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Positive setting for increased demand
During 2003, the Gerdau Group benefited from increased demand for steel throughout the world. This demand resulted in rising raw material costs and international steel prices, which required significant adjustments on our part. Nevertheless, our efforts translated into significantly improved financial and operating results, leading to one of our best performances in history.
The Group's gross revenue reached R$ 15.8 billion (+ 41.6%); EBITDA was R$ 2.6 billion (+ 25.7%) and net income reached R$ 1.3 billion (+ 53.1%). In 2003, we produced 12.3 million metric tons of steel, 30.7% more than in the previous year, as forecast in our 2002 Annual Report.
Brazilian operations consolidated
Steelmaking operations in Brazil were integrated into a single company: Gerdau Açominas S.A., which combines the assets of Aço Minas Gerais S.A. - Açominas and Gerdau S.A. We have actively participated in the management of Açominas since 1997, and took over the control at the end of 2001. The integration allowed us to expand our industrial and commercial synergies, increase the generation of cash from operating activities and rationalize our tax payments. In addition, the integration gives us an important platform for future growth. The controlling company continues to be Gerdau S.A.
North American integration continues to progress
The first year of merged operations in North America resulted in the creation of Gerdau Ameristeel and was marked by significant integration efforts in the new organization. This challenging task involves unifying different business cultures as the result of an investment process initiated in North America with the acquisition of the Canadian companies Courtice Steel and MRM Steel. Growth in the region took on an even larger dimension with the incorporation in the U.S. of AmeriSteel in 1999 and its merger with Co-Steel in 2002.
We believe that maximum efficiencies will be achieved in all areas within the next two to three years through management and cultural integration. The business outlook in North America is favorable for 2004 and indicates a trend toward improved profitability in the steelmaking sector.
The Co-Steel merger follows the growth strategy developed by the Gerdau Group throughout its history: to achieve market share in major markets through the acquisition of companies with operational challenges, by purchasing them at economically advantageous prices and developing them into efficient and profitable assets that add value for our shareholders.
Results improve in Argentina, Chile and Uruguay
Net income from operations in Argentina, Chile and Uruguay grew 178.0% in 2003, reaching R$ 93.4 million. The recovery of the Argentinean economy and 3.3% growth in the Chilean GDP were the primary factors contributing to the positive performance in the region.
New investments increase customer service efficiency and range of operations
Our investment programs are guided by two strategies: improving efficiency and increasing production. In Brazil, we made investments to increase production to meet national and international market demands. One of our investment highlights was the installation of a wire rod rolling mill in the Ouro Branco unit (state of Minas Gerais). The equipment has an installed capacity of 550,000 metric tons per year and incorporates state-of-the-art technologies such as thermomechanical treatment, which allows the production of more resistant steel while reducing alloy consumption. Additionally, rolling is performed at speeds as high as 110 meters per second, practically the theoretical limit for this production process.
In the Ouro Branco unit, we also increased the output of rolled structural shapes, launched into the market a year and a half ago. During this period, 64 different sizes were developed in record time. Ouro Branco supplied the entire Brazilian territory and allowed us to move into a primary position in Latin and North American markets. Our wide variety of rolled structural shape sizes, ranging from 150 mm to 610 mm in height, represents a true revolution in the Brazilian construction process, measurably increasing flexibility in the creation of steel architectonic projects.
It is also important to highlight our investments in the Gerdau Aços Finos Piratini mill (state of Rio Grande do Sul), a producer of specialty steel primarily for the autoparts sector. During the next four years, the unit's annual installed capacity will be increased from 300,000 metric tons to 500,000 metric tons of finished products. Furthermore, we expanded the capacity of the melt shop by 33% to 400,000 metric tons of crude steel at the beginning of 2004. Gerdau Riograndense (state of Rio Grande do Sul) is also currently undergoing a modernization process that will improve the quality of higher value-added drawn products.
This year, we invested US$ 59.4 million in Gerdau Ameristeel. Over the next three years, we are considering capital investments of US$ 70 million per year, representing less than 4% of Gerdau Ameristeel assets, for the modernization of the facilities in North America. This will allow all Gerdau Ameristeel units to attain international excellence.
Investments in technological upgrade and expansion reflect our historical concern with providing excellent quality products and services as part of a process of continuous growth, which adds value to the businesses of our customers. Our investments are consistent with our vision of economic, environmental and social sustainability, and are an integral part of our historical commitment to promoting the quality of life in our communities and protecting our natural resources.
Increasing shareholder return
Gerdau continues to offer increased returns for our shareholders. Our results in 2003 support our strategy: R$ 351.3 million for Gerdau S.A., and R$ 172.1 million for Metalúrgica Gerdau S.A., representing a payout of 32.5% and 31.5%, respectively. It is our policy to make distributions of at least 30% of the adjusted net income each year, through the distribution of dividends or interest on capital stock.
Indebtedness consistent with growth strategy
Despite our aggressive investment program, highlighted by the purchase of Açominas shares and the consolidation of Co-Steel, net interest paid per produced ton has remained stable, at approximately R$ 40, since 2002.
In 2003, we reduced the Group's indebtedness and closed the year with a debt-to-cash flow ratio (EBITDA) of two to one.
Confident of continued growth
We believe our solid performance in 2003 and positive outlook for the world steel industry will allow us to maintain our position as one of the most profitable and efficient steel companies in the world as we strive to reach even higher efficiency levels and take advantage of global opportunities.
The continuation of this journey, initiated in 1901, has been possible due to our employees, shareholders, suppliers, communities and, especially, our customers. I would like to thank each of you for your trust and for your continuing support in overcoming our challenges.
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