CONFIDENTIAL

Growth in the Metals Industry

Global Metals and Mining Sector

CEO presentation of "Growth in the Metals Industry"

April 1999
AGENDA

• Value creation by profitable growth: Can the

barriers be overcome?

• Winners have shown impressive growth records

in recent years

• The key for future success

– Reaching world class within the right growth
strategy

– Achieving excellence in growth-related

success factors

2
AGENDA

• Value creation by profitable growth: Can the

barriers be overcome?

• Winners have shown impressive growth records

in recent years

• The key for future success

– Reaching world class within the right growth
strategy

– Achieving excellence in growth-related

success factors

3
STOCK PERFORMANCE METALS vs. MARKET AVERAGE – GERMANY

Raise in stock price, 1989 - 99

300%

100%

DAX 30 Compound
metals index*

*CDAX Eisen und Stahl

Source:xxxxx 4
GROWTH – DEFINITION BY THE SALES/PROFITABILITY + Value creation
GAMEBOARD – Value
destruction

Sales

Definition:
Growth = sales
– + growth on high level
of profitability (i.e.,
ROIC > WACC)

ROIC

WACC
Source:xxxxx 5
SALES AND ROIC, 1995 - 98 DISGUISED REAL EXAMPLE

Sales
USD billions
25 ROIC = ~14%
= long-term top 20% of
metals industries

Future
growth
20

1998
1995
1996

Successful
restructuring 1997
15 ROIC
-30 -20 -10 0 10 20 30 Percent
WACC

Source:Client, xxxxx 6
MARKET VALUE OF EQUITY – EXAMPLE DISGUISED REAL EXAMPLE
USD billions

Market This translates to

performance raising economic
1988 - 98: profit by 16 to
CAGR 15.5% 21% every year

1998 2008 Value gap

Source:Stock exchange, xxxxx 7

CHANGE OF ECONOMIC PROFIT BY LEVER DISGUISED REAL EXAMPLE
USD millions

860 - 1,800 -
Annual sales growth rate 1,760 2,700*
between 9 and 14% until
2008 (total increase in
sales 140 - 280%)

540
~400

Economic Optimize Expanding Target

profit 1998 current current economic
business** business and profit in
building new 2008
businesses

*Translates to USD 34 billion market value

**Reduce invested capital by 15%, increase ROS from 1.8 to 3.0% (together leading to ROIC = 19%)
Source:xxxxx 8
GROWTH OBSTACLES IN METALS

GRO
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m
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Source:xxxxx 9
AGENDA

• Value creation by profitable growth: Can the

barriers be overcome?

• Winners have shown impressive growth

records in recent years

• The key for future success

– Reaching world class within the right growth
strategy

– Achieving excellence in growth-related

success factors

10
OUTSTANDING GROWTH COMPANIES IN METALS
Percent
Company Business CAGR sales 1990 - 97 Ø ROIC 1995 - 97

Ispat (UK) Steel 45 22

Riva (I) Steel 34 22

Chase** (USA) Brass, steel tubing 23 28

Maverick Tube* (USA) Pipes 20 10 Value creation

All companies
Castings (GB) Iron casting 16 27 were among the
top 20% for
Nucor (USA) Steel 16 16 growth of market
value added or
Acerinox (Spain) 16 18 economic profit
Stainless steel

Mueller*** (USA) Copper products 12 17

Rautaruukki (FIN) Steel 11 13

Rheinzink (G) Zinc products 9 57

*1989 - 97
**1993 - 97
***1991 - 97
Source:xxxxx analysis 11
COMPANY PROFILE – NUCOR, 1997

• Operations
– Leading steel minimill group
in North America
– 9.7 million tons output
– 6,900 employees
– Steel bars, flat rolled steel,
customized steel products
• Locations
– Headquarters in Charlotte,
North Carolina
– 20 facilities in the U.S., one
facility in Trinidad
• Markets
– Almost exclusively U.S.

