GERDAU AÇOMINAS S.A. MANAGEMENT REPORT To our Shareholders: The global economic recovery and the strong demand in China and in other Asian countries, as well as in the European Union, have driven the consumption

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GERDAU AÇOMINAS S.A. MANAGEMENT REPORT To our Shareholders: The global economic recovery and the strong demand in China and in other Asian countries, as well as in the European Union, have driven the consumption of steel and favored a rise of prices in the international market, which made 2004 a year of records in the steel sector. For the first time, the production of steel exceeded one billion tons, surpassing by 8.9% the volume produced in In Brazil, the sector also recorded figures never attained before, with a production of 32.9 million tons of steel, 5.7% higher than in 2003, and exports surpassing the US$ 5.0 billion mark. This scenario called for great flexibility from Gerdau Açominas, both to ensure that the customers in the domestic market were fully catered for, and to take advantage of the profitability brought about from exports. Based on the principle of balancing growth and profitability, the company has been capable of showing a positive performance in 2004, reaching record levels of production and results. The comparative analysis of year 2004 with the previous year, reported next, takes into consideration the pro forma operating data and results in 2003, which portray the operational restructuring carried out on November 28 as if it had occurred on January 1, This situation makes it possible for the stockholders to perceive the real dimension of the results achieved in Production The production of slabs, blooms and billets rose to 7.3 million tons in 2004, 4.4% higher than in In rolled products, 4.3 million tons were produced, growing 11.5% in relation to the volume of the previous year. Production of slabs, blooms and billets (1000 tons 2002 and 2003 pro forma) Production of rolled products (1000 tons 2002 and 2003 pro forma) Sales The sales of steel products in 2004 totaled 6.6 million tons, 0.6% more than in The sales to customers in Brazil were the great highlight, as a consequence of greater consumption in construction and of the strong growth of demand in industry. Domestic shipments totaled 3.9 million tons in the year, 15.0% higher than in This volume accounted for 58.5% of the company s sales. The strong demand in the home market, coupled with the preferential service for the customers in Brazil, fully offset the reduction in exports, which remained 14.4% below the volume traded in the previous year. Shipments abroad accounted for a share of 41.5% of the total sales of the operation in Brazil and generated an income of US$ 1.1 billion in the year. GERDAU AÇOMINAS S.A. P. 2 MANAGEMENT REPORT Sales by product line Common long rolled products 43.7% Slabs, blooms and billets 34.2% Special rolled products 5.7% Drawn and other products 11.9% Resale of flat steels 4.5% Results In the year, the company s sales reached R$ 13.0 billion, showing growth of 43.2% in relation to the pro forma figures for Net revenues were R$ 10.0 billion, 36.7% higher than in 2003, an increase that arose from the recovery of domestic demand and from the improvement in prices, both in Brazil and in the international market. The gross margin in 2004 reached 41.9%, against 38.5% in the previous year, taking the pro forma balance sheet into consideration. Contributions towards this performance came from the recovery of the operating margin of the operation in Brazil, because of the adjustments to prices resulting from the increases in the costs of some raw materials, and the rise in the prices in the international market, which benefited exports considerably. Operating expenses (sales, general and administrative expenses) increased 16.6% in 2004, in relation to 2003, against growth of 36.7% in net revenues, which led the expenses/revenues ratio to fall from 12.1% to 10.3%. This reduction occurred, in the main, from the lower volume of exports (reducing costs with port services). In 2004, consolidated operating expenses went up to R$ 1.0 billion, against R$ million in EBITDA (earnings before interest, taxes, depreciation and amortization) rose to R$ 3.7 billion in the year, against R$ 2.3 billion in 2003, an increase of 61.1%. The EBITDA margin reached 36.4%, against the previous year s 30.9%. Booked under the heading of Other Operating Income in the year, there were the gains arising from the final favorable verdict achieved by the company in its lawsuit on undue payments of PIS, on the basis of Decree-Laws 2445/88 and 2449/88, which, net of tax effects, totaled R$ 63.7 million. The company s net income reached R$ 2.5 billion in 2004 (R$ per share), 71.4% higher than the pro