Gerdau(GGB) - 2021 Q4 - Annual Report

PART I Key Information The company faces significant business, operational, financial, and regulatory risks, including steel industry cyclicality and competition Risk Factors - The steel industry is highly cyclical, exposing the company to significant fluctuations in demand and prices for its products[28] - Competition from China, the world's largest steel producer, poses a significant risk to global steel prices and market share[34][35] - Production costs are sensitive to the prices and availability of key raw materials, including steel scrap, iron ore, and coking coal[36][37] - Operations are subject to extensive environmental regulations, particularly those aimed at reducing greenhouse gas emissions[49][99][100] - A significant portion of the company's debt is denominated in foreign currencies, creating exposure to the depreciation of the Brazilian real[86][90] - The company is involved in several significant tax, civil, and labor disputes in Brazil with potential unprovisioned liabilities[92][93][97] - Economic and political instability in Brazil, including inflation and potential credit rating downgrades, could adversely affect the business[108][110][112] Company Information Gerdau is Brazil's largest steel producer with four business segments, utilizing both mini-mill and integrated production processes History and Development of the Company - Gerdau is Brazil's largest steel producer, a leading producer of long steel in the Americas, and Latin America's largest recycling company[128][129] - In 2021, the company formed a 50/50 joint venture with Shell to develop a 260MWdc solar park, supporting its decarbonization strategy[130][131] Business Overview - Gerdau operates through four main business segments: Brazil, North America, South America, and Special Steel[162][168] Consolidated Shipments by Business Segment (in 1,000 tonnes) | Business Segment | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | TOTAL | 12,722 | 11,461 | 12,090 | | Brazil | 5,755 | 5,129 | 5,609 | | North America | 4,451 | 4,334 | 4,275 | | South America | 1,255 | 962 | 1,059 | | Special Steel | 1,654 | 1,252 | 1,586 | Consolidated Net Sales by Business Segment (in R$ million) | Business Segment | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | TOTAL | 78,345 | 43,815 | 39,644 | | Brazil | 34,758 | 17,753 | 16,122 | | North America | 27,838 | 17,458 | 14,656 | | South America | 6,857 | 3,831 | 3,259 | | Special Steel | 10,980 | 6,096 | 6,702 | Consolidated Annual Production (in million tonnes) | Production Type | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Crude Steel | 13.294 | 12.194 | 12.453 | | Rolled Steel | 12.402 | 10.933 | 10.972 | | Iron Ore | 3.864 | 6.667 | 6.130 | - The company's principal competitors include Commercial Metals Company (CMC), Nucor Corporation, and ArcelorMittal[221][223][225] Organizational Structure - Gerdau S.A.'s operational structure includes significant subsidiaries such as Gerdau Ameristeel Corporation and Gerdau Açominas S.A.[292][293] - The company holds several key investments accounted for using the equity method, including stakes in Gerdau Corsa (Mexico) and Gerdau Metaldom (Dominican Republic)[296] Property, Plant and Equipment - The company operates numerous steel production facilities with a total installed capacity of 17.2 million tonnes of crude steel[309] - Gerdau owns and operates iron ore mines in Minas Gerais, Brazil, to ensure self-sufficiency for its steelmaking operations[310][312] - Capital expenditures in 2021 totaled R$ 3.0 billion, with a planned investment of R$ 4.5 billion for 2022[318][319][321] - The company has a goal to reduce scope 1 and 2 GHG emissions to 0.83 t of CO₂e per ton of steel by 2031[346][351] Unresolved SEC Staff Comments The company reports no unresolved comments from the U.S. Securities and Exchange Commission regarding its annual reports - The Company has no unresolved comments from the staff of the U.S. Securities and Exchange Commission with respect to its annual report[356] Operating and Financial Review and Prospects Financial performance improved significantly in 2021, driven by higher sales volumes and commodity prices, with a positive outlook for 2022 Results of Operations Consolidated Financial Performance (2021 vs 2020) | Metric (in R$ thousands) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | 78,345,081 | 43,814,661 | 78.8% | | Gross Profit | 20,817,360 | 5,930,559 | 251.0% | | Income Before Taxes | 20,272,568 | 3,495,678 | 479.9% | | Net Income | 15,558,938 | 2,388,054 | 551.5% | - Net sales in 2021 increased by 79% to R$78.3 billion, driven by a global upcycle in commodity prices and higher sales volumes[394] - Cost of goods sold increased by 52% in 2021, primarily due to rising raw material costs, including a 140% increase in iron ore prices[400] - The company recognized a gain of R$1.39 billion in 2021 from the recovery of an Eletrobras compulsory loan[406] - Net income surged by 552% to R$15.6 billion in 2021, compared to R$2.4 billion in 2020[411] Liquidity and Capital Resources - Net cash provided by operating activities increased by 95.3% to R$12.5 billion in 2021, primarily due to higher net income[412][413] - Net cash used in financing activities increased by 300.3% to R$10.0 billion in 2021, mainly due to higher dividend payments[412][416] Debt Profile (as of Dec 31) | Metric (in R$ million) | 2021 | 2020 | | :--- | :--- | :--- | | Total Debt | 14,040 | 17,515 | | Cash and Equivalents | 6,787 | 7,658 | | Net Debt | 7,253 | 9,857 | - As of December 31, 2021, 75% of the company's gross debt was denominated in U.S. dollars, with an average debt term of 8.3 years[418][419] - In 2021, the company repurchased bonds with a total principal of US$395.8 million as part of its liability management strategy[421][423][472] Trend Information - Global steel production grew 3.7% in 2021, with Gerdau's steel production increasing by 9% to 13.3 million tonnes[445] - The outlook for 2022 remains positive for the construction sector in the Americas, supported by infrastructure investment[447] - Prospects for the automotive industry are considered good, contingent on the recovery of semiconductor inventories[447] Critical Accounting Estimates - The company's critical accounting estimates include deferred income taxes, pension benefits, provisions for liabilities, and impairment testing[450][451] - The company had not recognized deferred tax assets on tax losses totaling R$240.2 million in Brazil and R$1.26 billion abroad[452][453] - As of December 31, 2021, total provisions for tax, labor, and civil liabilities amounted to R$1.74 billion[458] - The 2021 goodwill impairment test, based on discounted cash flow projections, resulted in no impairment losses[467][473][474] Directors, Senior Management and Employees This section details the company's leadership, compensation structure, board practices, and employee base Compensation - Total compensation paid to management and directors in 2021 was R$106.6 million[516] - The Long-Term Incentive Program ties executive incentives to EVA (Economic Value Added) and ESG scorecard indicators[519][523] Board Practices - The Board of Directors consists of 7 members, including 3 independent directors, and is supported by four committees[530][532] - The company utilizes a Board of Auditors (Conselho Fiscal), adapted for Sarbanes-Oxley compliance, in lieu of a U.S.-style audit committee[541][543] - The Board of Auditors has determined that member Bolívar Charneski qualifies as an "audit committee financial expert" under SEC rules[546] Employees Total Workforce (Year-End) | Year | Brazil | Other Countries | Total | | :--- | :--- | :--- | :--- | | 2021 | 18,102 | 9,637 | 27,739 | | 2020 | 15,313 | 9,300 | 24,613 | | 2019 | 14,950 | 9,837 | 24,787 | Major Shareholders and Related-Party Transactions Metalúrgica Gerdau S.A. is the controlling shareholder, and the company engages in various related-party transactions at market conditions - The controlling shareholder is Metalúrgica Gerdau S.A., which holds 97.26% of the company's voting common shares[570][571] - As of January 31, 2022, JP Morgan Chase Bank held 17.9% and Capital International Investors held 10.4% of the company's preferred shares[570] - Related-party transactions include loans and commercial operations, all conducted under prevailing market conditions[572][574] Financial Information The company details its legal proceedings, provisions for contingencies, and a dividend policy mandating a 30% minimum payout Provisions for Contingencies (in R$ thousands) | Subject | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Tax | 1,270,473 | 706,104 | 396,821 | | Labor | 435,803 | 428,821 | 357,130 | | Civil | 34,750 | 37,586 | 55,348 | - The company