Integrated Report 2017
1 CONTENTS
Integrated capitaL 18 Human Capital 19 Report Intellectual Capital 27 About Social & Relational Capital 33 01 Natural Capital 37 03 05 2017 the Report Financial Capital 40
MESSAGES 05 Operating Chairman of the Board 06 & Financial 02 Chief Executive Officer 07 06 Performance 47
03 Gerdau 09 Corporate Business Model 12 07 Information 57
04 Corporate Governance 13 01 ABOUT THE REPORT
3 ABOUT THE REPORT RelatoIntegrated IntegradoReport 2017 Gerdau presents in its Integrated Report for 2017 its activities in the economic, social and ABOUT THE REPORT environmental areas, as well as the digital- MeSSAGES innovation initiatives that are revolutionizing Chairman of the Board its day-to-day operations and its management efforts to boost profitability and create value for Chief Executive Officer shareholders. Gerdau Business This document, which was prepared based on Model the framework suggested by the International Corporate Integrated Reporting Council (IIRC), compiles Governance information on Gerdau’s strategic management CapitaLS Human Capital to strengthen the relationship among its human, Intellectual social, natural, intellectual and financial capital. Capital
Social & Relational Capital Adopting the Integrated Reporting Natural Capital framework for the second year Financial Capital attests to Gerdau’s efforts to Operating & Financial continually improve its transparency Performance and strengthen its stakeholder Corporate Information relations.
4 02 meSsages
5 Claudio Johannpeter Gerdau’s Chairman of the Board Integrated Report 2017 ENHANCED GOVERNANCE SUPPORTS ABOUT THE GERDAU’S TRANSFORMATION REPORT
MeSsages For 117 years, Gerdau has surmounted looking already was on our team. We chose Chairman of challenges while rapidly adapting its business Gustavo Werneck, then Executive Officer of the the Board to market fluctuations. Given the complex Brazil Business Division, to lead the company
Chief Executive scenario the world steel industry has faced in this new cycle. We are confident in Gustavo’s Officer in recent years, with overcapacity, strong unique management capacity and in his ability import flows in its key markets and a recession to help shape Gerdau’s new corporate culture. Gerdau in Brazil, Gerdau has once again reinvented In all prior positions, he has been results- Business Model itself. The intensive management efforts in all oriented, overcame important challenges, operations, combined with the gains captured leveraged results and formed high-performance Corporate from optimizing assets, from the digital teams, supported by his innovative management Governance innovation implemented and from modernizing profile and contagious energy. CapitaLS the corporate culture, are all reflected in Therefore, as of 2018, we will draw on our In 2018, we will draw on our Gerdau’s performance and profitability. Human Capital executive experience to focus more on executive experience to Intellectual However, we must take yet another step: formulating Gerdau’s medium- and long-term Capital modernizing the company’s governance. strategy to create value for our stakeholders focus more on formulating Social & Relational “ This decision, like all other successions while supporting our executives in its Capital Gerdau’s medium- and long- over Gerdau’s centennial history, has been implementation. Lastly, I thank the other Natural Capital term strategy to create value carefully planned over two years. We decided members of the Board of Directors, Advisory Financial Capital that the members of the fifth generation of Board, Audit Board, Executive Committee for for our stakeholders while Operating & the Gerdau Johannpeter family would now their contributions and all employees for their supporting our executives Financial dedicate themselves exclusively to the Boards hard work and commitment to transforming Performance in its implementation. of Directors of Gerdau S.A. and Metalúrgica Gerdau into one of the world’s most innovative Corporate Gerdau S.A., on which they already serve. steel companies. Information After meticulously analyzing candidates to serve as our Chief Executive Officer, we ” concluded that the professional we were
6 Gerdau’s Chief Executive Officer André Gerdau Johannpeter in 2017 Integrated Report 2017 STRONGER STEEL DEMAND AND MANAGEMENT EFFORTS
ABOUT THE TRANSLATE INTO BETTER FINANCIAL PERFORMANCE REPORT
MeSsages The transformation Gerdau is undergoing, its most profitable assets in the steel industry, Chairman of combined with the improvement in industry while moving forward in its transformation. the Board fundamentals, leveraged its financial As I end my executive career at the company performance in the fiscal year. Net revenue Chief Executive and continue my activities on the Board of Officer reached R$ 37 billion, growing slightly on the Directors, I want to take this opportunity to prior year. Adjusted EBITDA advanced 7% to R$ Gerdau highlight the legacy of the Gerdau Johannpeter 4.3 billion, while adjusted net income grew from Business family on its direct management, which R$ 91 million in 2016 to R$ 522 million in 2017. Model have consolidated its position as the leading Corporate Another period highlight was the digital producer of long and special steels in the Governance innovation and associated gains, which already Americas and launched its entry into the flat are being reflected in our performance. One steel segment. Over the past few years, as CapitaLS Over the past few years, as we example is the reduction in selling, general we faced the industry’s global challenges, we faced the industry’s global Human Capital and administrative expenses of nearly R$ 600 have turned around Gerdau’s results, optimized Intellectual million in 2017. Another significant result of its assets, implemented a pioneering digital challenges, we have turned Capital “ our management efforts was the reduction innovation in the steel industry and modernized around Gerdau’s results, Social & Relational in financial leverage, with gross debt down by our corporate culture. Capital optimized its assets, implemented R$ 4.1 billion and net debt down by 10%. As a Natural Capital In this context, I want to thank our employees, result, the net debt / EBITDA ratio decreased a pioneering digital innovation in Financial Capital clients, communities, the media, financial to 2.98x, from 3.5x a year earlier. We also market analysts and shareholders, as well the steel industry and modernized Operating & generated R$ 1.5 billion in free cash flow in the as the Executive Committee and Board of our corporate culture. Efforts Financial year, in line with the capital discipline strategy Performance Directors of Gerdau S.A. and Metalúrgica implemented by the company. through which the Gerdau Gerdau S.A., for their support and confidence Corporate Johannpeter family leaves an Information Our divestment plan reached R$ 6.3 billion in over these years. economic value over the last four years, with important legacy of its direct these proceeds enabling Gerdau to focus on management of the business. ” 7 MESSAGE FROM THE NEW CEO Integrated Report 2017 Gustavo Werneck ABOUT THE Gustavo Werneck, Gerdau’s Chief REPORT Executive Officer since January 2018 MeSsages Chairman of It is a great honor to accept the challenge. the Board challenge of leading a company with Our next step in Gerdau’s Gerdau’s history, scale and high- Chief Executive transformation journey is to quality teams. Given my firm belief Officer accelerate the digital innovation to in our capacity to innovate, we will better serve our clients and support Gerdau continue to work expeditiously on our their growth, building on the major Business digital transformation and cultural Model innovations implemented at our modernization to position Gerdau as plants in recent years. Another one of the world’s most innovative Corporate fundamental work front is to Governance steel producers. ensure the safety of our people in CapitaLS Regarding of our financial all our business divisions, aspiring Human Capital performance, we will work intently to exemplary levels of safety Intellectual to leverage the profitability of performance. Capital our operations, to maximize free Finally, I want to thank our employees Social & Relational cash generation and to continue for their enthusiasm, dedication Capital deleveraging. I am certain that, and the drive to build a new Gerdau Natural Capital regardless of external factors, we that is more profitable and better Financial Capital have the capacity to do even better, prepared to generate returns for our especially because we have in Gerdau Operating & shareholders. Financial a team capable of overcoming any Performance
Corporate Information
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9 Gerdau Integrated Report 2017 Accelerated transformation, innovation and a digital ABOUT THE REPORT mindset to capture operating MeSsages efficiency gains and grow our Chairman of the Board clients’ businesses, fostering intrapreneurship, optimizing Chief Executive Officer assets, deleveraging and a strong Gerdau focus on profitability define this Business Model new moment at Gerdau.
