Integration & Strategy

Integration & Strategy Reinhard Florey Strategy & Integration Outokumpu Outokumpu Experience 2013 May 22-23, 2013 Old Billingsgate, London, UK

Merging two stainless champions Combine 2 x 100 years of experience Combine 2 complementary global business approaches Combine 2 outstanding customer bases Combine 2 asset bases with significant synergy potential 2

Outline 1. Outokumpu strategy roadmap 2. Update on integration 3. Short term improvement: P300 and P150 4. Raw material procurement and hedging strategy 3

Strategic initiatives are the driver of change and support the Outokumpu strategy roadmap Restructuring + Growth = Performance Deliver on synergies New efficiency projects Transform company structure Ensure financial stability Ramp-up US presence Expand Ferrochrome Leverage HPSA Develop APAC Full integration and new culture Mill closures Loading efficiency Procurement & raw materials Streamlining overlapping activities P150 project ( 150 million savings) P300 project Working capital management Cold rolling ferritic optimization New leadership Market oriented Business Areas Customer orientation Global Group functions Minimize capex Optimize working capital management Pricing and hedging strategy Refinancing Ramp-up of Calvert mill Increase US market share Focus on quality and profitability Integrate Calvert and Mexinox Double production Achieve selfsufficiency Optimize efficiency Strategic review of VDM Strengthen profitability of specialty stainless Strengthen operations in the US Grow sales of specialty stainless Leverage production at SKS 1) Grow business in China, India and other South East Asia Advanced financial performance Pursue market leader strategy 2013 / 2014 2015 4

From integration planning to implementation the creation of new Outokumpu Integration planning Integration implementation? From Signing to Closing Planning work under strict legal restrictions Transversal Teams BA Teams Functional Teams Identifying synergies and measures Facilitating organization design process From Day 1 to Day 90 Day 1 execution Organization IT readiness Financial reporting alignment Aligned customer approach Transition from day 1 to day 90 Fine-tune organization in BA s and global functions Start synergy implementation 2013 2014 Living and leveraging the new organization Capturing synergy savings and set up advanced corporate programs Harmonization of processes, systems, data, guidelines Developing common culture and values 6

New Outokumpu operations Four Business Areas with sales, profit, production and supply chain management responsibility Strong group functions with global processes and topical responsibility to ensure efficiency and alignment Comprehensive governance approach through new Outokumpu Leadership Team (OLT) A manageable change adjust pace to ensure business continuity We will build on our strong heritage in quality and technical expertise while becoming even better at customer orientation, speed and reliability Our position as an industry leader in sustainability is testimony to our contribution to society 7

Our transformation principles From volumes to profit From production to customers Right volumes, with the right profitability Minimize money tied into inventories Set the benchmark for customer service in reliability, technical expertise, flexibility Working together Build trust across the company Always assume the best of intentions Speed Make and execute decisions quickly and decisively Execute decisions as one team Mika Seitovirta, CEO 8

Transaction expected to create annual synergy savings of EUR 200 million Synergy savings by category 15 % Production site closures ~35% Planned closures of melt shops in Germany (Krefeld and Bochum) Possible additional reduction of thin cold rolling production capacity in Sweden (financial savings not yet included) Capacity utilization and optimization ~25% Specialization and product swaps Lower variable costs through increased utilization 25 % 35 % Procurement & raw materials ~25% Economies of scale and centralization in procurement & raw materials purchasing 25 % Sales and general costs ~15% Streamlining of sales, service centers, head office, IT and other general costs Note: synergy saving target of MEUR 200 includes closures of Krefeld and Bochum melt shops but excludes possible savings from capacity reductions in Sweden. 9

Update synergy savings EUR 16 million achieved in Q1 2013 Synergy savings over time (cumulative) 250 200 150 100 50 0 16 Q1 13 Actual 13% 20% 3% 84% 50 2013 Target Q1/2013: EUR 16 million 2014 Target Target 2013: EUR 50 million 45% 2015 Target 35% 2016 Target 2017 Target Production optimization Procurement Sales & Admin Max Min We are on track to reach for targeted annual savings of EUR 50 million in 2013 Krefeld melt shop rampdown proceeding on plan, melt shop closed by the end of 2013 Up to EUR 150 million of the savings should be achieved during the first 2 years (annual) Note: synergy saving target of EUR 200 million includes closures of Krefeld and Bochum melts hops but excludes possible savings from capacity reductions in Sweden. Total expected implementation and non-recurring cumulative cash costs of up to EUR 160 million incurred in 2013-2017. 10

