ANNUAL REPORT 2012

BUILDING OPPORTUNITIES

Gerdau
BUILDING OPPORTUNITIES
Gerdau faces the challenges of the present with an eye on the future. That is why it is always looking to build new business opportunities that can generate outstanding returns and ensure its sustainable development. Stemming from a relationship of respect, integrity, transparency, and continuous search for mutual gains, Gerdau seeks to contribute toward the development of its customers, suppliers, employees, and communities where it operates, while creating value for its shareholders. Gerdau’s history began in 1901 as a small nail factory in Porto Alegre (RS). Today Gerdau is the leader in the segment of long steel in the Americas and one of the largest suppliers of special steel in the world. Gerdau steel is used in homes, cars, freeways, bridges, agricultural machinery, home appliances, telephone and electricity towers, among other uses and is part of the lives of millions of people everyday. It has industrial units in the Americas, Europe, and Asia, which together represent an installed capacity of over 25 million metric tons per year. It is the largest scrap recycler in Latin America and worldwide transforms millions of metric tons of this raw material into new steel products each year.

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Pictures on the Cover Gerdau is continuously investing in building new business opportunities. Below are some examples: 1. The construction of a new area of the rolling mill in Ouro Branco (MG) to manufacture hot rolled coils, making it possible to start the production of flat steel in Brazil in 2013. 2. The increase in production capacity of special bar quality (SBQ) in mills located in Brazil and the United States. 3. The start of production of special steel in India to supply the automotive market. 4. The expansion of production capacity of iron ore in Brazil.

KEY INDICATORS*

Social Responsibility

2012
52.7 7.9

2011
61.0 9.5

Consolidated financial performance (R$ million)
40,000 30,000 20,000 10,000 0

Investments (R$ million) Volunteer employees (thousand people)

37,982

35,407
People 2012
76% 1.06

2011
75% 1.59

4,176 1,496

4,651 2,098

General Satisfaction Index (internal climate) Accident frequency rate*

2012
Net sales EBITDA* Net income

2011

*Lost-time accident frequency rates per million hours worked, including employees and service providers. The data also includes restricted work and change of function (OSHA recordable treated as LT accidents).

Capital markets
Metalúrgica Gerdau S.A. Dividends (R$ per share) Dividend yield (%)* Gerdau S.A. Dividends (R$ per share) Dividend yield (%)*

2012
0.32 1.4 0.24 1.3

2011
0.55 3.1 0.35 2.4

*Represents earnings before interest, taxes, depreciation, and amortization. It is calculated in accordance with CVM Instruction no. 527.

Financial margins
Gross margin Net margin EBITDA Margin

2012
13% 4% 11%

2011
14% 6% 13%

*Ratio between the dividend paid per share and the preferred share price on the last day of the year.

Valuation of shares*
Metalúrgica Gerdau S.A. PN (GOAU4) - R$ Metalúrgica Gerdau S.A. ON (GOAU3) - R$

2012
30.2% 20.3% 25.7% 28.4% 17.0% 12.5% 7.4% 7.3% -10.7%

Production and shipments
Steel production (thousand metric tons) Consolidated shipments (thousand metric tons)

2012
18,920 18,594

2011
19,623 19,164

Gerdau S.A. PN (GGBR4) - R$ Gerdau S.A. ON (GGBR3) - R$ Gerdau S.A. ADRs Nyse (GGB) - US$ Gerdau S.A. - Latibex (XGGB) - € Ibovespa (São Paulo) - R$ Dow Jones (New York) - US$ Latibex (Madrid) - €

Environmental management
Reuse of by-products (% of total generated) Investments (R$ million)

2012
74.8 178.4

2011
78.3 370.9

*The appreciation of the shares was calculated considering the local currency at the beginning and at the end of the year.

*The dollar exchange rate on December 31, 2012 was R$ 2.0435.

CANADA

UNITED STATES

SPAIN

MEXICO GUATEMALA HONDURAS VENEZUELA COLOMBIA DOMINICAN REPUBLIC

PERU BOLIVIA CHILE

INDIA

BRAZIL

GERDAU AROUND THE WORLD
60 148 4 62 4 135 3
Steel mills Downstream operations Iron ore extraction areas Scrap collection and processing facilities * Power plants Retail facilities Private port terminals Gerdau Headquarters

URUGUAY ARGENTINA

Countries where Gerdau has jointly controlled entities: Guatemala, Mexico, and the Dominican Republic * Scrap collection and processing facilities, solid pig iron production facilities, and coal units.

MISSION
To create value for our customers, shareholders, employees, and communities by operating as a sustainable steel business.

VALUES
Be the CUSTOMER’s choice SAFETY above all Respected, engaged and fulfilled EMPLOYEES Pursuing EXCELLENCE with SIMPLICITY Focus on RESULTS INTEGRITY with all stakeholders Economic, social and environmental SUSTAINABILITY

VISION
To be a global organization and a benchmark in any business we conduct.

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GERDAU ANNUAL REPORT 2012

TABLE OF CONTENTS

05 06 07 11

Message from the Chairman of the Board Message from the CEO Corporate governance Strategy and competitive advantage

24 25 26 27

Customers Suppliers Shareholders Society

12 Business 12 Performance of operations 18 Finances 20 Relationships 20 Employees

28 Environment 30 36 40
Timeline Summarized financial statements Credits and contacts

2012 HIGHLIGHTS
• Gerdau announces new investments in mining to increase its annual installed capacity from 11.5 million to 18 million metric tons by 2016. Besides that, the first shipments of iron ore were made to the international market, totaling 325,000 metric tons. • Investments continue to be made to begin the production of flat steel in Brazil. With an installed capacity of 800,000 metric tons per year, the hot rolled coil mill will begin operations in 2013. • A new continuous casting plant is inaugurated in Monroe, • The company announces the construction of a new melt shop at its Riograndense mill located in Sapucaia do Sul (RS) with an installed capacity of 650,000 metric tons per year, which will replace the current melt shop. Michigan (U.S.) in 2012 as part of the investment to expand the installed capacity of special steels to meet the growing demand of the automotive market in the region. • The project for building a new plant in Mexico has resumed as the joint venture Gerdau Corsa. Focused on the production of structural shapes, the plant will have an annual installed capacity of 1 million metric tons of steel and 700,000 metric tons of rolled products. • Gerdau starts up the blast furnace operation in India along with the power generation plant, the sinter plant, the melt shop, and the new special steel rolling mill.

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MESSAGE FROM THE CHAIRMAN OF THE BOARD

“Our centennial experience and long-term strategy give us the confidence and reassurance that we will once again transform challenges into new business opportunities.”

Jorge Gerdau Johannpeter Chairman of the Gerdau Board of Directors

Ability to stand out in the steel market
The year 2012 was marked by the steel sector’s effort to overcome the difficulties imposed by the global economic scenario. We face an increasingly competitive environment, rising costs of raw materials, excess installed capacity, and exchange rate policies practiced by countries to artificially devalue their currencies in order to extend their gains with export. At Gerdau, this was no different. However, our centennial experience and long-term strategy give us the confidence and reassurance that we will once again transform challenges into new business opportunities. This certainty is based on our ability to work and the dedication of our more than 45,000 employees who share the Company’s values. This translates into a behavior of integrity, continuous search for excellence, and proximity with all stakeholders: employees, customers, shareholders, suppliers, and the community. Thus, we have enhanced our ability to respond to this economic scenario and adjust our operations. From the sector’s point of view, the steel industry is currently living the effects of a cyclical movement of depuration as has already happened in the past. This means that over the next few years only the most efficient companies will continue in operation. In this context, I am convinced that Gerdau, once again, will come out stronger, reinforcing its management capacity and consequently stand out in the global steel market. As a result, the shares of our publicly traded companies in Brazil showed one of the best performances in the world from the sector with an increase in value of over 20% in 2012.

Acknowledgments
I would like to thank the Board of Directors and the Gerdau Executive Committee for their dedication and management skills, as well as our employees for their efforts and outstanding commitment.

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GERDAU ANNUAL REPORT 2012

MESSAGE FROM THE CEO

“We built new business opportunities and seek to enhance our operational efficiency in a scenario marked by significant challenges.”

André B. Gerdau Johannpeter Gerdau Chief Executive Officer

Management efforts and construction of opportunities
For Gerdau, the year 2012 was marked by significant challenges, mainly due to strong competition in the global steel market. Because of this, we sought to expand our operational efficiency and build new business opportunities in an economic scenario characterized by a slowdown in China and other emerging countries, the European crisis, and by the uncertainty over the fiscal policy in the United States, which resulted in a lower global demand than initially expected. At the same time, we are experiencing an increase in the costs of raw materials and freight. Nevertheless, we increased our net sales by 7% to R$ 38 billion, even with the 3% reduction in shipments, which totaled 18.6 million metric tons in 2012. EBITDA in turn was R$ 4.2 billion, a 10% reduction compared to the previous year. Consolidated net income was R$ 1.5 billion, 29% lower than in 2011. During the year we worked hard to build new business opportunities such as increased investments in mining, which will generate significant results with exporting this raw material to the international market. We are also going to expand the product mix in Brazil with the start of production of flat steel products in 2013. Furthermore, we strengthened our presence in India where we started producing special steel, a high added-value segment.