Corporate Constantly reinventing Governance itself and rapidly CapitaLS adjusting to market Human Capital changes are strengths Intellectual Capital that have accompanied Social & Relational Capital the company over Natural Capital the last 117 years. Financial Capital
Operating & Financial Performance
Corporate Information
10 Gerdau Integrated Report One of the world’s 2017 Leading long largest Industrial producer of operations in special ABOUT THE steel in the REPORT steel 12 countries Americas suppliers MeSsages Chairman of the Board
Chief Executive Officer Produces Gerdau 40 flat 000 Business steel mills steel employees Model as well as commercial and iron ore 30, worldwide offices, transformation units in Brazil Corporate and scrap collection centers Governance
CapitaLS Human Capital ENVIRONMENT SOCIAL RESPONSIBILITY Intellectual R$ 19 million in socialinvestments Capital Latin America’s larger Social & Relational recycler, with 12 million Capital 400 projects worldwide Natural Capital tonnes of scrap recycled Financial Capital annually Operating & R$ 264 million invested Financial Listed on the Performance in protecting the São Paulo, Corporate environment R$ Information New York and Madrid stock 37 billion in net salesin exchanges 2017
11 BUSINESS MODEL Integrated Report
2017 Long Special long Flat steel Iron ore Intellectual Capital steel steel Development of pioneering ABOUT THE Intellectual Capital solutions in the industry REPORT Digital innovation Capture of productivity gains Supporting the growthof MeSsages clients’ businesses Fabricated Forged steel Chairman of rebar parts the Board Human Capital 30,000 Human Capital Chief Executive employees UCTS & SERVI ROD CES Officer worldwide P Engaged and satisfied people Gerdau High-performance U teams A Business D R Model social Capital E V G A
L 100,000 110,000 Y social Capital U B
Corporate clients shareholders E D Developing
G
E
Governance E
S communities near mills and
N U
social projects
400 E in the business chain
S
R
E
CapitaLS A
C Contributing T
R
Suppliers and business E
U to improving education
Human Capital D partners O
quality S
E
Intellectual R
N
Capital I financIAL Capital A
Social & Relational R$ 37 billion R$ 20 billion M Capital in net in market financIAL Capital sales capitalization Natural Capital IND ED Good returns for investors USTRIE S SERV and shareholders Financial Capital R$ 24 billion R$ 50 billion in total shareholders’ Sustainability assets equity of the business Operating & Financial Manufacturing Automotive Performance natural Capital natural Capital Water Corporate Preservation Energy of ecosystems near mills Information Iron ore Construction Agriculture Wind Coal and charcoal power Transformation Natural gas of scrap and waste into new products Oil & gas Sugar & Highway Shipbuilding ethanol 12 04 CORPORATE GOVERNANCE
13 CORPORATE GOVERNANCE Integrated Report 2017 Gerdau’s transformation also
ABOUT THE has involved enhancing its REPORT corporate governance. MeSsages Chairman of In 2017, Gerdau announced its new the Board CEO, Gustavo Werneck, previously Chief Executive Executive Officer of the Brazil Officer Business Division. Werneck took Gerdau Business office in January 2018. The members Model of the fifth generation of the Gerdau Corporate Governance Johannpeter family who were serving
CapitaLS in the company’s executive leadership Human Capital – André Gerdau Johannpeter, Chief Intellectual Capital Executive Officer (CEO), and the Social & Relational Executive Vice-Presidents Claudio Capital Johannpeter and Guilherme Gerdau Natural Capital Financial Capital Johannpeter – now serve exclusively
Operating & on the Boards of Directors of Financial Performance the companies Gerdau S.A. and
Corporate Metalúrgica Gerdau S.A., of which Information they already were members.
14 CORPORATE GOVERNANCE Integrated Report The Board of Directors is responsible for The Board of Auditors is responsible for 2017 CORPORATE formulating the Company’s long-term strategies supervising and monitoring the activities of GOVERNANCE and for supervising the guidelines established. the officers and directors and the financial ABOUT THE Meanwhile, the Gerdau Executive Committee statements. The Advisory Board, which is REPORT STRUCTURE (GEC) is responsible for working in accordance formed by members of the fourth generation of MeSsages with the policies established and for managing the the Gerdau Johannpeter family, is responsible for Chairman of business divisions and corporate departments. sharing their experience amassed over Gerdau’s the Board history and continuous evolution.
Chief Executive Officer
Gerdau BOARD OF DIRECTORS Business OF GERDAU S.A. AND OF Model METALÚRGICA GERDAU S.A. 5 Corporate 4 6 Governance 7 1 Claudio Johannpeter Chairman of the Board, Gerdau
S.A. and Metalúrgica Gerdau S.A. CapitaLS 1 2 Guilherme Gerdau Human Capital Johannpeter Director, Metalúrgica Gerdau S.A. Intellectual Capital 3 André Gerdau Johannpeter Social & Relational Director, Gerdau S.A. and Capital Metalúrgica Gerdau S.A. 2 3 4 Fernando Fontes Iunes Natural Capital Director, Gerdau S.A. and
Metalúrgica Gerdau S.A. Financial Capital 5 Richard Gerdau Operating & Johannpeter Financial Director, Gerdau S.A. Performance 6 Affonso Celso Pastore Director, Gerdau S.A. and Metalúrgica Gerdau S.A. Corporate Information 7 Aod Cunha de Moraes Júnior Director, Gerdau S.A. and Metalúrgica Gerdau S.A.
