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5 Year Strategy Steel Team Brad Beuc January 24 th , 2007

5 Year Strategy Steel Team Brad Beuc January 24 th , 2007. It is better to be prepared for an Opportunity and not have one than to have an Opportunity and not be prepared. Whitney Young Jr. (1921 – 1971) If Opportunity doesn’t knock….build a door. Milton Berle (1908-2002).

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5 Year Strategy Steel Team Brad Beuc January 24 th , 2007

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  1. 5 Year StrategySteel TeamBrad BeucJanuary 24th, 2007

  2. It is better to be prepared for an Opportunity and not have one than to have an Opportunity and not be prepared. Whitney Young Jr. (1921 – 1971) If Opportunity doesn’t knock….build a door. Milton Berle (1908-2002)

  3. Steel Team Objectives & Strategic Initiatives Assure Supply in a Dynamic, Globally Consolidating Market Expand Global Market Knowledge & Align The Steel Team Globally to Deliver Opportunities Strengthen Our Leverage Through Supply-Chain Diversification Eliminate Supply-Chain Inefficiencies Develop New Suppliers to Mirror EMR Expansion Plans. Use them to Leverage Existing Suppliers Strengthen Existing Relationships With Strategic Partners Eliminate Internal Constraints to Increase Speed and Flexibility

  4. Global Steel Spend (2003 - 2006 - 2011)Aligning With Emerson’s Growing Requirements 2003 18% BCC 2006 39% BCC 2011 (F) 64% BCC Ensuring Proper Global Alignment Requires Developing & Selecting Strong Preferred Suppliers

  5. Agenda • Steel Industry Dynamics & Drivers • Supply Base Alignment • SWOT Analysis • Organization Structure • Commodity Segment Strategies • KPI

  6. Agenda • Steel Industry Dynamics & Drivers • Supply Base Alignment • SWOT Analysis • Organization Structure • Commodity Segment Strategies • KPI

  7. Global Steel Production ForecastDeveloping Region Growth Fueling Steel Investment 15% Demand Growth next 5 years * Production & Consumption based on Semi+Finished Product basis CIS, Brazil & India Will be the Dominant Low-Cost Source of Steel China’s Demand Growth Expected to Balance Supply Expansion

  8. Industry GrowthBest & Worst Places for Capacity Expansion Industry Expansion Is Following Demand Growth and Raw Material/Labor Cost Advantages

  9. Nucor SDI USS Erdemir Tata Bao Benxi Severstal Novolipetsk USS Ternium Usiminas CSN Supplier Cost PositioningRegional Alignment Strategies 2006 Best-Cost Producers Steelmaking Cost Trend $/ST $/ST • Electricity costs are increasing in Developing regions  EAF Impact • Labor rates for BOF Mills reducing as they curtail legacy costs & consolidate • Scrap prices unlikely to reduce as global demand grows • Iron Ore has regained its advantage BOF Mills with Iron Ore Ownership Will be Industry Leaders Potential for Mills to Consolidate With Raw Material Producers

  10. Supplier Cost PositioningCost-Advantaged Producers Europe USS Severstahl Novolipetsk MMK Evraz Mittal North America USS Mittal Stelco Algoma Asia Bao India Tata SAIL Jindal Latin America CSN Usiminas Acesita Techint AHMSA Raw Material Rich Mills Will Hold a Long-Term Advantage as Consolidation Continues

  11. Global Industry AnalysisRelationships Critical With Key Consolidators 2001 2010 Scenario 2006 47% ROW 69% ROW 77% ROW 51% 51% 53% 31% 23% 1,280 MT 1,073 MT 830 MT Keep Your Friends Close Keep Your Enemies Closer Source: WSD

  12. Flat Roll Consolidation By Region & ProductImpacts Emerson’s Largest Purchase Volume Europe North America Top 4 Control 80% of Market Top 4 Control 68% of Market Japan China Top 4 Control 91% of Market Top 4 Control 56% of Market Managing Regional Oligopolies Requires New Competitive Suppliers & Stronger Strategic Alignments Sources: CRU, WSD