All this would not be possible without the commitment of our employees in a positive work climate, which can be seen by the high satisfaction rate on the Opinion Survey that increased from 75% in 2011 to 76% in 2012. We also believe that Gerdau’s growth is directly related to its respect for the environment and with the development of the steel business chain. That is why we have invested in more than 900 social projects and in the most advanced technologies to minimize the impact of our operations on nature.

Outlook
Considering the investments made in 2012 and the uncertainties about the global economic market, we will be more selective in evaluating future projects. Investments of R$ 8.5 billion have been planned for the period of 20132017, considering both the steel and mining activities. For 2013, we expect a gradual evolution of the U.S. economy and a recovery of Brazil’s, as well as continued growth in China and other countries in Latin America. These positive perspectives combined with the internal actions to improve our operating efficiency should improve Gerdau’s profitability throughout the year.

Acknowledgments
I would like to thank our employees for their dedication and the confidence of our customers, shareholders, suppliers, and communities, as they are fundamental to the continuation of our trajectory of sustainable development.

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CORPORATE GOVERNANCE A solid governance structure and transparency with our stakeholders are at the core of Gerdau
Gerdau follows strict ethical principles that have been consolidated along its centennial trajectory, and it is continually striving to improve its relationship with all of its stakeholders. It has a solid governance structure and uses modern management tools that make it possible to build business opportunities, achieve increasing levels of excellence and competitiveness, as well as achieve the highest quality in everything it does. Corporate management is the responsibility of the Gerdau currently has three publicly traded companies: Gerdau S.A., Metalúrgica Gerdau S.A., and Empresa Siderúrgica Del Perú S.A.A. (Siderperu). The Gerdau S.A. shares are traded on BM&FBOVESPA (São Paulo), on the New York Stock Exchange (NYSE), and on the Madrid Stock Exchange (Latibex). Because it has shares traded on the U.S. market, Gerdau S.A. follows the requirements of the Sarbanes-Oxley (SOX) act, which sets stringent corporate governance practices and internal controls. The shares of Metalúrgica Gerdau S.A. are traded on BM&FBOVESPA (São Paulo) and those of Siderperu on the Lima Stock Exchange. Board of Directors, whose Executive Committee (CEG) coordinates and supervises the Company’s Business Operations and the Functional Processes, working in accordance with the policies established by the Board of Directors. Composed of a CEO and five Executive Vice-Presidents, the CEG has the support of committees set up according to criteria of expertise. and two are elected by the minority shareholders. In both companies, the term of office of each member is one year with the possibility of re-election. It should also be pointed out that Gerdau S.A. and Metalúrgica Gerdau S.A. have audit committees that monitor and inspect the actions of the board members as well as give their opinions and advice on the financial statements. The members of the Board of Directors and of the Audit Committee in each one of the companies are elected at the Ordinary General Meeting (OGM).

Risk management
A structured and continuously updated management system monitors all the variables that may pose risks to Gerdau’s business and operations. In 2012, the Company consolidated its best practices in this area and formalized its Risk Management Policy, which was approved by the Board of Directors. Furthermore, the Risk Committee, which is responsible for managing and monitoring possible risks that may generate impacts directly or indirectly on the Company, began reporting directly to the Board of Directors and no longer as a committee of the CEG.

Corporate governance structure
The Board of Directors of Gerdau S.A. is responsible for defining the Company’s long-term strategies and to monitor the execution of the policies it establishes. In addition, this body makes decisions about issues considered relevant within the business and operations, as well as appointing the Gerdau Executive Committee (CEG) members. The Board of Directors has nine members, including external directors, who meet between eight to ten times a year. It is assisted by the following committees: Strategy Committee, Corporate Governance Committee, Compensation and Succession Committee, and Risk Committee. The Board of Directors of Metalúrgica Gerdau S.A., on the other hand, has 11 members, nine of which are also a part of the Board of Directors of Gerdau S.A.

Independent Audit
Gerdau’s publicly traded companies regularly submit their financial statements for external audit. In the case of needing to contract eventual services not related to external auditing by the independent auditor, the Company bases this on the principles that preserve the auditor’s independence.

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GERDAU ANNUAL REPORT 2012

CORPORATE GOVERNANCE Corporate Governance Structure

Shareholders’ Meeting

Board of Auditors

Board of Directors

Corporate Governance, Strategy, Compensation & Succession, and Risk Committees

Support Committees

Gerdau Officers and Executive Committee Macroprocesses

Business Divisions

Brazil

Special Steel

North America

Latin America

Read more about the Gerdau governance structure at http://www.gerdau.com.br/sobre-gerdau/governanca-corporativa.aspx?language=en-US

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CORPORATE GOVERNANCE Gerdau S.A. Board of Directors

Jorge Gerdau Johannpeter Chairman

Germano H. Gerdau Johannpeter Vice-Chairman

Klaus Gerdau Johannpeter Vice-Chairman

Frederico C. Gerdau Johannpeter Vice-Chairman

André B. Gerdau Johannpeter Board Member

Claudio Gerdau Johannpeter Board Member

Affonso Celso Pastore Board Member

Alfredo Huallem Board Member

Oscar de Paula Bernardes Neto Board Member

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GERDAU ANNUAL REPORT 2012

CORPORATE GOVERNANCE Gerdau Executive Committee (CEG)
1. André B. Gerdau Johannpeter Chief Executive Officer (CEO) and Chairman of the Gerdau Executive Committee (CEG) 2. André Pires de Oliveira Dias Executive Vice President of Finance, Auditing, and Investor Relations 3. Expedito Luz Executive Vice President of Legal Affairs and Compliance 4. Francisco Deppermann Fortes Executive Vice President of Human Resources, Management, and Organizational Development 5. Manoel Vitor de Mendonça Filho Executive Vice President of Brazil Business Division
4 5 3 1 2 6

6. Ricardo Giuzeppe Mascheroni Executive Vice President of North America and Latin America Business Divisions

GERDAU ANNUAL REPORT 2012

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STRATEGY AND COMPETITIVE ADVANTAGE Searching for new business opportunities ensures sustainable development
Gerdau builds business opportunities in order to generate outstanding returns and sustainable development from its operations. Within this scenario, it currently has three highlights in its investment plan: expansion of the mining activity, production of flat steel in Brazil, and manufacturing of special steel in India. In the mining area, the Company has been working over the past few years to gradually become an international supplier of iron ore, which began at the end of 2012. In addition, in the segment of steel, it is working to consolidate itself as a player in all segments of the market and, therefore, it is investing to begin production of flat steel in Brazil with the startup of operation of a rolling mill for hot rolled coils in 2013, and eventually for heavy plates. In India, industrial production started in 2012 in order to meet needs of the special steel market in the region. EBITDA Deployment In order to increase its profitability, Gerdau began the EBITDA Deployment project in 2012, which included the alignment of targets and identifying gaps that impact the generation of the Company’s operating cash flow. The project, which has a global scope, involves building a breakdown plan of the EBITDA targets in which benchmarks are established. To do this, the teams use management techniques to continually monitor results, correct deviations, as well as make any adjustments in the action plans. contributes to spreading Gerdau’s corporate culture, further expanding the integration between operations. Gerdau Template Since 2010, Gerdau has invested heavily in implementing a single and global information technology platform in all of its units around the world. The project, which has a permanent team of more than 250 employees, provides greater efficiency, security, and speed to customer service and in sharing information between units, which also contributes to the Company’s greater integration. The units located in Colombia, Mexico, and Peru were the pioneers in using the new system, and have already shown positive results. In 2012, the system was deployed in operations in Argentina, Canada, Chile, the United States, and Uruguay. Now in 2013, the initiative will be expanded to other units in the United States and the project will start up in Brazil.

Unique Features of Gerdau Management
Gerdau Business System (GBS) Taking actions as a fully integrated organization is the basis of Gerdau’s strategy. To do so, it uses the Gerdau Business System (GBS), a management system that standardizes, enhances, and transfers the best practices to all of the Company’s units around the world. The GBS also

GERDAU STRATEGY

Profitability and Growth with Sustainability

Relevance in the markets

Business competitiveness

Player in all segments

Geographic diversification

Integrated Organization

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GERDAU ANNUAL REPORT 2012 | PERFORMANCE OF OPERATIONS

BUSINESS
Gerdau expands investments in mining to become an international supplier of iron ore

PERFORMANCE OF OPERATIONS Brazilian market stands out in Gerdau’s performance
Strong global competition in the steel market due to the slowdown in China and other emerging countries, the European crisis and uncertainty over the fiscal policy in the United States influenced the reduction of 3% in the volume of Gerdau’s consolidated shipments in 2012, which was 18.6 million metric tons. Throughout the year, the effects of the global economic scenario were felt at different levels, depending on the business segment and geographic region of the operations. The positive highlight for the year was the Company’s performance in the Brazilian domestic market (excluding special steel mills), despite the lower economic activity recorded in the country, with an expansion in its net sales (12%) and the volume of shipments (+5%). Gerdau’s consolidated steel production in 2012, in turn, was 18.9 million metric tons, 4% less compared to 2011.
Note: The above information does not include the shipments volumes from affiliated companies and jointly-owned subsidiaries, neither of coal and coke.