15 CORPORATE GOVERNANCE Integrated Report 2017
ABOUT THE REPORT
MeSsages Chairman of the Board
Chief Executive Officer
Gerdau Business Model
Corporate Governance
CapitaLS Human Capital Intellectual Capital
Social & Relational Capital Natural Capital ETHICS AND CLOSE STAKEHOLDERS RELATIONS Financial Capital
Operating & Gerdau’s relationships are guided by rigorous standards of ethics and follow Financial Performance international parameters of corporate governance. Gerdau is listed on the São Corporate Paulo, New York and Madrid stock exchanges. Information
16 CORPORATE GOVERNANCE Integrated Report To reinforce the importance of acting Because its securities are traded in the U.S. stock market, Gerdau complies with the 2017 ethically, in 2017, the Company administered Sarbanes-Oxley Act, which establishes good practices of corporate governance and training programs on combatting corruption ABOUT THE rigorous controls of internal processes. In the Brazilian market, Gerdau stock is traded to employees at all business divisions REPORT on the Level 1 Corporate Governance segment of the BM&FBovespa, which establishes and conducted campaigns on ethics and differentiated practices for transparency in information disclosures to the market and MeSsages compliance. minimum levels of shareholder dispersion. Gerdau also adopt standards beyond those Chairman of the Board required by Brazilian law, such as 100% tag-along rights for all shareholders and the Other advances in the year included payment of a minimum dividend of 30% of adjusted net income. disseminating the policy on relations Chief Executive with government officials, which Officer establishes clear rules for contact Gerdau between Gerdau employees and Business Together with its stakeholders any government agent. Gerdau also Model (employees, clients, suppliers has an anonymous and confidential Corporate Gerdau Code of Ethics and local communities), Gerdau communication channel for receiving Governance Guiding your decisions in strives to maintain transparent and questions and reporting suspected the right direction. CapitaLS close relations based on mutual violations of its Code of Ethics Human Capital gains. The principles that guide the or the law. In 2017, the channel Intellectual Company’s relations with each of investigated 361 reports, 175 of which Capital these stakeholders are based on its were considered valid and led to the Social & Relational values and are described in the Code Capital application of the consequences of Ethics, which can be found on the Natural Capital policy. Gerdau website. Financial Capital
Operating & Financial Performance
Corporate Click here to read the Code of Ethics Information
17 05 capitaL
18 human capital Integrated Report 2017 Gerdau’s entire transformation has been driven by the thousands ABOUT THE REPORT of employees who every day MeSsages put the new corporate culture Chairman of the Board into practice. This means more simplicity for Chief Executive Officer executing projects, more Gerdau autonomy for proposing Business innovative solutions, more Model 30,000 Corporate entrepreneurship for Governance identifying new business Employees CapitaLS opportunities, just to worldwide Human Capital mention some of the advances. Intellectual Capital The new culture also has Social & Relational Capital enabled employees to align their Natural Capital challenges with the group’s goals, Financial Capital generating greater engagement % % Operating & and mutual gains. 11 89 Financial WOMEN MEN Performance
Corporate Information
19 human capital Integrated Report 2017 CULTURAL TRANSFORMATION
ABOUT THE REPORT Anticipating transformations in the industry With regard to leadership development, all Gerdau has been a constant feature of Gerdau’s leaders have a target of dedicating at least 30% of MeSsages management over its long history. The cultural their time to developing new leaders. In 2017, more Chairman of transformation journey began in 2014, sparked than 1,500 leaders were trained by other leaders the Board by the perception that the company had to on the new culture’s attributes and, in 2018, the change the way it operated in order to set itself Chief Executive program will continue until reaching all leadership Officer apart in the steel industry and consequently levels of the organization. boost the profitability of its operations, despite Gerdau the industry’s challenging scenario. To support Business this change, the company defined Model four cultural attributes to be implemented over Corporate the coming years: Openness, Simplicity, Governance Autonomy with Responsibility and CapitaLS Leaders Developing Leaders. Human Capital This cultural modernization reduced Intellectual Capital hierarchies, decentralized the decision-making process and empowered operations and Social & Relational Capital teams. The new dynamics incorporated greater Natural Capital agility and simplicity into the company’s day- Financial Capital to-day routines and encouraged employees to propose innovations in all fields and Operating & areas of the company, many of which are Financial Performance unprecedented in the steel industry.
Corporate Information
20 human capital Integrated Report 2017 cultural TRANSFORMATION
ABOUT THE REPORT In addition, countless actions symbolizing this new culture were implemented, such MeSsages as streamlining structures and processes, Chairman of modernizing the layouts of offices and the Board industrial plants and making workplaces Chief Executive lighter, friendlier and better suited for Officer collaboration between professionals Gerdau and teams. Business To stimulate the development of its employees, Model the company has been increasingly recruiting Corporate internally and, over the past four years, hundreds Governance of positions were filled in this way. This helps to CapitaLS promote employee mobility within the company Human Capital and gives them an opportunity to gain new professional experiences. Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
21 human capital Integrated Report 2017 Spaces for sharing
ABOUT THE experiences REPORT
MeSsages Innovation rooms Chairman of the Board Innovation rooms designed to stimulate integration among employees were built at several Chief Executive industrial and administrative units. The rooms Officer also are used to conduct training sessions and workshops. Gerdau Business Model Yammer
Corporate Internal social network Governance that promotes the CapitaLS exchange of ideas, 12,000 employees Human Capital greater integration connected in Brazil Intellectual among employees, Capital innovation and the 80% Social & Relational replication of good of the workforce Capital practices in various areas. Natural Capital Financial Capital Workshops and learning sessions Operating & Financial Encounters for exchanging knowledge on a Performance variety of topics in which employees and external Corporate professionals, such as clients, suppliers and Information partners, participate.
22 human capital Integrated Report 2017 INNOVATION &
ABOUT THE INTRAPRENEURSHIP REPORT Digital innovation in a wide array of areas at MeSsages Chairman of Gerdau, combined with agile methodology the Board for accelerating projects and results for the Chief Executive business, gained a strong ally: incentives Officer for intrapreneurship. Gerdau believes that Gerdau Business employees playing lead roles in their own Model careers increase satisfaction and engagement, Corporate which in turn supports the development of new Governance technologies, products and services. CapitaLS Human Capital Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
23 human capital Integrated Report 2017 Learn about some initiatives:
ABOUT THE Gmakers G.Rocket Silicon Valley REPORT In 2017, Gerdau launched the Launched in early 2018, G.Rocket In 2018, Gerdau will forge even MeSsages Gmakers program, which trains and is a program to further stimulate closer ties with California’s Chairman of develops professionals with a digital intrapreneurship. Open to all Silicon Valley, which is home to the Board vision to create disruptive solutions employees, the initiative invites the world’s leading technology for the company. The selection them to transform their ideas and innovation companies and Chief Executive process was open to employees and Officer into new businesses. Program is considered the cradle of market professionals. From among participants receive technical innovation. Gerdau will select Gerdau the 12,000 applications submitted, training in developing projects professionals to accompany Business 42 professionals were selected. in a startup format and the best permanently the latest trends and Model This created a diverse group formed initiatives receive Gerdau’s the ecosystem of Silicon Valley. Corporate by professionals from different support and investment for their The goal of these employees is Governance backgrounds, but with a shared testing. to identify disruptive solutions passion for challenges. CapitaLS for accelerating the Company’s digital innovation. Human Capital Intellectual Capital
Social & Relational Capital Natural Capital To learn more about the entire Financial Capital Gmakers process, click here to watch the video. Operating & Financial Performance
Corporate Information
24 human capital Integrated Report 2017 PURPOSE
ABOUT THE One of Gerdau’s targets for 2018 its stakeholders, to adopt a vision REPORT is to launch its new purpose, of the future capable of impacting MeSsages which it understands as the its medium- and long-term results Chairman of the Board connection between its and to identify new business
Chief Executive talent and the needs of routes. The effort has been the Officer today’s world. Through this focus of multidisciplinary teams Gerdau connection, Gerdau strives to and represents an important step Business Model generate results with economic, for defining Gerdau’s future.
Corporate social and environmental value for Governance
CapitaLS Human Capital Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
25 human capital Integrated Report 2017 DIVERSITY
ABOUT THE In 2017, Gerdau launched a structured REPORT project to foster diversity throughout the UN Women’s Empowerment MeSsages company. Given the breadth of the topic, Chairman of Principles, reinforcing its the Board Gerdau opted to start by analyzing gender commitment to promote gender equality. Chief Executive equality, which led it to conduct a survey Afterwards, more than 100 professionals Officer with its employees in Brazil and Latin who have a close affinity with the topic Gerdau America. In total, 6,500 people responded Business volunteered to participate in these work Model to the survey. Gerdau also became a fronts in 2018. Corporate signatory to the Governance
CapitaLS Human Capital Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
26 INTELLECTUAL CAPITAL #digitalsteel Integrated Report 2017 DIGITAL INNOVATION TO SUPPORT ADVANCES IN CLIENTS’ BUSINESSES
ABOUT THE Gerdau launched its digital During the year, Gerdau took yet Gerdau also is developing work REPORT innovation journey by another step in its digital innovation fronts in the internet of things, MeSsages process, with innovations now which, in the future, will connect transforming its mills in a its entire value chain, from the Chairman of focused on its clients in order to the Board pioneering move in the effectively contribute to the growth sourcing of raw materials for making of their businesses. steel to end customers. Special Chief Executive global steel industry. The Company is currently customer relations policies also Officer The company incorporated working on, for instance, artificial are being developed, which include, for example, more user-friendly Gerdau into its industrial operations a intelligence initiatives to improve Business customer service and anticipate platforms for clients that make doing Model series of new technologies to market trends. business with Gerdau even easier.