Source:Annual reports, xxxxx 12

GROWTH CREDENTIALS – NUCOR

Sales Net income

USD billions USD millions

CAGR
16%

1990 91 92 93 94 95 96 1997 1990 91 92 93 94 95 96 1997

ROIC Market capitalization
Percent USD billions

1990 91 92 93 94 95 96 1997 1990 91 92 93 94 95 96 1997

Source:Disclosure 13
SUMMARY GROWTH CASE – NUCOR

Growth activities

Exclusively internally generated

growth, fueled by a performance-
oriented culture and transforma-
tional process innovations
• Effective performance-oriented
incentive scheme
• Technological pioneering of
process innovations, giving
Nucor a sustainable lead over its
competitors
• Expertise in constructing own
plants cheaper and faster than
competitors

Source:Annual reports, xxxxx 14

NUCOR'S TECHNOLOGICAL PIONEERING
1965 1975
Sets up one
of the first
minimills
Action • Integrated back-
wards (from being a
producer of building
materials made of
steel) into steel pro-
duction by adapting
a largely unproven
technology
Impact • Radically lower
capital costs com-
pared to integrated
mills
• Set off the minimill
explosion
*Has not met expectations to date
Source:Annual reports, press clippings, Harvard Business Cases, International Directory of Companies, xxxxx interviews
1985 1995
First minimill
to challenge inte- Pioneers thin Pioneers iron
grated producers slab casting carbide process
downstream
• Started production • Started production • Developing a pro-
of steel decking, of steel sheets with cess that will use
cold-finished bars, a new, unproven iron carbide as a
etc., traditionally a technology, i.e., thin substitute for low
monopoly of inte- slab casting residual scrap
grated producers
• Drastically in- • Dramatically • Still in start-up
creased volumes lowered the mini- phase; forecast to
of minimills mum economic lower raw material
• Started to threaten scale for sheet cost by up to 10%*
some of the big production
players • Substantially under-
cut integrated
producers on fixed
and variable cost
• Vaulted Nucor into
the top 5 U.S. steel
producers
15
COMPANY PROFILE – ISPAT INTERNATIONAL, 1997

• Operations
– Revenues: USD 2.2 billion
– Employees: 7,000
– Production: 7.3 million tons
– Flat steel (slabs, HRC, pipe) 55%
– Long steel (billets, wire rods, bar
and structural) 45%
– DRI usage as scrap substitute
• Locations
– Incorporated in the Netherlands,
headquarters in London
– Production sites worldwide
(Mexico, Germany, Trinidad,
Ireland, Canada)*
• Markets
– North America (53%)
– Europe (20%)
– Latin America (16%)
– Asia-Pacific (4%)

*Meanwhile also Ispat Inland (U.S.), BF/BOF and EAF

Source:Annual reports, xxxxx 16
GROWTH CREDENTIALS – ISPAT INTERNATIONAL

Sales EBITDA
USD millions CAGR
USD millions
45%

1992 93 94 95 96 1997 1992 93 94 95 96 1997

ROIC*
Percent Economic profit
USD millions

1992 93 94 95 96 1997 1992 93 94 95 96 1997

*Based on EBITDA and approximation of invested capital based on total assets (no full balance sheets available before 1996)
Source:Annual reports, xxxxx 17
SUMMARY GROWTH CASE – ISPAT INTERNATIONAL

Growth activities
Growth by acquisitions and fast
turnaround of undervalued assets to
become the only truly global and
strongest growing major steel producer
in the world (8 locations in 7 countries
within 10 years)
• Ispat uses a superior screening
process for identifying potential
targets
• Ispat is extremely fast in increas-
ing operating performance of
acquired companies, which it usually
buys at 15 - 20% of the money it took
to build them
• Ispat's cost leadership is partly
based on its expertise in the use
of directly reduced iron (DRI)