Shipments per Business Division
18.6 million metric tons

Latin America

14%

Except Brazil

Except special steel mills

38%

Brazil

Special Steel

14%

Includes special steel operations in Brazil, Europe, and the United States

North America
Includes long steel operations in the United States and Canada

34%

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OUTLOOK: WORLD

In a scenario of significant cost pressures, especially of raw materials, and the deindustrialization of the country, the main challenge for Gerdau was to improve operational efficiency and the competitiveness of its units. To do this, the Company continued its investments in the technological modernization of its units, expanded its mining operations as a way to increase its profitability, and continued investing to begin the production of flat steel in Brazil. As for the mining area, the Company plans to achieve an installed capacity of 11.5 million metric tons in 2013. Moreover, Gerdau has already made its first shipments of iron ore to the international market, totaling 325,000 metric tons.

• The global steel market should show signs of recovery in 2013. According to the World Steel Association, steel consumption is expected to grow 3.2%, reaching 1.46 billion metric tons. • Gerdau is prepared to meet the growing demand for steel in the world. For the period of 2013-2017, R$ 8.5 billion are scheduled in investments in its industrial units, considering both the steel and mining activities.

Brazil (except special steel mills)
Gerdau operates in Brazil with 15 mills producing steel and rolled products, 3 downstream operations, 39 fabricated reinforcing steel facilities, 5 flat steel service centers, 9 scrap collection and processing units, and 4 iron ore extraction areas. It also has 88 distribution branches of Comercial Gerdau, which ensures an agile and efficient distribution of flat and long steel, as well as greater proximity to customers. At the end of 2012, Gerdau announced additional investments to expand its production capacity of iron ore to 18 million metric tons by 2016, and implement a rail terminal in Miguel Burnier (MG) for shipping the product easily. With these investments, the Company will have a broad portfolio of iron ore products – concentrates, sinter feed, and granulated materials – with a quality to meet the requirements of the most demanding markets. Gerdau’s volume of mineral resources today reaches

Gerdau will start the production of flat steel in Brazil in 2013

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GERDAU ANNUAL REPORT 2012 | PERFORMANCE OF OPERATIONS

6.3 billion metric tons of iron ore located in the state of Minas Gerais and have an iron content above 40%.

OUTLOOK: BRAZIL • According to the Brazil Steel Institute, steel

In the flat steel segment, Gerdau began the testing phase of the rolling mill for hot rolled coils at the Ouro Branco mill (MG) in December 2012. The equipment, whose annual installed capacity is 800,000 metric tons, will start up operation in 2013. In a second stage of the project, Gerdau will install a heavy plates rolling mill with an annual capacity of 1.1 million metric tons. Regarding the long steel segment, the Company will build a new melt shop at its Riograndense mill in Sapucaia do Sul (RS), increasing its annual installed capacity from 450,000 to 650,000 metric tons in 2015. Moreover, still in progress is the installation of a new rolling mill for wire rod and rolled rebar in Cosigua (RJ), which will begin operation in 2014, initially with an annual installed capacity of 600,000 metric tons that will be expanded to 1.1 million metric tons in a second stage.

consumption in the country should reach 26.4 million metric tons in 2013, which is a growth of 4.3% over 2012, and is in accordance with the prospects for growth of the Brazilian economy. • The construction projects for the World Cup in 2014 and for the 2016 Olympic Games are in full swing and should follow a faster pace during 2013. Gerdau will continue providing steel for the construction and renovation of stadiums, as well as building projects of urban mobility and infrastructure such as airports, railways, ports, and roads, which will run at a slower pace than expected. Within this scenario of expanding demand for steel, Gerdau is fully prepared to meet the market’s needs.

Among the investments initiated during the year is the

North America (Includes long steel mills in the United States and Canada)
Throughout 2012, Gerdau sought to improve its operational efficiency while simultaneously taking advantage of market opportunities considering the economic context generated by the uncertainty over the fisical policy in the U.S.

implementation of a new continuous casting in St. Paul mill (Minnesota), replacing the existing one, with an annual production capacity of 550,000 metric tons. The equipment is designed for the production of special bar quality (SBQ) and will begin operations in 2015. Furthermore, the Company initiated the operation of a new reheating furnace at its Calvert City mill (Kentucky) in January 2013.

Gerdau’s steel mill in Cambridge (Canada)

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Gerdau’s CEO announces resumption of the project to build a new plant in Mexico

To reduce costs, Gerdau acquired Cycle Systems Inc. in early 2013, a company with facilities located in Virginia for recycling and processing scrap steel, which is a key raw material for producing steel. It also continued with the implementation of a single information technology system, which will further ensure its customer service quality (see the section “Strategies and Competitive Advantages,” p. 11). OUTLOOK: NORTH AMERICA • For 2013, we expect a gradual recovery of the economies of the countries in North America. • In the United States, the increase in the production of shale gas should generate new market opportunities for Gerdau due to the infrastructure necessary for the exploration of this input, as well as allow the reduction of operating costs with a cheaper access to an alternative energy source. • Regarding steel consumption in the region, the World Steel Association forecasts growth of 3.6% in 2013 in the United States, reaching 100 million metric tons. In Canada, in turn, the consumption of steel should have a rise of 2.9%, reaching 15 million metric tons.

Latin America (except Brazil)
In 2012, Gerdau’s units in Latin America faced heavy pressure from raw material costs and significant growth in imports. Faced with this scenario, the Company worked to adjust its operations with agility and flexibility. Besides seeking to increase operational efficiency and competitiveness in the markets where it operates, Gerdau invested to expand its product line in the region. The main highlight was the resumption of the project to build a new plant in Mexico through its joint venture Gerdau Corsa. Focused on the production of structural shapes, the plant will have an annual installed capacity of 1 million metric tons of steel and 700,000 metric tons of rolled products. This investment will enable the replacement of imports of this product in the country and is expected to start up in the beginning of 2014. In Guatemala, Gerdau inaugurated a new factory of welded wire mesh focused on selling to the construction industry. Furthermore, it continued with the installation of a new rolling mill for rebars and light commercial profiles with an annual capacity of 200,000 metric tons that will go into operation in 2013. In Venezuela, the Company is investing in the technological upgrade of its mill with the objective

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GERDAU ANNUAL REPORT 2012 | PERFORMANCE OF OPERATIONS

of improving its operational safety and expanding the production capacity of steel and rolled products in order to meet the growing demand in the country. In order to get even closer to the civil construction market in Chile, Gerdau is building a new fabricated reinforcing steel facility that will begin operations in 2013. OUTLOOK: LATIN AMERICA • According to estimates from the World Steel Association, steel consumption should evolve 6.4% in Latin America (excluding Brazil), reaching 43.5 million metric tons. • The markets in this region have great growth potential for 2013 as compared to 2012. Because of this, Gerdau will continue investing to meet the future expansion of the market and the specific needs of its customers. demand for special steel in the country. In 2013, the new rolling mill for round bars will start up operations at the Pindamonhangaba (SP) mill with an annual capacity of 500,000 metric tons. In addition, the capacity of the
Gerdau’s special steels are used in automotive parts that require high safety, quality, and reliability

Special Steel (includes special steel operations in Brazil, Europe, the U.S., and India)
With steel mills producing special steel in Brazil, the U.S., Spain, and India, Gerdau is a leading global supplier to the automotive industry, besides selling to the segments of oil & gas, wind energy, agricultural machinery & equipment, mining, among others. In the Brazilian market, the production of medium and heavy vehicles (trucks and buses) showed a significant reduction over the year, of 38%, caused by the effect of anticipated manufacturing of heavy vehicles at the end of 2011 due to new Euro 5 regulations for diesel engines, which became effective in January 2012. In the segment of cars and light commercial vehicles, the reduction of the excise tax (IPI) caused production to move forward 1% to 3.2 million units according to the National Association of Vehicle Manufacturers (Anfavea). Nevertheless, Gerdau continued its investments to expand the capacity of its plants, focused on expand of future

Mogi das Cruzes (SP) rolling mill will grow in 2013 from 216,000 metric tons to 276,000 metric tons per year. As for the North America market (Canada, U.S., and Mexico), the production of light, medium, and heavy vehicles grew significantly during the year with an 18% evolution in the automotive segment and 8% in the segment of medium and heavy vehicles. In total, 15.8 million vehicles (light, medium, and heavy) were produced and, additionally, there was a higher local production of automotive components. To meet the development of the current and future demand, Gerdau started the operation of a new continuous casting in Monroe mill (Michigan) as well as continuing with its modernization and expansion of the installed capacity of this mill unit, which will increase from 500,000 to 800,000 metric tons per year by 2014. In Europe, meanwhile, the economic crisis experienced in the region led to a decrease in the production of light, medium, and heavy vehicles in 2012. For example, the production of light vehicle of 12.5 million units fell by 8%. The production of medium and heavy vehicles

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was of 378,000 units, a drop of 11% compared with the previous year. However, the Company continued investing in the technological upgrading of its operations located in Spain, such as the modernization of the continuous casting at the Basauri mill, in order to enhance the quality of its products and increase its productivity.

OUTLOOK: SPECIAL STEEL • For 2013, the markets of Brazil, the U.S., and India should show growth while Europe should start its process of recovering demand in 2014. • In Brazil, Anfavea’s projections indicate that the

Gerdau has started the operation of a blast furnace in India, a large potential market, with an annual installed capacity of 350,000 metric tons, the power generation plant that will use blast furnace gas, sintering, the melt shop, and the new special steel rolling mill with an annual installed capacity of 300,000 metric tons. Two new inspection lines of bars will start operating in 2013, and already in the plans for 2014 is the implementation of a coking plant with an annual capacity of 200,000 metric tons and integrated into it is a power generation plant.

production of cars will grow 4.5% and trucks 7%. • In the United States, the stronger demand in the region is expected to drive growth in the production of light vehicles and medium and heavy commercial vehicles by 4%, according to market forecasts. • In India, it is estimated that the production of light and heavy vehicles will present a growth compared to the previous year.

