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“KLÖCKNER & CO 2022” – OUR STRATEGY

In the age of digitalization, only the agile and adaptable will hold their own in the international competitive arena. That also applies to steel distribution. This maxim is reflected in our “Klöckner & Co 2022” strategy: Three main strategic pillars are supported by our transformation to a digital corporate culture characterized by greater openness and flexibility as well as customer centricity. We have systematically implemented this broadened strategy since we presented it in 2017.

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 transformation of steel and metal trading via web-based platforms.

2. Higher value-added business: Gradual expansion of business with higher value-added products and services is another key component of our strategy.

3. Efficiency improvement: Ongoing program of continuous improvement in all areas.

Our “Klöckner & Co 2022” strategy is backed up by a broad range of flanking activities as well as our cultural transformation into an agile company.

DIGITALIZATION AND PLATFORMS

The supply and value chain in the steel industry is inefficient and lacks transparency. There is no effective information and data interchange between market players with regard to available inventory and lead times. This results in long delivery times, incorrect shipments and surplus inventory. At the same time, the quotation process is highly time-consuming – also considering that just 30% of quotations lead to an order.

Klöckner & Co’s digitalization strategy aims to eliminate supply and value chain inefficiencies in the steel and adjacent industries.

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 90 employees now work at kloeckner.i in the fields of product innovation, software development, online marketing and business analytics. kloeckner.i is far enough removed from the core organization for it to act more independently in the rapid development of 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 our comprehensive expertise in steel distribution and leverage our relationships with customers and suppliers in developing solutions.

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. First, we go directly to the customer’s premises and evaluate on site how we can create added value. Once we have made our evaluation, we develop simple prototypes. The initial prototypes are specifically designed to cover solely the most important functions. Together with our customers, we then determine by means of a continuous testing and refinement process whether the tool meets the requirements set. This ensures from the very outset that all customer needs are met and only prototypes that have already been validated with customers are developed into solutions. Compared with the conventional approach typical of a large corporation, the new working methods have made us significantly faster. As a result, we have progressively raised the share of sales made through digital channels from 9% in the first quarter of 2016 to 29% in the second quarter of 2019. At the same time, we have digitally connected with wholesalers and major steel producers on the procurement side.

Based on the high level of demand generated by the successful digitalization of Klöckner & Co, kloeckner.i has also offered consulting services to other companies since the beginning of 2019. To this end, kloeckner.i has entered into partnerships with Axel Springer hy and diva-e to jointly offer customers the benefit of their experience in the successful digitalization of traditional groups.

Our digital tools, such as online shops, contract portals and order transparency tools, have already been integrated into the “Kloeckner Connect” service portal at many of our country organizations. 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 offering by opening up our – initially proprietary – online shops to partners offering complementary products. At the end of the reporting period, over 30 third-party vendors were already marketing their products through the Klöckner marketplace. This lets Klöckner & Co customers access a significantly wider range of steel, metal and complementary 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. We have been working with Arago, one of the leading providers of artificial intelligence (AI), in this key area for a number of years. 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.

In February 2018, we went live with the first version of our open industry platform, XOM Materials, in Europe. The platform now has 34 distributors and over 300 customers. Some €10 million in orders have already been processed on the platform. The next step in the dynamic evolution of XOM Materials took place in the reporting period when the platform went live in the USA. A large international steel producer, among others, will also market its products on XOM in the future.

In contrast to the Klöckner marketplaces, XOM Materials operates digital trading platforms for steel, metal and other industrial products that are also open to competitors. As well as remodeling the basic structure of materials trading, XOM Materials provides valuable tools for platform users.

The marketplace itself, which connects up buyers and sellers and where orders are placed and shipments organized, is supplemented with a range of further metal-specific software solutions. Vendors can use XOM as a shop-in-shop solution with their own branding. This features storage for all documents and full tracking of open orders. Additionally, there is a test version for e-procurement that provides transparency on price quotations and efficient comparison of competing offers. Other features such as insurance services, data analysis tools and options relating to logistics and financing will be enabled for platform users shortly. Growth of XOM Materials is to be funded by outside investors, which will also ensure its independence from Klöckner & Co. An initial investor was secured for XOM Materials in the reporting period. As of June 30, 51 employees worked for XOM Materials at three locations.

Platforms such as XOM Materials break up linear supply and value chains by allowing differently positioned market players to connect with each other directly. Looking ahead, steel and metal products will therefore be increasingly traded through various digital channels: online shops operated by individual distributors, marketplaces, industry specific vertical platforms and cross-sectoral horizontal platforms.