Source:Annual reports, xxxxx 18

ISPAT – CIL TURNAROUND, MAY 1989

Buy at low price Maximize utilization Upgrade

product mix

Price Billet production Product mix

USD millions Thousands of tons Percent

460
34.6
Higher- 4
value 20
products
• High
carbon
16.4 96 • Electrical
Commodity 80 grade
products • Cold-
70 heading
specialty
rod
1979 1989 April 1989 July 1989 Before After
green- acqui- acquisition acquisition
field sition Utilization 36% 74% DRI Low 92 - 95%
price cost rate percentage

Source:Annual reports, xxxxx 19

COMPANY PROFILE – RAUTARUUKKI, 1997

• Operations
– Integrated mill
– Revenues: USD 2.5 billion
– Employees: 12,705
– Production: 2.3 million tons
– Flat steel and long steel products
• Locations
– Headquarters in Helsinki
– Manufacturing factories in 11 European
countries (all Scandinavian countries,
Germany, The Netherlands, Eastern Europe)
• Markets
– Finland (27%)
– Other Nordic countries (28%)
– Baltic countries, Poland, Russia (6%)
– Other Europe (34%)
– Other countries (5%)

Source:Annual reports, xxxxx 20

GROWTH CREDENTIALS – RAUTARUUKKI
Sales Net income
USD billions CAGR USD millions
11%

1990 91 92 93 94 95 96 1997 1990 91 92 93 94 95 96 1997

ROIC Market capitalization

Percent USD millions

1990 91 92 93 94 95 96 1997 1990 91 92 93 94 95 96 1997

Source:Annual reports, xxxxx 21
SUMMARY GROWTH CASE – RAUTARUUKKI

Growth activities
Growth by service differen-
tiation and forward integration
• Differentiation by offering the
highest flexibility, highest
delivery reliability, and the
shortest lead times in the
European steel sector
• Continuous increase of its
value added through forward
integration along the value-
added chain
• Active protection of home
market to become the market
leader for its products

Source:Annual reports, xxxxx 22

RAUTARUUKKI'S STRATEGY FOR MARKET LEADERSHIP

Offer value

Shortest lead times

Protect and highest delivery
reliability
Domination of
wholesaler market
Superior customer
bonding
Consolidation of Nordic
long steel business to
prevent foreign entries
into flat steel business High flexibility and wide
product range
Noncompetition with
other Finnish steel
companies* Other services for
customers (inventory
management)

*Outokumpu stainless steel; Imatra low-alloy engineering steel

Source:xxxxx 23
AGENDA

• Value creation by profitable growth: Can the

barriers be overcome?

• Winners have shown impressive growth

records in recent years

• The key for future success

– Reaching world class within the right growth
strategy

– Achieving excellence in growth-related

success factors

24
STRATEGIC POSTURES OF GROWTH COMPANIES CAGR sales*
Average ROIC**
CAGR market
capitalization*
Companies Growth credentials
28
24
"Discovering the customer" • Rheinzink 16
• Rautaruukki
• Maverick Tube
• Chase Industries

"Attacking the own industry" • Nucor 38

• Ispat
• Acerinox 20 20
• Mueller Industries
• Riva
• Castings

9 7
5
Average of
metals industry
*1990 - 97
**1995 - 97
Source:xxxxx 25
CHARACTERIZATION OF STRATEGIC POSTURES

Product leadership
Attractive niche markets, high quality
products, value communication, branding
"Discovering the customer"

Service leadership
Shortest leadtimes, highest flexibility, best
technical consulting, service-oriented
operations
Be world class
in at least one
dimension!
Performance-based organic
expansion
Performance management, superior
"Attacking the own industry" process technologies, greenfield
expansion
CASTINGS P.L.C.

Leverage by acquired assets

Acquisition of undervalued targets,
Ispat International N.V.
effective turnaround, performance culture,
financial engineering, deal structuring
Gruppo IVA Group

Source:xxxxx 26
WORLD CLASS IN CRITICAL DIMENSION EXAMPLES

Ispat International N.V. CASTINGS P.L.C.

