Gerdau S A : 3Q20 Quarterly Results

QUARTERLY

RESULTS

GERDAU S.A.

3Q20

São Paulo, October 28, 2020 - Gerdau S.A. (B3: GGBR4 / NYSE: GGB) announces its results for the third quarter of 2020. The consolidated financial statements of the Company are presented in Brazilian real (R$), in accordance with International Financial Reporting Standards (IFRS) and the accounting practices adopted in Brazil. The information in this report does not include the data of associates and jointly controlled entities, except where stated otherwise.

GERDAU'S PERFORMANCE IN 3Q20

Operating Results

CONSOLIDATED	3Q20	3Q19	∆	2Q20	∆	9M20	9M19	∆
Volumes (1,000 tonnes)
Production of crude steel	3,200	2,733	17%	2,433	32%	8,820	9,501	-7%
Shipments of steel	3,189	3,056	4%	2,365	35%	8,244	9,012	-9%
Results (R$ million)
Net Sales	12,222	9,931	23%	8,745	40%	30,194	30,111	0%
Cost of Goods Sold	(10,525)	(8,946)	18%	(8,027)	31%	(26,924)	(26,584)	1%
Gross profit	1,697	985	72%	718	136%	3,270	3,527	-7%
Gross margin (%)	13.9%	9.9%		8.2%		10.8%	11.7%
SG&A	(370)	(365)	2%	(306)	21%	(1,047)	(1,078)	-3%
Selling expenses	(131)	(116)	13%	(97)	35%	(348)	(359)	-3%
General and administrative expenses	(239)	(249)	-4%	(209)	15%	(699)	(719)	-3%
%SG&A/Net Sales	3.0%	3.7%		3.5%		3.5%	3.6%
Adjusted EBITDA	2,139	1,465	46%	1,318	62%	4,634	4,596	1%
Adjusted EBITDA Margin	17.5%	14.8%		15.1%		15.3%	15.3%

Production & Shipments

In 3Q20, crude steel production grew in relation to both 2Q20 and 3Q19 due to the recovery of economic activity in the various countries where the company operates. Note that 2Q20 was marked by shutdowns at certain industrial units due to the impacts from the covid-19 pandemic.

Steel shipments in 3Q20 grew in relation to 2Q20 and 3Q19, led by shipments to the domestic market in the Brazil BD supported by the robust recovery of the construction industry.

Operating Result

Net Sales

Net sales in 3Q20 accompanied the growth in shipments in relation to both 2Q20 and 3Q19. Note that net sales in the period were mainly influenced by the 36% Brazilian real depreciation against the U.S. dollar in the last 12 months, which had a positive effect on the translation of net sales from our operations in the North America BD.

Cost of Goods Sold

Similarly, cost of goods sold also reflected the higher shipments and currency translation effect on the North America operations, as well as on inputs imported by the Brazil BD, and increased in relation to both comparison periods. The prices of the main raw materials used by the company also rose, led by the price increases on the prior-year period in scrap (+27%) and iron ore (+28%).

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Gross Profit

Consolidated gross profit and gross margin increased significantly, explained by the 18% increase in net sales per tonne sold in relation to 3Q19, while cost per tonne sold increased 13%.

Selling, General & Administrative Expenses

Selling, general and administrative expenses remained in line with 3Q19, corresponding to 3.0% of net sales, which is 70 bps lower than the ratio registered in 3Q19 and the best ratio ever reported by the company.

EBITDA & EBITDA MARGIN

Breakdown of Consolidated EBITDA	3Q20	3Q19	∆	2Q20	∆	9M20	9M19	∆
(R$ million)
Net income	795	289	175%	315	152%	1,331	1,115	19%
Net financial result	303	562	-46%	330	-8%	865	1,237	-30%
Provision for income and social contribution taxes	282	(150)	-	131	116%	433	264	64%
Depreciation and amortization	647	504	28%	611	6%	1,815	1,535	18%
EBITDA - Instruction CVM ¹	2,027	1,205	68%	1,387	46%	4,444	4,151	7%
Impairment of financial assets	3	8	-56%	25	-87%	72	16	360%
Equity in earnings of unconsolidated companies	(71)	(10)	638%	4	-	(78)	15	-
Proportional EBITDA of associated companies and jointly controlled	180	81	122%	91	99%	384	234	64%
Fixed cost impacts of plants without production	-	238	-	119	-	119	238	-50%
Credit recovery / Provisions	-	(57)	-100%	(308)	-	(308)	(57)	440%
Adjusted EBITDA²	2,139	1,465	46%	1,318	62%	4,634	4,596	1%
Adjusted EBITDA Margin	17.5%	14.8%		15.1%		15.3%	15.3%

