Finance

Gross revenues and net sales revenues

In 2006, consolidated gross revenues totaled R$ 27.5 billion, 7.2% higher than the previous year. Net sales revenues grew 9.8%, for a total of R$ 23.5 billion. Sales during the year totaled 14.8 million metric tons, representing a growth of 9.4% (see Business performance and investments).

The largest growth in net sales revenues took place in South America, where the Group recorded a 93.4% increase, to R$ 2.3 billion. In North America, revenues increased 6.7%, reaching R$ 10.7 billion. As of 2006, the results from the stake in Sidenor are also considered. In Spain, Gerdau Group sales revenues totaled R$ 806 million.

In Brazil, net sales revenues fell 4.9% due to the 18.1% drop in exports as well as the foreign exchange offset on international sales. On the other hand, volumes sold in the Brazilian domestic market increased 12.6%, reflecting a positive phase in the civil construction sector.

The consistent revenue growth is verified by a compound annual growth rate (CAGR) of 26.6% between 2002 and 2006.

The consolidated gross margin was 27.6%, practically the same as 2005.

EBITDA

The operating cash flow (EBITDA) was R$ 5.3 billion, representing a 5.4% growth compared to 2005. The slower increase of these funds compared to the sales revenues and net profit resulted from increased costs and expenses during the period.

Consequently, the EBITDA margin as a proportion of the net sales revenues decreased from 23.7% in 2005 to 22.7%. The EBITDA compound annual growth rate (CAGR) from 2002 to 2006 was 25.9%.

Financial results

The net financial income (financial revenues minus financial costs) was positive in 2006 – R$ 321.7 million compared to a negative R$ 29.9 million in 2005. Excluding the revenues from exchange rate variations resulting from the increased value of the Brazilian real during the period on the foreign currency debt (R$ 289.4 million) and the revenues from monetary variation (R$ 131,000), the result was positive at R$ 32.2 million. During the previous year, the Group had a negative result of R$ 176.6 million.

The effect of the exchange rate variation on the Gerdau Group’s foreign investments resulted in a negative equity pickup amounting to R$ 244.8 million for 2006. This value also includes fiscal incentive reserves and goodwill amortized in the period.

Financial liabilities

Net debt (loans and financing plus debentures less cash and cash equivalents) was R$ 3.1 billion as of December 31, 2006, compared to R$ 2.2 billion at the end of 2005.

Considering only gross debt (loans and financing plus debentures), 21.6% was short-term (R$ 2.0 billion) and 78.4% long-term (R$ 7.1 billion). The average debt maturity was 9 years and 2 months in December 2006.

On December 31, 2006, 27.7% of the gross debt was in national currency, 47.0% was in foreign currency contracted by companies in Brazil and 25.3% was in various currencies contracted by the Group’s subsidiaries abroad.

At the end of the fiscal year, cash together with financial investments totaled R$ 6 billion, R$ 2.2 billion (36.5%) of which was indexed in foreign currency, principally the U.S. dollar.

The net debt was 0.6 times EBITDA, well below the maximum limit of 2.5 times established in the Group’s indebtedness policy and representing slightly more than seven months of the company’s cash flow. The performance indicates that the acquisition of new assets during the year totaling US$ 1 billion did not compromise the Group’s indebtedness.

Net profit

The consolidated net profit totaled R$ 3.5 billion in 2006, representing a 7.6% growth over last year. The net margin, however, was 14.9%, compared to 15.2% in 2005. Although the net operational profit in Brazil dropped 4.9%, the margin remained stable at 23.6%. In North America, an 18.3% increase in profit was recorded, with the margin improving from 6.8% to 7.6%. Despite the 74.1% growth in South America (Argentina, Chile, Colombia, Peru and Uruguay), the margin dropped from 13.8% to 12.4% due to higher raw material costs, acquisition consolidation costs and heavy investments in the region.

Investment grade

In January 2007, Gerdau received the Fitch Ratings Investment Grade for long-term corporate credit in local and foreign currency (BBB-) and on a national scale in local currency (AA+) with a stable outlook.

According to Fitch, the rating Gerdau received reflects the Group’s ability to tap the international financial market and the fact that most of its indebtedness is guaranteed by the companies operating in Brazil.

The rating also reflects the positive business performance of the Brazilian subsidiaries, as well as the company’s solid financial performance, demonstrated by low leverage and high liquidity.

The BBB- rating is higher than the Brazilian sovereign risk due to the benefits of the operations in North America, significant exports from Brazil and a strong cash position.

Value added breakdown

The Gerdau Group’s added value reached R$ 10.8 billion in 2006, 3.6% higher than in 2005. This results from R$ 27.2 billion in product and service revenues minus costs of R$ 16.4 billion associated with raw materials and consumption goods, third party services, depreciation and amortization, equity and financial revenues.

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