forma result of the previous year. GERDAU AÇOMINAS S.A. MANAGEMENT REPORT Remuneration for shareholders in the year added up to R$ million, that is, R$ 5.92 for each currently existing share. Period Interest on own capital (R$ million) Dividends (R$ million) Per share (R$) Quantity of shares (million) Date of payment 1 st quarter /18/ /18/ nd quarter /17/ /17/ rd quarter /17/ /17/ th quarter /02/2005 On December 31, shareholders equity was R$ 4.8 billion, which corresponds to a book value of R$ per share. Investments In 2004, investments added up to US$ million, intended, in the main, for the construction of a new steel mill in the state of São Paulo and for refurbishment at the Ouro Branco mill. Besides these investments, we should also advise that, in the course of 2004, several projects for expanding the installed capacity were announced, as follows: On October 18, the resumption was announced of the project for setting up a new steel mill in the state of São Paulo. Investments of US$ million are forecast, to be applied in two stages, and the unit will have an installed productive capacity of 1.3 million tons of steel and of 1.2 million tons in rebars for the construction industry. In the first stage, the investments still to be carried out add up US$ million, and the capacity of the steelmaking shop will be 900 thousand tons, and that of the rolling mill, 600 thousand tons a year. The steelmaking shop is to come into operation in May 2005, and the rolling mill in April At the Ouro Branco (MG) mill, roughly US$ million will be invested, to increase the installed capacity for steel production from 3.0 million tons to 4.5 million tons a year, by the end of A new blast furnace will be installed, an HPS (Hybrid Pelletized Sinter), a Continuous Slab Caster, a Dephosphoration System, a Coke Shop, and Secondary Deduster in the Steelmaking Shop, amongst other improvements that will be carried out to the productive process. As announced last December, US$ million will be invested by 2007 in the construction of a new mill for special steels in Rio de Janeiro. The new unit is going to meet the demand from the automobile industry, and its installed annual capacity will be 800 thousand tons of steel and 500 thousand tons of rolled products. By 2007, the company will invest US$ million in the expansion of its present mill in the state of Rio de Janeiro. Gerdau Cosigua will have its installed capacity for steel expanded from 1.2 million tons to 1.8 million tons a year, and for rolled products, from 1.3 million tons to 1.6 million tons a year. With this investment, Gerdau in Rio de Janeiro will expand its supply to the metal-metallurgical industry, to construction, and to agriculture and livestock raising. GERDAU AÇOMINAS S.A. MANAGEMENT REPORT At the Gerdau Aços Finos Piratini unit, in Charqueadas (RS), US$ 43.0 million is being invested to expand the installed productive capacity from 350 thousand tons of rolled products to 500 thousand tons. This investment will be concluded at the end of the first quarter of In Bahia, Gerdau Usiba will be receiving investments of US$ 88.0 million over the next three years. The installed capacities for steel will be increased by 320 thousand tons, and for rolled products by 370 thousand tons a year. The Gerdau Riograndense unit will be given improvements in the steelmaking shop processes, which will make it possible to produce another 60 thousand tons of steel a year by At Gerdau Cearense, the installation of a new reheat furnace and the elimination of bottlenecks, programmed for 2006, are going to expand the unit s annual production by 50%, from 100 thousand to 150 thousand tons. Financial Liabilities The greater cash generation, arising from investments made in previous years coming to maturity, from the improvement in the demand for steel products in the domestic market, coupled with the rise in prices in the international market, has provided the conditions for reducing net indebtedness throughout On December 31, the net debt was R$ 2.4 billion, 24.5% lower than at the end of Taking gross debt into consideration, 29.7% was short-term (R$ million) and 70.3% de long-term (R$ 2.1 billion). Roughly 22.4% was contracted in local currency (mainly from the BNDES), and 77.6% was US dollar-denominated (the majority, connected to exports). Indebtedness (R$ million) Short-Term Local currency Foreign currency ,617.5 Total ,889.6 Long-Term Local currency Foreign currency 1, Total 2, ,412.7 Gross Debt 2, ,302.3 Cash and banks and financial investments Net Debt 2, ,123.0 On June 3, Gerdau Açominas concluded the placement of the second tranche of US$ million under the Export Receivables Notes program, which represents an important tool for lengthening the company s debt profile. This second tranche was placed with a final