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Our strategy: "Klöckner & Co 2022"

The international steel sector is no different from any other industry when it comes to digitalization: To be among the winners, you have to be fast and flexible. Operating on the leading edge of the digitalization movement, Klöckner & Co has broadened its strategy with the goal of increasing digitalization, efficiency and thus profitability. We have defined three strategic cornerstones, which are supported by our transformation to a digital corporate culture characterized by greater openness and flexibility as well as customer centricity:

1. Digitalization and platforms: Digital transformation of our business is the cornerstone of our strategy. We are pioneers here, blazing the trail for customers and partners. Part of our “Klöckner & Co 2022” strategy involves driving the disruption in steel and metal trading via an industrial platform. We will benefit from the clear line we have taken here in incorporating the opportunities and potential inherent in online marketplaces in our business.

2. Higher value-added business: Focusing on business with higher margins remains a key thrust of our
“Klöckner & Co 2022” strategy. We expect digitalization to give this pillar of our business an additional boost
as well.

3. Efficiency improvement: Launched in 2017, our “One Europe” program has already noticeably increased efficiency. We are making progress in the USA as well, having initiated “One US” with the aim of generating another substantial boost to efficiency.

Our new, extended “Klöckner & Co 2022” strategy is backed up by a broad range of flanking activities as well as a self-prescribed cultural transformation for the entire workforce and our Group divisions.

DIGITALIZATION AND PLATFORMS

The supply and value chain in the steel industry remains highly inefficient to this day. Many transactions continue to be carried out by telephone, fax or e-mail. There is no end-to-end digital order and production management. The intransparency resulting from the disruption in the flow of information at multiple points means that too many market participants are stockpiling a lot of steel at all levels of the supply chain. Process costs are also too high.

The digitalization strategy developed by Klöckner & Co aims to eliminate information asymmetries by digitally connecting all market participants in order to increase efficiency for all.

All projects and initiatives relating to Klöckner & Co’s digitalization and digital networking are being driven forward by kloeckner.i, our Group Center of Competence for Digitalization, from the heart of the German start-up scene in Berlin. Approximately 80 employees now work at kloeck-ner.i in the fields of product innovation, software development, online marketing and business analytics.

We make use of methods such as design thinking, agile product development and the lean start-up approach to design digital solutions for our customers and partners in the shortest possible time. To this end, we first go
directly to the customer’s premises and evaluate on site how we can create added value. Once we have made our evaluation, we need just a few weeks to develop simple prototypes. The initial prototypes are specifically designed to cover solely the most important functions. Through constant testing, we then check with our customers whether and to what extent the individual tool meets the given requirements. This ensures that only prototypes that have already been validated with customers are developed into solutions. These new workflows have also given us a boost in speed when compared with the traditional methods employed by large corporations.

kloeckner.i is our own start-up enterprise, which we founded as a separate operation in Berlin. The new company is far enough removed from Klöckner & Co for it to act more independently in rapidly developing digital tools and portals than would be possible from within Klöckner & Co. However, kloeckner.i is connected closely enough with Klöckner & Co for it to harness the Company’s in-depth expertise in steel distribution and leverage our relationships with customers and suppliers in developing solutions.

Thanks to our agile working methods, the online order processing system first outlined in our 2014 Annual Report has now largely become a reality. Our customers have already successfully implemented digital tools such as contract portals, online shops and order reviews. Apart from developing new tools, we have also continued to roll out existing solutions across the Group. As a result, the percentage of sales generated via digital channels rose steadily, increasing from 9% in the first quarter of 2016 to 18% at the end of the fourth quarter of 2017. At the same time, we have connected up with wholesalers and major steel producers on the procurement side.

At many of our country organizations, the digital tools in use have already been integrated into our “Kloeckner Connect” service portal. The platform gives both customers and partners a central access point for all tools and data, which they are then able to use much more efficiently than before.

We have also expanded the range of our – initially proprietary – online shop by opening it up to partners offering complementary products. This lets Klöckner & Co customers access a significantly wider range of steel and metal products without us having to invest in additions to our product portfolio.

Alongside digitalization of processes throughout the Group, intelligent use of the data generated is also gaining in importance. To gain an early foothold in this market, too, we entered into alliances with Aera and Arago, two of the leading providers of artificial intelligence (AI). AI has already helped us to automate parts of our IT infrastructure through permanent learning processes and continuous self-improvement. Going forward, having access to improved data assessments incorporating a wide variety of factors will make it possible to predict demand for steel and price trends with much greater accuracy. At the same time, a more in-depth analysis of customer behavior will open up additional growth potential.

Moreover, we have already gone live with the first version of our open industry platform. By contrast with the Klöckner & Co online shops, the industry platform operates as a completely independent marketplace for the steel and metal industry and is therefore also open to direct competitors of Klöckner & Co. Growth of the open industry platform is to be funded by venture capital, which will also ensure its gradual independence from Klöckner.

In digitalizing steel and metal distribution, Klöckner & Co has initiated a process that marks the beginning of the end of the linear supply and value chains typical of the sector. Trading in steel and metal products is increasingly moving to three digital channels. In the future, distribution will occur via the proprietary online shops of individual dealers, industry-specific vertical platforms and cross-sector horizontal platforms.

We will be in a position to offer the entire range of products and services, irrespective of manufacturer, via all online sales channels. Yet our portfolio will be strictly geared to the needs of our customers. The end result will be procurement processes for products and services that are considerably simpler, more transparent and more efficient.