Short-term improvement programs Cost = P150 = P150 is aiming an additional cost saving of EUR 150 million on EBITDA level Full implementation and effective until end of 2014 Considerable impact already in 2013 expected (EUR 30-50 million bottom line effect) Global scope of program: all entities and corporate functions are included New net working capital optimization program leveraging experiences from successful Outokumpu P250 program. Cash = P300 = Cash release continuation Focus Inventories and Accounts Payables / Receivables. Two year program during 2013 and 2014, but significant cash flow contribution to be expected still this year. 12

P150 cost savings program Procurement Admin & Other IT Headcount Corporate Functions External Services P150 planning targeted to be completed in May with first actions started Complete roll-out into entire organization done Settle framework for program controlling and reporting Split of top-down target into single levers / functional areas Workshops for measure identification started First measure definition and start of implementation end of May 13

P300 cash release program Accounts Payables / Receivables Inventories Seamless transition from successful P250 program to P300 done in Q1 P300 target setting for inventories, accounts payables and receivables for 2013 fixed and set of actions started Complete roll-out into entire organization done Framework for program controlling and reporting settled 14

Raw material procurement focus 2013 Bundling purchasing power with a global, lean and agile organization Synergy and P150 savings Leveraging purchasing power to increase discounts Using the right raw materials efficiently in a global production network Cash Flow contribution Increasing payment terms and consigment stocks Optimizing supplier finance programs Metal Risk Management Global organization Metal Desk in Procurement is implementing and operating new hedging system Building superior purchasing capabilities and knowledge of supplier markets Implementing a daily nickel position to balance out nickel intake and sales Keeping link to cross-functional partners through site presence 16

Stainless volatility Mill Orders Trade Stocks Nickel Price 2010 2011 2012 2013 17

Timing gains / losses from alloy surcharge Timing Gain on Nickel Gain Nickel market price Purchasing Base illustrative Invoicing Base time Delivery Date Timing gains or losses arise from difference between purchase price and invoice price of metal components Purchasing Base (period which determines alloy purchase price for scrap or prime material supplies) is typically 100 days before date of delivery Invoicing Base (period which determines AAF for stainless steel customer) is 40 days before the date of delivery The illustration shows that timing gains arise when metal market prices increase (and vice versa) Timing gains and losses arise from all alloys, but are significant usually in Ni, Cr, Mo and Fe Timing Loss on Nickel Loss Purchasing Base illustrative Invoicing Base Nickel market price time Delivery Date 18

Is the current alloy surcharge appropriate to manage volatility? Surcharges (as e.g. applicable in Europe and the US) are unable to match timing of nickel purchases with sale of stainless steel Lead time in production does not correspond to pricing periods Change of lead times due to economic up and downswings are not managed Customer order activity is not equal in periods of rising or falling nickel prices timing gains or losses are not balanced even on a long time horizon Main perceived problem: since surcharge is known in advance, stainless buyers may choose to adjust ordering behavior in line with expected stainless price changes due to surcharge Competitors from Asia for instance offer on a fixed price basis Besides the surcharge system more and more contracts are based on fixed price where timing differences between raw material purchase and pricing of products to customers are even more evident 19

Outokumpu s way forward to manage metal related risks Offer a variety of pricing models which have one element in common: pricing period is in the future so that metal risk can be hedged Alloy surcharge Daily (updated) alloy surcharge Fixed price sale for short and long-term deliveries Price in effect (fixing any time between order and delivery) Offer alloy surcharge system only to customers who are honoring the contract and the pricing period There is the option that Outokumpu offers fixed prices to end-users/distributors and then hedge nickel component of pricing exposure 20

Cornerstones of the new hedging concept Minimize valuation risk by moving raw material pricing forward to m+1 or m+2 Hedging via Suppliers Close communication between Metal Desk in Raw Material Procurement and the Sales forces worldwide Create a risk culture for raw materials Hedging guideline Updated guideline with definition of risk and strategy how to manage it. Price risk management Nickel/Chrome/ Molybdenum position as a daily balance of all intakes (purchases) and extakes (sales) Daily live position tracking One system to track and measure efficency Risk committee to supervise Sets the risk limits and other thresholds and controls the metal price risk Updated guideline with definition of risk and strategy how to manage it 21

Q&A Outokumpu Experience 2013 May 22-23, 2013 Old Billingsgate, London, UK