Corporate increase efficiency and reduce Governance costs, effectively boosting its CapitaLS profitability. Human Capital Intellectual And the results of this effort Capital To learn more about Gerdau’s Social & Relational already have begun to be digital innovation initiatives, Capital perceived in Gerdau’s results. watch the vídeo. Natural Capital Financial Capital Innovations, for example, have
Operating & played a key role in cutting selling, Financial Performance general and administrative
Corporate expenses by nearly R$ 600 million Information in 2017.
27 INTELLECTUAL CAPITAL #digitalsteel Integrated Report 2017 DIGITAL CUSTOMER SERVICE
ABOUT THE PLATFORMS REPORT
MeSsages Chairman of the Board eGerdau Portal The portal allows customers to place orders, Chatbot João Chief Executive Officer manage their portfolio and obtain financial Baptized with the name of Gerdau’s information. Today, half of Gerdau’s direct sales founder from over one hundred years Gerdau customers in Brazil use the platform. ago, Chatbot João uses deep-learning Business Model tools to provide information on the Cut and Bend Portal corporation and its products and Corporate enables clients to receive quotes and Governance This portal serves clients in the construction industry, which is one of Gerdau’s key markets. carry out other tasks. CapitaLS Around 70% of orders for fabricated rebar Human Capital placed in Brazil are made through the portal. Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
28 INTELLECTUAL CAPITAL #digitalsteel Integrated Report 2017
ABOUT THE REPORT
MeSsages Chairman of ONLINE MONITORING AND the Board DIAGNOSTIC SYSTEM
Chief Executive Gerdau launched a pioneering initiative in the global Officer steel industry: real-time control of the performance Gerdau of one thousand pieces of equipment at eleven mills Business in Brazil through more than 40,000 sensors installed Model on the machines. Corporate Using algorithms and artificial intelligence, the Governance technology is helping the company to anticipate CapitaLS potential equipment failures, which reduces Human Capital maintenance costs and increases gains. Estimates Intellectual indicate that the new technology could increase by up Capital to 20% the useful life of equipment. Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
29 INTELLECTUAL CAPITAL #digitalsteel Integrated Report 2017 LOGISTICS SOLUTIONS
ABOUT THE SmartLog Management of truck lines REPORT To optimize its network and reduce logistics costs, Another initiative that generated significant gains for Gerdau’s MeSsages Gerdau is investing in a platform that connects logistics management was the management of its truck Chairman of various management systems and standardizes lines. Using a dedicated app, drivers can schedule loading the Board processes involving the contracting, negotiation and unloading operations at mills and manage the various and management of freight services. SmartLog vehicles stages inside the mill, which expedites the process Chief Executive and ensures productivity gains. Officer allows users to monitor costs, loading productivity and customer service quality. This is achieved by Gerdau using market projections and trends combined with Business technologies such as machine learning, internet of Model things and big data. Corporate Infographic Governance CapitaLS Before After Human Capital Intellectual trip per day trips per day Capital 1 3
Social & Relational Capital Natural Capital Financial Capital In 2017, the system already was Operating & operational at 11 units in Brazil Financial Performance
Corporate 68,000 14,000 4,67 out of 5 Information operations Vehicles Driver scheduled registered satisfaction
30 INTELLECTUAL CAPITAL #digitalsteel Integrated Report Mining logistics 2017 control center
ABOUT THE REPORT The use of the internet of things has process. Route management also is revolutionized the management of automated with RFID technology making MeSsages logistics for iron ore production. A it possible to monitor truck routes and Chairman of digital system connects an operator in know precise delivery times. the Board the control room with 900 drivers, 600 trucks and ten loaders that, supported Chief Executive Officer by antennas and RFID tags, effectively automate the ore transportation Watch the vídeo to see how the Gerdau system works. Business Model
Corporate Governance CapitaLS Robotics center Human Capital Gains In 2017, Gerdau inaugurated its first robotics Intellectual 900 Capital Drivers center in São José dos Campos, São Paulo. 1 Reduction in costs of over Social & Relational Controller The new center will help to automate Capital R$ 30 million industrial processes at the Company, Natural Capital 600 helping to capture productivity gains and Trucks Financial Capital Reduction in time spent in improve worker safety in routine operations. truck lines at mines of Furthermore, the space is designed for Operating & training employees and local residents Financial 30% Performance 10 (college students and others interested in Loaders Satisfaction of drivers, the topic), with capacity to reunite up to Corporate Antennas the main users 600 students per week. Information and RFID tags
31 INTELLECTUAL CAPITAL #digitalsteel Integrated Report 2017 Scrap More agile classification ABOUT THE REPORT Using smartphones to classify scrap has reduced the time spent on the process by 93 hours per MeSsages month and enabled operators to classify the Chairman of scrap directly in the yard instead of going to a the Board control room. This saves four hours of work Chief Executive per day, which generates important productivity Officer gains in the operation. Gerdau Automated inventory Business Model Conducting scrap inventories using drones has shortened the classification process from Corporate Governance 3 days to 7 minutes while cutting costs
CapitaLS by 80%. Human Capital Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
32 SOCIAL & RELATIONAL CAPITAL Integrated Report 2017 R$ 19 Around ABOUT THE REPORT million 400 MeSsages projects Chairman of in social the Board investments in worldwide Chief Executive Officer 2017
Gerdau Business Model INNOVATION FOR SOCIAL IMPACT Corporate Governance In 2017, Gerdau launched a To enhance its social impact, it sought to forge The partnership of Gerdau, Junior Achievement partnerships with accelerators and startups and StartSe resulted in a pilot project to CapitaLS transformation in its social Human Capital with a view to developing innovative initiatives. transform classrooms into a startup incubator One example is the new project by Junior for developing an entrepreneurial mindset Intellectual action. It reviewed the projects Achievement in Brazil, the JA Startup. Junior of the new economy. The project engaged Capital it supports focusing on three Social & Relational Achievement, which partners with Gerdau 31 students from a school in the state of Rio Capital major fronts: business chain, on initiatives around the world, has fostered Grande do Sul for eight weeks. After completing Natural Capital local communities (where its mills education and entrepreneurship in Brazil for over the project, the young students developed their Financial Capital 20 years. In 2017, the organization gained a new projects and presented them to a panel formed are located) and higher-quality ally for improving young professional’s readiness by the local agents of the startup ecosystem. Operating & Financial education and management. for the job market: StartSe, Brazil’s largest Due to its success, the program will be Performance startup ecosystem. replicated in São Paulo, Rio de Janeiro, Minas Gerais and Pernambuco in 2018. Corporate Information
Want to read more about the entire process? Click here to watch the video.
