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Presentation to the SMA Annual Board of Directors Meeting
February 15, 2007
Ocean Reef Club, Key Largo, FL
“Mini’s in a Maxi World”
www.first-river.com2
3 Parts
Size Industry Structure Growth
www.first-river.com3
…couldn’t respond to the SMALL opportunity
The GAP
It used to be the BIG company…
entrepre
ne
urial
www.first-river.com4
But maybe big is not so bad now
Big organization skills Larger organization good at
– Hiring & developing people– Sharing best practice between
mills– Multi-location customers– One-stop shop products &
services– etc
Economies of scale in:– Manufacturing, maintenance– Purchasing – Financing– Sales & Distribution– R&D
Industry Environment Healthy demand & global growth
– Cost curves relatively flat Resources are critical
– People, materials, equipment Lots of corporate opportunities
– Acquisitions, Joint ventures– International scope– Integration up & downstream
Technical issues to the fore Complex financial matters
– Currencies, futures, indices
www.first-river.com5
And big may not hurt performanceData from 118 global public steel companies
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75
Revs $Bn (LTM)
% E
BIT
DA
(L
TM
)
Source: CapIQ, First River
www.first-river.com6
Is SMALL now a limitation in responding…
The GAP?…to BIG opportunities?
Organiza
tio
nal?
www.first-river.com7
ArcelorMittal radically changed the scale
0
20
40
60
80
100
120
140
Cru
de
Ste
el P
rod
uct
ion
(M
illio
n T
on
ne
s)
Source: IISI, First River
China36%
ArcelorMittal10%
Everybody Else54%
33.7
22.5
www.first-river.com8
How do you manage a company this size?
320,000 employees in 60 countries Strategy focused on three axes
– Geography– Product– Value chain
~2 acquisitions a month in 2007 But organization design goals
– Lean, flat, avoid top-heavy bureaucracies, avoid functional silos– Clear ‘line of sight’ in the decision-making process– Promote/allow inventiveness, allow adaptability– Clear accountability at every level – “…and faster entrepreneurial spirit that will keep AM ahead of
competition”
www.first-river.com9
At the top the CEO + Group Management Board
Flat Long Distribution Mining
Americas
Europe
Asia/Africa/CIS/Stain-less
4
32
1
Combine with ~20 senior executives to form Management Committee
www.first-river.com10
VP Sales & Mktg
VP Operations
GM’s
$23Bn revs
Flat Carbon Americas would be #6 in the world if a separate company
www.first-river.com11
Top heavy layers are inevitable
AM US Steel Nucor SteelDynamics
GM GM GM GM
VP VP EVP VP
CEO-C
CEO-R
CEO
GMB
COO
CEO CEO
COO CEOP&L
www.first-river.com12
Large buildings need more support
>20 stories ~35% floor space for structural elements
Smaller buildings ~20%
www.first-river.com13
Increasing organizational size reflected in SG&A expenses*
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0 5 10 15 20 25 30 35
Revs $Bn
SG
&A
% o
f S
ales
Source: CapIQ, First River*Selected global public steel companies, excluding China
SG&A can add value
Industry structure
www.first-river.com15
When industry structure shifts…NAFTA* steel shipments by company size, 2004 & 2007
0
10
20
30
40
50
60
>20MT 10-20 2-10 <2
Cu
m. S
hip
me
nts
, MT
2007 2004
40% 30% 30%
41% 23% 28%
8%
2
2
12
19
3
10 41
Source: First River, company filings*US & Canada only, producers with meltshop only
www.first-river.com16
It drives product line consolidation…
3 firm share
Source: First River, company filings
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Rebar Hot Roll
Top
3 S
uppl
iers
M
arke
t Sha
re (%
)
2001
2006
www.first-river.com17
Improves competitor conduct…
6,000
7,000
8,000
9,000
10,000
11,000
Jan-
03
Apr
-03
Jul-0
3
Oct
-03
Jan-
04
Apr
-04
Jul-0
4
Oct
-04
Jan-
05
Apr
-05
Jul-0
5
Oct
-05
Jan-
06
Apr
-06
Jul-0
6
Oct
-06
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
60%
65%
70%
75%
80%
85%
90%
95%
100%
FR Inv. (KT - Left Axis) Cap Util (%) - Right Axis
Source: MSCI, AISI, First River
93%98%
SSC FR inventories & capacity utilization
77%75%
www.first-river.com18
Leads to better, converging performanceA predictable function of improved industry structure?
-5%
0%
5%
10%
15%
20%
25%
30%
2003 2004 2005 2006 2007
EB
ITD
A %
AKS USS NUCOR STLD
Source: CapIQ, First River
www.first-river.com19
Some say structure can be predictedZipf’s law – frequency inversely proportional to rank
Distribution of 47K online document requests, Boston Univ. 1995
Distribution of 4M firms size in the US, 1997
Predicted line slope = -1.0
www.first-river.com20
If AM didn’t exist, you’d have to invent itWorld’s largest steel producer distribution 2000 & 2007
2007
y = -0.8312x
-2
-1
0
1
2
3
4
5
6
0 2 4 6 8
l N(Rank)
lN(T
on
nes
)
2000
y = -0.7089x
-1
-0.50
0.5
11.5
22.5
3
3.54
4.5
0 2 4 6 8
l N(Rank)
lN(T
on
ne
s)
ArcelorMittal
Source: IISI, First River
www.first-river.com21
US industry structure still developingZipfian distribution says smaller players persist!
World Steel Producers
y = -0.8312x
0
1
2
3
4
5
6
0 2 4 6
l N(Rank)
lN(T
on
ne
s)
NAFTA Steel Producers
y = -1.592x
-3
-2
-1
0
1
2
3
4
5
0 1 2 3 4
l N(Rank)
lN(T
on
ne
s)
ArcelorMittal
Source: IISI, First River
Growth
www.first-river.com23
0%
5%
10%
15%
20%
25%
30%
0 5 10 15 20 25 30 35 40
Small has greater range of performance Tons liquid steel production v. EBITDA %*
*60 global steel companiesSource: CapIQ, IISI, First River
…reflects variety of positions,
growth strategies & resources
www.first-river.com24
0%
5%
10%
15%
20%
25%
30%
0 5 10 15 20 25 30 35 40
Growth choice to size or quality Tons liquid steel production v. EBITDA %*
*60 global steel companiesSource: CapIQ, IISI, First River
www.first-river.com25
You know how to grow against big – you’ve done it before
Not because you were ‘mini’ – but because you could manage
Let loose the energy of small groups of people Took risks on new technologies & deployed them rapidly Went where the growth was – regions, products Innovated in many areas Took more not less risk
Bring those skills to reinventing the steel corporation
www.first-river.com26
Organize for growth…
If you aspire to size Overhead is useful ‘Extra’ resources will find ways to add value in today’s industry Experiment with organizational structure
If you aspire to quality Not a hiding place from competitive realities Needs skill scaling to global market from smaller resource base And it still means growth…
www.first-river.com27
2007 Production: ~500 2007 Production: 100K
Porsche
The dangers of niche confinement
Morgan
Thank you!
Big or small less important to performance
than leadership
Mini’s in a maxi world?