Most up-to-
Best deal
date casting
structuring
technology

Lowest cost Shortest lead

in tube Most times in steel
performance- Most com-
oriented plete zinc
culture product range

Gruppo IVA Group

Most
innovative Most efficient
Highest deliv- energy Most modern
ery reliability technology in turnaround
products
in brass stainless
products steel

Source:xxxxx 27
STRATEGY POSTURE vs. ECONOMIC PERFORMANCE
Economic
performance

IVA

CASTINGS P.L.C.

You have to
focus in order
to win!

• Clear focus on • Clear focus on

"Discovering Strategy "Attacking the
the customer" own industry"

Source:Annual reports, xxxxx 28

MATCHING OF CUSTOMER VALUE, CAPABILITIES, AND
STRATEGIC POSTURE
Customer Capability
value platform

Quality

Price

Service

...

...

Strategic
posture

Source:xxxxx 29
MATCHING OF CUSTOMER VALUE, CAPABILITIES, AND EXAMPLE NUCOR

STRATEGIC POSTURE
Customer Capability
value platform
Mainly price/ Cost-focused
cost game profile
...
...
...
...
...

• Markets with price sensitive • Superior operations,

customers: steel bars, hot process innovation, risk
rolled products, etc. management, effective
Strategic controlling mechanisms,
• Little room for differentiation posture extremely performance-
by non-price factors oriented culture
Performance-based
organic expansion

• Aggressive expansion and cost leadership by

transformational process innovation, ruthless
performance management
Source:xxxxx 30
MATCHING OF CUSTOMER VALUE, CAPABILITIES, AND EXAMPLE RAUTARUUKKI

STRATEGIC POSTURE
Customer Capability
value platform
Potential market Market-focused
game profile
...
...
...
...
...

• Identifies ship building • Tailors capabilities to

industry as a segment customers' value: builds up
with delivery time as KBF superior logistics, marketing
Strategic skills, flexible operations
in an otherwise rather price posture
game industry
Service differentiation

• "Discovers the customer" by offering the

shortest lead times, highest order flexibility, and
highest delivery reliability in the European steel
Source:xxxxx 31
AGENDA

• Value creation by profitable growth: Can the

barriers be overcome?

• Winners have shown impressive growth

records in recent years

• The key for future success

– Reaching world class within the right growth
strategy

– Achieving excellence in growth-related

success factors

32
KEY SUCCESS FACTORS OF GROWING METALS COMPANIES

Achieving a balanced portfolio of busi-

nesses, which are in the mature, emerging,
or embryonic state of their life cycle

Building up capa-
bility-based strengths
Organizing for sustained growth
in marketing, inno-
vation, or M&A
Marketing
Strong basis for
value-driven growth
through operational
excellence, portfolio
optimization and
stretch targets and
visions
Managing business
Balancing growth horizons
by horizon and
building an entre-
preneurial organi-
zation
Mergers
Innovation and
acquisitions
Systematic identifi-
cation of new busi-
ness opportunities
Searching for opportunities along all possible
Laying the foundation strategic degrees of
freedom

Source:xxxxx 33
NUCOR – GROWTH HORIZON EVOLUTION

EXAMPLE

• Steel making by • Cold finished bars • Beam JV with • Iron car-

Horizon 3 novel minimill Yamamoto bide tech-
Create viable process • Steel sheet mak- nology
options ing using thin
slab casting
Tested Tested Tested
Horizon 2
Build emerging • Steel joist division – • Minimills • Cold finished bars • Beam production
business only profitable unit • Steel sheet

Replicated Replicated Replicated

Horizon 1
Extend and • Nuclear instrumen- • Steel joists • Minimills • Cold finished bars
defend core tation, chemicals, … • Steel joists • Minimills
business all unprofitable • Steel joists
Divested