33 SOCIAL & RELATIONAL CAPITAL Integrated Report 2017 In the area of management, Gerdau BUSINESS CHAIN forged a partnership with the Public ABOUT THE REPORT Leadership Center, which develops Gerdau has vast experience in serving the Over the five years of this partnership, Gerdau construction industry, one of its key clients. To already has donated more than 15 tons of nails MeSsages public leaders driven to foster draw on its knowledge amassed in the industry to build 2,000 houses, which benefitted families Chairman of the Board transformational changes through and generate social impact, Gerdau joined forces in 87 communities nationwide. In addition with TETO, an international organization that to donating materials, Gerdau employees management efficiency and higher- Chief Executive works to protect people in situations of social volunteer on certain projects to help build the Officer quality public policy. In the class vulnerability by supporting the construction homes. In 2018, Gerdau plans to expand its of emergency housing in impoverished partnership with TETO and currently is studying Gerdau of the 2017-18 cycle, 33 leaders will communities. new forms of alliances. Business Model graduate from the master’s program in Public Leadership & Management. Corporate Governance
CapitaLS Human Capital Intellectual Capital
Social & Relational Capital Natural Capital To read stories about the communities and Financial Capital the volunteers involved, watch the video. Operating & Financial Performance
Corporate Information
34 SOCIAL & RELATIONAL CAPITAL Integrated Report 2017 Since 2007, Gerdau has been a signatory services to the Company, it regularly to the Corporate Pact against Sexual organizes actions to train drivers on how to ABOUT THE Exploitation of Minors on Brazilian act as agents protecting the rights of children REPORT TEN YEARS COMBATTING Highways, which was proposed by and teens. The drivers have, for example, MeSsages THE SEXUAL Childhood Brasil and by Instituto Ethos. reported suspicious or confirmed events of Gerdau supports the Mão Certa Program, sexual exploitation, which helps to eradicate Chairman of the Board EXPLOITATION OF which works to combat the sexual the problem. MINORS ON BRAZILIAN exploitation of children and teens on the Chief Executive country’s highways. Officer HIGHWAYS Given Gerdau’s broad geographic Gerdau diversification nationwide and extensive Business network of truck drivers who render Model
Corporate Governance To learn more about the activities of the CapitaLS Mão Certa Program over its ten years, Human Capital click here Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
35 SOCIAL & RELATIONAL CAPITAL Integrated Report 2017 COMMUNITY DEVELOPMENT
ABOUT THE REPORT In the communities where it operates, supporting construction of the expansion Santa Fé, with the support of employees Gerdau works with charitable organizations, of the Modesto J. Cerrato Technical volunteer. MeSsages local organizations and local governments School. The new facilities will make Chairman of In Peru, Gerdau also helps to prepare young to promote the region’s development by it possible to train more students in the Board professionals for the job market by supporting initiatives related to education. In automation and electromechanics to fill managing a technical school at its Chief Executive 2017, when the new melt shop was inaugurated jobs in the region. Some of the technical Chimbote unit. Over 1,000 students have Officer in the province of Santa Fé, Argentina, Gerdau program’s practical modules were developed already graduated since its creation in 1988. also contributed to the local community by Gerdau over ten years at Gerdau’s rolling mill in Business Model
Corporate Governance
CapitaLS Human Capital Intellectual Capital
Social & Relational EDUCATION IN ENVIRONMENTAL PRESERVATION Capital Natural Capital In the Brazilian state of Minas Gerais, Gerdau extensive collection and cultural activities, in the district of Ouro Preto. The biocenter Financial Capital has several industrial units, which include the the museum offers an educational calendar created by Gerdau has 48 hectares of Operating & Ouro Branco Mill, its largest unit worldwide, designed especially for children. preserved areas and sponsors educational Financial and the iron ore mining operation. Given programs and awards to encourage Performance In Minas Gerais, Gerdau also maintains, the state’s historical vocation in mining residents to act responsibly and to become since 1990, the Gerdau Germinar Program, Corporate and metallurgy, the company has helped to actively engaged in the preservation of which focuses on environmental education Information preserve the local history and culture as the natural resources. for students and teachers at public schools operator of MMGerdau, Mines and Metal in the cities of Ouro Branco, Congonhas, Museum, since 2013. In addition to an Conselheiro Lafaiete, Moeda, Itabirito and
36 natural Capital Integrated Report 2017 PRINCIPLES OF THE CIRCULAR ECONOMY GUIDE GERDAU’S ENVIRONMENTAL
ABOUT THE MANAGEMENT PRACTICES REPORT
MeSsages Gerdau’s management system balances the Chairman of economic, social and environmental pillars and the Board features practices aligned with the concept of a circular economy. This model replaces the linear Chief Executive economy, in which products are manufactured Officer R using raw materials and then discarded upon the S 12 million tonnes E T C Gerdau end of their useful lives. In the circular economy C of scrap recycled Y U 73% annually by Gerdau C Business model, products, or part of them, are reused, D L Model O of co-products worldwide I repaired and recycled. This type of economy aims N R reused P G to rebuild capital, whether financial, industrial, - Corporate 72% of steel O
Governance human, social or natural. As such, it enables the C produced most efficient management of natural R$ 338 from scrap at CapitaLS million in revenue Gerdau mills Human Capital resources and maximizes the well-being from sales of co-products of Intellectual of society as a whole. 97,7% water reused at Capital Steel is one of the industries that contributes to Gerdau mills Social & Relational the transition from a linear to a circular economy Capital because of the material’s infinite recyclability and Natural Capital durability, which enables it to be recycled, reused Use of renewable resources to produce Financial Capital steel through the use of a bioreducer at and remanufactured. certain mills and of power generation Operating & at hydropower plants. Financial Performance
Corporate Information RENEWABLES
37 natural Capital Integrated Report 2017 GERDAU INITIATIVES
ABOUT THE REPORT Co-products Recycling MeSsages Co-products, which are materials Gerdau is the largest recycler of ferrous scrap in Water recycling is also a top priority at Gerdau, Chairman of generated as secondary products during Latin America and transforms 12 million tonnes with 97.7% of its water reused through internal the Board the steel production process, have of scrap into new steel goods every year. In treatment and recirculation systems. Protecting innumerous application and are used 2017, 72% of the steel produced by the Company the air is another key element of the Company’s Chief Executive Officer by various industries, including for road was manufactured using scrap as the main raw environmental management. On this front, paving, railroad ballast, casting, cement material. Therefore, scrap recycling is one of all Gerdau mills feature modern dust removal Gerdau and ceramics. In 2017, Gerdau reused Gerdau’s main contributions to the environment, systems that capture the solid particles Business 73% of its co-products, which generated since it removes obsolete materials from cities generated during the steel production process, Model revenue of R$338 million in the year. while reducing energy consumption and CO2 as well as system for reusing blast furnace gases. Corporate emissions in steel production, creating new jobs Governance and generating income for a broad network of CapitaLS suppliers. Human Capital Intellectual Capital Social & Relational Renewables Capital Natural Capital A bioreducer (charcoal obtained from planted forests) Financial Capital is used to substitute carbon in some of the Company’s units that use blast furnaces in their production Operating & process. Because it is a renewable biomass, charcoal Financial Performance helps to mitigate environmental impacts by reducing greenhouse gases. Gerdau also produces part of the Corporate energy it uses in Brazil at its hydropower plant located Information in the state of Rio Grande do Sul.
