EX-99.2 3 a16-5867_2ex99d2.htm EX-99.2

Exhibit 99.2

Highlights in fourth quarter and fiscal year 2015

Main Highlights

· Selling, general and administrative expenses decrease 5.4% in 2015 compared to 2014.

· Positive free cash flow generation of R$1.2 billion in 4Q15 and R$3.0 billion in 2015, supported by the optimization of working capital.

· Extraordinary events of R$5.3 billion adversely affect fiscal year 2015.

· Consolidated EBITDA margin remains resilient due to geographic diversification, despite the current scenario in the world steel industry.

· CAPEX disbursements in 2016 projected at R$1.5 billion, down 35% from the R$2.3 billion invested in 2015.

Key Information		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation  4Q15/3Q15		Fiscal Year 2015		Fiscal Year  2014		Variation  2015/2014
Steel
Production of Crude Steel (1,000 tonnes)		3,889		4,323		-10.0	%	4,201		-7.4	%	16,862		18,028		-6.5	%
Shipments (1,000 tonnes)		3,887		4,399		-11.6	%	4,669		-16.7	%	16,970		17,869		-5.0	%
Net Sales (R$ million)		10,449		10,843		-3.6	%	11,925		-12.4	%	43,581		42,546		2.4	%
SG&A (R$ million)		(655	)	(681	)	-3.8	%	(631	)	3.8	%	(2,582	)	(2,728	)	-5.4	%
Adjusted EBITDA(1) (R$ million)		911		1,246		-26.9	%	1,291		-29.4	%	4,501		4,906		-8.3	%
Adjusted Net Income(2) (R$ million)		(41	)	95		—		193		—		684		1,190		-42.5	%
Gross margin		7.5	%	11.8	%			10.2	%			9.8	%	12.1	%
EBITDA Margin		8.7	%	11.5	%			10.8	%			10.3	%	11.5	%
Shareholders’ equity (R$ million)		31,970		33,255				36,012				31,970		33,255
Total Assets (R$ million)		70,095		63,042				76,490				70,095		63,042
Gross debt / Total capitalization(3)		45.0	%	36.0	%			43.0	%			45.0	%	36.0	%
Net debt(4) (US$) / EBITDA(5)  (US$)		3.6	x	2.1	x			2.7	x			3.6	x	2.1	x

(1) - Adjusted EBITDA = non-accounting mesurement prepared by the Company.

(2) - Adjusted net income (non-accounting measurement) = net income (loss) adjusted by the extraordinary events

(3) - Total capitalization = shareholders’ equity + gross debt - interest on debt

(4) - Net debt = gross debt - interest on debt - cash, cash equivalents and short-terminvestments

(5) - Adjusted EBITDAin the last 12 months.

World Steel Market

· On October 12, 2015, the worldsteel released its latest Short Range Outlook containing forecasts for global apparent steel consumption. For 2016, the forecast calls for growth of 0.7%, since the current unfavorable scenario is expected to be partially mitigated, given the expectations of a stabilization of the Chinese economy and recoveries in developed economies, which, despite their current weakness, continue to advance. Apparent steel consumption in China is expected to contract by 2.0% in 2016, after peaking in 2013. Emerging and developing economies (excluding China) began to deteriorate in 2012, due to internal structural issues, low commodity prices and growing political instability, such as in Russia and Brazil. Apparent steel consumption in emerging and developing economies is expected to grow by 3.8% in 2016. Meanwhile, in developed economies, apparent steel consumption is expected to grow by 1.8% in 2016.

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Consolidated Information

Gerdau’s performance in the fourth quarter of 2015

The Consolidated Financial Statements of Gerdau S.A. are presented in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the accounting practices adopted in Brazil, which are fully aligned with the international accounting standards issued by the Accounting Pronouncement Committee (CPC).

The information in this report does not include data for jointly controlled entities and associate companies, except where stated otherwise.

Consolidated Results

Production and shipments

Consolidated (1,000 tonnes)		4th Quarter 2015		4th Quarter 2014		Variation  4Q15/4Q14		3rd Quarter 2015		Variation  4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation  2015/2014
Production of crude steel		3,889		4,323		-10.0	%	4,201		-7.4	%	16,862		18,028		-6.5	%
Shipments of steel		3,887		4,399		-11.6	%	4,669		-16.7	%	16,970		17,869		-5.0	%

· Consolidated crude steel production decreased in 4Q15 in relation to 4Q14 and 3Q15, due to the adjustment of inventories in practically all business operations.

· Consolidated shipments decreased in 4Q15 compared to 4Q14, reflecting mainly the lower shipments by the Brazil BO in the domestic market. Compared to 3Q15, consolidated shipments decreased in 4Q15 in all business operations, which also reflects the period’s seasonality.

Net sales, cost and gross margin

Consolidated (R$ million)		4th Quarter 2015		4th Quarter 2014		Variation  4Q15/4Q14		3rd Quarter 2015		Variation  4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation  2015/2014
Net Sales		10,449		10,843		-3.6	%	11,925		-12.4	%	43,581		42,546		2.4	%
Cost of Goods Sold		(9,662	)	(9,559	)	1.1	%	(10,714	)	-9.8	%	(39,290	)	(37,406	)	5.0	%
Gross profit		787		1,284		-38.7	%	1,211		-35.0	%	4,291		5,140		-16.5	%
Gross margin (%)		7.5	%	11.8	%			10.2	%			9.8	%	12.1	%

· Consolidated net sales decreased in 4Q15 compared to 4Q14, mainly due to lower shipments by the Brazil BO, which were partially offset by the higher net sales generated by the North America BO when translated into Brazilian real. Compared to 3Q15, consolidated net sales decreased, mainly due to lower shipments by the Brazil and North America BOs.

