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Gerdau S.A. UBS Brazil 2006 – Seventh Annual CEO Conference March 2006
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Agenda Steel Sector Gerdau Group Operating and Financial Highlights
Capital Markets
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World Steel – Supply and Demand
Finished Steel + 15.3% over 2005 In million tons + 18.6% over 2005 1,153 1,000 1,117 According to a WSD forecast for 2010, 97% of the world’s production will be consumed. 830 942 690 698 632 772 655 641 603 1985 1990 1995 2000 2005F 2010F Production Apparent Consumption Source: IISI / World Steel Dynamics F=Forecast
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Among the Leaders Crude Steel – Output 2004 Mittal Steel (NET) 1 58.9
In million tons Mittal Steel (NET) 1 58.9 * Arcelor (LUX) 2 46.9 Nippon Steel (JAP) 3 32.4 JFE Steel (JAP) 4 31.6 Posco (KOR) 5 30.2 Shangai Baosteel (CHI) 6 21.4 US Steel (USA) 7 20.8 Corus Group (UK) 8 19.0 Nucor (USA) 9 17.9 ThyssenKrupp (GER) 10 17.6 Riva Group (ITA) 11 16.7 Gerdau Group (BRA) 12 13.4 Gerdau should have an installed capacity of approximately 21 million tons of crude steel per year after the investment program in Brazil is completed in 2007. Sumitomo (JAP) 13 13.0 * Includes ISG acquired by Mittal Steel in 2004. Source: IISI
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Steel Sector – 2005 The world’s steel output reached 1.1 billion metric tons of crude steel in 2005, an increase of 5.9% compared to Crude steel production in China reached 349 million metric tons (31.5% of the world’s steel output), an increase of 24.6% compared to 2004. World The North American crude steel output for 2005 was 127 million metric tons, a decrease of 5.3% compared to the previous year. In the USA, crude steel output reached 93.3 million metric tons in 2005 from 99.7 million metric tons in 2004 (- 6.4%). North America The South American crude steel output for 2005 was down 1.2% at 45.3 million metric tons. Brazil is the largest producer, with 69.8% of the total output, followed by Argentina, with 11.9% of the total output in the region. South America In 2005, the crude steel output reached 31.6 million metric tons, 3.9% less than in the previous year. Domestic sales of long steel products (including blooms and billets) in reached 6.3 million metric tons, a decrease of 10.7% compared to 2004. Exports of long steel products (including ingots, blooms and billets) totaled 4,3 million metric tons in 2005 (+ 25.6% YoY). In 2005, the long steel production decreased 4.8% compared to 2004, retaking the levels of 2003. Brazil Source: IBS and IISI
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Brazil and the Global Steel Industry
Crude Steel Production – 2005 In million tons Total World Production: 1,108 million tons China accounted for 31.5% of the global steel output Brazil accounted for 2.8% of the global steel output India Italy Brazil China Japan USA Russia Ukraine Germany South Korea Source: IISI
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Agenda Steel Sector Gerdau Group Operating and Financial Highlights
Capital Markets
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TO BE A WORLD-CLASS INTERNATIONAL STEEL COMPANY
Philosophy VISION TO BE A WORLD-CLASS INTERNATIONAL STEEL COMPANY MISSION Gerdau is an organization focused on the steel business with a mission to satisfy customers` needs and add value to shareholders, committed to the fulfillment of people and to the sustainable development of society
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Investment Considerations
A low cost international steel company with operations in Brazil, Uruguay, Canada, Chile, Argentina, Colombia, Spain and the United States Substantial international profile – foreign exchange generation through subsidiaries abroad and export sales amount approximately 67% of consolidated revenues in 2005 Ranked 12th globally by steel output in 2004 with an output of 13.7MM tons (including strategic shareholdings) 2nd largest long steel producer in North America and largest long steel producer in the Americas Focused on the production of long steel products Gerdau operates 30 mills incorporating both integrated and mini mills with the latest technologies Relevant market share in every country with operations and diversified product range, with high value-added products Strong low cost strategy as a result of diversified production processes and multiple raw material sourcing Sound balance sheet (Gross Debt-to-EBITDA at approximately 1.6x in 2005) and strong cash generation Shares of Gerdau S.A. are currently traded at the São Paulo, New York and Madrid stock exchanges Shares of Metalúrgica Gerdau S.A. are traded at the São Paulo stock exchange Gerdau Ameristeel’s shares are traded at the New York and Toronto stock exchanges
