Gerdau(GGB) - 2022 Q4 - Annual Report

PART I Key Information This section details Gerdau's significant business, operational, mining, financial, regulatory, and country-specific risks, including steel industry cyclicality, competition, raw material volatility, and financial exposures Risks Relating to Business and the Steel Industry Gerdau's performance is highly susceptible to the cyclical nature of steel demand and prices, intense competition, and volatile raw material costs - The steel industry is highly cyclical, exposing the company to significant fluctuations in demand and prices for its products, which can be adversely affected by global economic slowdowns and crises[26][27] - Gerdau faces intense competition from both domestic and foreign steel producers, with China's large production capacity and export levels being a major factor that can depress international steel prices[31][33][34] - The company's profitability is vulnerable to price increases or supply shortages of key raw materials, including steel scrap for its mini mills and iron ore and coking coal for its integrated facilities[35][36][39] Risks Relating to Operations Operational risks include capital project delays, equipment failures, energy shortages, labor disputes, cybersecurity breaches, and health epidemics impacting business continuity and costs - Capital investment projects are subject to risks such as delays, cost overruns, and failure to obtain necessary permits, which could adversely affect growth and profitability[42] - Unexpected equipment failures, fires, or severe weather can cause material plant shutdowns, leading to increased costs, reduced shipments, and lower earnings[43] - The company is exposed to cybersecurity risks, including data breaches and system interruptions, which could result in operational disruptions, financial losses, and reputational damage[59][60] - The COVID-19 pandemic continues to pose risks, with potential for production interruptions, reduced demand, and supply chain disruptions that could adversely impact future results[63][65][67] Risks Relating to Mining Operations Mining operations face risks from uncertain mineral resource estimates, lack of proven reserves, and potential structural failure of the tailings dam - Estimates of mineral resources are inherently uncertain and may differ from the quantities that can actually be extracted, as the company has not established any proven or probable mineral reserves under SEC definitions[70][72] - The company operates one mining dam for tailings disposal, the Alemães Dam. An accident affecting its structural integrity could lead to severe consequences, including shutdowns, high expenditures, fines, and environmental impacts[76][78] Financial Risks Financial risks include credit rating downgrades, high indebtedness, foreign exchange rate fluctuations, and adverse outcomes from significant litigation - The company holds an investment-grade rating from S&P and Fitch, and was upgraded by Moody's to Baa3. A loss of these ratings could increase the cost of capital and impair access to financing[80][81] - As of December 31, 2022, debt denominated in foreign currency, mainly U.S. dollars, amounted to R$ 9.6 billion, representing 76% of consolidated gross debt. A significant depreciation of the Brazilian real could adversely affect the company's ability to service this debt[87] - The company is involved in several significant tax disputes for which no provision has been established, including claims related to ICMS, IPI, PIS/COFINS, and goodwill amortization, with potential liabilities totaling billions of reais[89][90] Regulatory Risks Regulatory risks encompass trade protectionism, stricter environmental laws, anti-corruption and antitrust compliance, and ongoing Brazilian investigations - The business is exposed to trade protectionism, such as quotas and tariffs, which can increase product costs and reduce export competitiveness[93] - Increasingly strict environmental laws, especially those targeting greenhouse gas emissions, could lead to higher capital expenditures and operating costs[94][96] - The company is subject to investigations by Brazilian authorities regarding Administrative Board of Tax Appeals (CARF) proceedings and political contributions, the outcome of which is currently unpredictable. The U.S. SEC has closed its inquiry into these matters[101] Risks Relating to Brazil Brazilian risks include sovereign credit rating downgrades, political instability, and high inflation impacting economic growth and debt servicing costs - Brazil's sovereign credit rating is below investment grade, and any further downgrades could heighten investor risk perception and adversely affect the company's share price[103][104] - Political instability in Brazil has historically affected investor confidence and can lead to economic deceleration and increased volatility in securities[105] - High inflation in Brazil could slow economic