· On a consolidated basis, gross profit and gross margin decreased in 4Q15 compared to 4Q14, due to the weaker performance of the Brazil BO, which was affected by production stoppages, and the Special Steel BO, which were partially offset by the better performance of the North America BO, reflecting the Company’s geographic diversification. Compared to 3Q15, the reductions in consolidated gross profit and consolidated gross margin were due to the weaker performance of the Brazil, North America and Special Steel BOs, mainly due to lower shipments.

Operating expenses

Consolidated  (R$ million)		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation 4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation 2015/2014
SG&A		(655	)	(681	)	-3.8	%	(631	)	3.8	%	(2,582	)	(2,728	)	-5.4	%
Selling expenses		(225	)	(166	)	35.5	%	(196	)	14.8	%	(785	)	(691	)	13.6	%
General and administrative expenses		(430	)	(515	)	-16.5	%	(435	)	-1.1	%	(1,797	)	(2,037	)	-11.8	%
Other operating income (expenses)		56		33		69.7	%	8		600.0	%	97		88		10.2	%
Result in operations with jointly controlled entities		—		637		—		—		—		—		637		—
Equity in earnings of unconsolidated companies		(44	)	13		—		6		—		25		102		—

· General and administrative expenses decreased in 4Q15 compared to 4Q14 and 3Q15, demonstrating the Company’s efforts over the periods to rationalize these expenses and despite the effects from exchange variation

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in the comparison periods. These efforts led to a reduction in selling, general and administrative expenses as a ratio of net sales, from 6.4% in 2014 to 5.9% in 2015.

Impairment of assets

· Gerdau presents its financial statements in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). This standard requires impairment tests of goodwill and other long-lived assets held by the Company. To determine the recoverable amount of each Business Segment, the Company uses the discounted cash flow method based on the financial projections for each segment. The projections are updated considering the changes observed in the economic scenario of the markets in which the Company operates, as well as the assumptions for the expected results in each segment.

· Impairment tests of goodwill and other long-lived asset conducted during 2015 and 2014 identified losses from asset impairments classified as follows:

		Fiscal Year 2015										Fiscal Year 2014
Impairment of assets by business operations (R$ million)		Brazil BO		North America BO		South America BO		Special Steel BO		Consolidated		South America BO		Consolidated
Goodwill		—		1,520		354		1,125		2,999		—		—
Property, plant and equipment, net		835		—		—		800		1,635		339		339
Investments		—		362		—		—		362		—		—
Total		835		1,882		354		1,925		4,996		339		339

· In 4Q15, from the total amount of R$ 3.1 billion in impairment of assets, R$ 1.2 billion was recorded as goodwill in North America BO, R$ 1.1 billion as goodwill in Special Steel BO and R$ 835 million as property, plant and equipment in Brazil BO. Specifically in Brazil BO, the losses were due to demand slowdown and production stoppages at certain units of the Company during 2015 in order to adjust production to the new demand levels.

		4th Quarter 2015								3rd Quarter 2015								4th Quarter 2014
Impairments of assets by business operations (R$ million)		Brazil BO		North America BO		Special Steel BO		Consolidated		North America BO		South America BO		Special Steel BO		Consolidated		South America BO		Consolidated
Goodwill		—		1,169		1,125		2,294		351		354		—		705		—		—
Property, plant and equipment, net		835		—		—		835		—		—		800		800		339		339
Investments		—		—		—		—		362		—		—		362		—		—
Total		835		1,169		1,125		3,129		713		354		800		1,867		339		339

EBITDA

Breakdown of Consolidated EBITDA (R$ million)		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation 4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation 2015/2014
Net income (loss)		(3,170	)	393		—		(1,958	)	61.9	%	(4,596	)	1,488		—
Net financial result		392		673		-41.8	%	1,381		-71.6	%	2,879		1,561		84.4	%
Provision for income and social contribution taxes		(207	)	(120	)	72.5	%	(697	)	-70.3	%	(1,499	)	(150	)	899.3	%
Depreciation and amortization		707		590		19.8	%	672		5.2	%	2,608		2,227		17.1	%
EBITDA - Instruction CVM (1)		(2,278	)	1,536		-248.3	%	(602	)	—		(608	)	5,126		-111.9	%
Impairment of Assets		3,129		339		823.0	%	1,867		67.6	%	4,996		339		1373.7	%
Result in operations with jointly controlled entities		—		(637	)	—		—		—		—		(637	)	—
Equity in earnings of unconsolidated companies		44		(13	)	—		(6	)	—		25		(102	)	—
Proportional EBITDA of associated companies and jointly controlled entities		16		21		-23.8	%	32		-50.0	%	88		180		-51.1	%
Adjusted EBITDA(2)		911		1,246		-26.9	%	1,291		-29.4	%	4,501		4,906		-8.3	%
Adjusted EBITDA Margin		8.7	%	11.5	%			10.8	%			10.3	%	11.5	%

(1) - Non-accounting measurement calculated pursuant to Instruction 527 of the CVM.

(2) - Non-accounting mesurement prepared by the Company.

Note: EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is not a method used in accounting practices, does not represent cash flow for the periods in question and should not be considered an alternative to cash flow as an indicator of liquidity. The Company presents adjusted EBITDA to provide additional information regarding cash flow generation in the period.