  13. Current PSLs and Expansion Targets Tighten Marquee & Approved Suppliers and Increase Spend Leverage Expand Developing Suppliers for EMR Expansion and Supplier Competition All Changes Must Be Approved by the Team Leader

  14. Steel Team PSL Metrics Industry-Specific Metrics Will Drive Proper Alignment

  15. Cold Roll - Global Price Forecast Demand & Inventory Fuel Price Volatility Price Arbitrage Opportunities Will Continue to Exist Create Supply-chains to Quickly Take Advantage of Market Changes

  16. Industry AnalysisKey Takeaways • Global Steel Demand Increasing (3.74% CAGR) • Production Will Increase in Developing Regions to Meet Demand • Focus on Brazil, Russia/Ukraine and India for EMR Alignment • Raw Materials Will Determine Cost Advantage in the Industry • Consolidation Will Continue and New M&A Concepts Will Arise • Focused on raw material acquisition, labor reduction and developing regions • Mills buying Distributors & Iron Ore Mines • Volatility Will Persist • Pricing power in mills’ hands and production control remains • Resulting in Arbitrage Opportunities • De-stabilizing Effects • China: Supply/Demand Balance, Raw Material Costs, Antidumping, Inflation • USA: Weakening Currency affecting interest rates & credit • CIS: Oil & Gas Market “Bull” Market Cycle Expected to Strengthen in Near Term

  17. SWOT Analysis of Team Strategy

  18. Organizational ChangesAddressing the Weaknesses Eliminate Constraints to Increase Speed and Flexibility

  19. Steel Organization – Future StateAligning Organization For Efficiency & Expansion

  20. Commodity Segments

  21. Electrical Steel2007 Strategy Review“Options Create Leverage” Mark D. Weisheit January 24, 2007

  22. Electrical Steel2007 Strategy Review“Options Create Leverage” Mark D. Weisheit January 24, 2007

  23. Spend AnalysisIndigenous Growth In 2 Years ENP +357%, MAC +20%, Tools +20% • ENP Led by Liebert’s Grain-Oriented Spend - U.S. D.O.E. TP1 Regs (’06) • MAC Driven by Hermetic Motors/Copeland Sales – U.S. D.O.E. SEER Regs (’05) • Tools Group Led by Sales Growth at In-Sink-Erator

  24. Top Electrical Steel SuppliersLook Outside Our Comfort Zone Well-Entrenched w/ Suppliers in “Western” Countries 79%

  25. Spend by Region & Supplier DemographicTrending East Emerson Motor Company Spend 8% 13% Production / Growth Continues Moving Into Best Cost Countries 14% 27% 44% 36% 30% 29% 2006 Emerson Global Spend BCC Spend Continues to Grow (Utilizing Traders) • JFE & Nippon (Japan) • Bao & Wuhan (China) • Novolipetsk (Russia)

  26. BCC AnalysisFocus on Best Overall Cost Sourcing Decisions are ROTC Driven Japan (HCC) Provided Leverage in Mexico BCC = Always Best Cost Supply Chain

  27. Expected Demand GrowthSupport a Shifting Paradigm Novolipetsk MMK Wuhan Bao Maanshan China Steel E. Europe $49 M $115 M W. Europe $55 M $46 M USA Intra-Regional Support $125 M $81 M China $21 M $36 M MEXICO $130 M $188 M Static N.A. Supply Base  Develop Import Options to Take Advantage of Arbitrage ROW Wuhan JFE Nippon Anshan Novolipetsk SeverCorr Usiminas $14 M $11 M 2006 2011

  28. 5-Yr Strategies OverviewPreparing for the Future • 2005 Strategies: • Align w/ Best Cost Local Suppliers • Develop S.P. Supply in Mexico • Utilize LTAs to Stabilize Price • Develop JFE Alternatives in Asia • Engage Corp Staff in European • Sourcing Decisions • Forward Strategies: • Migrate to Globally Available Parts • Realign our Supply: • - Refine Existing Mill Base • - Introduce New Coil Suppliers • - Develop Stamping Options • Create Opportunities Thru Supply • Chain Developments • Logistics • Demand Forecasts – “Digitize” • All Decisions Will be Based on Best ROTC Impact, and Long-Term Strategic Relationship.