Gerdau starts up the production of special steel in India to supply the region’s market

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GERDAU ANNUAL REPORT 2012 | FINANCES

FINANCES Net Sales Grows 7% in 2012
Net sales
Gerdau closed the year 2012 with a consolidated net sales of R$ 38 billion, which is a growth of 7% compared to last year.

Source of net sales
R$ 38 billion

North America

32%

Includes long steel operations in the United States and Canada

Cost of sales and operating expenses
In 2012, the cost of sales in consolidated terms was R$ 33.2 billion, 10% above that recorded in 2011. This increase reflects the rising costs of key raw materials for the steel production process and lower dilution of fixed costs due to lower volumes sold. Selling, general, and administrative expenses grew 3% to R$ 2.5 billion. However, its part in relation to net revenues proved to be stable in 2012 compared with the previous year.
Special Steel

Except special steel mills

36%

Brazil

Latin America

19%

Except Brazil

13%

Includes special steel operations in Brazil, Europe, and the United States
Note: The information above does not include data from affiliated companies and jointly owned subsidiaries.

Consolidated statement of income - summarized* Gerdau S.A. and subsidiaries (R$ millions)
Net sales Cost of sales Gross profit Operating expenses Income before financial income and taxes Financial income Income before taxes Income tax and social contribution Net income for period
* Years ended on December 31, 2012 and 2011.

2012
37,982 -33,234 4,748 -2,400 2,348 -789 1,559 -63 1,496

2011
35,407 -30,298 5,109 -2,230 2,879 -528 2,351 -253 2,098

Composition of consolidated EBITDA* (R$ million)
Net income Net financial income Provision for income tax and social contribution Depreciation and amortization EBITDA EBITDA Margin
* Includes the results of associated companies and jointly-controlled entities according to the equity method.

2012
1,496 789 63 1,828 4,176 11%

2011
2,098 528 253 1,772 4,651 13%

FINANCES | GERDAU ANNUAL REPORT 2012

19

EBITDA
EBITDA (earnings before interest, taxes, depreciation and amortization) was R$ 4.2 billion, which is a 10% reduction compared to the previous year influenced mainly by rising costs of key raw materials and lower equity in earnings of subsidiaries and associated companies. As a result, the EBITDA margin was also impacted, going from 13% last year to 11% in 2012.

Indebtedness (R$ million)
Current Non-current Gross debt Cash, cash equivalents, and financial investments Net debt

12/31/2012
2,583 12,086 14,669 2,497 12,172

12/31/2011
1,757 11,927 13,684 4,578 9,106

Financial expenses and incomes
The higher net financial expenses, which reached R$ 789 million against R$ 528 million in 2011, were primarily due to a lower net income and foreign exchange losses on the hedge of net investment.

Financial liabilities
On 31 December 2012, Gerdau’s net debt (gross debt minus cash on hand and financial investments) was R$ 12.2 billion against the R$ 9.1 billion recorded at the end of 2011. This increase in net debt is a reflection primarily of the exchange rate effect on debts in foreign currencies, the increased need for working capital throughout 2012, and investments made during the year. Gross debt at the end of the year was R$ 14.7 billion, of which 82% was long-term and 18% short-term. Of the total gross debt, 47% was in foreign currency contracted by the subsidiaries in Brazil, 33% in different currencies contracted by subsidiaries abroad, and 20% in reais. On December 31, 2012, Gerdau’s available cash, cash equivalents, and investments were R$ 2.5 billion, of which 35% was held by the Gerdau companies abroad, mainly in U.S. dollars. The ratio between net debt and EBITDA reached 2.9

Net profit
For the year, consolidated net profit went from R$ 2.1 billion in 2011 to R$ 1.5 billion in 2012, which was mainly due to lower operating and financial results.

Added value breakdown
The added value of Gerdau companies in consolidated terms reached R$ 10 billion in 2012, which is a 2% increase on the previous year. This good performance is a result of revenues from products and services net of discounts, which reached R$ 39.6 billion, net of costs of R$ 29.6 billion related to raw materials and consumer goods, outsourced services, depreciation and amortization, equity in earnings, and financial income, among other items.

Added Value Breakdown
R$ 10 billion
Taxes and social contributions Reinvestments of profits (R$ 1.1 bi)

times in December 2012 against 2.0 times in December 2011. The ratio between gross debt and EBITDA, in turn, reached 3.5 times versus 2.9 times in the previous year.

11%

25%

(R$ 2.5 bi)

Salaries, benefits, profit sharing, and training Interest on financing
(R$ 4.9 bi)

49%

11%

(R$ 1.1 bi)

Dividends and interest on shareholder’s equity

(R$ 0.4 bi)

4%

20

GERDAU ANNUAL REPORT 2012 | EMPLOYEES

RELATIONSHIPS
The safety of people in the work environment is a top priority in all of Gerdau’s operations

EMPLOYEES Gerdau’s corporate culture is the base for the efficiency needed to face the global challenges
Gerdau’s corporate culture, made up of values, history, and attitudes, is shared by its more than 45,000 employees. And this is what forms the basis of the existence of this centennial Company. Knowledge of the business, focus on results, continuous search for customer preference, quality, commitment, integrity, safety, social responsibility, and recognition are concepts that permeate daily operations and contribute toward Gerdau building new business opportunities and consolidating itself in the global steel market. Strengthening this culture, which was one of the main highlights in the area of human resources in 2012, has contributed toward the Company responding to the challenges posed by the current global economic scenario in an increasingly integrated and agile way. This is achieved through communicating the Company’s values, by setting up and aligning processes and practices in all business operations, implementing processes and tools for managing people, and developing
The book “Our Culture Unites Us - Lessons from Our History” with stories about the experiences of employees in their daily work routines, was distributed to all of Gerdau’s operations worldwide

leaders who act as clear agents of Gerdau’s corporate culture, spreading the Company’s values to their teams through personal examples, along with enhancing the employees’ autonomy and showing respect to people. During the year, for example, meetings were held between members of the Board of Directors and the Gerdau Executive Committee with over 1,000 employees in Chile, the United States, and Peru. The perspective is that all the leaders in Gerdau participate in these meetings over a period of two years.

EMPLOYEES | GERDAU ANNUAL REPORT 2012

21

Health and safety
People’s safety is a fundamental value for Gerdau. That is why the Company has a strict set of practices that are part of its Safety Management System, which involves investment in new technologies, equipment, and global management systems. In 2012, this area received R$ 92.7 million, 31% more than the previous year. With the objective of improving safety in the work environment, the Company has developed a manual in line with the best global practices with guidelines on behavioral management. In parallel, it initiated specific training on the topic for the leaders of the operations in Argentina, Brazil, and Spain. In 2013, the training will be extended to the other operations in Latin America and in 2014 to North America. These initiatives contributed so that the accident frequency rate per million hours worked (international index that measures the occurrence of accidents in the workplace) decreased from 2.31 in 2010 to 1.06 in 2012. This level is below the world average for the sector, whose latest figure released by the World Steel Association is 1.9. Furthermore, Gerdau received the Safety and Health Excellence Recognition for the third time, which is awarded by the World Steel Association. The Company was awarded for the project “Safety Multipliers”, which recorded positive results since its implementation in 2004. The project consists of train operators who encourage and offer support to their colleagues to put into practice solutions that make the work environment 100% accident free.
Gerdau receives for the third time the Safety and Health Excellence Recognition awarded by the World Steel Association

Accident frequency rate*
2.31 1.59 1.06

Investments in occupational health & safety (R$ million)
92.7 71.0 49.1

2.5 2.0 1.5 1.0 0.5 0

100 80 60 40

2010

2011

2012
20

*Lost-time accident frequency rates per million hours worked, including employees and service providers. The data also includes restricted work and change of function (OSHA recordable treated as LT accidents).

0

2010

2011

2012

22

GERDAU ANNUAL REPORT 2012 | EMPLOYEES

Internal climate
The favorability index of the Opinion Survey, which evaluates the Company’s internal climate, once again reflected a high level of engagement of its employees. The indicator rose from 75% in 2011 to 76% in 2012, with a highlight being the growth in operations of long steel and special steels in North America. The performance was five percentage points above the world market average, which includes global companies with excellent financial performance and/or that are part of the ranking of the most admired companies in Fortune magazine. Moreover, Gerdau was elected as the best company to work for in the steel and metallurgy industry in Brazil by Guia Exame/Você S.A., a leading benchmark in the country in this area. The Company is among the 150 organizations best positioned in this ranking since 2007.

alignment and synergy of this function in all of its operations. The training also aims to meet the standards of the Gerdau Business System (GBS) and currently there are a total of 12 professionals participating.
 Training and development Investments (R$ million) Number of training hours per employee

2012
37.2 52.4

2011
32.1 53.4

Knowledge Management
Knowledge Management is an initiative on Gerdau’s part to have a set of strategies to maximize the use of existing knowledge in the Company, generating positive impacts such as increased efficiency and operational productivity, while at the same time reducing costs. One of the main strategies adopted is the Communities of Practice, which facilitate interaction between employees in different countries through a virtual network for sharing of best practices. This way, for example, it is possible for an employee from one country to have an issue cleared up by a colleague from across the world with speed and clarity. In the fifth year since it began, the Communities of Practice have already gathered together more than 5,000 employees in 36 communities, exceeding 58,000 posts. Posts can take on the form of questions, answers, documents, and news, and they take place between 95 plants in 14 countries. The operation in India began its participation in 2012.