Conciliation of Consolidated EBITDA (R$ million)		4th Quarter 2015		4th Quarter 2014		3rd Quarter 2015		Fiscal Year 2015		Fiscal Year 2014
EBITDA - Instruction CVM (1)		(2,278	)	1,536		(602	)	(608	)	5,126
Depreciation and amortization		(707	)	(590	)	(672	)	(2,608	)	(2,227	)
OPERATING INCOME (LOSS) BEFORE FINANCIAL RESULT AND TAXES(2)		(2,985	)	946		(1,274	)	(3,216	)	2,899

(1) - Non-accounting measure calculated pursuant to Instruction 527 of the CVM.

(2) - Accounting measurement disclosed in consolidated Statements of Income.

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Consolidated EBITDA (R$ million) and EBITDA margin (%)

· Adjusted EBITDA decreased in 4Q15 compared to 4Q14, due to the weaker performance of the Brazil BO, which was affected by production stoppages, and the Special Steel BO, which was partially offset by the better performance of the North America BO. Adjusted EBITDA decreased slower than gross profit due to the effect from higher depreciation. Compared to 3Q15, adjusted EBITDA decreased in line with gross profit, due to the weaker performance of the Brazil, North America and Special Steel BOs.

· Adjusted EBITDA margin decreased slower than gross margin in 4Q15 compared to 4Q14 and 3Q15.

Financial result and net income

Consolidated (R$ million)		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation 4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation 2015/2014
Income (loss) before financial income (expenses) and taxes(1)		(2,985	)	946		—		(1,274	)	—		(3,216	)	2,899		—
Financial Result		(392	)	(673	)	-41.8	%	(1,381	)	-71.6	%	(2,879	)	(1,561	)	84.4	%
Financial income		73		60		21.7	%	102		-28.4	%	378		276		37.0	%
Financial expenses		(519	)	(392	)	32.4	%	(495	)	4.8	%	(1,780	)	(1,397	)	27.4	%
Exchange variation, net		37		(372	)	—		(1,044	)	—		(1,564	)	(476	)	228.6	%
Exchange variation on net investment hedge		71		(214	)	—		(909	)	—		(1,302	)	(328	)	297.0	%
Exchange variation - other lines		(34	)	(158	)	-78.5	%	(135	)	-74.8	%	(262	)	(148	)	77.0	%
Gains (losses) on financial instruments, net		17		31		-45.2	%	56		-69.6	%	87		36		141.7	%
Income (loss) before taxes(1)		(3,377	)	273		—		(2,655	)	27.2	%	(6,095	)	1,338		—
Income and social contribution taxes		207		120		72.5	%	697		-70.3	%	1,499		150		899.3	%
On net investment hedge		(71	)	214		—		909		—		1,302		328		297.0	%
Write-off of deferred tax assets		—		—		—		(284	)	—		(284	)	—		—
Other lines		278		(94	)	—		72		286.1	%	481		(178	)	—
Consolidated Net Income (loss)(1)		(3,170	)	393		—		(1,958	)	61.9	%	(4,596	)	1,488		—
Extraordinary events		3,129		(298	)	—		2,151		45.5	%	5,280		(298	)	—
Result in operations with jointly controlled entities, net		—		(637	)	—		—		—		—		(637	)	—
Reversal of the Impairment of assets		3,129		339		823.0	%	1,867		67.6	%	4,996		339		1373.7	%
Reversal of the write-off of deferred tax assets		—		—		—		284		—		284		—		—
Consolidated Adjusted Net Income (loss)(2)		(41	)	95		—		193		—		684		1,190		-42.5	%

(1) - Accounting measurement disclosed in the income statement of the Company.

(2) - Non accounting measurement made by the Company to demonstrate the net income adjusted by the extraordinary events that impacted the result, but without cash effect.

· In 4Q15 compared to 4Q14, the lower negative financial result reflects the positive exchange variation on liabilities contracted in U.S. dollar (appreciation in the end-of-period price of the Brazilian real against the U.S. dollar of 1.7% in 4Q15 and depreciation of 8.4% in 4Q14), even though financial expenses increased due to the negative effect from exchange variation (depreciation in the average price of the Brazilian real against the U.S. dollar of 51.2% in 4Q15 compared to 4Q14).

· The lower negative financial result in 4Q15 compared to 3Q15 is mainly explained by the higher positive exchange variation in 4Q15 (appreciation in the end-of-period price of the Brazilian real against the U.S. dollar of 1.7% in 4Q15, versus depreciation of 28.1% in 3Q15) even considering the higher financial expenses.

· Note that, in accordance with IFRS, the Company designated the bulk of its debt in foreign currency contracted by companies in Brazil as hedge for a portion of the investments in subsidiaries located abroad. As a result, only the effect from exchange variation on the portion of debt not linked to investment hedge is recognized in the financial result, with this effect neutralized by the line “Income and Social Contribution taxes on net investment hedge.”

· The consolidated adjusted net loss in 4Q15, compared to the adjusted net income in 4Q14 and 3Q15, is explained by the lower operating income in the period.

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Dividends

· In 2015, Gerdau S.A. allocated R$253.0 million (R$0.15 per share) to the payment of dividends and interest on capital, which was distributed from the net income recorded in the first six months of 2015 and retained earnings reserve, despite the challenging scenario in the steel industry.