growth, reduce demand for the company's products, and increase the servicing costs of its debt denominated in Brazilian reais[107] Risks Related to Corporate Structure and Shares Risks include controlling shareholder influence, less stringent foreign issuer disclosure, NYSE governance exemptions, and complexities for ADS holders - The controlling shareholder has the power to elect a majority of the board and establish administrative policy, which may lead to decisions that conflict with the interests of other shareholders[111] - As a foreign issuer, the company is exempt from certain NYSE corporate governance standards, including the requirement for a majority of independent directors on its board[115] - U.S. holders of ADSs may be unable to exercise preemptive rights unless a registration statement under the Securities Act is effective, which the company is not obligated to file[116] Company Information This section provides a comprehensive overview of Gerdau's history, global and regional steel industry presence, operational segments, product mix, production processes, and environmental strategies History and Development Gerdau S.A., incorporated in 1961 and controlled by the Gerdau family, is Brazil's largest steel producer and Latin America's largest recycler - Gerdau is Brazil's largest steel producer, a leading producer of long steel in the Americas, and one of the world's leading suppliers of special steel[123] - The company is the largest recycler in Latin America, with 73% of its steel produced from scrap, transforming 11 million tonnes of scrap into steel products each year[123] Business Overview This section details Gerdau's operational landscape, including its global steel industry position, segment-wise performance, product range, production processes, and key inputs - Gerdau was classified as the world's 30th largest steel producer in 2021, with a total consolidated installed annual capacity of approximately 16.7 million tonnes of crude steel as of December 31, 2022[149][151] Consolidated Shipments by Business Segment (in 1,000 tonnes) | Business Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | TOTAL | 11,902 | 12,722 | 11,461 | | Brazil | 5,394 | 5,755 | 5,129 | | North America | 4,090 | 4,451 | 4,334 | | South America | 1,212 | 1,255 | 962 | | Special Steel | 1,657 | 1,654 | 1,252 | Consolidated Net Sales by Business Segment (in R$ million) | Business Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | TOTAL | 82,412 | 78,345 | 43,814 | | Brazil | 32,971 | 34,758 | 17,753 | | North America | 31,099 | 27,838 | 17,458 | | South America | 7,180 | 6,857 | 3,831 | | Special Steel | 13,626 | 10,980 | 6,096 | Annual Production (in million tonnes) | Production Type | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Crude Steel | 12.67 | 13.29 | 12.19 | | Rolled Steel | 11.43 | 12.40 | 10.93 | | Iron Ore | 6.42 | 3.86 | 6.67 | Organizational Structure Gerdau S.A. operates through consolidated subsidiaries and equity-accounted joint ventures across the Americas, including key entities in Brazil, North America, and other regions - The company's operational structure consists of numerous subsidiaries and joint ventures across Brazil, the USA, Canada, Peru, Mexico, Argentina, and other countries[280][281] - Key operating companies that are fully consolidated include Gerdau Aços Longos S.A. and Gerdau Açominas S.A. in Brazil, and Gerdau Ameristeel Corporation in North America[289][290][291] - Significant investments accounted for using the equity method include joint ventures like Gerdau Metaldom Corp. (Dominican Republic), Gerdau Corsa S.A. (Mexico), and Diaco S.A. (Colombia)[283][284] Property, Plant and Equipment This section details Gerdau's production facilities, mining assets, investment programs, environmental regulations, and decarbonization strategy, including capital expenditures and eco-efficiency investments - As of December 31, 2022, Gerdau's total installed capacity was approximately 16.0 million tonnes of crude steel and 15.4 million tonnes of rolled products across its global operations[296] - The company announced a new investment plan of R$ 5.0 billion for 2023, focusing on maintenance, expansion, technological updating, and ESG practices. This follows a R$ 4.3 billion capex disbursement in 2022[303][304] - Gerdau has a decarbonization goal to reduce scope 1 and 2 greenhouse gas emissions from 0.93 t of CO₂e per ton of steel (2020 baseline) to 0.83 t of CO₂e per ton of steel by 2031, aiming for carbon neutrality by 2050[329][332] - In 2022, the company invested R$ 639.31 million in eco-efficiency practices and environmental protection technologies. Provisions for environmental liabilities totaled R$ 484.7 million as of December 31, 2022[308][311] Operating and Financial Review and Prospects This section analyzes Gerdau's financial performance, liquidity, capital resources, and critical accounting estimates, highlighting net sales growth, net