An excellent year for steelmaking
World steel consumption reached its highest peak ever in 2004. Global production topped the billion metric ton mark, boosted mainly by the growth in demand in China and the United States. As a result, the average dollar price of steel exported by Gerdau from Brazil rose 62.4%. Prices increased primarily due to rising raw material costs — in many cases by over 50% — and maritime freight charges. In this context, the Gerdau Group's net income totaled R$ 3.3 billion, up 165.8% from the previous fiscal year, with gross revenues up 48.3% to R$ 23.4 billion.
Meeting the growing demands of the market
Throughout the year, the Gerdau Group increased production to ensure that it could fully meet its customers' needs and expanded its presence in major markets in the Americas.
Four mills were acquired from North Star Steel in the United States for US$ 308 million, of which US$ 181 million consisted of working capital. The investment expanded the company's geographical coverage toward the Midwestern U.S. and added 1.6 million metric tons to the Group's annual installed capacity.
A strategic alliance was established in Colombia to gradually take over control of the Diaco Group, which has a production capacity of 460,000 metric tons of steel per year. This initiative will allow the Gerdau Group to reach a position of leadership in that national market. The initial investment in this project was US$ 68.5 million.
Low indebtedness allows for new investments
The Gerdau Group's production capacity has doubled in five years to 16.4 million metric tons per year, and should reach 21 million metric tons by 2007, with the investment of US$ 3.2 billion in the construction, expansion and modernization of the Group's industrial facilities. Of this total, US$ 2.4 billion will be invested in Brazil, where annual production capacity will grow over 50%, from 7.6 to 11.7 million metric tons. Units in other countries in the Americas will receive US$ 800 million during the same period.
The investment program will be based on cash generation and on the leverage allowed by the Group's current financial position. Operating cash generation (EBITDA) of R$ 5.5 billion has allowed a significant reduction of debt levels. At the end of 2004, net debt was just 0.7 times EBITDA, well below the limit of 2.5 times determined by the Group's policy. In addition, the net interest paid-per-metric-ton-sold was R$ 22.36, approximately half that of the previous fiscal year.
Strategic investment decisions are based on the principle of balancing growth and profitability. For this reason, annual dollar returns of at least 15% on capital invested are always required of the Group's acquisition and expansion projects. This goal has been consistently achieved for both acquisitions and industrial plant expansions after the investments mature.
Commitment to economic, social and environmental sustainability
Balancing economic, social and environmental demands is part of the Group's values. With this vision, the Group works to continue offering growing dividends each year. The Gerdau companies in Brazil have a policy of distributing 30% of adjusted net income each year. The absolute value of dividends has yielded shareholders an average of 6% per year for Gerdau S.A. and 10.3% for Metalúrgica Gerdau S.A. since 2000.
In the social area, community development is supported through a range of projects aimed mainly at sharing knowledge, optimizing the ability of people to transform their own world and creating a culture of personal development and learning in and around all the units. In total, the Group takes part in more than one hundred initiatives to help improve the quality of life in our communities.
The environmental aim is to reach increasingly demanding levels of ecoefficiency. All the steel mills are undergoing international ISO 14001 certification. A total of US$ 25 million was invested in 2004 to upgrade air, water and soil protection equipment and to promote programs that encourage environmental awareness among our employees and communities.
A positive perspective for 2005
The current international conditions indicate a continued high level of steel consumption in 2005, with prices tending to stabilize. The price of steel in international markets is directly linked to raw material volumes, with iron ore and coal as the defining factors. These components are also strongly influenced by international freight costs. We believe that there is no possibility of a significant increase in the supply of these raw materials in the next two years.
Another important consideration is "inefficient steel," or steel produced at non-competitive costs or with government subsidies. This has been a recurring theme in the debates at the International Iron and Steel Institute (IISI) since before the global steel boom of the last few years, and is under negotiation in the Organization for Economic Co-operation and Development (OECD). The belief is that, as new, more competitive production capacity comes on line, the inefficient mills will leave the market. In this context, the Gerdau Group strives to be a world-class company with a long-term vision.
Thank you
The results presented in this report were only possible because of the commitment and responsibility of each of our employees, the work of our teams and their daily attitude of servicing the needs of the market. The Gerdau Group also thanks its investors, shareholders, suppliers, communities and especially its customers.
Jorge Gerdau Johannpeter
Chairman
Gerdau Group
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