Investments

· In 4Q15, CAPEX amounted to R$555.5 million. Of the amount invested in the quarter, 43.8% was allocated to the Brazil BO, 19.4% to the North America BO, 19.1% to the South America BO and 17.7% to the Special Steel BO.

· In 2015, investments in fixed assets amounted to R$2.3 billion, which was inflated by the depreciation in the Brazilian real against the U.S. dollar, considering that some investments are linked to the dollar.

· Based on the investments scheduled for 2016, Gerdau plans to invest R$1.5 billion, considering the investments in productivity improvements and maintenance, which is 35% below the amount in 2015.

Working Capital and Cash Conversion Cycle

· In December 2015, the cash conversion cycle (working capital divided by daily net sales in the quarter) decreased slightly in relation to September 2015, reflecting the 14.5% decrease in working capital in comparison with the 12.4% decrease in net sales.

· Note that the R$1.7 billion decrease in working capital between September and December 2015 includes the effects from exchange variation on the working capital of companies abroad. Excluding this variation, the cash effect was a R$1.2 billion decrease between September and December 2015, demonstrating the Company’s efforts to optimize working capital. From December 2014 to December 2015, the cash effect was a R$2.4 billion decrease in working capital.

Financial Liabilities

Debt composition (R$ million)		12.31.2015		09.30.2015		12.31.2014
Short Term		2,387		2,132		2,038
Long Term		24,074		25,451		17,484
Gross Debt		26,461		27,583		19,522
Cash, cash equivalents and short-term investments		6,919		6,739		5,849
Net Debt		19,542		20,844		13,673

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· On December 31, 2015, gross debt was 9.0% short term and 91.0% long term. Gross debt was 13.1% denominated in Brazilian real, 81.8% in U.S. dollar and 5.1% in other currencies. The R$1.1 billion decrease in gross debt between September and December 2015 is mainly explained by the payments made during 4Q15 and by the effects from exchange variation in the period (appreciation in the end-of-period price of the Brazilian real against the U.S. dollar of 1.7% in 4Q15).

· On December 31, 2015, 66.9% of cash was held by Gerdau companies abroad and denominated mainly in U.S. dollar.

· The decrease in net debt on December 31, 2015 compared to September 30, 2015 is due to the reduction in gross debt and cash increase.

· On December 31, 2015, the nominal weighted average cost of gross debt was 6.8%, or 11.8% for the portion denominated in Brazilian real, 6.0% plus exchange variation for the portion denominated in U.S. dollar contracted by companies in Brazil, and 6.0% for the portion contracted by subsidiaries abroad. On December 31, 2015, the average gross debt term was 6.5 years, with more than 70% maturing only as of 2018.

· On December 31, 2015, the payment schedule for long-term gross debt was as follows:

Long Term		R$ million
2017		4,637
2018		1,531
2019		969
2020		3,863
2021		4,663
2022		198
2023		2,415
2024		3,538
2025 and after		2,260
Total		24,074

· The Company’s main debt indicators are shown below:

Indicators		12.31.2015		09.30.2015		12.31.2014
Gross debt / Total capitalization (1)		45	%	43	%	36	%
Net debt(2) (US$) / EBITDA (3) (US$)		3.6	x	2.7	x	2.1	x

(1) - Total capitalization = shareholders’ equity + gross debt- interest on debt

(2) - Net debt = gross debt - interest on debt - cash, cash equivalents and short-term investments

(3) -  Adjusted EBITDAin the last 12 months.

Indebtedness

(R$ billion)

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· Note that, since the bulk of EBITDA in the last 12 months was generated by business operations abroad, mainly in U.S. dollar, and more than 80% of consolidated net debt on December 31, 2015 was also denominated in U.S. dollar, the net debt / EBITDA ratio calculated in this currency stood at 3.6 times.

Free Cash Flow (FCF)

· In 2015, the Company generated R$3.0 billion in consolidated free cash flow, which is explained by the EBITDA generation of R$4.5 billion surpassing by R$593 million the Company’s commitments (CAPEX, income tax and interest on debt) and by the freeing up of working capital of R$2.4 billion. In 4Q15, the Company generated R$1.2 billion in free cash flow, basically due to the freeing up of working capital in the period. This positive free cash flow is aligned with the Company’s strategy grounded in capital discipline, as was the case in 2013 and 2014, despite the challenging scenario in the steel industry.

Free Cash Flow 2015

(R$ million)

Free Cash Flow 4Q15

(R$ million)

Clarification about Zelotes Operation

Given that the name of Gerdau has been mentioned in Zelotes Operation, the company hereby clarifies and reiterates the following to the public:

· Gerdau has pending proceedings filed with the Administrative Council of Tax Appeals (CARF) and has always used the services of external firms strictly to obtain the best technical advice.

· Contrary to media reports, this is not a question of tax evasion - false tax statement or omission to skirt eventual taxes due — but a question of the legitimate use of the right of Gerdau companies, expressly backed by law and precedents.

· The financial information related to ongoing proceedings at CARF have been disclosed in the notes to the Company’s Financial Statements.

· All agreements with these external firms, as with other agreements that Gerdau has entered into with service providers, have included a clause that determines absolute compliance with laws, breach of which calls for immediate termination thereof.

· No money was paid or passed on to external firms in the specific case and agreements were rescinded when the names of service providers investigated were reported in the press for suspected illegal activities.

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· The company never gave any authorization for its name to be used in alleged unlawful negotiations and strongly repudiates any action taken for this purpose.