CONCILIATION OF CONSOLIDATED EBITDA	3Q20	3Q19	2Q20	9M20	9M19
(R$ million)
EBITDA - Instruction CVM ¹	2,027	1,205	1,387	4,444	4,151
Depreciation and amortization	(647)	(504)	(611)	(1,815)	(1,535)
OPERATING INCOME BEFORE FINANCIAL RESULT AND TAXES³	1,380	701	776	2,629	2,617

1 - Non-accounting measure calculated in accordance with CVM Instruction 527.

2 - Non-accounting measure calculated by the Company. The Company presents Adjusted EBITDA to provide additional information on cash generation in the period.

3 - Accounting measure reported in the consolidated Income Statement.

In 3Q20, adjusted EBITDA and adjusted EBITDA margin increased in relation to both comparison periods, mainly due to higher shipments to the domestic market in the Brazil BD and the better results in the South America BD. Note that this is the best quarterly EBITDA registered by the company since 2008.

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

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Financial Result & Net Income

CONSOLIDATED	3Q20	3Q19	∆	2Q20	∆	9M20	9M19	∆
(R$ million)
Income before financial income expenses and taxes¹	1,380	701	97%	776	78%	2,629	2,617	0.5%
Financial Result	(303)	(562)	-46%	(330)	-8%	(865)	(1,237)	-30%
Financial income	42	49	-14%	51	-17%	139	138	1%
Financial expenses	(354)	(368)	-4%	(390)	-9%	(1,069)	(1,066)	0%
Exchange variation, net (including net investment hedge)	57	(193)	-	29	92%	30	(214)	-
Exchange variation (other currencies)	(48)	(42)	15%	(20)	140%	35	(78)	-
Gains (losses) on financial instruments, net	(1)	(9)	-94%	0	-	0	(16)	-
Income before taxes¹	1,076	139	674%	446	141%	1,765	1,379	28%
Income and social contribution taxes	(282)	150	-	(131)	116%	(433)	(264)	64%
Exchange variation including net investment hedge	1	211	-100%	19	-95%	100	190	-47%
Other lines	(283)	(123)	130%	(85)	231%	(469)	(516)	-9%
Non recurring items	-	62	-	(64)	-100%	(64)	62	-
Consolidated Net Income ¹	795	289	175%	315	152%	1,331	1,115	19%
Non recurring items	-	(119)	-100%	(124)	-100%	(124)	119	-
Fixed costs Impacts of plants without production	-	238	-	119	-100%	119	238	-50%
Credit recovery / Provisions	-	(57)	-100%	(308)	-100%	(308)	(57)	440%
Income taxon extraordinary items	-	(62)	-100%	64	-100%	64	(62)	-
Consolidated Adjusted Net Income²	795	408	95%	191	316%	1,207	1,234	-2%

1 - Accounting measure disclosed in the consolidated Income Statement.

2 - Non-accounting measure calculated by the Company to show net profit adjusted by non-recurring events that influenced the result.

In 3Q20 compared to 2Q20 and 3Q19, the variation in the financial result was basically due to the effects from exchange variation.

Net income in 3Q20 increased in relation to 2Q20 and 3Q19 supported by the growth in EBITDA.

Dividends

Gerdau's Board of Directors approved the payment of dividends in the amount of R$204.1 million (R$ 0.12 per share), which was distributed as an advance on the minimum mandatory dividend for 2020, as stipulated in the Bylaws.

Payment date: November 18, 2020

Record date: shareholding position on November 6, 2020

Ex-dividend date: November 9, 2020

Working Capital & Cash Conversion Cycle

The cash conversion cycle (working capital divided by daily net sales in the quarter) decreased from 95 days in June 2020 to 63 days in September 2020, effectively optimizing working capital after the effects from the covid-19 pandemic, supported by a decrease in inventory days in the period combined with days payable increasing more than days receivable, reflecting the recovery in economic activity and the good conditions for payment terms.

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