Training
Gerdau seeks to invest heavily in training its team of employees, which already includes about 600 people with master’s and doctorate degrees. The main objective is working with high performers who are aligned with the strategic business objectives, besides forming global leaders. In 2012, the investments in this area reached R$ 37.2 million. The activities involved 2.2 million hours, which represents an average of 52 hours of training per employee. The Gerdau Business Program (GBP) is one of the highlights in this area. Lasting two years, this initiative was developed in partnership with the Institute of Education and Research (Insper) in São Paulo and consists of a specific MBA degree conducted in accordance with the needs of Gerdau. The executives selected for this program are of high potential and participate in modules in leading universities worldwide such as Insead in France and Darden in the United States. The third edition of the GBP is in progress with the participation of 32 executives from Brazil, Chile, Mexico, Peru, and the Dominican Republic. In 2012, the Company launched a program structured for training controllers with the aim of increasing the

Autonomy and Creativity
Gerdau encourages delegation, autonomy, and creativity in its teams. One example of this is the program Management Focused on the Operator (MFO) where employees, besides performing their usual activities, help control processes such as quality, safety, cost, maintenance, and the environment. This shared management encourages professionals to overcome their challenges, expand the productivity of processes and quality of final products. The program has been deployed in plants in Argentina, Brazil, Chile, Colombia, the United States, Mexico, the Dominican Republic, and Uruguay. In 2013, it will be expanded to eight more industrial plants.

EMPLOYEES | GERDAU ANNUAL REPORT 2012

23

The active participation of employees is also present in two other programs: Quality Improvement Story (QIS) and Ideas. In the QIS, teams of three to seven people offer creative solutions to problems in their daily operations. In 2012, 6,800 employees in 11 countries participated with 437 projects, which generated earnings worth US$ 145.3 million. The Ideas program, on the other hand, encourages the search for innovative solutions both individually or in groups. During the year, the project involved 13,800 people from eight countries who registered over 97,000 new ideas. Of this total, the Company implemented 73,000 suggestions throughout the year that yielded earnings of US$ 20.2 million.

executives are prepared to take strategic positions in the Company. In 2012, there were 211 of these committees set up in various countries where Gerdau operates.

Gerdau Future Trainees
The Gerdau Future Trainee Program is the main entrance of young professionals into the Company. For a two-year period, the trainees work on projects and activities that challenge their professional skills while also bringing good results to the business. Furthermore, the trainees receive training and evaluations that help their learning and development process. Currently, Gerdau has 382 trainees in this program in ten countries.

Compensation and benefits
Gerdau maintains a compensation policy of fixed and variable amounts based on the achievement of individual, team, and operation’s targets. In addition to this, the Company offers a benefit plan for employees and their families. The benefits vary according to the needs of each region where Gerdau operates. A new health insurance model was launched in Brazil in 2012. In line with the best market practices, the plan
The teams that reach the most significant results are recognized at the QIS global meetings

gives the option for more coverage and flexibility for employees with more competitive costs for Gerdau. Furthermore, close to 100% of the employees in Brazil participate in the complementary pension plan with a defined contribution, and the Company adds 150% of that amount as a contribution to the employee. Benefits (R$ million)
Meals Transportation Health Insurance Private Pension Plan

Management of high potentials
To be able to count on outstanding professionals who are prepared to take on positions of high responsibility is another of Gerdau’s concerns. In this sense, external consultants contribute to enhance the training of the Company’s employees through the External Executive Coaching Program, an initiative launched in 2012. Parallel to this, 14 of Gerdau’s leaders with higher level of knowledge and experience, among them members of the Board of Directors and the Gerdau Executive Committee, supported during the exercise the development of 19 executives through the Mentoring Program.

2012
94.7 75.4 401.4 170.7

2011
71.7 68.6 299.0 137.3

Labor union agreements
Gerdau guides its relationship with the unions by seeking mutual gains, taking into account the labor demands and the Company’s sustainability. During the year, 15 agreements were made in Brazil, Canada, Chile, the United States, Mexico, and Venezuela.

Succession
Discussions about careers and succession at Gerdau are held in the People Development Committees made up of leaders from different areas. This way, new

24

GERDAU ANNUAL REPORT 2012 | CUSTOMERS

CUSTOMERS

Fabricated reinforcing steel facilities adopt new practices and processes to improve customer service

Innovative solutions contribute to increasing the competitiveness of customers
Gerdau seeks to establish a relationship of mutual gains with its more than 130,000 customers, contributing to the development of the consumer chain of steel. It also strives for excellence in all aspects of its business, all the way from the quality of its products and services to delivery and technical assistance. To do this, it has a team of highly specialized employees and takes surveys to monitor customer satisfaction and improve its services to each market segment, as well as carrying out specific relationship programs. Toward this end, Gerdau held a survey in 2012 with more than 500 civil construction technicians in Brazil to understand fabricated reinforcing steel market needs. As a result it adopted new technologies and internal processes, set up monitoring systems to increase the predictability of deliveries, and also trained sales teams for giving technical support to contractors. These new practices will be applied in Gerdau’s more than 100 fabricated reinforcing steel facilities around the world. The cutting and bending system makes it possible to deliver the steel in quantities, shapes, and sizes according to the demands of each project and can increase productivity by up to 70% in the structure assembly stage at the jobsite.

Gerdau steel also contributes for building projects to receive environmental certifications for their work because it is 100% recyclable. The Leadership in Energy and Environmental Design (LEED) certification, for example, has already been granted to several projects that use the Company’s products. Among the projects certified are the Duke Energy Center in the United States, the Oscar Niemeyer Tower in Brazil, and the Transoceanic Building in Chile. Gerdau’s Research and Development Centers for the special steel sector located in Brazil and Spain are another highlight of its services for the industry. Currently the Company is participating in more than 70 projects for the automotive, energy, and naval sectors. These initiatives are aimed at continually improving the mechanical properties of steel, resulting in better performance in use and gains in efficiency along the chains supplied by Gerdau. Two of these projects are focused on developing nano-alloyed steels for the automotive industry. Regarding the flat steel segment, Gerdau is conducting an intense market mapping in order to understand customer needs before the startup of operations of a hot rolled coil mill in Brazil (read more on this topic in chapter “Business”, p. 14).

SUPPLIERS | GERDAU ANNUAL REPORT 2012

25

SUPPLIERS Supporting the sustainable development of suppliers strengthens the steel business chain
Gerdau establishes long-term relationships with its suppliers based on a direct, transparent and in search for mutual gains relationship. It gives preference to contracting suppliers that share its policy of respect for people and the environment because it believes that the sustainability of its business also passes through the steel chain. Because of this, it requires strict compliance with the laws in each country where it operates and carries out periodic audits to make sure that the supply chain is complying with its levels of excellence. With operations in the Americas, Europe, and Asia, Gerdau currently has a network of more than 30,000 suppliers, 60% of which are micro, small and medium enterprises that strengthen the local economies where it operates. For this reason, the Company has supported its Supplier Development Program since 2007 in order to improve the management performance of these organizations. This initiative, developed with partner organizations, ranges from giving courses and on-site consulting to designing and Regarding the supply of scrap steel, a key raw material in steel production, Gerdau has its own collection and processing units of scrap, especially in Brazil and North America. In order to expand the supply of this raw material and develop micro and small suppliers, programs to develop technical and managerial skills were promoted in 2012 for about 90 companies and scrap cooperatives in Brazil, Chile, Colombia, Peru, Uruguay, and Venezuela that increased their sales to Gerdau by 125%. At the same time, Gerdau is increasingly seeking to expand the synergy among its operations around the world through a global procurement structure that makes it possible to reach economies of scale, productivity, and cost reduction in the purchase of equipment and inputs. Additionally, the new structure generates for the large suppliers the
Participants of the Supplier Development Program receive certificates in Peru

monitoring the execution of action plans. In total, more than 500 training hours are devoted to addressing issues related to management improvement, quality & productivity, encouraging entrepreneurship, citizenship, and sustainability over a period of 24 months. The program has had a direct impact on Gerdau’s competitiveness as it prepares the way to receive products and services of better quality, punctual delivery, and building long-term relationships, as well as sharing its ethical values along its business chain. Moreover, by strengthening these micro, small, and medium enterprises, this stimulates market growth and generates jobs and wealth based on projects with a strong social content. In 2012, the program involved 404 micro, small, and medium enterprises in Argentina, Brazil, Colombia, Mexico and Peru. As a result, the business volume between Gerdau and the participating companies grew 24% compared to 2011. For 2013, the program will be expanded to suppliers in Chile, India, the the Dominican Republic, Uruguay, and Venezuela.

opportunity to expand their business in different countries and regions, as well as to streamline their logistics delivery.