income decline, and debt position Results of Operations (2022 vs. 2021) In 2022, net sales increased by 5.2% to R$ 82.4 billion, while net income decreased by 26.2% to R$ 11.5 billion due to higher costs and financial expenses Consolidated Income Statement Highlights (in R$ thousands) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | NET SALES | 82,412,210 | 78,345,081 | 5.2% | | Cost of sales | (63,661,156) | (57,527,721) | 10.7% | | GROSS PROFIT | 18,751,054 | 20,817,360 | (9.9)% | | INCOME BEFORE TAXES | 15,859,027 | 20,272,568 | (21.8)% | | NET INCOME | 11,479,552 | 15,558,938 | (26.2)% | - The 5.2% increase in net sales was primarily due to a global upcycle in commodity prices, resulting in higher net sales per tonne, which offset a 4.7% decrease in sales volume[374] - Cost of goods sold increased by 10.7% to R$ 63.7 billion, driven by rising costs of key raw materials, including a 9% increase in iron ore prices and a 32% increase in scrap prices[380] - Net financial expenses increased significantly, mainly due to an R$ 866 million increase in expenses from exchange rate variations compared to 2021[386] Liquidity and Capital Resources In 2022, operating cash flow decreased, investing activities increased, and financing activities decreased, while total debt declined and net debt remained stable Consolidated Cash Flow Summary (in R$ thousands) | Cash Flow Activity | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 11,150,338 | 12,516,933 | (10.9)% | | Net cash used in investing activities | (4,459,684) | (2,996,103) | 48.8% | | Net cash used in financing activities | (8,256,287) | (9,982,642) | (17.3)% | Debt Profile (in R$ thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | TOTAL DEBT | 12,607,390 | 14,039,693 | | Total cash and short-term investments | 5,434,998 | 6,786,866 | | NET DEBT | 7,172,392 | 7,252,827 | - Capital expenditures in 2022 totaled R$ 4.3 billion, with 60% allocated to the Brazil Segment and the remainder to other operations[410] Critical Accounting Estimates This section details critical accounting estimates, including goodwill impairment, provisions for legal claims, and deferred tax asset recoverability, all requiring complex management judgments - The annual goodwill impairment test, conducted in December 2022, concluded that the recoverable amount exceeded the book value for all segments, resulting in no impairment charge[434][442] Provisions for Claims (in R$ thousands) | Provision Type | 2022 | 2021 | | :--- | :--- | :--- | | Tax provisions | 1,530,040 | 1,270,473 | | Labor provisions | 463,452 | 435,803 | | Civil provisions | 32,511 | 34,750 | | Total | 2,026,003 | 1,741,026 | - The company did not recognize deferred tax assets of R$ 240 million in Brazil and R$ 1.1 billion abroad due to a lack of expectation for their use[451] Directors, Senior Management and Employees This section outlines Gerdau's Board of Directors and Executive Officers, compensation philosophy, corporate governance structure, and employee workforce statistics - The Board of Directors is chaired by Guilherme Chagas Gerdau Johannpeter, and the Chief Executive Officer is Gustavo Werneck da Cunha[458][459] - Total compensation for management (directors and officers) in 2022 was R$ 84.3 million, including salaries, variable pay, benefits, and social charges[497] - The company has a Board of Auditors (Conselho Fiscal) that is adapted to comply with Sarbanes-Oxley Act requirements, serving in a capacity similar to a U.S. audit committee, with Bolívar Charneski identified as the 'audit committee financial expert'[522][524][527] Employee Workforce | Year | Brazil | Other Countries | Total | | :--- | :--- | :--- | :--- | | 2022 | 18,372 | 9,825 | 28,197 | | 2021 | 18,102 | 9,637 | 27,739 | | 2020 | 15,313 | 9,300 | 24,613 | Major Shareholders and Related-Party Transactions This section identifies Gerdau's major shareholders, including the controlling entity Metalúrgica Gerdau S.A., and details related-party transactions conducted at market conditions Major Shareholders as of December 31, 2022 | Shareholder | Common Shares % | Preferred Shares % | | :--- | :--- | :--- | | Metalúrgica Gerdau S.A | 97.26% | — | | JP Morgan Chase Bank | — | 19.9% | | Capital International Investors | — | 10.4% | - Metalúrgica Gerdau S.A. is the controlling shareholder, holding 97.26% of the voting capital stock of Gerdau S.A[553] - Related-party transactions include loans, commercial sales and purchases, and property transactions, which are carried out under market conditions[555][556][557] Financial Information This section details Gerdau's legal proceedings, including provisions for probable losses and significant contingent liabilities, alongside its dividend distribution policy Provisions for Contingencies (in R$ thousands) | Contingency Type | 2022 | 2021 | | :--- | :--- | :--- | | Tax | 1,530,040 | 1,270,473 | | Labor | 463,452 | 435,803 | | Civil | 32,511 | 34,750 | - The company