Proprietary online shops: Klöckner & Co is already setting new standards in steel and metal product trading with its online shops. Customized online shop solutions will enable us to offer customers more specialized products and services in the future.

Vertical platform: Klöckner & Co is set to revolutionize steel distribution by building an open, vertical industry platform. The platform will be directed at price-sensitive customers with product expertise, whom we will offer a vertical platform containing a wide-ranging product portfolio with transparent pricing and availability. To this end, the platform will aggregate the products and services offered by various suppliers.

Horizontal platforms: We will be taking active advantage of our extensive online marketing expertise to offer standardized steel and metal products, without any add-on services, on cross-sector, horizontal platforms operated by third parties. The focus here will be on infrequent, low-volume customers.

We are perfectly poised to take on a market-dominating position in all online sales channels for steel and metal products going forward.

With regard to the ongoing implementation of our digitalization strategy, we have set ourselves ambitious goals: By 2022, we want to see 60% of all Group sales generated via digital channels. Digitalization is then projected to contribute more than one percentage point to our EBITDA margin, essentially by generating additional business and improving efficiency.

We connect up with external start-ups via our kloeckner.v venture capital company. This company invests both through selected venture capital firms and directly in start-ups that support our digitalization strategy with disruptive approaches. Our first such direct investment was in Contorion, an online building supplies marketplace for tradespeople. In the second quarter of 2016, we invested an amount in the mid seven digits, and sold our stake for more than twice that amount in the second quarter of 2017. Also in the second quarter of 2017, we invested in tech start-up BigRep. BigRep develops and manufactures the world’s largest commercially available 3D printer. Apart from the financial investment in the company, Klöckner & Co plans to deploy BigRep’s industrial-scale 3D printers across its extensive location network in Europe and the USA.

Our digitalization strategy also goes hand in hand with a profound cultural shift within our Company. We want our employees to understand our digitalization strategy and to be aware of how they can contribute to reaching our Company’s ambitious goals. Moreover, we need to become even faster and more agile given the increasingly dynamic changes occurring in our sector. For example, the innovative working methods employed in the start-up scene are being applied more and more throughout the Group. This is accompanied by an in-depth exchange between kloeckner.i, our digitalization subsidiary, and employees from other divisions in all of the country organizations. Online training is also being provided by Klöckner & Co Digital Academy to get the workforce in shape for the digital age. This lends employees support in developing and implementing new ideas, which they can discuss and fine-tune with their colleagues across national and divisional borders in a non-hierarchical way using innovative channels of communication, such as Yammer, the Group’s internal social network. We have thus broken down the existing vertical communication silos in favor of an unfiltered, increasingly horizontal form of communication.

These measures, too, are already having an impact. In the rankings put out by kununu, Europe’s biggest employer rating platform, we were the 9th best company in all of Germany in the category of Leadership Culture. We also achieved an outstanding ranking in the category of Work Climate, coming in at 38th place.

HIGHER VALUE-ADDED BUSINESS

Higher value-added business has great potential in the market. Many of our customers are highly vertically integrated and still use conventional methods to carry out tasks we could perform more efficiently by consolidating orders. A good example of this is our investment in 3D lasers, which we can use to combine several customer tasks such as drilling, sawing and slitting at an attractive price and with significant gains in precision. In Great Britain, for instance, we have built what is now the country’s second-largest 3D laser center near Dudley. At home in Germany, we have already taken our third 3D laser into operation, thus very successfully occupying a market niche.

3D printing is a new technology that we brought to our organization in the reporting period. After successful initial tests with our first 3D printer at kloeckner.i in Berlin, Klöckner & Co Deutschland GmbH – our German country organization – invested in a 3D printer to enter the growth market of additive manufacturing.

In addition, we will also be undertaking a major expansion of our higher-margin business in higher value-added products. At our Bönen location in North Rhine-Westphalia, Germany, for instance, we built a service center to process aluminum flat products for the European automotive and manufacturing industries in the reporting year. The service center has a total processing capacity of 80,000 tons of aluminum per year.

After having generated 48% of sales in higher value-added business in fiscal year 2017, we aim to increase this share to 60% by 2022.

Efficiency improvement

“ONE EUROPE” PROGRAM
Over the last few years, we have restructured the European distribution business at the country level, downsized capacity and pooled operations. Under the “One Europe” program, we have brought the activities of our country organizations in Austria, Belgium, France, Germany, the Netherlands and Great Britain even closer together. In this way, we not only aim to generate cost savings and synergies more readily – especially in purchasing and logistics – but also to enable even faster, more efficient implementation of the “Klöckner & Co 2022” strategy. “One Europe” is projected to contribute around €30 million per year to EBITDA from 2019 onward, and the program already brought in €10 million in fiscal year 2017.

ONE US PROGRAM
Following several acquisitions, we boast a location network across the USA with good coverage of the key regions between the East and West Coast. In order to leverage synergies, as an intermediate step, we initially organized those locations under three segments based on product groups. The three segments are now to be pooled in a single unit with a view to securing further cost savings through organizational streamlining and efficiency gains. This will additionally enable even more rapid implementation of the digitalization strategy and expansion of higher value-added business. From 2020 onward, the program is slated to deliver an annual EBITDA contribution totaling $15 million, including $4 million as early as this year.

EBITDA MARGIN TO EXCEED 5% BY 2022
In total, we plan to improve our EBITDA margin from the 3.5% recorded in the reporting period to over 5% in 2022. Digitalization, our “One Europe” and “One US” optimization programs as well as our expanded higher value-added business (HVAB) are expected to deliver the main contributions to the increase.