%

EBITDA (R$ million) EBITDA Margin (%) Participation of Adjusted EBITDA per BD (last 12 months)

OPERATING PERFORMANCE



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Steel shipments to Brazil’s domestic market came to 3.9 million tonnes, increasing 9% in relation to 2017, influenced by the ongoing recovery of the industrial sector and the start of a recovery in the construction sector. Exports from Brazil amounted to 1.6 million tonnes, down 20% on the prior year. Despite the lower exports, the operation’s net sales amounted to R$ 15.7 billion, advancing 25% in relation to 2017. The division accounted for 33% of Gerdau’s consolidated net sales. Meanwhile, EBITDA amounted to R$ 3 billion, 57% higher than in 2017. In 2018, the Brazil Business Division was the best performing division in terms of profitability, with EBITDA margin (ratio of EBITDA to net revenue) of 19.3%, compared to 15.3% in 2017.

Includes the operations in Brazil (except special steel) and the iron ore operation in Brazil ON BRASIL 2018 2017 ∆

Volumes (1,000 tonnes)

Production of crude steel 5.845 6.131 -4,7%

Shipments of steel 5.535 5.608 -1,3%

Domestic Market 3.951 3.617 9,2%

Exports 1.585 1.991 -20,4%

Shipments of long steel 4.079 4.261 -4,3%


Exports 1.396 1.677 -16,8%

Shipments of flat steel 1.457 1.347 8,1%


Exports 189 314 -39,8%

Results (R$ million)

Net Sales¹ 15.745 12.563 25,3%


Exports 3.425 3.056 12,1%

Cost of Goods Sold (13.044) (10.996) 18,6%

Gross profit 2.701 1.567 72,4%

Gross margin (%) 17,2% 12,5%

EBITDA 3.032 1.925 57,5%

EBITDA margin (%) 19,3% 15,3%

1 - Includes iron ore net sales.

Performance of Brazil Division

BRAZIL DIVISION



PERFORMANCE


ABOUT THE REPORT

MESSAGES

An important initiative in the year was the company’s expansion into the retail construction market, with the launch of the company “Juntos Somos Mais,” Brazil’s largest loyalty program in the retail construction materials industry, jointly with Votorantim Cimentos and Tigre Group. Gerdau also implemented 39 digital innovation initiatives designed to improve customer service and to capture operating efficiency gains at industrial units, which are detailed in the section Intellectual Capital, on page 35.

Regarding the expectations for Brazil’s steel industry in 2019, Gerdau believes that a positive economic cycle is beginning, which should drive a recovery in the domestic market. In this light, the Company is fully prepared to meet any demand growth in Brazil, even having idle capacity that could rapidly be put into operation.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

NORTH AMERICA 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.

In 2018, the North America Division registered shipments of 6.1 million tonnes, down 3% on 2017, which mainly reflect the divestment of certain rebar units in the United States.

Even so, the division’s net sales grew 29%, to R$ 19.9 billion, to account for 42% of the Company’s total consolidated net sales. EBITDA was R$ 1.8 billion, up 124% on the prior year. Meanwhile, EBITDA margin expanded to 9%, from 5.2% in 2017.

NORTH AMERICA BD 2018 2017 ∆


Production of crude steel 6.431 6.764 -4,9%



Net Sales 19.927 15.433 29,1%


Gross profit 1.763 609 189,4%

Gross margin (%) 8,8% 3,9%

EBITDA 1.787 797 124,2%


The better performance in 2018 was driven by the combination of a better economic scenario, lower steel imports in the United States resulting from Section 232 and the efforts implemented by the company’s management.

Performance of North America Division



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Also, the asset portfolio of the North America division was optimized with the conclusion of the sale of four rebar units and of fabricated rebar units in the United States, to Commercial Metals Company (CMC). The agreement included the mills in Jacksonville (FL), Knoxville (TN), Rancho Cucamonga (CA) and Sayreville (NJ), as well as all Gerdau’s fabricated rebar units in the United States. The economic value of the transaction was US$ 600 million.

For 2019, the expectation is for the U.S. economy to remain strong, driving demand for long steel goods. We also believe that Section 232 will remain in effect in 2019.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Shipments in South America came to 1.3 million tonnes in 2018, down 24% compared to 2017, mainly due to the sale of the Chile operation and the economic slowdown in Argentina. The division’s net sales in the year came to R$ 3.8 billion, down 6% on the previous year, accounting for 8% of consolidated net sales. EBITDA was R$ 679 million, growing 20% compared to 2017, while EBITDA margin stood at 17.9%, up from 14.1%.

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.

SOUTH AMERICA DIVISION

SOUTH AMERICA BD 2018 2017 ∆


Production of crude steel 746 1.043 -28,5%



Net Sales 3.801 4.026 -5,6%

Cost of Goods Sold (3.231) (3.523) -8,3%

Gross profit 570 503 13,4%

Gross margin (%) 15,0% 12,5%

EBITDA 679 567 19,7%


With regard to the prospects of its markets in South America, expectations are calling for the region’s economy to grow, led by Peru and Colombia. As in 2018, the Argentinian economy remains a point of concern in the region, with market consensus calling for the country’s economy to slow.

