Gerdau(GGB) - 2018 Q4 - Annual Report

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]