In 2005, Gerdau Group gross revenues rose 8.9% to R$ 25.5 billion. Net profit reached R$ 3.3 billion, close to the record level achieved in 2004, the best year in the history of steelmaking. The international scenario contributed significantly to this performance, especially due to the strong demand from China. World production reached 1.1 billion metric tons, up 6.1% on the previous year, encouraging the Gerdau Group to invest in the expansion of its operations.
Margins and operating cash flow were affected this year by increased raw material costs, such as iron ore, coal and electricity. As a result, net margin – the relation between net profit and net sales revenue – was 15.4% and gross margin was 27%, compared to 17.1% and 31.9%, respectively, in the previous year. Operating cash flow (EBITDA) was R$ 4.9 billion, compared to R$ 5.5 billion in 2004. EBITDA margin – the relation between EBITDA and net revenue – was down from 28.1% to 23%.
Sales expenses and general and administrative expenses totaled R$ 1.7 billion and represented 7.9% of net revenue for the year, slightly higher than the 7.7% recorded in 2004. This increase resulted from greater port service costs due to export growth and increased costs with long-term incentives for North American employees.
In 2005, financial income (financial costs minus financial revenues) was positive, to the sum of R$ 42.2 million. This fiscal year, revenues resulting from the increased value of the Brazilian real against the US dollar in relation to foreign currency debts totaled R$ 166.5 million and monetary fluctuation costs totaled R$ 19.8 million. Excluding these monetary and exchange rate variations, net financial costs totaled R$ 104.5 million for the year, against R$ 253.1 million in 2004.
The effect of the exchange rate variation on Gerdau’s foreign investments resulted in negative equity pickup, to the sum of R$ 157.9 million for the year. This value also includes fiscal incentive reserves and goodwill amortized in the period.
Net debt (gross debt less cash and cash equivalents) was reduced by 51.9% to R$ 2.0 billion in 2005, due to the cash flow generated during the year and the increased value of the real, which reduced the dollar portion of the debt contracted by the companies in Brazil, when converted into reais.
Gross debt (loans and financing plus debentures) rose from R$ 6.1 billion to R$ 7.4 billion as a result of financial operations carried out during the year. Of the gross debt, 18.1% (R$ 1.4 billion) corresponds to short-term financing and 81.9% (R$ 6.0 billion) to long-term. The average debt maturity rose from four to nine years, thanks to the extension strategy adopted in 2005.
Of the total debt, 19.5% is in Brazilian currency, 48.8% in US dollars contracted by the companies in Brazil and 31.7% was contracted in various currencies by the Group’s companies outside Brazil.
At the end of the fiscal year, net debt was 0.4 times EBITDA, well below the limit of 2.5 times established as the Group’s indebtedness policy. At present, net debt corresponds to less than six months of the Company’s cash flow, showing that the acquisition of new assets in the period did not compromise the Group’s indebtedness.
Net debt/Total capitalization1
EBITDA/Net financial expenses
(except monetary and exchange variation)
1. Capitalização total = patrimônio líquido+dívida líquida.
In October, the company concluded the issue of Euro Commercial Paper, a short-term debt
instrument, to the value of US$ 200 million, maturing on October 11, 2006. This operation
continued a program begun in 2003 and renewed three times to date.
Since the first issue, the interest rates have shown a downward trend: 4.125% in 2003 (275 bps above one year LIBOR), 3.125% in 2004 (67 bps above one year LIBOR) and 5% in 2005 (45.5 bps above one year LIBOR).
On October 31, 2005, Gerdau Ameristeel increased its line of working capital to US$ 650 million from US$ 350 million. In addition to extending the maturity of the operation from 2008 to 2010, the company also reduced its fund raising cost by an average of 1.25%. This line is guaranteed by the company’s product stocks and accounts receivable.
Another important operation that took place in the beginning of 2006 was the US$ 236.5 million financing obtained by Gerdau Açominas to expand its production capacity.
In November 2005, the rating agency Standard & Poor’s published its reclassification of foreign currency risk for certain Latin American, Asian and Pacific region companies.
Gerdau S.A. moved up two levels on the classification scale, from BB- (stable) to BB+ (stable). More importantly, it is now just one level below investment grade, the rating for companies recommended for international investors.
CONSOLIDATED CASH FLOW
Metalúrgica Gerdau S.A.
(in thousand R$)
Net Income for Year
Provision for Credit Risk
Gain (Loss) in Fixed Asset Disposal
Gain (Loss) in Liquidation of Investments
Monetary and Exchange Variation*
Depreciation and Amortization
Income Tax and Social Security Contribution
Interest on Debt
Changes in Trade Accounts Receivable
Changes in Inventories
Changes in Contractors
Other Accounts in Operating Activities
Net Cash Provided by Operating Activities
Fixed Assets Acquisition/Disposal
Acquisition of Assets
Proceeds from Dividends/Interest on Capital Stock
Cash Applied to Investments
Fixed Assets Suppliers
Working Capital Financing
Proceeds from Fixed Assets Financing
Payments of Fixed Assets Financing
Payment of Interest on Financing
Capital Increase/Treasury Stock
Payment of Dividends/interest on Capital Stock and Statutory Participations
Net Cash Provided by Financial Activities
Change in Cash Balance
At the Beginning of the Period
Update of Initial Cash Balance
Initial Balance of Companies Consolidated in the Year