38 natural Capital Integrated Report 2017 Environmental preservation
ABOUT THE REPORT 4,000 MeSsages hectares of legal reserves or Chairman of permanent preservation areas the Board
Chief Executive 5,000 Officer Investments hectares of conserved forests Gerdau to protect the Business 10,000 Model environment trees planted in 2017 Corporate R$ Governance 264 5,000 people trained in environmental CapitaLS million education Human Capital Intellectual 9,000 Capital hours of training administered
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
39 FINANCIAL CAPITAL & OPERATING PERFORMANCE Integrated Report 2017 Financial Results of the Company’s Performance 2017: management efforts: ABOUT THE REPORT
MeSsages Chairman of the Board R$584 R$ 4,1 million billion Reduction in Reduction in Chief Executive R$ R$4,3 37 selling, general and gross debt Officer billion billion administrative expenses net sales Consolidated Gerdau adjusted Business EBITDA Model R$1,5 2,98 x billion Corporate Improvement in Free cash Governance leverage ratios generation R$ 522 (gross debt / EBITDA) CapitaLS 11,7% million Human Capital Adjusted Consolidated EBITDA adjusted net Divestments in Intellectual margin income the last four years Capital R$6,3 came to Social & Relational billion Capital Natural Capital Financial Capital
Operating & Financial Performance Improving the Financial Generating profitability of Corporate free cash Deleveraging Information priorities the business flow for 2018: divisions
40 FINANCIAL CAPITAL & OPERATING PERFORMANCE Integrated Report 2017 NET SALES Consolidated Net Revenue
ABOUT THE Gerdau closed 2017 with R$ 37 billion REPORT consolidated net sales of R$ MeSsages 37 billion, down 2% compared Includes the special Chairman of steel operations in the Board to the prior year, which was Brazil, United States influenced by the 4% reduction and India. Chief Executive 16% Includes the Officer in consolidated net shipments. Special operations in Includes all operations Gerdau Steel 33% Brazil (except In 2017, consolidated shipments in South America special steel) Brazil Business (except the operations and the iron ore Model amounted to 14.9 million tonnes. 11% in Brazil), as well as South America operation in the joint ventures in Corporate Steel production, however, Brazil. Governance the Dominican advanced 3% to 16.1 million tonnes Republic and CapitaLS Colombia. 40% in the same period. Human Capital North America Intellectual Capital
Social & Relational Capital Natural Capital Includes the long-steel operations in Canada, United States and Mexico, as Financial Capital well the joint venture and associate company in Mexico. Operating & Financial Performance
Corporate Information
41 FINANCIAL CAPITAL & OPERATING PERFORMANCE Integrated Report 2017 NONRECURRING ITEMS EBITDA
ABOUT THE In 2017, Gerdau’s results Adjusted EBITDA, which excludes non-recurring items, REPORT were adversely affected came to R$ 4.3 billion in 2017, 7% higher than in the same MeSsages period last year. Chairman of by non-recurring non-cash the Board items of R$ 861 million.
Chief Executive These items refer to the reversal Officer R$4,3 of the provision for contingencies billion em 2017 Gerdau due to the exclusion of ICMS from Business Model the PIS and COFINS tax calculation Corporate base and to accounting write-offs Governance (fixed assets and goodwill) net of ADJUSTED NET INCOME CapitaLS taxes. Due to these non-recurring Human Capital Adjusted consolidated net income posted significant growth, Intellectual items, Gerdau is reporting Capital from R$ 91 million in 2016 to R$ 522 million in 2017. Social & Relational adjusted net income and adjusted Capital cash generation (EBITDA) to better Natural Capital demonstrate its performance Financial Capital and management efforts during Operating & Financial the year. R$ 91 R$522 Performance million million Corporate in 2016 in 2017 Information
42 FINANCIAL CAPITAL & OPERATING PERFORMANCE Integrated Report 2017 DIVIDENDS INVESTMENTS
ABOUT THE In fiscal year 2017, Gerdau S.A. In 2017, investments in fixed assets (CAPEX) amounted to R$ REPORT allocated R$ 136.5 million (R$ 873 million. For 2018, CAPEX is projected at R$ 1.2 billion, which MeSsages 0.08 per share) to the payment will focus on maintenance and optimizing performance. The Chairman of the Board of dividends, which was growth in CAPEX is due to the shift to 2018 of a portion of the
Chief Executive distributed from the profits investments projected for 2017. Officer earned. Metalúrgica Gerdau S.A., Gerdau meanwhile, allocated R$ 19.5 Business CAPEX of R$ 873 million in 2017 Model million (R$ 0.02 per share), which
Corporate was debited from the existing By Business Division Governance profit reserves. Includes all operations in CapitaLS South America (except the operations in Brazil), as well Human Capital as the joint ventures in the 14% Intellectual Dominican Republic and Includes the Colombia. South operations in Capital America Brazil (except Social & Relational Includes the special special steel) steel operations in Capital and the iron ore Brazil, United States 13% 40% operation in Natural Capital and India. Special Steel Brazil Brazil. Financial Capital
Operating & 33% Financial North America Performance
Corporate Information Includes the long-steel operations in Canada, United States and Mexico, as well the joint venture and associate company in Mexico.
43 FINANCIAL CAPITAL & OPERATING PERFORMANCE Integrated Report 2017 DIVESTMENTS YEAR ASSETS SOLD ECONOMIC VALUE
ABOUT THE Gerdau continues to execute its United States: interest in the flat REPORT steel mill Gallatin Steel and two R$ 1,1 billion strategy of focusing on its more 2014/2015 manufacturing units MeSsages profitable assets and, since 2014, Spain: one manufacturing unit Chairman of the Board has conducted divestments Spain: special steel operation that combined have Chief Executive Colombia: long steel mill and coke Officer production units and coking coal generated R$ 6.3 billion in reserves Gerdau R$ 1,3 billion proceeds. The transactions 2016 Guatemala: 30% interest in JV Business Corporación Centroamericana del Model are aligned with the process Acero
Corporate to optimize the Company’s United States: manufacturing units Governance and land asset portfolio with a focus on CapitaLS deleveraging. Colombia: 50% interest in Gerdau Human Capital Diaco, becoming a JV
Intellectual United States: special steel R$ 800 million Capital 2017 manufacturing units and plants making products for the construction industry Social & Relational Capital Chile*: Chile operation Natural Capital Financial Capital United States*: rebar and wire-rod mills and units producing steel goods. Operating & 2018 R$ 3,1 billion Financial Brazil*: hydropower plants in Goiás Performance
Corporate Information
*The transaction is subject to authorization from regulatory agencies and typical settlement conditions.
44 FINANCIAL CAPITAL & OPERATING PERFORMANCE Integrated Report 2017 FINANCIAL LIABILITIES
ABOUT THE During the year, the efforts made With regard to the former amortization, in As a result, on December 31, 2017, the nominal REPORT October 2017, Gerdau repurchased US$ 552 weighted average cost of gross debt was 6.4%, by the Company’s management million in securities due in 2021 and US$ 35 or 7.5% for the portion denominated in Brazilian MeSsages resulted in significant million in securities due in 2020 (amount of real, 5.5% plus exchange variation for the Chairman of principal in each issue). To support the repurchase, portion denominated in U.S. dollar contracted the Board deleveraging. The R$ 4.1 it issued US$ 650 million in new securities due in by companies in Brazil and 7.2% for the portion
Chief Executive billion reduction in gross 2027 with a coupon of 4.875% p.a. The purpose of contracted by subsidiaries abroad. On December 31, Officer debt between December these transactions is to lengthen the average debt 2017, the average gross debt term was 6.7 years. term and to better balance the maturity schedule Gerdau 31, 2016 and December 31, for the coming years. Business Model 2017 was due to the amortization
Corporate of debt securities in the U.S. Governance market and of other liabilities to Debt (R$ billion) & Leverage Ratio CapitaLS finance working capital and capital Human Capital 20,6 19,7 20,0 Intellectual expenditures, which also contributed 18,7 Capital 16,5 to a reduction in net debt. 3,6x Social & Relational 3,5x 3,5x 3,4x Capital 3,0x Natural Capital 6,1 Financial Capital 5,5 5,4 5,1 3,4 Operating & Financial Performance Dec/16 Mar/17 Jun/17 Set/17 Dez/17 Corporate Information Gross Debt Cash Net Debt/EBITDA
45 FINANCIAL CAPITAL & OPERATING PERFORMANCE Integrated Report 2017 FREE CASH FLOW
ABOUT THE Free cash flow, one of the Free Cash Flow 2017 REPORT priorities of Gerdau’s financial MeSsages management, came to R$ 1.5 Chairman of the Board billion in 2017. The result was (873) (126) Chief Executive supported by EBITDA generation (1.255) Officer 4.321 in the period, which was more (524) Gerdau than sufficient to honor all capital 1.543 Business Model expenditure, income tax and Income Debt Cost, net Working Free Cash Adjusted CAPEX Tax Capital Flow 2017 Corporate interest commitments as well as EBITDA 2017 Governance the working capital consumption CapitaLS of R$ 524 million. This positive Human Capital Intellectual free cash flow reflected Capital the Company’s strategy Social & Relational Capital grounded in capital Natural Capital discipline, as was the case Financial Capital in previous years, despite the Operating & Financial challenging scenario in the steel Performance industry. Corporate Information
46 06 OPERATING AND FINANCIAL PERFORMANCE
47 OPERATING AND FINANCIAL Integrated Report PERFORMANCE 2017
ABOUT THE Gerdau reports its financial REPORT results by Business Division, MeSsages as established in its corporate Chairman of the Board governance.