26

GERDAU ANNUAL REPORT 2012 | SHAREHOLDERS

SHAREHOLDERS Transparency and agility characterize Gerdau’s relationship with its shareholders
Conservative financial management, flexibility, geographic diversification of operations, and ability to take advantage of opportunities were Gerdau’s characteristics recognized by the capital market. As a result, the shares of Gerdau S.A. appreciated by 26% and those of Metalúrgica Gerdau S.A. by 30%, respectively, over 2012, which is one of best performance among companies in the global steel industry. In 2012, the shareholders of Metalúrgica Gerdau S.A. received R$ 130 million in dividends and interest on capital, which is equivalent to R$ 0.32 per share and Gerdau S.A. R$ 408 million, equivalent to R$ 0.24 per share. three months on capital of at least 30% of adjusted net income for the year calculated in accordance with Brazilian accounting practices. It is worth noting that this percentage is higher than the level of 25% set by corporate law in Brazil. The compensation policy for the company Siderúrgica del Perú S.A.A. on the other hand, is to pay dividends of up to 33% of its adjusted net profit.

Relationship actions with shareholders
With over 65 years of experience in capital markets, Gerdau is always working hard to improve its relationship with its more than 130,000 shareholders. In 2012, it held over 500 meetings with shareholders, investors, and investment analysts, the main ones being 13 non-deal road shows in Brazil, in the United States, and in countries in Europe and Asia, and participated in two meetings of the Association of Capital Market Analysts and Professionals (APIMEC) in Brazil. Gerdau also launched a new website (www.gerdau.com/ri) in order to improve its services to the capital markets such as increasing the speed of browsing and access to information. This new communication channel also provides content specific for individual shareholders and institutional investors in Portuguese, English, and Spanish. Moreover, Gerdau’s publicly listed companies in Brazil are part of the main index of BM&FBOVESPA, Ibovespa, in which Gerdau S.A. has the 11th highest liquidity among companies that make up this indicator. They are also listed on the Special Corporate Governance Stock Index (IGC), the Share Index with Differentiated Tag Along Rights (ITAG), on the Brazil Index 50 (IBrX50), on the Index of Basic Materials (IMAT), and on the Industrial Sector Index (INDX). For the seventh consecutive year, Gerdau S.A. and Metalúrgica Gerdau S.A. have been a part of the Corporate Sustainability Index (ISE) portfolio of BM&FBOVESPA. This index is made up of shares of companies that stand out for their more sustainable practices in the long term and have a high degree of commitment on issues of corporate governance, social responsibility, and the environment.

Recognition from capital market
In recognition of Gerdau’s management capacity, the three major rating agencies in the capital market maintained the Company’s investment grade in 2012. Standard & Poor’s and Fitch Ratings kept their rating level at BBB-, while Moody’s maintained an investment grade of Baa3.

Shareholder compensation
Gerdau’s three publicly listed companies – Gerdau S.A., Metalúrgica Gerdau S.A., and Empresa Siderúrgica del Perú S.A.A. – have clear remuneration policies that are in line with market practices. Metalúrgica Gerdau S.A. and Gerdau S.A. pay dividends and/or interest every

SOCIETY | GERDAU ANNUAL REPORT 2012

27

SOCIETY Volunteer work from employees is critical to the development of social programs
Over the years, Gerdau has been improving its role in social responsibility and consolidating the theme in its business strategy. With the belief that the growth of its operations is directly related to developing its business chain and the communities where its plants are located, the Company has expanded, standardized, and internationalized its practices for this area over the last few years. It also began to apply management methodologies in planning, implementation, and monitoring of social projects in order to achieve even more effective results. In 2012, R$ 52.7 million was invested in more than 900 social projects that were conducted in 13 countries where Gerdau operates. These initiatives are led by Gerdau Institute, which is responsible for the Company’s social responsibility policies and guidelines, and are focused in the areas of education, emergency assistance, and quality management. Moreover, Gerdau believes that volunteering is an important transforming agent of change in society. For this reason it offers specific training courses to Gerdau also develops partnerships with major institutions that implement programs to encourage quality in management and entrepreneurship along the steel business chain. Furthermore, the Company supports institutions that promote transforming actions in society such as the Competitive Brazil Movement, Everyone for Education Movement, Junior Achievement, and the World Childhood Foundation. One of the highlights among the volunteering actions undertaken during the year was the Gerdau Volunteer Olympics, a competition held in nine countries: Argentina, Brazil, Chile, Colombia, Spain, Mexico, Peru, Uruguay, and Venezuela. Under the slogan “United for Safety: victory belongs to us all”, 13,000 volunteer employees helped promote improvements and awareness activities to encourage safe habits and behaviors in the daily activities of about 800 micro and small enterprises, schools, daycare centers, and other social organizations. its employees who want to get involved in volunteer activities. As a result, in 2012, approximately 8,000 employees participated in the Gerdau Volunteer Program (PVG) by working actively in social projects supported by the Company.

The Gerdau Volunteer Olympics was one of the highlights among the volunteer activities done in 2012

28

GERDAU ANNUAL REPORT 2012 | ENVIRONMENT

ENVIRONMENT
Gerdau invested in the expansion and modernization of the dust removal system in plants in Canada, Colombia (photo), and Chile

Gerdau contributes to the sustainability of the communities and their businesses by transforming scrap into steel
For Gerdau, recycling is not just an initiative of environmental protection, but it is also part of its business strategy. Every year, it transforms more than 15 million metric tons of steel scrap, making it the largest scrap recycler in Latin America. The use of this raw material reduces the volume of material deposited in inappropriate places and reduces the consumption of energy as well as other natural resources in the steel production process, while minimizing emissions of greenhouse gases such as CO2. Moreover, the collection and processing of scrap generate jobs over a long chain of small, medium and large entrepreneurs who live off of this activity. Gerdau has been developing projects in partnership with the public sector in Brazil, Colombia, and Peru in order to further expand scrap collection in the regions where it operates and promote proper disposal of cars, trucks, and buses that are no longer in circulation. Besides contributing to the environment, these initiatives play an important socio-economic role, because they reduce the costs of governments with its storage, generate revenue from the sale of scrap, and also create new

job opportunities in the processing of this raw material. Since 2010 when the project began, over 36,000 metric tons of scrap have already been recycled.

Stringent environmental management practices
Gerdau’s strong commitment to the environment is reflected in its stringent practices in this area along with its ISO 14001 certification, of which the Environmental Management System (EMS) is a part. The Company uses the EMS to monitor the entire production cycle of steel, beginning from the collection of raw materials all the way to delivering the final product and the disposal of by-products. Currently 48 industrial plants are ISO 14001 certified, which corresponds to 89% of the total.

By-products
Through continuous investment, improvements in processes, and studies in partnership with universities, research entities and companies, Gerdau seeks intelligent and sustainable alternatives for the application of its by-products. As a result of these initiatives, in 2012, the reuse rate of these materials reached 74.8%.

Air
The dust removal systems at Gerdau’s plants capture with high efficiency the solid particles generated by the steelmaking

ENVIRONMENT | GERDAU ANNUAL REPORT 2012

29

process, which are later processed into by-products used in other segments of the industry. In 2012, the Company invested in the expansion and modernization of the dust removal system in plants in Canada, Colombia, and Chile.

to increase energy savings in auxiliary equipment to the steel production process, which represent approximately 40% of the energy consumed in the mills. The project goal is to achieve a reduction of 2.5% of total

Water
Gerdau has one of the best water recirculation rates in the global steel industry today with an average rate exceeding 97%. This percentage represented in 2012 over 2 trillion liters of recycled water to be used internally in the production of steel. The volume, if captured, corresponds to a supply of water for a period of two years from the state of New York (United States), which has over 19 million inhabitants, considering an average consumption of 150 liters per person per day. The small amount not reused corresponds mainly to evaporative losses.

energy consumed by 2014. To start this process, teams from all the industrial mills in Brazil ran a diagnostics of savings opportunities, which were transformed into more than 1,300 actions. This project will also be applied in other countries where Gerdau operates. Gerdau also optimizes the use of energy by expanding the use of by-products from the production process of its mills. In addition, the Company is increasing its use of natural gas in its operations, which is already applied in 94% of its mills worldwide.

Biodiversity
Gerdau maintains green areas at its mills for the purpose of improving the quality of the air and maintain local biodiversity. Currently, of its total 17,000 hectares of Company property, 3,000 hectares are preserved native forests made up of legal reserves, permanent preservation areas, and private reserves of natural heritage. Over 4,000 hectares are areas preserved voluntarily.

Water treatment system in Peru will increase the mill’s recirculation rate to more than 98%

Environmental education
As part of its environmental management practices, Gerdau promotes awareness campaigns, conferences, and training courses for employees and third parties. In 2012, these activities totaled 48,200 hours with the involvement of about 26,000 people. One of the initiatives created during 2012 was the Environmental Laboratory, which seeks to improve socialenvironmental practices and knowledge of educators in the municipal and state schools in the region of Ouro Branco (MG). For the year, 292 professionals participated in 22 courses and workshops.

These achievements in the process of reusing water are due to continuous investments in advanced closed water treatment and recirculation systems. In 2012, for example, a new water treatment plant was constructed at the Reinosa mill located in Spain. With this, the amount of water captured externally by the plant decreased by 50%. Also, in Peru, a project is currently underway to improve and upgrade the water treatment system in order to increase the level of the plant’s recirculation from 95.1% to more than 98%.