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100+ Years in Business 1901 THE 80’s THROUGH THE 40’s THE 50’s
1901 – First operation: nail factory Acquisition of three mills (Rio de Janeiro, Minas Gerais and Bahia) Construction of two new plants (Paraná and Ceará) Operations abroad begin (Uruguay and Canada) THROUGH THE 40’s First steel mill acquisition – Siderúrgica Riograndense (1948) THE 50’s THE 90’s Expansion of Siderúrgica Riograndense Construction of second Riograndense’s mill Diversification into specialty steel – acquisition of Piratini Expansion abroad – acquisition of mills in Chile, Canada, Argentina and the USA Acquisition of second mill in Minas Gerais and rolling mill in São Paulo Shareholdings restructuring Acquisition of stake in Açominas THE 60’s Market share increase by the: - Diversification and verticalization of product line - Structuring of distribution network (today more than 75 sales points) - Acquisition of mill in Pernambuco THE NEW MILLENNIUM THE 70’s More acquisitions in the US Downstream expansion in North America Entering the European market Presence in São Paulo with a brand new steel mill Capacity expansion with acquisition of two mills (Alagoas and Paraná); construction of largest Gerdau mill (Rio de Janeiro) Diversification into reforestation
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Solid Track Record 16,372 18,658 TOTAL INVESTED (1981-2005):
In thousand tons Potter Form Gate City & RJ North Star (USA) SACK (Chile) 18,658 TOTAL INVESTED ( ): Brazil = US$ 4.0 billion + Debt North America = US$ 1.4 billion + Debt South America = US$ 468 million + Debt Araçariguama (Brazil) Sidenor (Spain) 11,076 7,696 Controll of Açominas (Brazil) Cartersville Drawing Co-Steel (USA) 16,475 Diaco (Col.) Ameristeel (USA) AZA New Plant (Chile) Additional stake in Açominas (Brazil) 3,072 3,934 4,568 Cambridge (Canada) Usiba (Brazil) Piratini (Brazil) AZA (Chile) 4,595 Stake in Açominas (Brazil) 2,611 1,757 Manitoba (Canada) Barão de Cocais (Brazil) Laisa (Uruguay) Brazil – Crude Steel Installed Capacity Abroad – Crude Steel Installed Capacity
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An International Company
Total Capacity (Includes Strategic Shareholdings) 18.7 million tons of crude steel 14.9 million tons of rolled steel products Brazil 8.6 million tons of crude steel 5.3 million tons of rolled steel products 11 mills 11 fabrication shops 6 downstream operations and special sections 75 sales points and flat steel service centers Abroad 10.1 million tons of crude steel 9.6 million tons of rolled steel products 19 mills 37 fabrication shops 15 downstream operations and special sections Steel mills Strategic Shareholding 12
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Solid Market Share in Long Steel
BRAZIL NORTH AMERICA Other 29% Barra Mansa 5% Imports 18% Gerdau 48% Commercial Metals 7% Other 7% Aços Villares 5% Gerdau Ameristeel 19% Nucor 27% Belgo 35% COUNTRY MARKET SHARE MAIN COMPETITORS CHILE 53% CAP + Imports URUGUAY 90% Imports ARGENTINA 20% Acindar + Bragado + Zapla COLOMBIA 37% Acerias Paz Del Rio SPAIN 36%* GSB * Specialty steel only
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Growth portfolio (CAGR 1999-2003) benchmarked against industry average
Value Builder Company ATKearney Growth portfolio (CAGR ) benchmarked against industry average Revenue Growth 30% Gerdau Outokumpu Acerinox 25% China Steel Usinas Baoshan1) Salzgitter Nucor INI Steel 20% Rautaruukki Ipsco Tata 15% US Steel Voest-Alpine Industry average Smorgon 10% Boehler-Uddeholm SSAB Arcelor Ispat Corus JFE 5% Harsco SAIL Thyssenkrupp Dofasco Nippon Steel CSN Kobe Onesteel1) 0% Wuhan Steel1) Kennametal RIVA1) Carpenter -5% Iscor AK Steel Stelco Haynes Nisshin Steel -10% Eregli Demir Posco Allegheny -35% -25% -15% -5% 5% 15% 25% 35% 45% Industry average Value Growth Note: 1) RIVA 98 02, Wuhan Steel & Onesteel 00 03, Baoshan 01 03 Source: ThyssenKrupp (segment), Kobe (segment), RIVA, Haynes: EBIT Growth