Thus, Gerdau, as a company that has been in the market for 115 years, reiterates that it has set strict ethical standards for its dealings with public agencies and reaffirms that it is, as it has always been, at the disposal of competent authorities to provide any clarifications that may be requested.

Business Operations (BO)

As of the third quarter of 2015, the Company adopted a new business segmentation to capture greater strategic and operational synergies for serving the South American, North American and Brazilian markets, as follows:

· Brazil BO (Brazil Business Operation) — includes the steel operations in Brazil (except special steel), the metallurgical and coking coal operation in Colombia and the iron ore operation in Brazil

· North America BO (North America Business Operation) — includes all North American operations (Canada, United States and Mexico), except special steel;

· South America BO (South America Business Operation) — includes all operations in South America (Argentina, Chile, Colombia, Peru, Uruguay and Venezuela), except the operations in Brazil, the metallurgical and coking coal operation in Colombia and the iron ore operation in Brazil

· Special Steel BO (Special Steel Business Operation) — includes the special steel operations in Brazil, Spain, United States and India.

For comparison purposes, the information on prior periods in this report was modified based on this new business segmentation.

Net Sales

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EBITDA and EBITDA Margin

Brazil BO

Production and shipments

Brazil BO (1,000 tonnes)		4th Quarter  2015		4th Quarter  2014		Variation  4Q15/4Q14		3rd Quarter  2015		Variation 4Q15/3Q15		Fiscal Year  2015		Fiscal Year  2014		Variation  2015/2014
Production of crude steel		1,481		1,619		-8.5	%	1,578		-6.1	%	6,247		6,458		-3.3	%
Shipments of steel		1,394		1,738		-19.8	%	1,938		-28.1	%	6,457		6,583		-1.9	%
Domestic Market		815		1,357		-39.9	%	1,127		-27.7	%	4,284		5,540		-22.7	%
Exports		579		381		52.0	%	811		-28.6	%	2,173		1,043		108.3	%

· Crude steel production decreased in 4Q15 compared to 4Q14 and 3Q15, following the lower shipments.

· Shipments in the domestic market decreased in 4Q15 compared to 4Q14, reflecting the weaker growth in the construction and manufacturing industries due to economic uncertainties, mainly in December 2015. On the other hand, exports advanced in relation to 4Q14, due to opportunities in the international market and the favorable exchange rate. Compared to 3Q15, shipments in the domestic market decreased due to seasonality and economic uncertainties. Exports decreased in 4Q15 compared to 3Q15, reflecting the greater selectivity in the transactions carried out and in keeping with the new level of the exchange rate.

· In 4Q15, 1,462 thousand tonnes of iron ore were shipped to the Ouro Branco Mill in Minas Gerais and 660 thousand tonnes were sold to third parties.

Operating result

Brazil BO (R$ million)		4th Quarter  2015		4th Quarter  2014		Variation 4Q15/4Q14		3rd Quarter  2015		Variation  4Q15/3Q15		Fiscal Year  2015		Fiscal Year  2014		Variation  2015/2014
Net Sales(1)		2,678		3,751		-28.6	%	3,723		-28.1	%	12,977		14,813		-12.4	%
Domestic Market		1,883		3,067		-38.6	%	2,563		-26.5	%	9,802		12,837		-23.6	%
Exports		795		684		16.2	%	1,160		-31.5	%	3,175		1,976		60.7	%
Cost of Goods Sold		(2,535	)	(3,055	)	-17.0	%	(3,283	)	-22.8	%	(11,433	)	(12,003	)	-4.7	%
Gross profit		143		696		-79.5	%	440		-67.5	%	1,544		2,810		-45.1	%
Gross margin (%)		5.3	%	18.6	%			11.8	%			11.9	%	19.0	%
EBITDA		186		715		-74.0	%	470		-60.4	%	1,656		2,815		-41.2	%
EBITDA margin (%)		6.9	%	19.1	%			12.6	%			12.8	%	19.0	%

(1) - Includes iron ore, coking coal and coke net sales.

· The decrease in net sales in 4Q15 compared to 4Q14 and 3Q15 was mainly due to the lower shipments in the domestic market. Specifically compared to 4Q14, net sales from exports grew slower than shipments due to lower international prices and the less favorable product mix, despite the favorable exchange variation in the comparison period.

9

· Cost of goods sold decreased in 4Q15 compared to 4Q14 and 3Q15, mainly due to the lower shipments in the domestic market. Gross margin contracted in 4Q15 in relation to 4Q14 due to the lower dilution of fixed costs and the less favorable market mix. Compared to 3Q15, the decrease in gross margin in 4Q15 was mainly due to the lower shipments and the costs of production stoppages, which amounted to R$109.7 million no 4Q15.

· EBITDA and EBITDA margin in 4Q15 accompanied the declines in gross profit and gross margin in comparison with 4Q14 and 3Q15.

EBITDA (R$ million) and EBITDA Margin (%)

North America BO

Production and shipments

North America BO (1,000 tonnes)		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation 4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation 2015/2014
Production of crude steel		1,450		1,586		-8.6	%	1,675		-13.4	%	6,469		7,009		-7.7	%
Shipments of steel		1,433		1,483		-3.4	%	1,664		-13.9	%	6,232		6,500		-4.1	%

· Crude steel production decreased in 4Q15 compared to 4Q14, due to the lower shipments and the efforts to optimize inventories.

· Shipments decreased in 4Q15 compared to 4Q14, due to continued pressure from imported products in the region. Compared to 3Q15, shipments decreased due to seasonality.