Energy
In order to expand its energy efficiency, Gerdau invests continuously in improving and optimizing its industrial processes. In 2012, for example, the Company initiated a pilot project in operations in Brazil in order

30

GERDAU ANNUAL REPORT 2012 | TIMELINE

TIMELINE Learn about the key facts that marked Gerdau’s history

João Gerdau businesses branch into two separate areas: Hugo runs the nail factory and his brother Walter assumes responsibility for the Gerdau Furniture Factory, both in Porto Alegre (state of Rio Grande do Sul, Brazil). Later, in 1930, Hugo and Walter Gerdau take part in the creation of the State center for the manufacturing industry, future Federation of Industries of the State. The Nail Factory is expanded with construction of a new plant in Passo Fundo (state of Rio Grande do Sul, Brazil), active until 1964. The Nail Factory – today Metalúrgica Gerdau S.A. – becomes a public company and begins trading on the Porto Alegre stock exchange.

1907 1901
João Gerdau and his son Hugo lay the foundations of Gerdau with the Pontas de Paris Nail Factory in Porto Alegre (state of Rio Grande do Sul, Brazil).

1933 1914
Hugo Gerdau becomes a founding member of the Cia Geral de Indústrias (state of Rio Grande do Sul, Brazil), which later becomes Fogões Geral. He later assumes control of the company and in 1947 leaves the business.

1947 1946
Curt Johannpeter, son-in-law of Hugo, takes the company’s helm and oversees a decisive phase of business expansion.

TIMELINE | GERDAU ANNUAL REPORT 2012

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Steel production begins with Riograndense – known as Usina Farrapos (UFA) – in Porto Alegre (state of Rio Grande do Sul, Brazil), with forward-thinking conception of the mini-mill, a model based on the use of scrap and regional sales, enabling more competitive operational costs. The Gerdau Foundation is created, with health, education, housing and social assistance programs, reinforcing the culture of social responsibility within the Organization. The São Judas Tadeu Wire Factory is set up in São Paulo (state of São Paulo, Brazil), marking the company’s expansion into the Brazilian southeast. Gerdau acquires the Açonorte steel plant (state of Pernambuco, Brazil), whose facilities were being transferred from Tição (in the city of Iguarassu) to the industrial district of Curado (in the city of Recife).

1948 1957
The second Riograndense unit starts up operation in Sapucaia do Sul (RS). The mill was also known as Rio dos Sinos mill.

1963 1964

1967
Germano, Klaus, and Jorge Gerdau Johannpeter take on leadership positions in the Company, and, in 1971, Frederico Gerdau Johannpeter also becomes part of the board.

1969 1970
Siderúrgica Riograndense publicly launches shares on the Rio de Janeiro and São Paulo stock exchanges.

32

GERDAU ANNUAL REPORT 2012 | TIMELINE

Beginning of internationalization Steel distribution activities start with the first Comercial Gerdau in the state of São Paulo (Brazil). Gerdau assumes control of the Guaíra plant, a steel production pioneer in the state of Paraná (Brazil). with the acquisition of Laisa in Uruguay. Cosigua begins to have its shares traded on the Stock Exchanges in São Paulo and Rio de Janeiro.

Gerdau’s executive leadership begins to be in the hands of Jorge Gerdau Johannpeter (CEO) and Germano, Klaus, and Frederico Gerdau Johannpeter (Vice Chairmen). Gerdau wins its first privatization auction in Brazil and acquires the Barão de Cocais steel mill (state of Minas Gerais, Brazil).

1971 1973
Construction of Cosigua mill (RJ) begins in the Industrial District of Santa Cruz, which was completed in record time of 14 months. The project had the participation of Thyssen ATH and was financed by the World Bank through the International Finance Corporation (IFC), among others. Germano, Klaus, Jorge, and Frederico Gerdau Johannpeter became part of the Gerdau Board of Directors.

1980 1982
Operation begins at the Cearense plant in Maracanaú (state of Ceará, Brazil). Second Gerdau plant in the state of Paraná (Brazil) begins operation, in Araucária.

1983 1984

1988
Cosigua shares are publicly released, which earns the company more than 60,000 new shareholders.

TIMELINE | GERDAU ANNUAL REPORT 2012

33

Gerdau acquires Usiba (state of Bahia, Brazil) at a privatization auction. Gerdau acquires Siderúrgica Gerdau enters North America with the acquisition of Courtice Steel, which later took on the name of Cambridge in the province of Ontario (Canada). Gerdau acquires MRM in the province of Manitoba, Canada. Acquire part of the capital stock of Sipar rolling mill in Argentina. In 2005, Gerdau takes a controlling stake. Pains, now called Divinópolis mill. Gerdau acquires control of Ameristeel, marking its arrival in the United States. Gerdau S.A., a publicly traded company in Brazil, is listed on the New York Stock Exchange (NYSE).

1989 1992

1994

1995 1997

1998
Gerdau becomes a partner of Açominas with a small ownership stake.

1999

The Company acquires AZA in Chile and Aços Finos Piratini (state of Rio Grande do Sul, Brazil). The GG 50 rebar, a Gerdau flagship product in Brazil, is launched.

34

GERDAU ANNUAL REPORT 2012 | TIMELINE

André B. Gerdau Johannpeter takes over as Chief Executive Officer (CEO) and Claudio Gerdau Johannpeter becomes Chief Operating Officer (COO). Gerdau acquires Chaparral Steel, one of the largest producers of structural steel in the United States, thus marking the greatest acquisition in the history of the Company. Gerdau celebrates 100 years in business with an installed steel production capacity of 8.4 million metric tons per year. Gerdau takes a controlling stake in Gerdau Açominas (state of Minas Gerais, Brazil), its largest mill. Gerdau acquires the Cartersville plant (United States). Diaco (Colombia) and North Star Steel (United States) are acquired. The Company enters Mexico (Siderúrgica Tultitlán) and Venezuela (Siderúrgica Zuliana). The Organization also acquires a stake in the Dominican Republic (Industrias Nacionales - Inca) and in Aceros Corsa (Mexico), signs agreement for purchase of Macsteel (United States), and starts the Kalyani Gerdau joint venture (India). Gerdau Açominas (state of Minas Gerais, Brazil) increases its production capacity by 50% to 4.5 million metric tons per year.

2001 2002
The merger of Gerdau and Co-Steel, in North America, creates Gerdau Ameristeel.

2004 2005
Gerdau enters Europe, acquiring 40% of Sidenor. As a result of this acquisition, the Company takes an indirect stake in Aços Villares (Brazil). The Gerdau Institute, responsible for coordinating the Company’s social responsibility policies and guidelines, is created, broadening the scope of the Gerdau Foundation, established in 1963. Gerdau São Paulo mill (state of São Paulo, Brazil) commences operations.

2007 2006
Gerdau acquires Siderperu (Peru), Sheffield Steel (United States), Callaway Building Products (United States), and GSB (Spain). The Company announces its joint venture Pacific Coast Steel (United States).

TIMELINE | GERDAU ANNUAL REPORT 2012

35

Gerdau invests to expand its own production of iron ore. Gerdau acquires Tamco (United States), a leading producer of rebars on the west coast of the United States, with production capacity of 500,000 metric tons per year. Gerdau gains 100% ownership of Gerdau Ameristeel, with the acquisition of approximately 34% of the company’s minority shares. As a result, the company shares are no longer traded on the Toronto and New York stock exchanges. An additional stake of 49.1% is acquired in Cleary Holdings (Colombia), granting Gerdau 100% ownership of the company’s capital. Gerdau incorporates Aços Villares, a special steel producer in Brazil, in which the Company already had an 87% direct and indirect stake.

Gerdau enters Central America, with a 30% stake in Corporación Centroamericana del Acero, in Guatemala. The Company acquires a 50.9% stake in Cleary Holdings (Colombia), a metallurgical coke producer and holder of coking coal reserves. Gerdau takes over Macsteel operations (United States), a producer of special steels.

2008 2009
The Várzea do Lopes mine (state of Minas Gerais, Brazil) is initiated with the production of iron ore. The Company’s entering into the flat steel sector in Brazil is disclosed. Company announces new investments in India.

2010 2011
Gerdau completes 110 years of business, reaching an annual production capacity of 25 million metric tons and revitalizes its brand.

2012
Gerdau announces new investments in mining to increase its annual installed capacity to 18 million metric tons by 2016. Later, it celebrates the firts shipments of iron ore, marking its entry into the international mining market. The Company completes 20 years of experience in the special steel sector. Production of special steel in India begins, in order to supply the region’s market.

The Mission, Vision, Values, and Code of Ethics are revised and unified at a global level, strengthening Gerdau’s corporate culture. Gerdau begins studies for commercial exploration of part of its iron ore resources located in Minas Gerais. The first phase for implementing the Gerdau Template, which aims to deploy a single system of information technology using SAP in all countries where the Company operates, is completed. Gerdau announces investments to increase the installed

capacity in special steel mills in Brazil and the United States.

