EARNINGS RELEASE 3rd QUARTER OF 2019 Gustavo Werneck President & Chief Executive Officer Harley Scardoelli Chief Financial Officer | --- | --- | --- | |-----------------------------------------------------------------------------------------------|----------------------------------------|--------------------------------------------------------------------------------| | | | | | | | | | Highlights | | | | 3 r d q u a r t e r o f 2 0 1 9 | | | | Free Cash Flow: R$ 1.9 billion Second best quarter in historical ...

Financial Data and Key Metrics Changes - Gerdau reported an adjusted EBITDA of BRL1.6 billion in Q2 2019, down from BRL1.8 billion in Q2 2018, primarily due to the deconsolidation of divested assets and lower margins in Brazil and Special Steel business divisions [17][18] - The EBITDA margin improved year-on-year due to better margins in North and South America business divisions, with a margin of 15.5%, the best in 11 years [8][18] - Financial expenses decreased by 58% year-on-year, from BRL730 million to BRL300 million in Q2 2019, attributed to a lower debt position [14] Business Line Data and Key Metrics Changes - In North America, the EBITDA margin increased from 9.2% in Q2 2018 to 11.1% in Q2 2019, despite a decline compared to Q1 2019 due to market conditions [10] - The Special Steel business in Brazil saw a 3% increase in production and a 12% increase in shipments to the local market, although exports were down 42% due to economic issues in Argentina [36] - The long steel margins in Brazil remained flat compared to Q1 2019, with increased competition and a zero-growth demand scenario [32] Market Data and Key Metrics Changes - Global steel demand is projected to grow by 1.3% in 2019, reaching 1.735 billion tonnes, driven by investments in developed countries and improving performance in emerging economies [25] - In Brazil, apparent steel consumption is expected to grow by 2.1% in 2019, reaching 21.7 million tonnes, supported by civil construction and infrastructure investments [26] - The U.S. economy is expected to grow by 2.6%, with strong demand for construction and infrastructure influencing steel shipments [34] Company Strategy and Development Direction - Gerdau is focusing on a more profitable asset portfolio and stringent cost management, achieving a reduction of 18% in SG&A expenses year-on-year [11] - The company plans to invest BRL1.8 billion in 2019, increasing to BRL2.6 billion in 2020 and 2021, while remaining selective with new investments [39][41] - Gerdau is enhancing its digital transformation and innovation initiatives, including a partnership with Manchester University to explore advanced applications of steel [43][44] Management's Comments on Operating Environment and Future Outlook - Management remains optimistic about the outlook for Brazil and the U.S., despite challenges in effective demand growth for steel in Brazil [24] - The company anticipates a recovery in steel demand in Brazil, contingent on structural reforms and economic measures [33] - In the U.S., management expects stable margins and a recovery in shipments due to low inventory levels and strong demand [53] Other Important Information - Gerdau issued BRL1.4 billion in debentures to strengthen cash flow and extend the debt profile, indicating good liquidity in the Brazilian market [20] - The company generated BRL361 million in free cash flow in Q2 2019, reversing a negative trend from Q1 [22] - The company’s net debt decreased from BRL14.7 billion in June 2018 to BRL12.5 billion in June 2019, with a net debt to EBITDA ratio of 1.9x [19] Q&A Session Summary Question: Net debt reconciliation and cash generation - Management explained the reconciliation of free cash flow and net debt, highlighting nonrecurring items affecting cash flow calculations [50] Question: Margins expectations in Brazil and the U.S. - Management indicated that metallic spreads in the U.S. remain high, with expectations for stable margins despite challenges in Brazil due to low demand [53][54] Question: North America business developments and cost cuts - Management confirmed successful divestment from rebar assets and ongoing cost reduction efforts, achieving the lowest SG&A in the company's history [67] Question: Special Steel margins and demand recovery - Management noted that recovery in Special Steel margins is slow, with expectations for gradual improvement as inventory levels stabilize [78] Question: CapEx adjustments and project schedules - Management stated that CapEx has been reduced for 2019 but will maintain investments in the coming years, contingent on market recovery [81]

Financial Performance - The company's net sales for 2018 reached R$46,159,478, an increase of 25.5% compared to R$36,917,619 in 2017[20] - Gross profit for 2018 was R$6,149,378, representing a 70.5% increase from R$3,604,624 in 2017[20] - The net income for 2018 was R$2,326,382, a significant recovery from a net loss of R$338,667 in 2017[20] - Basic earnings per share for common and preferred shares in 2018 were R$1.35, compared to a loss of R$0.21 in 2017[21] - Cash and cash equivalents as of December 31, 2018, totaled R$2,890,144, an increase from R$2,555,338 in 2017[23] - Total assets increased to R$51,281,029 in 2018, up from R$50,301,761 in 2017[23] - The company declared cash dividends of R$0.45 per share for both common and preferred shares in 2018, compared to R$0.08 in 2017[21] - Current liabilities rose to R$8,504,253 in 2018 from R$7,714,120 in 2017, indicating a need for careful management of short-term obligations[23] - The company reported a net working capital of R$8,998,829 in 2018, down from R$10,267,993 in 2017, reflecting tighter liquidity[23] Industry Conditions - The steel industry remains cyclical, with potential risks from fluctuating demand and prices impacting the company's financial performance[33] - The steel industry is highly cyclical and has been adversely affected by global economic conditions, with significant disruptions noted during the 2008-2009 financial crisis[34] - An increase in iron ore and coal prices could adversely affect production costs, impacting the company's financial condition[44] - Global steel pricing is significantly influenced by China's production capacity, which has exceeded domestic consumption, leading to increased exports and lower international prices[42] - The company faces competition from domestic