Operating result

North America BO (R$ million)		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation 4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation 2015/2014
Net Sales		4,311		3,693		16.7	%	4,833		-10.8	%	17,312		14,640		18.3	%
Cost of Goods Sold		(3,948	)	(3,468	)	13.8	%	(4,360	)	-9.4	%	(15,800	)	(13,693	)	15.4	%
Gross profit		363		225		61.3	%	473		-23.3	%	1,512		947		59.7	%
Gross margin (%)		8.4	%	6.1	%			9.8	%			8.7	%	6.5	%
EBITDA		396		202		96.0	%	519		-23.7	%	1,619		955		69.5	%
EBITDA margin (%)		9.2	%	5.5	%			10.7	%			9.4	%	6.5	%

· Net sales increased in 4Q15 compared to 4Q14, due to the effect from exchange variation in the periods (depreciation in the average price of the Brazilian real against the U.S. dollar of 51.2% in 4Q15 compared to 4Q14), which was offset by the decline in net sales per tonne sold in U.S. dollar and by lower shipments. Compared to 3Q15, the decrease in net sales was due to the reductions in shipments and in net sales per tonne sold in U.S. dollar, despite the 8.7% depreciation in the Brazilian real against the U.S. dollar in the comparison period.

· Cost of goods sold increased in 4Q15 compared to 4Q14, due to the effects from exchange variation. Gross margin increased in 4Q15 compared to 4Q14, which is explained by cost-cutting initiatives and the lower scrap costs in this business operation. Compared to 3Q15, cost of goods sold decreased due to lower shipments, which is explained by the lower dilution of fixed costs and consequently the lower gross margin.

10

· The increases in EBITDA and EBITDA margin in 4Q15 compared to 4Q14 were driven by the improvement in gross profit. Compared to 3Q15, EBITDA and EBITDA margin decreased, following the performance of gross profit and gross margin.

EBITDA (R$ million) and EBITDA Margin (%)

South America BO

Production and shipments

South America BO (1,000 tonnes)		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation 4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation 2015/2014
Production of crude steel		333		307		8.5	%	297		12.1	%	1,242		1,253		-0.9	%
Shipments of steel		550		584		-5.8	%	583		-5.7	%	2,222		2,277		-2.4	%

· Shipments in 4Q15 decreased compared to 4Q14 and 3Q15, with performances varying in the countries where Gerdau operates due to the high level of imports into the region.

Operating result

South America BO (R$ million)		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation 4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation 2015/2014
Net Sales		1,481		1,364		8.6	%	1,434		3.3	%	5,477		5,078		7.9	%
Cost of Goods Sold		(1,252	)	(1,193	)	4.9	%	(1,269	)	-1.3	%	(4,800	)	(4,423	)	8.5	%
Gross profit		229		171		33.9	%	165		38.8	%	677		655		3.4	%
Gross margin (%)		15.5	%	12.5	%			11.5	%			12.4	%	12.9	%
EBITDA		206		114		80.7	%	130		58.5	%	557		476		17.0	%
EBITDA margin (%)		13.9	%	8.4	%			9.1	%			10.2	%	9.4	%

· Net sales and cost of goods sold increased in 4Q15 compared to 4Q14, which is mainly explained by the effect from exchange variation resulting from the depreciation in the average price of the Brazilian real against the currencies of the countries where Gerdau operates, despite the lower shipments sold and lower scrap cost. Compared to 3Q15, net sales increased due to the exchange variation, while costs of goods sold decreased due to the efforts to optimize costs in this business operation.

· Gross margin increased in 4Q15 compared to 4Q14 and 3Q15, due to the efforts to optimize costs in this business operation and to lower scrap costs.

· EBITDA and EBITDA margin increased in 4Q15 compared to 4Q14 and 3Q15, accompanying the performance of gross profit and gross margin and reflecting the decline in operating expenses.

11

EBITDA (R$ million) and EBITDA Margin (%)

Special Steel BO

Production and shipments

Special Steel BO (1,000 tonnes)		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation 4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation 2015/2014
Production of crude steel		625		811		-22.9	%	651		-4.0	%	2,903		3,308		-12.2	%
Shipments of steel		608		677		-10.2	%	617		-1.5	%	2,621		2,894		-9.4	%

· Crude steel production decreased in 4Q15 compared to 4Q14 and 3Q15, due to the optimization of inventories in Brazil and the United States.

· Shipments decreased in 4Q15 compared to 4Q14, which is explained by the sharp drop in demand from the auto industry in Brazil and, to a lesser extent, from the oil and gas industry in the United States. Compared to 3Q15, shipments decreased mainly due to seasonality in Brazil and the United States.

Operating result

Special Steel BO (R$ million)		4th Quarter 2015		4th Quarter 2014		Variation 4Q15/4Q14		3rd Quarter 2015		Variation 4Q15/3Q15		Fiscal Year 2015		Fiscal Year 2014		Variation 2015/2014
Net Sales		2,185		2,104		3.8	%	2,194		-0.4	%	8,882		8,644		2.8	%
Cost of Goods Sold		(2,136	)	(1,911	)	11.8	%	(2,060	)	3.7	%	(8,333	)	(7,922	)	5.2	%
Gross profit		49		193		-74.6	%	134		-63.4	%	549		722		-24.0	%
Gross margin (%)		2.2	%	9.2	%			6.1	%			6.2	%	8.4	%
EBITDA		151		254		-40.6	%	224		-32.6	%	850		918		-7.4	%
EBITDA margin (%)		6.9	%	12.1	%			10.2	%			9.6	%	10.6	%

· Net sales increased in 4Q15 compared to 4Q14, despite lower shipments, mainly due to the effects from exchange variation on shipments at the units abroad. Compared to 3Q15, net sales remained stable, with lower shipments partially offset by the effect from exchange variation in the period.