36

GERDAU ANNUAL REPORT 2012 | FINANCIAL STATEMENTS

SUMMARIZED FINANCIAL STATEMENTS
GERDAU S.A. As of December 31, 2012 and 2011 CONSOLIDATED BALANCE SHEETS
2012
Current assets
Cash and cash equivalents Short-term investments Trade accounts receivable Inventories Other current assets 1,437,235 1,059,605 3,695,381 9,021,542 1,196,634 16,410,397 1,476,599 3,101,649 3,602,748 8,059,427 1,078,726 17,319,149

(In thousands of Brazilian reais)

2011

Non-current assets
Deferred income and social contribution taxes Other non-current assets Investments in associates and jointly-controlled entities Goodwill and other intangible assets Property, plant, and equipment 2,210,300 1,958,863 1,425,605 11,397,812 19,690,181 36,682,761 1,547,967 2,034,819 1,355,291 10,429,497 17,295,071 32,662,645 49,981,794

Total assets Current liabilities
Trade Accounts Payable Short-Term Debt and Debentures Taxes payable Payroll and related liabilities Other current liabilities

53,093,158

3,059,684 2,582,353 528,698 558,634 1,093,813 7,823,182

3,212,163 1,756,993 591,983 617,432 598,430 6,777,001

Non-current liabilities
Long-Term Debt and Debentures Deferred income taxes Employee benefits Other non-current liabilities 12,086,202 1,795,963 1,187,621 1,402,273 16,472,059 11,926,535 1,858,725 1,089,784 1,809,946 16,684,990

Shareholder’s equity
Attributable to the equity holders of parent Non-controlling interests 27,245,604 1,552,313 28,797,917 24,997,469 1,522,334 26,519,803 49,981,794

Total liabilities and equity

53,093,158

FINANCIAL STATEMENTS | GERDAU ANNUAL REPORT 2012

37

CONSOLIDATED STATEMENTS OF INCOME
2012
Net sales
Cost of sales 37,981,668 -33,234,102 4,747,566 -2,471,675 72,314

(In thousands of Brazilian reais)

2011
35,406,780 -30,298,232 5,108,548 -2,401,684 172,144

Gross profit
Selling, general, and administrative expenses Other Operating Income (expenses), net

Income before financial income and taxes
Net financial income (expenses) Exchange variations, net

2,348,205 -654,615 -134,128 1,559,462 -63,222 1,496,240 1,425,633 70,607 0.84

2,879,008 -580,093 51,757 2,350,672 -253,096 2,097,576 2,005,727 91,849 1.22

Income before taxes
Income and social contribution taxes

Net income
Attributed to: Owners of the parent Non-controlling interests

Earnings per share - common and preferred

CONSOLIDATED STATEMENTS OF CASH FLOWS
2012
Net income
Adjustments to reconcile net income with net cash Changes in assets and liabilities (net of interest and income tax) 1,496,240 3,048,240 -200,433 4,344,047 -3,438,025 -1,036,294 90,908 -39,364 1,476,599 1,437,235

(In thousands of Brazilian reais)

2011
2,097,576 2,794,863 -3,182,421 1,710,018 -2,111,158 727,064 89,641 415,565 1,061,034 1,476,599

Net cash generated by operating activities Net cash used in investing activities Net cash used in financing activities
Effect of exchange rate variation on cash and cash equivalents (Decrease) Increase in cash and cash equivalents Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Read more on the financial statements of Gerdau S.A. at www.gerdau.com/ri

38

GERDAU ANNUAL REPORT 2012 | FINANCIAL STATEMENTS

SUMMARIZED FINANCIAL STATEMENTS
METALÚRGICA GERDAU S.A. As of December 31, 2012 and 2011 CONSOLIDATED BALANCE SHEETS
2012 Current assets
Cash and cash equivalents Short-term investments Trade accounts receivable Inventories Other current assets 1,437,724 1,059,605 3,695,381 9,021,542 1,213,403 16,427,655 1,477,020 3,101,649 3,602,748 8,059,427 1,094,723 17,335,567

(In thousands of Brazilian reais) 2011

Non-current assets
Deferred income and social contribution taxes Other non-current assets Investments in associates and jointly-controlled entities Goodwill and other intangible assets Property, plant, and equipment 2,376,709 1,959,459 1,425,605 11,489,825 19,690,863 36,942,461 1,658,416 2,005,594 1,355,291 10,521,510 17,295,833 32,836,644 50,172,211

Total assets Current liabilities
Trade Accounts Payable Short-Term Debt and Debentures Taxes payable Payroll and related liabilities Other current liabilities

53,370,116

3,059,814 3,888,232 534,631 558,634 1,088,177 9,129,488

3,212,278 1,760,780 594,532 617,432 588,906 6,773,928

Non-current liabilities
Long-Term Debt and Debentures Deferred income taxes Employee benefits Other non-current liabilities 12,073,867 1,844,731 1,187,621 2,316,057 17,422,276 13,223,260 1,907,493 1,089,784 2,626,758 18,847,295

Shareholder’s equity
Attributable to the equity holders of parent Non-controlling interests 9,965,945 16,852,407 26,818,352 9,040,054 15,510,934 24,550,988 50,172,211

Total liabilities and equity

53,370,116

FINANCIAL STATEMENTS | GERDAU ANNUAL REPORT 2012

39

CONSOLIDATED STATEMENTS OF INCOME
2012
Net sales
Cost of sales 37,981,668 -33,234,102 4,747,566 -2,477,894 50,783

(In thousands of Brazilian reais)

2011
35,406,780 -30,298,231 5,108,549 -2,422,943 182,865

Gross profit
Selling, general, and administrative expenses Other operating income (expenses), net

Income before financial income and taxes
Net financial income (expenses) Exchange variations, net

2,320,455 -835,573 -134,128 1,350,754 -18,077 1,332,677 456,731 875,946 1.12

2,868,471 -740,152 51,754 2,180,073 -200,424 1,979,649 760,522 1,219,127 1.87

Income before taxes
Income and social contribution taxes

Net income
Attributed to: Owners of the parent Non-controlling interests

Earnings per share - common and preferred

CONSOLIDATED STATEMENTS OF CASH FLOWS
2012
Net income
Adjustments to reconcile net income with net cash Changes in assets and liabilities (net of interest and income tax) 1,332,677 3,184,773 -244,477 4,272,973 -3,438,025 -965,152 90,908 -39,296 1,477,020 1,437,724

(In thousands of Brazilian reais)

2011
1,979,649 2,905,786 -3,174,739 1,710,696 -2,111,158 725,602 89,633 414,773 1,062,247 1,477,020

Net cash generated by operating activities Net cash used in investing activities Net cash used in financing activities
Effect of exchange rate variation on cash and cash equivalents (Decrease) Increase in cash and cash equivalents Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Read more on the financial statements of Gerdau S.A. at www.gerdau.com/ri

40

GERDAU ANNUAL REPORT 2012 | credits and Corporate Information

Corporate Information
Gerdau Av. Farrapos, 1811 Porto Alegre – RS – Brazil CEP 90220-005 Phone: +55 (51) 3323.2000 www.gerdau.com Shareholders Relations Av. Farrapos, 1811 Porto Alegre – RS – Brasil CEP 90220-005 acionistas@gerdau.com.br Phone: 0800.702.2001 Phone: +55 (51) 3323.2211 Fax: +55 (51) 3323.2281 Depositary Bank in Brazil Itaú Corretora de Valores S.A. investfone@itau.com.br Phone: 3003.9285 (Capital Cities) Phone: 0800.720.9285 (Other Regions) Phone: 0800.722.1722 (Hearing and speech impaired) Depositary Bank Overseas The Bank of New York Mellon shrrelations@bnymellon.com Phone: +1 888 BNY ADRS (From the United States) Phone: +1 201 680-6825 (Outside the United States) Investor and Analyst Service Av. Farrapos, 1811 Porto Alegre – RS – Brasil CEP 90220-005 inform@gerdau.com.br Phone: +55 (51) 3323.2703 Fax: +55 (51) 3323.2281 Independent Auditor PricewaterhouseCoopers

Credits
Coordination Gerdau Corporate Communications and Public Affairs Editing and production supervision Gerdau Corporate Communications and Public Affairs and Odin Art & Communication Graphic Design Néktar Design Printing Gráfica Comunicação Impressa Paper and ink Offset 240g (cover) and Offset 120g (content) Printed with soy-based inks. Circulation 300 copies in Brazilian Portuguese and 150 in English. Photo credits and illustrations Ana Fuccia (page 23), Animake (page 16), Gerdau Files (pages 25, 27, and 28), Christian Buendia Gama (page 15), Eduardo Colesi (page 20), Eduardo Rocha (cover and page 13), Foguinho / Save the image (cover), Ivson Miranda (cover and pages 5, 6, 10, 12, and 24), Leonid Streliaev (page 14), Rahgu (cover and page 17), República das Ideias (page 20), Roberto René Rodríguez (page 29), WorldSteel (page 21). We would like to thank all of those who contributed by supplying information and images for this publication. Gerdau believes in the importance of seeking continuous improvement in all its processes, products and services. As such, we would like to hear your opinion about the 2012 Annual Report. Evaluate its scope, relevance, quality of information, and graphic presentation. Your opinion is very important to us. Access our website www.relatoriogerdau.com.br and answer the opinion survey or send an email to gerdau@gerdau.com, with suggestions on aspects which can be improved. We thank you in advance for your participation.

www.gerdau.com

ARGENTINA www.sipargerdau.com BRAZIL www.gerdau.com.br CANADA www.gerdau.com/longsteel CHILE www.gerdauaza.cl COLOMBIA www.gerdau.com.co DOMINICAN REPUBLIC www.industriasnacionales.com GUATEMALA www.acerosdeguatemala.com INDIA www.gerdau.in MEXICO www.gerdau.com.mx PERU www.sider.com.pe SPAIN www.gerdau.es UNITED STATES www.gerdau.com/longsteel www.gerdau.com/specialsteel URUGUAY www.gerdau.com.uy VENEZUELA www.sizuca.com.ve

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