Online shops are of only limited use to customers due to the restricted product portfolio. Although Klöckner also started in this way some years ago, we are already several steps ahead of our competitors.

Marketplaces offer products and services beyond the Company’s own portfolio. The Klöckner marketplaces allow our customers to purchase products from complementary third-party vendors as well as specialized products and services from our own portfolio.

Vertical platforms offer a wide range of sector-specific and complementary products and services. The focus here is on price-sensitive customers. XOM Materials aggregates the ranges of different market players and thus offers a broad product portfolio with a high level of transparency on price and availability.

Horizontal platforms offer a large number of standard products for various sectors but no customer-specific or add-on services. The focus here will be on infrequent, low-volume customers.

Klöckner & Co is fundamentally well positioned to make use of all online channels, with a focus on our marketplaces and XOM Materials. We are thus poised to take on a leading position in all online sales channels for steel and metal products going forward. We have set ourselves ambitious goals for the ongoing implementation of our digitalization strategy: By 2022, we want to see 60% of all Group sales generated via digital channels.

To support our digitalization strategy, we also invest in attractive start-ups that are able to offer added value for the further development of Klöckner & Co. We connect up with external start-ups via our venture capital company, kloeckner.v. In July, we committed €1.5 million each in additional investments in a Visionaries Club seed fund and growth fund. Investing in this way secures Klöckner & Co access to highly promising start-ups and ideas. The investment universe of both funds is concentrated around European B2B enterprises.

Our digitalization strategy also goes hand in hand with a profound cultural shift within our Company. Our employees understand our digitalization strategy and want to help attain our ambitious goals. At the same time, we need to become even faster and more agile given the ever more dynamic changes occurring in our sector. By increasingly applying the innovative working methods employed in the start-up scene, we encourage in-depth dialogue between kloeckner.i, our digitalization subsidiary, and employees from other divisions in the various country organizations.

Online training is provided by Klöckner & Co Digital Academy to get our workforce in shape for the digital age. This lends employees support in developing and implementing new ideas, which they can discuss with their colleagues across national and divisional boundaries 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 dialog.

HIGHER VALUE-ADDED BUSINESS

Many of our customers are highly vertically integrated and still use conventional methods to carry out tasks we can already 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 slotting at an attractive price and with significant gains in precision. In the UK, for instance, we have built what is now the country’s second-largest 3D laser center near Dudley. In Germany, we have already taken three 3D lasers into operation, thus very successfully occupying a market niche.

As set out in our strategic targets, we will also be reinforcing our higher-margin business with higher value-added products. A case in point is the service center to process aluminum flat products for the automotive and manufacturing industries at our Bönen location in North Rhine-Westphalia, Germany, which we brought into operation in 2017.

Our US country organization, Kloeckner Metals Corporation (KMC), last year further enhanced a new line of sheet and profile products with an innovative coating process for both architectural and industrial applications. KMC has also added to its range of other complex finishing processes for alloy and stainless sheet and fabricated metal products.

EFFICIENCY IMPROVEMENT

Our continuous efficiency improvement programs keep on accelerating the implementation of our “Klöckner & Co 2022” strategy.

Over the last few years, we have restructured the European distribution business at the country level, downsized capacity and pooled operations. Under our “One Europe” program, we have largely standardized the processes of our country organizations in Austria, Belgium, France, Germany, the Netherlands and the United Kingdom. In this way, we aim to not only generate cost savings and synergies more readily – especially in purchasing, logistics and pricing – 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 the end of 2019 onwards, with a total of €27 million already generated.

Our location network across the USA covers the key regions between the East and West Coast. As part of our “One US” efficiency program, the three product groups resulting from various acquisitions in the USA have been combined into one unit and the regional focus has been brought out more strongly with a new structure in order to promote cooperation and provide customers with a central point of contact. At the same time, the more efficient organization should lead to cost savings as well as even more rapid implementation of the digitalization strategy and expansion of higher value-added business. From the end of 2020, this program is slated to deliver an annual EBITDA contribution totaling USD 15 million, USD 11 million of which has already been attained.

Steel and metal distribution has for many years faced a highly challenging market environment. To keep in shape to meet that challenge, we must make the Company even leaner and more efficient in selected areas. We are therefore digitalizing processes and transferring additional functions from the Klöckner & Co SE holding company to our country organizations in order to further step up entrepreneurial responsibility there.

In light of this, we have begun restructuring our administration. Expenses of €3.5 million were recognized in this connection at the holding company in the second quarter.

In France, too, we have responded to the ongoing difficult environment with efficiency and productivity programs, in the course of which we have launched further restructuring measures with a cost of €2.0 million in the second quarter.