and foreign producers, which may adversely affect profitability and market share[38] Operational Risks - Unexpected equipment failures could lead to production curtailments, negatively impacting shipments and earnings[52] - The company is subject to risks from adverse changes in economic and political conditions, which could affect liquidity and operations[37] - Labor disruptions and strikes could adversely affect operations and project timelines, potentially increasing costs[58] Financial Obligations and Debt - Gerdau's credit ratings remain investment grade, with S&P maintaining a positive outlook and Fitch also providing a stable outlook[74] - The company held R$11 billion in foreign currency-denominated debt, representing 73.8% of its consolidated gross debt as of December 31, 2018[84] - Fluctuations in foreign exchange rates may increase the cost of servicing debt and adversely affect overall financial performance[80] Tax and Legal Matters - Gerdau is involved in several tax disputes with claims totaling R$613,642 thousand related to ICMS and R$968,047 thousand related to PIS and COFINS[87] - The Company is involved in three administrative proceedings related to Withholding Income Tax, totaling R$ 410,893 thousands[93] - The Company and its subsidiary Gerdau Internacional Empreendimentos Ltda. are engaged in proceedings related to Corporate Income Tax and Social Contribution Tax, amounting to R$ 1,200,672 thousands[93] - The total updated amount of proceedings regarding the disallowance of the deductibility of goodwill is R$ 7,062,878 thousands[93] Environmental and Regulatory Risks - Compliance with environmental regulations may lead to increased costs, negatively affecting the Company's financial results[98] - Future laws aimed at reducing greenhouse gas emissions could increase operational costs, impacting cash flows and financial condition[100] - Regulatory risks include potential trade restrictions on steel products that may increase costs or limit export capabilities, impacting financial condition and results[97] Economic and Political Environment - Brazil's sovereign credit rating has been downgraded multiple times, currently rated below investment grade, which could adversely affect the Company's share prices[112] - Brazil's political instability continues to adversely affect the Company's performance and investor confidence[114] - Ongoing corruption investigations, including the Lava Jato scandal, have led to the arrest and conviction of numerous politicians and executives, impacting market perception[115][116] - The Brazilian economy is subject to government policies that may negatively influence the Company's operations and financial performance[119] - High inflation in Brazil could slow economic growth, reduce demand for the Company's products, and increase costs, adversely affecting profit margins and net income[120] Strategic Acquisitions and Growth - The Company has made significant acquisitions, including the purchase of Companhia Paraibuna de Metais for US$30 million (R$88.1 million) to ensure iron ore self-sufficiency[141] - The Company has expanded internationally, acquiring interests in steel production across North America and Latin America, enhancing its market presence[140] - Gerdau acquired 36% of Sipar Aceros S.A. in Argentina, increasing its total interest to 74%[142] - Gerdau acquired a 57% interest in Diaco S.A., Colombia's largest rebar manufacturer, and later increased its stake to 99% for US$107.2 million[142] - Gerdau became the majority shareholder (60%) in Corporación Sidenor S.A. after acquiring a total of 60% for US$507.2 million[144] - Gerdau's acquisition of Chaparral Steel Company for US$4.2 billion expanded its product portfolio significantly[150] - Gerdau sold its wire-rod production unit in Beaumont, Texas for US$99.5 million, with an annual production capacity of approximately 700,000 short tons[157] - Gerdau concluded the sale of its two hydropower plants in Goiás for R$835 million, with a combined capacity of 155 MW[159] - Gerdau's sale of four U.S. rebar mills to Commercial Metals Company was valued at US$600 million[162] Production and Capacity - The company produced 15.344 million tonnes of crude steel in 2018, a decrease of 4.8% compared to 16.120 million tonnes in 2017[203] - Gerdau's rolled steel production was 13.749 million tonnes in 2018, down from 14.047 million tonnes in 2017[203] - The total shipments for Gerdau in 2018 were 14.560 million tonnes, a decline of 2.5% from 14.938 million tonnes in 2017[201] - Gerdau's total consolidated installed annual capacity was approximately 20.3 million tonnes of crude steel as of December 31, 2018[195] - Brazil Business Segment's annual crude steel installed capacity is 8.2 million tonnes and finished steel products capacity is 6.7 million tonnes[207] - North America Business Segment's annual production capacity is 8.1 million tonnes of crude steel and 5.9 million tonnes of finished steel products, accounting for 43.2% of overall Gerdau sales volumes in 2018[209][212] - Special Steel Business Segment in Brazil has an annual production capacity of 1.4 million tonnes of crude steel and 1.8 million tonnes of rolled steel, serving over 300 clients[216] - Special Steel Segment in North America has an annual installed production capacity of 1.4 million tonnes of crude steel and 1.5 million tonnes of rolled steel products, with a client portfolio of more than 200[217] Market Dynamics - In Brazil, Gerdau's net sales increased to R$ 15.745 billion in 2018, up from R$ 12.563 billion in 2017, reflecting a growth of 25.8%[202] - North America accounted for R$ 19.927 billion in net sales in 2018, a significant increase from R$ 15.433 billion in 2017, marking a growth of 29.4%[202] - Gerdau's total steel exports in 2018 were 14.1 million tonnes, representing 43.5% of total sales[179] - The Brazilian GDP increased by 1.0% in 2018, while steel consumption rose by 7.3%[177] - In the Brazil Business Segment, steel shipments decreased slightly in 2018 due to a decline in exports, while domestic market shipments grew driven by retail construction and manufacturing demand[206] - Approximately 15% of production sold in Brazil was distributed through Gerdau's distribution channel, which includes stores and independent distributors[207] - The North America Business Segment's 2018 shipments were at the level of 6.1 million tonnes[212]