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.



INDEBTEDNESS

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.

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.

RATING

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