Chief Executive Officer EBITDA and EBITDA Margin by Business Division Gerdau Business Model Brazil BD North America BD South America BD Special Steel BD Corporate Governance 43,5% 18,0% 12,8% 25,7%
CapitaLS Human Capital Intellectual Capital
Social & Relational 18,3% 7,1% Capital 15,3% 13,1% 12,9% 5,2% 15,1% 14,1% Natural Capital 1.139 1.925 1.102 905 Financial Capital 1.499 797 722 567
Operating & Financial 2016 2017 2016 2017 2016 2017 2016 2017 Performance
Corporate Information EBITDA (R$ million) EBITDA Margin BD’s contribution to adjusted EBITDA (LTM)
48 BRAZIL DIVISION Integrated Report 2017 Includes the operations in Brazil (except BRASIL BD FY 2017 FY 2016 Change 2017/16 ABOUT THE special steel) and the iron ore operation REPORT Volume (1.000 tonnes) in Brazil. MeSsages Crude steel production 6.131 6.134 0,0% Chairman of Long steel sales 4.261 4.555 -6,5% the Board In 2017, steel shipments to Brazil’s domestic market came to 3.6 million Domestic Market 2.584 2.703 -4,4% Chief Executive Exports 1.677 1.852 -9,4% Officer tonnes, decreasing 2% in relation to 2016, Flat steel sales 1.347 1.513 -11,0% Gerdau due to the slowdown in the construction Domestic Market 1.033 1.005 2,8% Business industry. Exports from Brazil amounted Model Exports 314 508 -38,2% to 2 million tonnes, down 16% over the Corporate Total sales 5.608 6.068 -7,6% Governance prior year. Despite the lower exports, the Domestic Market 3.617 3.708 -2,5% CapitaLS operation’s net sales amounted to R$ 12.6 Exports 1.991 2.360 -15,6% Human Capital billion, an increase of 8% compared to Results (R$ million) Intellectual Capital 2016. The division accounted for 33% of Net sales¹ 12.563 11.635 8,0% Social & Relational Domestic Market 9.507 8.569 10,9% Capital Gerdau’s consolidated net sales. EBITDA Natural Capital in the year amounted to R$ 1.9 billion, Exports 3.056 3.066 -0,3% Financial Capital 28% higher than in 2016. Cost of sales (10.996) (10.405) 5,7% Operating & Gross profit 1.567 1.230 27,4% Financial Performance Gross margin (%) 12,5% 10,6%
Corporate EBITDA 1.925 1.499 28,4% Information EBITDA margin (%) 15,3% 12,9%
1 - Includes revenue from iron ore sales.
49 BRAZIL DIVISION Integrated Report In the fiscal year, the highlights were the arranged in a showroom with QR codes to Expectations for Brazil’s steel industry in 2018 2017 digital innovation initiatives designed to provide detailed viewing of the technical point to growth of 4% in domestic demand, improve customer service and to capture specifications on a smartphone. The store according to the Brazilian Steel Institute. The ABOUT THE REPORT efficiency gains at industrial units. These also has interactive displays for accessing outlook is for the Brazilian economy to continue initiatives are detailed in the section the product catalog using 360° glasses, developing, led by the manufacturing sector MeSsages Intellectual Capital, which begins on page 27. which allows customers to immerse and, at a more gradual pace, the construction Chairman of themselves in the production process by sector. Gerdau is ready to meet the potential the Board Moreover, Comercial Gerdau, the watching a video on steel production. For expansion in Brazilian demand, but, until it Company’s commercial units arm in 2018, five more concept stores are scheduled materializes, will continue to export part of its Chief Executive Officer Brazil, inaugurated its first concept to be inaugurated in Brazil. production to ensure the division’s profitability. store in Recife, called Loja do Aço, Gerdau In the flat steel segment, Gerdau worked which offers a buying and interactive Business during the year to consolidate its entry into Model experience that is unprecedented in the heavy plates market and to expand sales the country’s steel industry. to different regions, such as Latin America, Corporate Governance Europe and the Middle East. The store sets itself apart with its CapitaLS presentation of products, which are Human Capital Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
50 NORTH AMERICA DIVISION Integrated Report 2017
ABOUT THE Includes the long-steel operations in NORTH AMERICA BD FY 2017 FY 2016 Change 2017/16 REPORT Canada, United States and Mexico, as MeSsages Volume (1.000 tonnes) well as the joint venture and associate Chairman of Crude steel production 6.764 5.988 13,0% the Board company in Mexico. Steel sales 6.313 5.965 5,8%
Chief Executive Results (R$ million) Officer In 2017, the North America Division Net sales 15.433 15.431 0,0% Gerdau registered shipments of 6.3 million Cost of sales (14.824) (14.515) 2,1% Business tonnes, 6% more than in the previous Model Gross profit 609 916 -33,5% year, supported by continued firm Corporate Gross margin (%) 3,9% 5,9% Governance demand from the non-residential EBITDA 797 1.102 -27,7% CapitaLS construction sector and by less pressure EBITDA margin (%) 5,2% 7,1% Human Capital from imported goods in the region. Intellectual Capital In the year, the division’s net sales Social & Relational Capital amounted to R$ 15.4 billion, remaining Natural Capital stable in relation to 2016, and Financial Capital accounting for 40% of consolidated Operating & Financial net sales. EBITDA declined 28% on the Performance prior year, to R$ 797 million. Corporate Information
51 NORTH AMERICA DIVISION Integrated Report In early 2018, the North America Division underwent have a positive influence on steel demand, 2017 a significant restructuring that included the the announced divestment of its rebar mills in the United such as incentives for infrastructure projects and ABOUT THE States. The purpose of the divestments is to allow the further developments under Section 232 in tariffs on REPORT company to focus its efforts in the region on markets steel and aluminum imports into the United States. MeSsages with higher profit margins, especially bars, structural The expectation is for margins in the North American profiles and special steel. Despite the disposal of these Chairman of steel industry to remain pressured throughout 2018. the Board assets, Gerdau maintains a strong presence in the Meanwhile, imports should be somewhat lower United States, which, like Brazil, is a priority market for compared to 2017, due to higher steel prices in the Chief Executive the company. Officer international market.