has significant contingent liabilities classified as 'possible' losses for which no provisions have been made, including tax claims related to goodwill amortization totaling R$ 8.7 billion[994] - The company's bylaws require a minimum dividend distribution of 30% of adjusted net income for each fiscal year[577] The Offer and Listing This section details Gerdau's securities listings on the B3, NYSE (as ADSs), and Latibex, along with relevant trading mechanisms and regulatory oversight - Gerdau's shares are listed on the São Paulo Stock Exchange (B3) in the Level 1 Differentiated Corporate Governance segment, the New York Stock Exchange (NYSE) as ADSs (GGB), and the Madrid Stock Exchange (Latibex) as DRs (XGGB)[593][606][607] - In 2022, 3.5 billion ADSs were traded on the NYSE, representing a trading volume of US$ 19.74 billion[606] Additional Information This section covers Gerdau's material financial contracts, Brazilian exchange controls, and a comprehensive summary of Brazilian and U.S. federal income tax implications for non-resident shareholders - As of December 31, 2022, the company had outstanding bonds totaling US$ 1.59 billion (R$ 8.3 billion) and debentures totaling R$ 1.4 billion[399][400][612][613] - Under Brazilian tax law, dividends paid to non-resident holders are currently exempt from income tax, while payments of interest on shareholders' equity are subject to a 15% withholding tax (or 25% for residents of tax-favorable jurisdictions)[636][640] - For U.S. holders, distributions are generally treated as dividends for U.S. federal income tax purposes. These dividends may be considered 'qualified dividends' subject to a preferential tax rate, provided certain conditions are met and the company is not classified as a Passive Foreign Investment Company (PFIC)[673][675] Quantitative and Qualitative Disclosures Regarding Market Risk This section details Gerdau's exposure to market risks, including exchange rate, interest rate, and commodity price fluctuations, and its strategies for risk mitigation and capital management - The company is exposed to exchange rate risk, with a sensitivity analysis indicating a 5% appreciation of the Real/Argentinian Peso against the US Dollar would result in a gain of R$ 113.8 million as of Dec 31, 2022[695][696] - Interest rate risk sensitivity analysis shows that a 10 basis point change in floating interest rates would impact financial expenses by R$ 32.4 million[699] - The company manages capital structure risk by monitoring key performance indicators, aiming for a Net Debt/EBITDA ratio of less than or equal to 1.5 times and an average debt maturity of more than 6 years[958] Description of Securities Other Than Equity Securities This section describes Gerdau's Level II ADSs traded on the NYSE, including their representation of preferred shares and associated depositary fees and reimbursements - Gerdau's Level II ADSs trade on the NYSE under the symbol GGB, with each ADS representing one preferred share[710] - In 2022, the depositary (J.P. Morgan Chase Bank) reimbursed the company US$ 1.2 million for expenses related to the maintenance of the ADS program[711] PART II Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[717] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO framework[722] Other Information This section covers governance topics including the audit committee financial expert, code of ethics, principal accountant fees, and differences between Brazilian and NYSE corporate governance practices - The Board of Auditors has determined that member Bolívar Charneski is an 'audit committee financial expert' as defined by SEC rules[725] Principal Accountant Fees (in R$ thousands) | Fee Type | 2022 (PwC) | 2021 (KPMG) | | :--- | :--- | :--- | | Audit fees | 9,612 | 9,443 | | Audit-related fees | 166 | 170 | | Total | 9,778 | 9,613 | - The company changed its certifying accountant from KPMG Auditores Independentes to PricewaterhouseCoopers Auditores Independentes for the fiscal year ending December 31, 2022[743] - As a foreign private issuer, Gerdau follows Brazilian corporate governance practices, which differ from NYSE standards for domestic companies, particularly regarding the requirement for a majority of independent directors on the board and its committees[747][749] PART III Financial Statements This section presents Gerdau's audited consolidated financial statements for 2022, prepared under IFRS, including the independent auditor's report from PricewaterhouseCoopers - The consolidated financial statements were prepared in accordance with IFRS as issued by the IASB[771][807] - The independent auditor's report for the 2022 fiscal year was issued by PricewaterhouseCoopers Auditores Independentes Ltda., which opined that the financial statements present fairly, in all material respects, the financial position of the company and that the company maintained effective internal control over financial reporting[773][774]