Mid-60s Mid-70s Mid-80s Early 90s

Source:Annual reports, xxxxx interviews 34

CHARACTERISTICS: STRONG BASIS FOR
VALUE-DRIVEN GROWTH
Operational excellence in
core business measured
1
by return on capital costs
Strong
basis for
Targeted and continuous
value-driven 2
portfolio optimization
growth
Rigorous execution of 1 and
3 2 and external relationship
management lead to
confidence of investors
Source:Annual reports, press clippings, xxxxx
Examples OVERVIEW
• All companies are among the top 20% in
profitability of the metals industry (e.g.,
average ROIC Rheinzink 50%)
• Often cost-leader (e.g., Ispat, Maverick Tube,
Acerinox)
• Superior quality (e.g., Chase, Nucor,
Maverick Tube, Rheinzink)
• Streamlined portfolio: divestment of non-
strategic units (e.g., Nucor, Ispat, Riva,
Mueller) and expansion into strategic
areas (Riva, Ispat, Maverick Tube)
• Focus on certain segment or material
(Acerinox, Rheinzink)
• Transparency through informative annual
reports (all companies), open
communication (e.g., Nucor, Maverick
Tube), active public relations (e.g.,
Acerinox through Cedinox)
35
RAUTARUUKKI'S EXPLORATION OF GROWTH EXAMPLE
OPPORTUNITIES
• Strong customer
Existing bonding (services, visits,
products and customers
workshops, etc.)
• Rautaruukki's employees
New products and work at customers to
services
control inventories and
place orders
• Delivery flexibility
• In new markets
New
customers

New industry • Early entry in JIT –

Existing
structure shortest lead times in
business New value delivery
and system
New geography Europe
capability • Consolidation • Flexible order manage-
platform New compet-itive of long steel ment (due to small
arena
• New pro- market (Fundia) converter size)
duction sites • Consolidation • Own transportation
• Forward in Eastern of distribution in company
integration Europe/Baltic Finland (Asva
from pure hot countries and Kesko-
into cold rolling metalli – 2/3 of
and downward market)
activities up to
distribution
• Long products
Source:Annual reports, press clippings, xxxxx 36
GROWTH PATHS IN METALS INDUSTRIES

OVERVIEW
Growth paths Examples

Marketing
• Rheinzink: superior value communication and
customer bonding
Internal • Rautaruukki: highest quality of delivery
services in Europe
• SSAB: build up brand with significant premium
• Nucor: achieved leadership position through
Innovation various technological breakthroughs
Core • Maverick Tube: Leadership in product
innovations in energy tubular products
business
• Voest Alpine: development of 120m rail

Mergers
• Ispat: fastest growing steel company of the
world by acquisitions
External
• Mueller Industries: Leverage of skills and
distribution network through acquisitions in
related product areas
Acquisitions
Source:xxxxx 37
SSAB – SUCCESSFUL BRANDING
Exceptionally aligned
value delivery chain
Distinct value proposition
tailored to customer
segment needs
• Highly differentiated value
proposition, tailored to
customer value
• Targeting latent demand with
fine-tuned value proposition
by subsegment
• Staying ahead by relentlessly
enhancing value proposition
Source:SSAB, xxxxx
Superiority in EXAMPLE
selling the value
• Strong and consistent value
communication
• Sales organization focused
on selling the value
• Systematic reinforcement of
• Direct sales with brand name (painted on all
strong technical products, communication of
brand names via campaigns,
support
etc.)
• Product develop-
ment closely linked
to customers
• Production highly
focused on niche
products
• Flat, performance-
focused organization
38
RAUTARUUKKI – DELIVERY TIMES
Days from receipt of order to delivery

EXAMPLE
Superior delivery Rautaruukki's activities
time and reliability
allow Rautaruukki to • Increase in flexibility throughout
earn a price premium steel mill
of 3 - 5% – Small batch size
– Change of rolls in 12 minutes
– 2,000 products offered; order
size as small as 2 tons possible
• Increase in efficiency
– Use of electronic data inter-
change with customers
• Improvement of transport
logistics
– Establishment of own
transportation company with
Rautaruukki Compet- Compet- superior logistics
itor A* itor B*
Finland Finland Europe Europe Europe
1990 1996 1996 1996 1996