Gerdau With regard to the prospects for 2018, market studies Business point to growth of 4% in long steel consumption in the Model United States, considering the region’s main steel- consuming sectors: non-residential construction, Corporate Governance manufacturing, oil and gas. Moreover, the Trump administration is expected to take decisions that could CapitaLS Human Capital Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
52 SOUTH AMERICA DIVISION Integrated Report 2017 Includes the operations in South SOUTH AMERICA BD FY 2017 FY 2016 Change 2017/16 America (except Brazil) and the joint ABOUT THE Volume (1.000 tonnes) REPORT ventures in the Dominican Republic Crude steel production 1.043 1.231 -15,3% MeSsages and in Colombia. Steel sales 1.723 2.088 -17,5% Chairman of the Board Shipments in South America came Results (R$ million) to 1.7 million tonnes, down 17% Net sales 4.026 4.776 -15,7% Chief Executive Officer compared to 2016, while the division’s Cost of sales (3.523) (4.103) -14,1% Gerdau net sales in the fiscal year stood at Gross profit 503 673 -25,3% Business Gross margin (%) 12,5% 14,1% Model R$ 4 billion, 10% lower than in the EBITDA 567 722 -21,5% Corporate previous fiscal year. The declines EBITDA margin (%) 14,1% 15,1% Governance are due to the deconsolidation of CapitaLS the operation in Colombia. In the Human Capital year, the division accounted for 11% Intellectual Capital of consolidated net sales. EBITDA Social & Relational Capital declined by 22% to end the year at Natural Capital R$ 567 million. Financial Capital
Operating & Financial Performance
Corporate Information
53 SOUTH AMERICA DIVISION Integrated Report For 2018, the expectation for South 2017 America calls for economic growth, especially in Peru, Colombia and ABOUT THE Argentina, with Gerdau inaugurating REPORT in the latter country a new melt shop MeSsages in 2017. The melt shop, which was built Chairman of alongside the existing rolling mill, has the Board installed steel production capacity of 650,000 tonnes. The melt shop, which Chief Executive required investment of US$ 190 million, Officer will serve primarily the domestic market. Gerdau Business Model
Corporate Governance
CapitaLS Human Capital Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
54 SPECIAL STEEL DIVISION Integrated Report Includes the special steel operations in 2017 SPECIAL STEEL BD FY 2017 FY 2016 Change 2017/16 Brazil, United States and India. ABOUT THE Volume (1.000 tonnes) REPORT In 2017, 2 million tonnes were shipped, Crude steel production 2.182 2.324 -6,1% MeSsages 6% less than in 2016, reflecting the Steel sales 1.977 2.102 -5,9% Chairman of the Board divestment of the units in Spain in Results (R$ million) 2016. The division’s net sales came to Net sales 6.229 6.885 -9,5% Chief Executive Officer R$ 6.3 billion, representing a decline Cost of sales (5.301) (6.239) -15,0% Gerdau of 10% in the year and accounting Gross profit 928 646 43,7% Business Gross margin (%) 14,9% 9,4% Model for 16% of consolidated net sales. EBITDA 1.139 905 25,9% Corporate Meanwhile, EBITDA advanced 26% Governance EBITDA margin (%) 18,3% 13,1% to R$ 1.1 billion. CapitaLS Human Capital Intellectual Capital
Social & Relational Capital Natural Capital Financial Capital
Operating & Financial Performance
Corporate Information
55 SPECIAL STEEL DIVISION Integrated Report 2017 In 2017, the highlights were the recovery in the automotive positive. The expectation is that Brazil’s auto industry post industry in Brazil and the growth in special steel exports, with strong sales growth to the both the local and export markets. ABOUT THE the addition of new clients in the United States, Europe, Latin Furthermore, Gerdau Summit, a joint venture by Gerdau, REPORT America, Africa and Asia. Sumitomo Corporation and The Japan Steel Works (JSW), MeSsages Unlike other types of steel, the production of special steel is will supply, starting in 2018, forged parts for the wind power Chairman of the Board characterized by meeting the specific needs of each client, industry, which enjoys excellent growth potential. which predominately operate in the automotive industry. With regard to the U.S. and Indian markets, strong demand Chief Executive Officer In practice, this means that the composition of the steel is from the auto industry is expected. Gerdau adjusted to give specific characteristics to each product based Business on its application, such as hardness, malleability, strength, etc. Model Considering the transformation that the automotive industry Corporate Governance is experiencing, with challenges such as lighter, hybrid and
CapitaLS autonomous cars, Gerdau receives requests every day for Human Capital studies of new steel types or improvements to existing Intellectual products. To meet this new market dynamic, the Company Capital started using artificial intelligence to develop and improve Social & Relational Capital its products. Normally, responses to requests from the auto Natural Capital industry took from 20 to 30 days, but now are resolved in a Financial Capital matter of hours. The adoption of artificial intelligence will result Operating & Financial in greater agility in meeting new demands and higher potential Performance profitability for the Company and its business chain. Corporate For 2018, the market prospects for the division are very Information
56 07 CORPORATE INFORMATION
57 CORPORATE INFORMATION Integrated Report 2017 Gerdau Custodian Bank in Brazil Av. das Nações Unidas 8.501 - 8º andar Itaú Corretora de Valores S.A. ABOUT THE REPORT Pinheiros [email protected] 05425-070 Tel.: 3003.9285 (State capitals) MeSsages São Paulo - SP Tel.: 0800.720.9285 (Other areas) Chairman of the Board +55 11 3094-6600 Tel.: 0800.722.1722 (For hearing and speech impaired) www.gerdau.com Chief Executive Foreign Custodian Bank Officer Gerdau on social media JPMorgan Chase Bank N.A. Gerdau www.facebook.com/GerdauSa [email protected] Business @gerdau (http://twitter.com/gerdau) [email protected] Model www.linkedin.com/company/gerdau Tel.: (800) 990-1135 (from the United States) Corporate Governance www.youtube.com/user/GerdauSA Tel.: (651) 453-2128 (outside the United States)
CapitaLS Shareholder Services Investor and Analyst Services Human Capital Itaú Corretora de Valores S.A. Av. das Nações Unidas, 8501 – 8º Andar Intellectual Capital [email protected] São Paulo – SP - Brasil
Social & Relational Tel.: 3003.9285 (State capitals) CEP 05425-070 Capital Tel.: 0800.720.9285 (Other areas) [email protected] Natural Capital Tel.: (11) 3094.6300 Financial Capital
Operating & Independent Auditor Financial KPMG Auditores Independentes Performance
Corporate Information
58 credits Integrated Report 2017 Coordination & Concept Gerdau Corporate Affairs and Corporate Communication ABOUT THE REPORT Copy & Production Supervision MeSsages Gerdau Corporate Affairs and Corporate Communication Chairman of the Board and D3N Comunicação
Chief Executive Graphic Design Officer Néktar Design Gerdau Business Model Photograph & Illustration Credits Gerdau Archive (3, 24, 34, 35, 52 e 54), Junior Corporate Achievement Archive (33), Márcio Bruno (6, 7, 8, 13, 14, Governance 15, 16, 18, 20, 21, 22 e 23), Ivson Miranda (10 e 32), Pyra CapitaLS Filmes (cover, 27 e 50), Roberto Lima (19, 26, 29, e 47) Human Capital and Shutterstock.com (3, 5, 9, 38, 39, 56 e 57). Intellectual Capital We thank everyone who contributed with information Social & Relational Capital and images to this publication. Natural Capital Financial Capital
Operating & Financial Performance
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