Plan for restructuring AvestaPolarit melting activities

1
Plan for restructuring AvestaPolarit melting
activities

• 28 August 2001

2
Background to restructuring decision

• Overall objective of merger between Avesta
  Sheffield and Outokumpu Steel in January 2001
• To secure a significant and sustained increase in
  value for AvestaPolarits shareholders
• by creating an independent, world-class, focused,
  profitable and growth-oriented stainless steel
  company
• with strong potential and ambition to become the
  leader in the global stainless steel industry.
• The rationale for the combination was rooted in
  significant synergies identified in a joint
  business plan, which was approved by the Boards
  of both companies prior to the merger.

3
Strategy for value creation

• Key drivers in creating value were at the time of
  the merger identified to include
• An effective combination of the two companies and
  their complementary strengths to exploit
  economies of scale in production, sales and
  distribution, RD, purchasing and administration.
• The opportunity to increase specialisation at the
  individual production units, which will
  simultaneously significantly improve logistics.
• Clear strategy included in the original business
  plan
• Focus on Coil Products as the Groups core
  business
• Effective implementation of current large-scale
  investment programme to create foundation for
  growth
• Effective integration to ensure achievement of
  projected synergies
• Development of Special Products businesses to
  ensure value creation
• Position the Group for growth and global
  expansion
• Sound financial management to maintain strong
  position and attractiveness as an investment
• The need to rationalise the melting shop
  structure was already specified in the original
  business plan

4
Preparations for Board decision on melting shop
restructuring

• A full, detailed strategic plan for the Group was
  prepared during the spring months 2001.
• It included a thorough analysis of melting
  capacity requirements and restructuring
  alternatives.
• Plan discussed by the Board at several meetings
  during the spring and summer months.
• Plan also discussed several times with Employee
  Committee, individual trade union representatives
  and their business consultant.
• Final proposal on identified best option for
  melting shop restructuring made by the Executive
  Management to the Board in August.

5
Board decision August 22, 2001

• Restructure to improve overall cost efficiency of
  the Groups melting activities.
• Establish strong platform for further development
  of Long Products.
• Plan for phased closure of Degerfors Stainless
  melting and billet rolling activities by
  mid-2003.
• Initiate negotiations with union
  representatives.
• Transfer production to Sheffield/SMACC, where an
  investment of EUR 22 million will be made in
  bloom/billet casting equipment, commissioning in
  2002.

6
Key issues and rationale

• AvestaPolarit today operates four steel melting
  shops
• Tornio 650 to 1650 kton/aAvesta 600
  kton/aSheffield 600 kton/aDegerfors 230
  kton/a
• Ongoing major expansion at Tornio gives excess
  melting capacity from 2003 onwards.
• Need to rationalise the Groups melting shop
  structure to be able to further reduce costs and
  ensure sustained profitability at world-class
  levels.
• Cost-efficiency is a critical success factor as
  competition increases on global market, dominated
  by consolidation trends.

7
Thorough analysis of options

• Thorough analysis of melting shop restructuring
  options, performed in connection with the review
  of overall Group strategy, covered projected
  development of total melting capacity and demand
  up to 2010.
• Three alternatives studied
• 1 Closure of Degerfors
• 2 Closure of SMACC
• 3 Closure of Degerfors and SMACC
• The key variables included in the analysis
• Capital expenditure, variable costs, fixed costs,
  transportation costs, closure costs, material
  stocking costs, remaining site costs, etc.
• Validity of outcome checked for sensitivity to
  different scenarios regarding eg. demand growth
  and currency exchange rates.

8
Clear outcome of the analysis
Return on investment ofthe three alternatives

• The alternative to close Degerfors is the best
  option.
• Best financial return
• Lowest production costs
• Good base for further growth
• If SMACC would be closed, larger investments in
  new melting capacity would be required earlier.
• The Degerfors site will continue as the base for
  the Hot Rolled Plate business unit, which will
  continue to develop its activities.

IRR,
1 Close Degerfors 2 Close SMACC 3 Close
Degerfors SMACC
9
Improved overall profitability

• The Degerfors melting shop closure simplifies the
  Group structure
• Tornio and Avesta are the principal melting shops
  in the coil system the Groups core business.
• The main role of SMACC will be to feed Long
  Products and Hot Rolled Plate (HRP), with minor
  volume to coil system.
• HRP slab feed comes already today mainly from
  SMACC and Avesta
• Degerfors billet tonnage in 2001 is around 170
  ktonnes. Of that only 40 ktonnes goes to Swedish
  plants, 130 ktonnes is exported. For the exported
  tonnage SMACC is either equally well or better
  situated than Degerfors.
• The proposed restructuring enhances
  competitiveness and profitability through greater
  overall cost-efficiency and opportunity to ensure
  value creation.

10
Shared value opportunities
Special Products
Tubular products
Ferrochrome
Precision strip
Long products/ rod, wire
Welding products

• Develop Long Products melting casting within
  existing large scale melt shop operations

11
Long Products able to establish a strong platform
for further development

• Success in the long products market is becoming
  increasingly dependent on access to competitive
  feedstock.Economies of scale at SMACC can secure
  world-class cost-efficiency for billet
  production.
• Improved cost base will benefit all of the
  Groups downstream wire, rod and bar operations
• Sweden Fagersta Stainless, AvestaPolarit
  Welding, Avesta Valbruna AB
• UK ASR (Sheffield)
• USA AvestaPolarit Bar Co, AvestaPolarit Welding
  Products Inc.
• Potential to grow into a world leader in
  stainless steel long products

12
Current profitability of Degerfors Stainless not
indicative of sustainable performance

• Financials by individual business units within
  AvestaPolarit are not reported in public
• Not calculated on comparable or true commercial
  terms
• Degerfors Stainless past performance records
  dependent on numerous variables
• internal deliveries invoiced at above-market
  prices
• slab manufacture no longer required as Avesta
  Melt shop builds up to full output
• current profitability greatly aided by weak
  Swedish krona
• Prospects for sustainable profitability deemed
  poor
• Scale too small, Groups highest conversion cost
  level
• Destined for closure already within Avesta
  Sheffield, prior to the merger

13
Implications at Degerfors site - Slide 1

• Closure of the Degerfors Stainless operations
  planned to be concluded by mid-2003.
• Degerfors will continue to be the base for the
  Groups Hot Rolled Plate business unit.
• It will continue to develop its business to
  maintain its position as the worlds leading
  producer of stainless quarto plate.
• Challenge to reconfigure operations, as a phased
  1-2 year process.

14
Implications at Degerfors site - Slide 2

• Closure plan for Degerfors Stainless operations
  will result in a loss of 330 jobs out of a
  current 700 at the site.
• Personnel at both Degerfors Stainless and Hot
  Rolled Plate business units are affected by the
  closure, due to the shared-site operations.
• AvestaPolarit will offer affected employees
  assistance with re-training, early retirement,
  re-deployment to other sites, or outplacement.

15
Onward process at Degerfors

• Important to handle closure responsibly and in
  good cooperation with local authorities.
• Objective must be to make period of continuing
  uncertainty about consequences on both individual
  employee and broader community level as short as
  possible.
• Prompt MBL-negotiations about closure plan
  details.
• Swift decisions in the planning process needed to
  establish a strong organisation, which can secure
  the future operations of Hot Rolled Plate in
  Degerfors.
• Crucially important task to help all parties
  focus on preparations for the future.