*Major European steel makers

Source:Annual reports, press clippings, xxxxx 39
NUCOR – INNOVATION MANAGEMENT

EXAMPLE
Knowledge
Strategy management Risk management

• Flat steel largest • Own experiments • Time and success of

segment but highly for thin slab casting technology implemen-
competitive had not been very tation at risk
• Entry with conven- promising
tional technology too
expensive (USD
2 billion)

+ +
• Need for dramatic • Acquisition of tech- • Performance contracts
reduction of production nology from SMS with SMS
cost (based on previous • Independence of
• Go for transformational joint research efforts) downstream business
process innovation • Lower grade steel as
alternative market

Source: Harvard Business Cases, xxxxx interviews 40

ISPAT – MINIMILL ACQUISITION SCREENS EXAMPLE
Coastal
Low pur- location to
chase price Potential allow for DRI Built-out infra-
relative to to usage and structure* (W.
value of land improve steel Europe and N.
and assets produc- shipments America)
tivity

Number of minimills
100% = 1,078 plants
Eastern Other
Europe

?
South
America 66
9
43 Asia
North 12
America
25
Western
Europe

Irish Ispat    
*Stable and competitive energy supplies and reliable transportation system
Source:Annual reports, xxxxx 41
RAUTARUUKKI'S MANAGEMENT BY HORIZON

EXAMPLE
Horizon 3

Horizon 2

Horizon 1

Business Raahe Steel Building materials Services

• Type of • "Engineering • "Business builder" • "Visionary"*

manager type" – Entrepreneurial, – Unconventional
– Disciplined, creative, sharp thinker
deep func- decision maker
tional under-
standing
• Talent • "No excuses" • Autonomy and • Freedom to
approach management freedom to create experiment*
style
• Performance • Near term bottom- • Top-line growth • Size of payoff
management line results and and capital and probability
cash flows productivity of success
*Still an exception, largely dominated by steel engineers and horizon 1 management approach
Source:xxxxx interviews 42
ELEMENTS OF ORGANIZATION BEST-PRACTICE OVERVIEW
COMPANIES
1 2
Attract and select top talent Assign and support entrepreneurial
• Acerinox: Attractive employer in economical weak responsibility
environment (e.g., high unemployment) • Ispat:
• Chase industries: – Plants operate as profit centers, high degree
– Brings new talents from diverse backgrounds of autonomy, but tight performance control
into board of directors and managing team – Accountability enforced: deal makers have
– Extremely low turnover (less than 2%) to stay on after acquisition to implement
• Nucor: interviews with officers two levels above improvement (career dependent on success)
vacant position, psychological test for recruiting • Mueller: actively creates a climate of change
on all levels and action
Performance-
oriented
entrepreneur
4 development 3
Develop and support managers Evaluate and reward based on performance
• Maverick Tube: • Nucor: performance evaluation on
– Rotation scheme between departments for each level, based on ROE, ROA, and output
management and workers targets (bonus up to 150% of base salary)
– Trains fresh graduates extensively (to "Maverick" • Ispat: rewarding best-performing employee
style) (identified by internal benchmarking)
• Acerinox: • Mueller Industries: up to 100% of base
– 433 specialized courses are provided salary as bonus
(attendance 2,021 employees)
– Training in Japan by Nisshin steel (Japanese
work ethic)

*Now competition by Nokia

Source:xxxxx 43
OVERCOMING GROWTH BARRIERS IN METALS

GRO
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Fla
Co t co
mm st
cu
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Ov itiz
St er a
ag ca tio
na pa n
tin cit
g ies
m
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Reach out for

the medal!

Source:xxxxx 44