· Cost of goods sold increased in 4Q15 compared to 4Q14 and 3Q15, mainly due to the effects from exchange variation on the special steel operations at units abroad and the lower dilution of fixed costs resulting from the lower shipments. Gross margin decreased in 4Q15 compared to 4Q14 and 3Q15, mainly due to the lower dilution of fixed costs and the lower profitability of units in the United States. Even though demand from the country’s

12

auto industry remained firm, the challenges in the oil and gas industry affected profitability at these units.  On the other hand, the unit in India delivered higher profitability, especially compared to 4Q14.

· EBITDA and EBITDA margin decreased in 4Q15 compared to 4Q14 and 3Q15, accompanying the performance of gross profit and gross margin, but was partially offset by the optimization of operating expenses.

EBITDA (R$ million) and EBITDA Margin (%)

THE MANAGEMENT

This document contains forward-looking statements. These statements are based on estimates, information or methods that may be incorrect or inaccurate and that may not occur. These estimates are also subject to risk, uncertainties, and assumptions that include, among other factors: general economic, political, and commercial conditions in Brazil and in the markets where we operate, as well as existing and future government regulations. Potential investors are cautioned that these forward-looking statements do not constitute guarantees of future performance, given that they involve risks and uncertainties. Gerdau does not undertake and expressly waives any obligation to update any of these forward-looking statements, which are valid only on the date on which they were made.

13

GERDAU S.A.

CONSOLIDATED BALANCE SHEETS

as of December 31, 2015 and 2014

In thousands of Brazilian reais (R$)

		2015		2014
CURRENT ASSETS
Cash and cash equivalents		5,648,080		3,049,971
Short-term investments
Held for Trading		1,270,760		2,798,834
Trade accounts receivable - net		4,587,426		4,438,676
Inventories		8,781,113		8,866,888
Tax credits		673,155		686,958
Income and social contribution taxes recoverable		724,843		468,309
Unrealized gains on financial instruments		37,981		41,751
Other current assets		454,140		331,352
		22,177,498		20,682,739
NON-CURRENT ASSETS
Tax credits		77,990		78,412
Deferred income taxes		4,307,462		2,567,189
Unrealized gains on financial instruments		5,620
Related parties		54,402		80,920
Judicial deposits		1,703,367		1,430,865
Other non-current assets		490,583		375,732
Prepaid pension cost		140,388		196,799
Investments in associates and jointly-controlled entities		1,392,882		1,394,383
Goodwill		14,653,026		12,556,404
Other Intangibles		1,835,761		1,547,098
Property, plant and equipment, net		23,255,730		22,131,789
		47,917,211		42,359,591
TOTAL ASSETS		70,094,709		63,042,330

14

GERDAU S.A.

CONSOLIDATED BALANCE SHEETS

as of December 31, 2015 and 2014

In thousands of  Brazilian reais (R$)

		2015		2014
CURRENT LIABILITIES
Trade accounts payable		3,629,788		3,236,356
Short-term debt		2,387,237		2,037,869
Taxes payable		349,674		405,490
Income and social contribution taxes payable		140,449		388,920
Payroll and related liabilities		480,430		668,699
Dividends payable		—		119,318
Employee benefits		18,535		34,218
Environmental liabilities		27,736		23,025
Other current liabilities		829,182		858,901
		7,863,031		7,772,796
NON-CURRENT LIABILITIES
Long-term debt		23,826,758		17,148,580
Debentures		246,862		335,036
Related parties		896		0
Deferred income taxes		914,475		944,546
Unrealized losses on financial instruments		—		8,999
Provision for tax, civil and labor liabilities		1,904,730		1,576,355
Environmental liabilities		136,070		93,396
Employee benefits		1,687,486		1,272,631
Obligations with FIDC		853,252		—
Other non-current liabilities		690,766		635,457
		30,261,295		22,015,000
EQUITY
Capital		19,249,181		19,249,181
Treasury stocks		(383,363	)	(233,142	)
Capital reserves		11,597		11,597
Retained earnings		6,593,078		11,366,957
Operations with non-controlling interests		(2,877,488	)	(1,732,962	)
Other reserves		9,092,796		3,539,188
EQUITY ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT		31,685,801		32,200,819
NON-CONTROLLING INTERESTS		284,582		1,053,715
EQUITY		31,970,383		33,254,534
TOTAL LIABILITIES AND EQUITY		70,094,709		63,042,330

15

GERDAU S.A.

