Record profits

For the Gerdau Group, 2006 was a very positive year. Not only was the global steel arena favorable, but the results show that we were able to expand our operations and achieve new levels of efficiency. Gerdau Group production grew 13.9%, which is higher than the global average of 8.8%. Net sales revenues during the same period reached R$ 27.5 billion, 7.2% more than the previous year. In US dollars, net sales revenues increased 17.4% to US$ 12.9 billion. This resulted from the 8.7% increase in value of the Brazilian currency, the real, against the US dollar. Net profit reached R$ 3.5 billion – an increase of 7.6%.

In 2006 we strengthened our vision of becoming a global steel company among the most profitable in the sector. We maintained a strategy of continued expansion of productivity, efficiency, and scale with ongoing investments in technology and human resources. We also looked for growth opportunities with the clear determination of being one of the steel industry’s consolidators.

Gerdau Group enters Europe

During this time, the Gerdau Group moved into new markets with the acquisition of 40% of Sidenor (Spain), which was concluded in 2006, and of Siderperu (Peru). Furthermore, Sidenor acquired control of the Spanish company GSB Acero as part of the growth strategy in the European specialty steel sector. We also made advances in North America. We expanded our presence in the Midwest of the United States by purchasing Sheffield Steel Corporation, a plant in Oklahoma. We also reached the country's West Coast by acquiring control of the Pacific Coast Steel joint venture in California. Gerdau Ameristeel Corporation, the company responsible for the Gerdau Group's operations in Canada and the United States, has a strong presence in the eastern part of both countries.

To maintain business competitiveness, Gerdau Ameristeel announced the deactivation of the melt shop at Perth Amboy, New Jersey at the end of 2006. The rolling mill operation at this unit was retained at its current production levels of approximately 500,000 metric tons of wire rod annually. Since the closing down of the melt shop, Perth Amboy has been supplied with steel from other Gerdau Ameristeel units.

In Brazil, production capacity grew more than 20% in 2006 compared with 2005. Gerdau São Paulo was inaugurated. It is the Group's first new mill to be built in the country for 25 years. Gerdau São Paulo is capable of producing up to 900,000 metric tons of steel a year. We also began work on a new blast furnace at Gerdau Açominas that will raise the steel production volume from 3 million to 4.5 million metric tons.

We are continually working on increasing our operational efficiency and productivity. This is only possible through investments in updating technology, through advanced management practices, and by continually training our employees. These factors place us among the best steel companies in the world and single us out in the market through the quality of our products and services. Our constant striving for improvement resulted in outstanding levels of profitability during both favorable and difficult times.

The Gerdau Group not only wants to be an international company, but also an organization without borders. This means being a global steel player in terms of processes, quality, services and productivity. We are reaching this objective with the support of a consistent strategic planning structure and by using the Gerdau Business System (GBS), which allows the best international practices in operational or functional processes to be replicated in all operations.

Governance and sustainability

We have also sought a continual evolution of the Group's corporate governance. In January 2007, André Gerdau Johannpeter became the chief executive officer (CEO) in my stead and Claudio Gerdau Johannpeter was appointed chief operating officer (COO). Both were formerly executive vice presidents. Furthermore, former senior executive vice presidents Frederico Gerdau Johannpeter and Carlos Petry and I will now serve only on the Board of Directors.

This change began in 2000 and was gradually implemented until three important objectives had been reached: the consolidation of the Board of Directors with the participation of external members; the consolidation of the Executive Committee made up of a new generation of managers; and the fulfillment of shareholders' expectations in maintaining a modern and professional corporate governance system.

The Gerdau Group's good practices policy also includes adopting strict international standards in its operations. In the area of safety, for example, ever more demanding targets are set in an effort to achieve a zero accident index. Some industrial areas have already been operating for almost 20 years without a single lost-time accident. Unfortunately, there were still three deaths in 2006 despite our efforts. This shows that there is still room for improvement and that we must continue to seek an accident-free environment. Safety is a priority of the organization's culture, as expressed in the values of the Gerdau Group.

We believe in the transforming power of people and their contribution to the growth of a business. That is why we invest in training our professionals and preparing them for a global presence. The resources made available for these activities totaled R$ 40.3 million in 2006.

We also worked at building a consistent, transparent, and long-lasting relationship with our employees. In North America, Gerdau Ameristeel continued working towards the resolution of its union agreements. In 2006, the company reached agreements at the Manitoba Metals (Canada) scrap collection and processing unit during the third quarter, and Gerdau Ameristeel Perth Amboy (United States) in the fourth quarter. In March, 2007, new agreements were reached in the United States in Beaumont (Texas), St. Paul (Minnesota), and Wilton (Iowa). The negotiations are progressing and the company remains optimistic about the prospects of reaching agreements at the other North American units, and of reconciling the interests of both parties.

Our community service included an investment in the people living in the vicinity of Gerdau plants, through participation in 817 social actions. A great contribution has been made by the Gerdau Institute, which supports initiatives focused on knowledge sharing, whether by formal teaching, culture, entrepreneurship, sports, or in other ways. We are always trying to go beyond simply allocating resources. We want to establish integrated solutions between Gerdau Group businesses, governmental institutions, private initiative, and civil organizations. We understand that this is the way to make our actions long lasting and expandable.

“The new generation of officers will have a great challenge ahead of them. They will have to stay on the growth and profitability path taken by the Group for a century”

Concerning the environment, we are constantly working to reduce the impact of our industrial activities. This has been our practice over the years and in 2006 we invested US$ 78.8 million in environmental technologies of which 77% was for air quality protection systems.

We also had a high recycling rate: today the Gerdau Group is one of the largest recyclers in the world, reusing 10.4 million metric tons of scrap metal every year – the main raw material in the production process. The consumption of scrap metal brings benefits such as reduced carbon emissions, streamlined processes, energy savings, more competitive costs, and increased productivity.

The future

The prospects for the coming years point to a growing demand for steel as a consequence of global economic development. Based on this expectation, US$ 4 billion will be invested in improvements and expansions over the next three years, which does not include possible acquisitions. Our low indebtedness and high cash generation make it possible for the Gerdau Group to expand consistently and safely.

We know that the new generation of officers will have a great challenge ahead of them. They will have to stay on the growth and profitability path taken by the Group for a century. To meet this objective they will need to combine the practice of teamwork with an atmosphere of open dialog among the different levels of the organization. These hallmarks, important elements in the continuing corporate development, have been laid down by the main leaders of recent decades. The group of officers completing the current cycle was the one directly responsible for the leap in steel production seen over the last 30 years, from 840,000 metric tons in 1977 to 15.6 million metric tons today. We cannot help but express our gratitude for their invaluable contribution. In the same way we are grateful to our employees, whose enthusiasm has made the Gerdau Group an outstanding organization, and for all of those who have always supported us, our customers, shareholders, suppliers, financiers, and the community.

Jorge Gerdau Johannpeter
Chairman of the Board of Directors

top ▲