Performance of South America Division



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Shipments in 2018 came to 2.1 million tonnes, up 7% from the previous year. The division’s net sales amounted to R$ 8.2 billion, an increase of 31% compared to 2017, and accounting for 17% of Gerdau’s consolidated net sales. EBITDA advanced 14% to R$ 1.3 billion, while EBITDA margin was 15.9%, down from 2017, influenced by the economic slowdown in Argentina, which affected Brazil’s automotive industry, since the country is the main market of the special steel operation in Brazil.

Includes the special steel operations in Brazil and United States.

SPECIAL STEEL DIVISION

Furthermore, the division was affected by higher costs with inputs and raw materials, especially electrodes, scrap and alloys.

SPECIAL STEEL BD 2018 2017 ∆


Production of crude steel 2.321 2.182 6,4%

Shipments of steel 2.111 1.977 6,8%


Net Sales 8.159 6.229 31,0%


Gross profit 1.094 928 17,9%

Gross margin (%) 13,4% 14,9%

EBITDA 1.299 1.139 14,0%


Performance of Special Steel Division



PERFORMANCE


ABOUT THE REPORT

MESSAGES

In 2018, Gerdau announced investments of R$ 550 million to install a new continuous casting line at its mill in Pindamonhangaba, São Paulo. The line, which is slated for startup in 2020, should improve the unit’s efficiency and productivity. With the new continuous casting line, Gerdau will produce stronger and purer steel, in line the trends of the auto and oil and gas industries. The investment is the first step towards the future expansion of the Pindamonhangaba Mill’s installed capacity, from 600,000 tonnes/year to 1 million tonnes/year of special steels.

The Special Steel Division also has been implementing important digital innovation initiatives to support the development of the auto industry. One example is the Intelligent Steel Analysis (ISA) platform, which uses artificial intelligence to calculate, in seconds, the feasibility of demands for the new special long steel goods used in the auto industry. This enables Gerdau to give its clients agile solutions adapted to their specific needs. For more details on the

ISA, see the section Intellectual Capital, on page 37. The division also maintains an Innovation and Advanced Materials Center (NIMA) that studies innovative solutions for the sector. One of the themes currently being studied is the production of steel using 3D printers. In 2019, Gerdau plans to invest R$ 10 million in NIMA.



PERFORMANCE


ABOUT THE REPORT

MESSAGES

Another important market in Brazil’s special steel segment is wind power generation, which is served by the joint venture Gerdau Summit, formed by Gerdau, Sumitomo Corporation and The

Japan Steel Works (JSW). In 2019, the unit will launch production of cast parts for the wind power industry, a market with vast growth potential in the country.

For 2019, the market outlook for the Special Steel Division is positive. Brazil’s auto industry is projected to grow, while special steel demand in the U.S. market should remain strong, in line with last year.

7CORPORATIVE INFORMATION

NEW WAYS

of working



PERFORMANCE


ABOUT THE REPORT

MESSAGES


GerdauAv. das Nações Unidas 8.501 - 8º andar Pinheiros 05425-070 São Paulo - SP +55 11 3094-6600 www.gerdau.com

Gerdau on Social Media www.facebook.com/Gerdau @gerdau (http://twitter.com/gerdau) www.linkedin.com/company/gerdau www.youtube.com/user/GerdauSA

Shareholder ServicesItaú Corretora de Valores [email protected]: 3003.9285 (State capitals)Phone: 0800.720.9285 (Other areas)

Custodial Bank in BrazilItaú Corretora de Valores [email protected]: 3003.9285 (State capitals)Phone: 0800.720.9285 (Other areas)Phone: 0800.722.1722 (For hearing and speech impaired)

Transfer Agent AbroadJPMorgan Chase Bank [email protected]: (800) 990-1135 (from the United States)Phone: (651) 453-2128 (outside the United States)

Investor and Analyst ServicesAv. das Nações Unidas, 8501 – 8º AndarPinheiros05425-070São Paulo - [email protected]: (11) 3094.6300

Independent AuditorKPMG Auditores Independentes

http://www.facebook.com/GerdauSa

http://twitter.com/gerdau

http://www.linkedin.com/company/gerdau

http://www.youtube.com/user/GerdauSA



PERFORMANCE


ABOUT THE REPORT

MESSAGES

CREDITS

Coordination & Concept Gerdau Corporate Communication

Copy & Production Supervision Comunicação Corporativa da Gerdau D3N Comunicação

Graphic design Néktar Design

Photograph & Illustration Credits Gerdau Archive (Cover, pp. 3, 4, 6, 7, 9, 13, 14, 15, 16, 17, 18, 19, 20, 21, 23, 24, 25, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 39, 41, 43, 44, 52, 56, 61, 65, 67, 70, 72, 75); Shutterstock.com (pp. 5, 12, 42, 46, 47, 48, 49, 50, 51, 62, 71); Unsplash (p. 8); Apis Cor (p. 43).

We thank everyone who contributed with information and images to this publication.

Documents

experiencing the world - ri.gerdau.com · Board of Directors, Audit Board, Executive Board and each employee on our team. ... governance practices and rigorous controls of internal