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Agenda Steel Sector Gerdau Group Operating and Financial Highlights
Capital Markets
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Shipments 13,550 12,560 12,144 9,109 7,302 7,411 In thousand tons
South America (10% in 2005) 9,109 North America (45% in 2005) 7,302 7,411 Brazil – Exports (20% in 2005) Brazil – Domestic Market (25% in 2005) Billets, blooms & slabs Merchant bars Rebars Fabricated steel Heavy structural shapes Wire-rod Wires Nails
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NET REVENUE BREAKDOWN BY REGION EXPORT SHIPMENTS BY REGION
Strong Export Business 2005 NET REVENUE BREAKDOWN BY REGION South America 6% Brazil (Domestic Market) 34% North America 47% Exports (from Brazil) 13% EXPORT SHIPMENTS BY REGION Africa 8% Europe 11% Central America 13% North America 5% Asia 44% South America 19%
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Margin Evolution Gross Margin EBITDA Margin
Gross profit in the 4th quarter experienced a slight decrease of 5.6%, compared to the 3rd quarter, as a result of a moderate increase in cost of sales. Gross margin consequently went from 27% to 26%. In 2005, gross margin was 27%. EBITDA for the quarter was R$ 1 billion (R$ 1.1 billion in the 3rd quarter); consolidated EBITDA margin was 21% compared to 22% in the 3rd quarter. Net profit for the 4th quarter was R$ 730 million, 10% lower than that of the 3rd quarter, and net margin was 15%, in the 4th quarter, compared to 16% in the third. Brazil North America South America
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Costs and Prices Brazil South America North America
Net Revenue and Cost of Sales per ton In US Dollars/ton 709 Brazil 696 717 682 646 673 626 518 486 475 467 469 426 420 423 408 382 404 Net Revenue 321 355 294 274 295 284 Cost of Sales 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 South America North America 822 779 756 710 681 686 694 663 624 646 677 635 605 605 609 557 Exports, with dollar-based prices and FX ratio against, continue to contribute to the maintenance of operating rates, albeit contributing with lower results. If the Brazilian domestic demand resumes growth we may see a recovery of margins due to an improved product mix. The stabilization in the 4th quarter of metallic inputs has allowed margins to remain at reasonable levels. Steel scrap prices in the 4th quarter remained stable compared to those of the 3rd quarter. Pig iron in the Brazilian market has stabilized prices due to the excess supply resulting from the reduction in exports. Price increases are unlikely. The supply of charcoal is in balance in spite of the negative impact of excess rain due to the stoppage of several pig iron mills. The supply contracts for iron ore are under review and we still do not have international reference prices to negotiate new contracts. Where coking coal is concerned, we do expect a decrease in prices of about US$ per ton. Our main alloys are also presenting reduction in international prices in the past months. 521 518 477 501 477 486 403 549 388 616 638 564 544 549 580 463 484 484 511 528 400 486 464 397 396 459 314 348 333 354 361 273 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 Net Revenue Cost of Sales Net Revenue Cost of Sales
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Consolidated Financials
In US$ millions 2003 2004 2005 Balance Sheet Current assets Non-current assets Fixed assets Total Current liabilities Non-current liabilities Shareholders’ equity 1,846 364 2,721 4,931 1,503 1,747 1,681 3,600 390 3,041 7,031 1,977 2,186 2,868 5,182 377 3,788 9,347 1,790 3,225 4,332 Income Statement Net revenue Gross profit Operating income Net income EBITDA 4,627 1,139 397 434 929 7,383 2,353 1,678 1,219 2,092 9,077 2,446 1,727 1,386 2,098 31.9% 28.3% 1.1x 0.8x 19.8x 26.9% 23.1% 1.6x 0.4x 27.8x Ratios Gross margin EBITDA margin Total debt / EBITDA Net debt / EBITDA EBITDA/Net Financial Expenses 24.6% 20.1% 2.3x 2.0x 5.0x