CONSOLIDATED STATEMENTS OF INCOME

In thousands of Brazilian reais (R$)

		For the three months period ended				for the year ended
		December 31, 2015		December 31, 2014		December 31, 2015		December 31, 2014
NET SALES		10,449,129		10,843,796		43,581,241		42,546,339
Cost of sales		(9,662,584	)	(9,559,065	)	(39,290,526	)	(37,406,328	)
GROSS PROFIT		786,545		1,284,731		4,290,715		5,140,011
Selling expenses		(225,010	)	(165,684	)	(785,002	)	(691,021	)
General and administrative expenses		(430,299	)	(515,381	)	(1,797,483	)	(2,036,926	)
Other operating income		86,573		85,872		213,431		238,435
Other operating expenses		(30,269	)	(53,285	)	(116,431	)	(150,542	)
Impairment of assets		(3,128,654	)	(339,374	)	(4,996,240	)	(339,374	)
Gains in Joint ventures operations		—		636,528		—		636,528
Equity in earnings of unconsolidated companies		(43,812	)	13,024		(24,502	)	101,875
INCOME (LOSS) BEFORE FINANCIAL INCOME (EXPENSES) AND TAXES		(2,984,926	)	946,431		(3,215,512	)	2,898,986
Financial income		72,887		59,486		378,402		276,249
Financial expenses		(519,077	)	(392,296	)	(1,780,366	)	(1,397,375	)
Exchange variations, net		37,252		(371,942	)	(1,564,017	)	(476,367	)
Gain and losses on financial instruments, net		16,826		30,958		87,085		36,491
INCOME (LOSS) BEFORE TAXES		(3,377,038	)	272,637		(6,094,408	)	1,337,984
Current		77,784		(246,238	)	(158,450	)	(571,926	)
Deferred		129,737		366,594		1,656,872		722,315
Income and social contribution taxes		207,521		120,356		1,498,422		150,389
NET INCOME (LOSS)		(3,169,517	)	392,993		(4,595,986	)	1,488,373
(+) Reversal of impairment losses		3,128,654		339,374		4,996,240		339,374
(-) Gains in Joint ventures operations		—		(636,528	)	—		(636,528	)
(+) Reversal of write-offs of deferred tax assets		—		—		284,014		—
ADJUSTED NET INCOME *		(40,863	)	95,839		684,268		1,191,219

*Adjusted net income is a non GAAP measure prepared by the Company, reconciled with its financial statements and consists of net income (loss) adjusted by extraordinary events that impacted the statement of income, although with no cash effect.

16

GERDAU S.A.

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the years ended December 31, 2015, 2014 and 2013

In thousands of  Brazilian reais (R$)

		2015		2014
Cash flows from operating activities
Net income (loss) for the year		(4,595,986	)	1,488,373
Adjustments to reconcile net income for the year to net cash provided by operating activities
Depreciation and amortization		2,607,909		2,227,396
Impairment of Assets		4,996,240		339,374
Equity in earnings of unconsolidated companies		24,502		(101,875	)
Exchange variation, net		1,564,017		476,367
Gains on financial instruments, net		(87,085	)	(36,491	)
Post-employment benefits		233,287		200,699
Stock based remuneration		48,589		39,614
Income tax		(1,498,422	)	(150,389	)
Gains on disposal of property, plant and equipment and investments		(3,971	)	(48,639	)
Gains in Joint ventures operations		—		(636,528	)
Allowance for doubtful accounts		127,701		49,890
Provision for tax, labor and civil claims		323,314		281,876
Interest income on investments		(153,631	)	(144,723	)
Interest expense on loans		1,471,526		1,178,034
Interest on loans with related parties		(2,712	)	(2,743	)
(Reversal) Provision for net realisable value adjustment in inventory		17,536		(6,062	)
		5,072,814		5,154,173
Changes in assets and liabilities
Decrease (Increase) in trade accounts receivable		1,219,605		(36,468	)
Decrease (Increase) in inventories		1,977,361		(173,191	)
Decrease in trade accounts payable		(768,627	)	(251,911	)
Increase in other receivables		(270,391	)	(701,550	)
(Decrease) Increase in other payables		(509,227	)	280,187
Dividends from jointly-controlled entities		52,769		95,600
Purchases of trading securities		(1,958,522	)	(3,028,974	)
Proceeds from maturities and sales of trading securities		3,929,971		2,544,895
Cash provided by operating activities		8,745,753		3,882,761
Interest paid on loans and financing		(946,041	)	(859,821	)
Income and social contribution taxes paid		(637,394	)	(452,079	)
Net cash provided by operating activities		7,162,318		2,570,861
Cash flows from investing activities
Additions to property, plant and equipment		(2,324,718	)	(2,266,702	)
Proceeds from sales of property, plant and equipment, investments and other intangibles		90,942		1,067,938
Additions to other intangibles		(126,428	)	(141,956	)
Advance for capital increase in jointly-controlled entity		—		—
Payment for business acquisitions, net of cash of acquired entities		(20,929	)	—
Increase in controlling interest in associated companies		—		—
Capital increase in jointly-controlled entity		(40,524	)	—
Net cash used in investing activities		(2,421,657	)	(1,340,720	)
Cash flows from financing activities
Reduction of capital by non-controlling interests		—		(550,000	)
Purchase of treasury shares		(189,071	)	—
Proceeds from exercise of shares		—		5,483
Dividends and interest on capital paid		(358,226	)	(455,139	)
Proceeds from loans and financing		3,042,783		2,771,048
Repayment of loans and financing		(5,028,386	)	(2,173,555	)
Intercompany loans, net		30,126		8,939
Increase in controlling interest in subsidiaries		(339,068	)	(130,199	)
Put-Options on non-controlling interest		—		—
Net cash used in financing activities		(2,841,842	)	(523,423	)
Exchange variation on cash and cash equivalents		699,290		244,029
Increase in cash and cash equivalents		2,598,109		950,747
Cash and cash equivalents at beginning of year		3,049,971		2,099,224
Cash and cash equivalents at end of year		5,648,080		3,049,971

17