maturity of eight years (April 2012) and interest of 7.321% a year. The operation was concluded in parallel with a derivative instrument (a US Treasury Lock), which reduced the effective final cost to 6.798% a year. In December, the company took an untied loan in the amount in US$ million, to modernize and to expand the Ouro Branco (MG) mill. The guarantee for the finance was given by the Nippon Export and Investment Insurance (NEXI), a Japanese credit agency linked to the Japanese government. The total term of the loan is seven years, including two years of grace and five of amortization. Final Considerations Current indicators lead us to believe that 2005 will likewise be a year of growth for the main economies in the world, and of brisk consumption of steel products. With this vision, Gerdau Açominas is implementing a US$ 2.4 billion investment program over the next three years, with the purpose of expanding installed capacity, with a view to meeting the growth in demand both in Brazil and abroad, and to keep its industrial plant competitive in the international market. In 2005, the company will continue along its course of growth, and with its efforts to reaffirm itself as a world-class company, satisfying its shareholders, customers, collaborators and communities in which it is installed. Gerdau Açominas also wishes to register its thanks to its customers, suppliers, representatives, shareholders, financial institutions and government bodies for the support received, as well as its team of collaborators, for the zeal and dedication they have displayed. Ouro Branco, March 10, 2005 MANAGEMENT GERDAU AÇOMINAS S.A. BALANCE SHEET AT DECEMBER 31 (In thousands of reais) ASSETS Company CURRENT ASSETS Cash and cash equivalents Note Trade accounts receivable Note Inventories Note Tax credits Note Deferred income tax and social contribution on net income Note Other accounts receivable Total current assets LONG-TERM RECEIVABLES Related parties Note Eletrobrás loans Deferred income tax and social contribution on net income Note Compulsory deposits and other Note Total long-term receivables PERMANENT ASSETS Investments Note Fixed assets Note Deferred charges Note Total permanent assets Total assets GERDAU AÇOMINAS S.A. BALANCE SHEET AT DECEMBER 31 (In thousands of reais) LIABILITIES AND SHAREHOLDERS' EQUITY Company CURRENT LIABILITIES Trade accounts payable Financing Note Taxes and contributions payable Note Deferred income tax and social contribution on net income Note Salaries payable Dividends payable Note Related parties Note Other accounts payable Total current liabilities LONG-TERM LIABILITIES Financing Note Provision for contingencies Note Post-employment benefits Note Other accounts payable Total long-term liabilities SHAREHOLDERS' EQUITY Capital Note Capital reserves Revenue reserves Retained earnings Total shareholders' equity Total liabilities and shareholders' equity The accompanying notes are an integral part of these financial statements. STATEMENT OF INCOME YEARS ENDED DECEMBER 31 (In thousands of reais) Company GROSS SALES REVENUES Taxes on sales ( ) ( ) ( ) ( ) Freights and discounts ( ) ( ) ( ) ( ) NET SALES REVENUES COST OF SALES ( ) ( ) ( ) ( ) GROSS PROFIT SELLING EXPENSES ( ) (94.133) ( ) (94.702) FINANCIAL INCOME Note (30.847) (29.052) FINANCIAL EXPENSES Note 16 (59.337) (93.827) (57.529) (94.173) GENERAL AND ADMINISTRATIVE EXPENSES Management fees (39.603) (9.460) (40.267) (9.706) General expenses ( ) ( ) ( ) ( ) EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES AND ASSOCIATED COMPANIES Note (10.025) (1.323) OTHER OPERATING INCOME (EXPENSES), NET Note (1.068) (1.046) OPERATING PROFIT NON-OPERATING INCOME (EXPENSES), NET (13.916) (13.363) PROFIT BEFORE TAXES AND PROFIT SHARING PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME Note 9 Current ( ) ( ) ( ) ( ) Deferred ( ) ( ) MANAGEMENT PROFIT SHARING Note 23 (39.603) (9.460) (39.603) (9.460) NET INCOME FOR THE YEAR Net income per share - R$ 15,65 5,36 Net equity per share - R$ 30,04 19,10 The accompanying notes are an integral part of these financial statements. STATEMENT OF CHANGES IN FINANCIAL POSITION YEARS ENDED DECEMBER 31 (In thousands of reais) Company FINANCIAL RESOURCES WERE PROVIDED BY Operations Net income for the year Expenses (income) not affecting working capital Depreciation and amortization Cost of permanent asset disposals Equity in the (earnings) losses of subsidiaries and associated companies Note 11 (10.391) (6.458) Foreign exchange effects on working capital of foreign companies - - (611) (44.901) Monetary variations on long-term debt ( ) (48.893) ( ) (45.369) Monetary variations on long-term receivables (399) 102 (399) 102 From operations Third parties Contributions to capital reserves Increase (decrease) in long-term liabilities (82.578) (45.516) Working capital - operational integration - ( ) - ( ) Working capital of merged/consolidated companies (1.157) Dividends not included in income for the year Total funds provided FINANCIAL RESOURCES WERE USED FOR Investments Fixed assets Deferred charges Increase (decrease) in long-term receivables ( ) ( ) Dividends / interest on equity Note Total funds used CHANGES IN WORKING CAPITAL ( ) ( ) Working capital At the beginning of the year ( ) ( ) ( ) ( ) At the end of the year ( ) ( ) CHANGES IN WORKING CAPITAL ( ) ( ) The accompanying notes are an integral part of these financial statements. SUPPLEMENTARY INFORMATION GERDAU AÇOMINAS S.A. STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31 (In thousands of reais) Company Net income for the year Equity in the (earnings) losses of subsidiaries and associated companies Note 11 (10.391) (6.458) Provision for credit risks Loss on disposal of fixed assets Loss on disposal of investment Monetary and exchange variations ( ) ( ) Depreciation and amortization Income tax and social contribution on net income ( ) ( ) Interest on debt Contingencies/judicial deposits (4.394) (4.509) Changes in trade accounts receivable ( ) ( ) Changes in inventories ( ) ( ) ( ) ( ) Changes in trade accounts payable Other operating activity accounts (21.756) (31.452) Net cash provided by operating activities Purchase/disposal of fixed assets ( ) ( ) ( ) ( ) Increase in deferred charges (13.803) (1.581) (18.006) (1.639) Acquisition/disposal of investments (7.984) (52.814) 650 (52.814) Receipt of interest on own capital/profit distribution Net cash used in investing activities ( ) ( ) ( ) ( ) Suppliers of fixed assets Working capital financing ( ) ( ) Permanent asset financing Payments of permanent asset financing ( ) ( ) ( ) ( ) Payment of financing interest ( ) ( ) ( ) ( ) Loans with related parties ( ) (19.012) ( ) (10.695) Payment of dividends/interest on equity and profit sharing ( ) (18.226) ( ) (23.679) Net cash used in financing activities ( ) ( ) ( ) ( ) Changes in cash and cash equivalents Cash and short-term investments At the beginning of the year Note Restatement of opening balance - - (6.345) (31.895) Opening balance of consolidated/merged companies for the year At the end of the year Note GERDAU AÇOMINAS S.A. (A free translation of the original in Portuguese) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2004 AND 2003 (All amounts in thousands of reais unless otherwise indicated) NOTE 1 OPERATIONS Gerdau Açominas S.A. is the company that includes the steel producing assets of the Gerdau Group in Brazil and has an installed capacity of 7.6 million tons of crude steel per year. The Gerdau Group is dedicated mainly to the production of common and special steel rods and sale of general steel products (plates and rods), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the Unites States of America. The Gerdau Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from scrap and pig iron purchased, for the most part, in the region near each plan (mini-mill concept). Gerdau also operates plants which are capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special steels. It is the largest scrap recycling group in Latin America and among the largest in the world. The industrial sector is the most important market, including manufacturers of consumer goods, such as vehicles and household and commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil construction sector, which demands a high volume of rebar and wires for concrete. There are also numerous customers for nails, staples and wires, commonly used in the agribusiness sector. NOTE 2 PRESENTATION OF THE FINANCIAL STATEMENTS The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM). A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information in order to provide additional information. NOTE 3 SIGNIFICANT ACCOUNTING PRACTICES a) Cash and cash equivalents financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the interest rates agreed with the financial institutions, and do not exceed market value; b) Trade accounts receivable are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees and the legal advisors opinion, and is considered sufficient to cover eventual losses on realization; c) Inventories are stated at the lower of market value and average production or purchase cost; GERDAU AÇOMINAS S.A. (A free translation of the original in Portuguese) NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2004 AND 2003 (All amounts in thousands of reais unless otherwise indicated) d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss is recorded in an income statement account; e) Fixed assets are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note 12, whic
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