faces significant contingent liabilities classified as possible losses, including lawsuits related to goodwill amortization (R$8.2 billion)[587][1023][1024] - The company's dividend policy requires a minimum distribution of 30% of adjusted net income for each fiscal year[592][600] The Offer and Listing Gerdau's shares are listed on the B3, NYSE (as ADSs), and the Madrid Stock Exchange (as DRs) - The company's shares are listed on the São Paulo Stock Exchange (B3) under the Level 1 Differentiated Corporate Governance segment[609][610] - Gerdau has Level II American Depositary Shares (ADSs) traded on the New York Stock Exchange (NYSE) under the symbol GGB[623] - The company's preferred shares are also traded as Depositary Receipts (DRs) on the Latibex segment of the Madrid Stock Exchange[624] Additional Information This section covers material contracts, exchange controls, and the tax implications for non-resident and U.S. holders of its shares Material Contracts - As of December 31, 2021, the company had an outstanding balance of R$10.3 billion in bonds[629] - The company had an outstanding balance of R$2.9 billion in debentures as of December 31, 2021[630] - Gerdau maintains a senior unsecured working capital revolving credit facility of US$800 million[632] Taxation - For non-resident holders, dividends paid by Gerdau are currently exempt from Brazilian income tax[652][653] - Payments of interest on shareholders' equity to non-resident holders are subject to a 15% withholding income tax in Brazil[656] - For U.S. holders, qualified dividends may be subject to a maximum U.S. federal income tax rate of 20%, provided the company is not a PFIC[691][692] - The company believes it was not a Passive Foreign Investment Company (PFIC) for its 2021 taxable year[700] Quantitative and Qualitative Disclosures Regarding Market Risk The company is exposed to exchange rate, interest rate, and commodity price risks, which it manages using derivative instruments - The company's primary market risks are exchange rate risk, interest rate risk, and commodity price risk[709] Sensitivity Analysis of Market Risks (Impact on Income) | Assumption | Percentage of Change | 2021 Impact (R$ thousands) | 2020 Impact (R$ thousands) | | :--- | :--- | :--- | :--- | | Foreign currency sensitivity | 5% | 19,036 | 15,057 | | Interest rate sensitivity | 10 bps | 55,964 | 85,147 | | Price of products sold | 1% | 783,451 | 438,147 | | Price of raw materials | 1% | 437,210 | 269,454 | - The company manages capital structure risk by monitoring key indicators such as Net Debt/EBITDA, with a target of 1.0 to 1.5 times[983] PART II Controls and Procedures Management concluded that disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[732] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2021[737] - KPMG Auditores Independentes issued an unqualified opinion on the effectiveness of the company's internal controls[738] Other Information This section covers governance topics, including the code of ethics, accountant fees, and exemptions from NYSE listing standards Code of Ethics and Conduct - The company has a Code of Ethics and Conduct that applies to all employees, officers, and directors[740][741][742] Principal Accountant Fees and Services Principal Accountant Fees (in R$ thousands) | Fee Type | 2021 | 2020 | | :--- | :--- | :--- | | Audit fees | 9,443 | 10,024 | | Audit-related fees | 170 | — | | All other fees | — | 648 | | Total | 9,613 | 10,672 | Change in Registrant's Certifying Accountant - On December 14, 2021, the company approved the engagement of PricewaterhouseCoopers (PwC) as its principal accountant for fiscal year 2022[754] Corporate Governance - As a foreign private issuer, Gerdau follows Brazilian corporate governance practices, which differ from NYSE standards[760][761][762] PART III Financial Statements This section contains the company's audited consolidated financial statements prepared in accordance with IFRS for the year ended Dec 31, 2021 - The report includes the consolidated financial statements of Gerdau S.A. and its subsidiaries as of December 31, 2021 and 2020[785] - The independent auditor, KPMG, issued an unqualified opinion on the consolidated financial statements[786] - The auditor identified three critical audit matters: goodwill impairment testing, recoverability of deferred tax assets, and assessment of tax risks[790][791][796]