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Liquidity Management Gerdau maintains a policy of strong liquidity to ensure that resources are available in to face opportunities or downturns in market conditions Gerdau’s liquidity policy Cash and liquid investments of at least 25% of total debt Gerdau export sales not more than 50% leveraged through export credit and receivable securitization Liquid funds are held in USD and Brazilian Reais both in offshore and onshore accounts
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Indebtedness DEBT STRUCTURE Dec. 05 Companies Abroad 31%
In US$ million COST OF DEBT IN DEC. 05 (per annum) Dec. 05 In US$ Brazil – Domestic Currency Brazil – Foreign Currency Companies Abroad 32.5%* 5.9% 7.3% DEBT AVERAGE LIFE years *Includes 11.82% of 2005 FX DEBT STRUCTURE Companies Abroad 31% Of the main indicators that help monitor the Gerdau companies’ indebtedness, the Gross debt/EBITDA was a meager 1.6X. Net debt can, theoretically, be settled in less than 5 months of operating cash generation. EBITDA, compared to net financial expenses excluding monetary and FX variations, provides an interest coverage ratio of 21X. Debt’s average life remains greater than 9 years. On December 31st, cash and cash equivalents totaled R$ 5.5 billion, of which R$ 2.2 billion (41.0%) were pegged to foreign currencies, mainly to the US dollar. Foreign Currency 46% Domestic Currency 23%
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Consolidated Debt Amortization
In US$ millions – December/05 Bonds: 400 Perpetual:600 Debentures: 336 BNDES: 106 Debentures GNA: 97 Imports: 108 BNDES: 65 Pre-Export: 55 1,535 BNDES: 76 Imports: 87 Pre-Export: 113 Euro Commercial Paper: 200 BNDES: 48 409 364 326 242 231 162 1H06 2H06 2007 2008 2009 2010 AFTER 2010
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Investment Program 2006 – 2008: US$ 3.8 billion
Capital Expenditures INVESTMENTS In US$ millions BRAZIL 568.8 ABROAD 289.2 North America 135.9 South America 153.3 TOTAL 858.0 Investment Program 2006 – 2008: US$ 3.8 billion EVOLUTION OF INSTALLED CAPACITY In thousand tons Rolled Steel Crude Steel + 14% + 14% 21,360 16,908 18,658 14,869 + 6% + 7% 10,073 10,675 10,323 9,609 + 24% + 25% 10,685 6,585 8,585 5,260 2006 2008 2006 2008 Brazil Abroad Brazil Abroad
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Agenda Steel Sector Gerdau Group Operating and Financial Highlights
Capital Markets
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Gerdau’s shares traded a daily volume of US$ 34.3 million during 2005
Listed Companies Gerdau’s shares traded a daily volume of US$ 34.3 million during 2005 GERDAU S.A. GGBR4 = R$ Market Cap = US$ 10.9 billion METALÚRGICA GERDAU S.A. GOAU4 = R$ Market Cap = US$ 3.6 billion BOVESPA São Paulo NYSE New York GERDAU S.A. GGB = US$ 24.33 GERDAU AMERISTEEL CORP. GNA = US$ 9.22 TSE Toronto GERDAU AMERISTEEL CORP. GNA.TO = Cdn$ Market Cap = Cdn$ 3.3 billion Após um período de ajustes nos preços dos produtos siderúrgicos, em níveis internacionais, começou-se a observar um inicio de recuperação para os produtos longos, a partir do fim do segundo trimestre, o que pode indicar que o fundo do poço já foi alcançado. Os últimos dados de crescimento das principais economias são encorajadores, indicando que, após o período de ajustes de estoques e preços, os produtos siderúrgicos devem entrar num ciclo mais favorável. A indústria de transformação e o setor imobiliário, dois pilares da economia americana, mostraram dados positivos em junho, sugerindo que o crescimento dos EUA pode se acelerar no segundo semestre. As encomendas de bens duráveis cresceram 1,4%. Em maio, o aumento já havia sido o maior em três anos, segundo dados do Departamento de Comércio. Já a venda de casas novas cresceu 4%, alcançando um volume anual que registra um novo recorde: 1,374 milhão de novas moradias. O mercado já espera um crescimento do PIB superior a 4,5% no terceiro trimestre, com as vendas de casas aumentando em todo o país. Também nos EUA, o mercado de longos apresenta um maior vigor, comparado ao de planos. Os estoques em geral estão em declínio e as perspectivas para o terceiro trimestre são em geral positivas. No Brasil, por outro lado, o desempenho da economia continua a refletir os efeitos negativos de juros extremamente elevados e câmbio valorizado, a boa noticia fica restrita basicamente à inflação declinante e sob controle. Como já havíamos antecipado na discussão do primeiro trimestre, o crescimento do PIB em 2005, abaixo das expectativas iniciais, deve trazer a indústria siderúrgica aos níveis de consumo de 2003, como já admitiu, inclusive, o IBS. LATIBEX Madrid GERDAU S.A. XGGB = € 19.95 Stock prices in
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Stock Liquidity METALÚRGICA GERDAU S.A. AND GERDAU S.A. PREFERED SHARES ARE PART OF BOVESPA INDEX METALÚRGICA GERDAU S.A. (GOAU4) Monthly average # of trades Monthly average volume GERDAU S.A. (GGBR4) Monthly average # of trades Monthly average volume In US$ million (Volume) In number of trades 50% Stock bonus (GGBR e GOAU) 30% Stock bonus + 70% Split (GOAU) 100% Stock bonus (GGBR) 25 1,500 20 1,200 GGBR4: 1,020 trades US$ 17.6 MM 15 900 GGBR4: 595 trades US$ 8.3 MM 10 600 GOAU4: 441 trades US$ 7.1 MM GOAU4: 162 trades US$ 2.3 MM 5 300 Jan 04 Mar 04 May 04 Jul 04 Sep 04 Nov 04 Jan 05 Mar 05 May 05 Jul 05 Sep 05 Nov 05 Jan 06 Source: Economática
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DIVIDENDS DISTRIBUTION*
Dividends Policy 30% of the adjusted net income (Pay-out) Dividend payments are being made on a quarterly basis DIVIDENDS DISTRIBUTION* In US$ million Metalúrgica Gerdau S.A. (GOAU4) Gerdau S.A. (GGBR4) DIVIDEND YIELD 1999 2000 2001 2002 2003 2004 2005 GOAU4 6.0% 7.9% 17.0% 11.3% 6.2% 7.8% 6.1% GGBR4 3.6% 6.8% 3.9% 4.6% * Dividends related to each period, but not necessarily paid in the same period.
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Outlook Brazil North America South America Europe
Greater economic growth in 2006 – 3 to 3.5% Increase in volumes shipped in the domestic market - 5 to 6% Strengthening of the civil construction sector Price stability in Brazilian currency Inventories adjusted Increase in government spending North America Consistent economic growth More investments in infrastructure (Highway Bill) Stability in production costs Stability in metal spread South America Consolidated economic growth Demand is strong Europe Consolidation of stake in Sidenor as of the 1Q06 The general outlook for international markets for long common steel is positive. This is the result of the balance between supply and demand and inventory levels around the world. Global discipline is yet another factor that has contributed to maintain competitive environment stable. In Brazil there are indications that the worst is over and that the country will take off in 2006 at a pace that should lead to economic recovery. From the domestic market’s perspective with interest rates falling and perhaps an increase in government spending, the economy may show some confidence. Civil construction is already signaling recovery and may play a relevant role in economic growth. We should see recovery also in the industrial sector such as agricultural equipment and power transmission towers. It’s worthy The US GDP should continue to grow at healthy rates and the highway bill, along with the reconstruction efforts in the Gulf area should maintain demand for rebars, merchant bars and profiles strong. In broad terms, it is fair to assume that the world economy will experience a favorable environment in 2006. On the other hand, in the long run, there is the threat of the excess capacity in China, which brings uncertainty not only to the American market but to international prices too. The Chinese economy should continue to grow and it is reasonable to expect that domestic demand will continue to absorb a significant portion of this added capacity.
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Safe Harbor Statement This presentation can contain statements which constitute forward-looking statements. Such forward-looking statements are dependent on estimates, data or methods that may be incorrect or imprecise and that may be incapable of being realized. These estimates also are subject to risk, uncertainties and suppositions and include, among other, overall economic, political and commercial environment, in Brazil and in the markets we are present in addition to government regulations, present and future. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements, which speak only as of the date made.
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Gerdau S.A.
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