  29. SWOT AnalysisWhat Can We Drive Today

  30. Global Commonality Move to Common Global Thickness and Grades • Dual-Source / Back-up Supply • Increased Leverage in Negotiations • Interchangeability Across Regions / Platforms .65mm FP 400-800 Grade .50mm FP 600-1000 Grade .018”-.031” SP Type 2 & 4 .022” SP Type 4

  31. Current North American CRML Diversity“Faucet” Approach ISE .031” Type 2 Russellville .018-.025 Type 4 Paragould .031” Type 2 .022” Type 4 LSNA .018-.029” Types 2 & 4 ELAM .018-.031” Types 2 & 4 RLAM .018-.031” Types 4 Strategy: Drive Future CRML Designs to Utilize .019” (.50mm) and .026” (.65mm) Type 4 S.P. and 700 Grade F.P. Interchangeability with Global Opportunities / Arbitrage

  32. Flat Roll Mill ConsolidationFocus on Developing Regions 2011 Projected 2006 Areas of Interest: BRIC New CR Capacity Coming Online

  33. Current Electrical Steel PSLsCoil Suppliers Expand Our Options – Refine Our Spend

  34. Preferred Supplier RefinementRealign Spend for the Future Growth With Current Suppliers: US Steel Mittal-Arcelor Hylsa JFE Novolipetsk Bao Wuhan • Fully Integrated Mills • Global, or Soon-to-be-Global, Footprint • Regional Dominance • Desire for Long-Term OEM Business • Openness to Extended Payment Terms • Diverse Product Offering • Ability to Produce Grain-Oriented Steels Replace Less-Strategic Current Suppliers: Nucor Tempel Corus • No Control of Raw Materials • De-Leverage Current Supply Chain • Currency / High Cost Inputs

  35. Preferred Supplier RefinementRealign Spend for the Future Growth With Current Suppliers: US Steel Mittal-Arcelor Hylsa JFE Novolipetsk Bao Wuhan • Fully Integrated Mills • Global, or Soon-to-be-Global, Footprint • Regional Dominance • Desire for Long-Term OEM Business • Openness to Extended Payment Terms • Diverse Product Offering • Ability to Produce Grain-Oriented Steels Replace Less-Strategic Current Suppliers: Nucor Tempel Corus • No Control of Raw Materials • De-Leverage Current Supply Chain • Currency / High Cost Inputs

  36. Preferred SuppliersMigrate Spend Toward Emerging Markets and Technology Who Do We Align With in the Future? US Steel Tempel (High-End) Nucor Posco Anshan (Hautang) Hylsa Marcegaglia Corus Tempel (Low-End) UCC JFE MISA APM Euro- Transitoria Wuhan Dunaferr S.I.T.E.M. Mittal- Arcelor Novolipetsk Bao Tata Nippon Mitsui • Focus: US Steel (N.A.), Hylsa (L.A.), JFE (Asia), Mittal-Arcelor (Global) • Introduce: Posco, Tata, SAIL (into Asia, N.A., L.A., Europe) SAIL

  37. Preferred SuppliersMigrate Spend Toward Emerging Markets and Technology Who Do We Align With in the Future? US Steel Tempel (High-End) Nucor Posco Anshan (Hautang) Hylsa Marcegaglia Corus Tempel (Low-End) UCC JFE MISA APM Euro- Transitoria Wuhan Dunaferr S.I.T.E.M. Mittal- Arcelor Novolipetsk Bao Tata Nippon Mitsui • Focus: US Steel (N.A.), Hylsa (L.A.), JFE (Asia), Mittal-Arcelor (Global) • Introduce: Posco, Tata, SAIL (into Asia, N.A., L.A., Europe) SAIL

  38. Trading Companies Bring ValueMitsui Example

  39. Trading Companies Bring ValueMitsui Example • Global Mill Relationships • Ocean Logistical Leverage • Service Centers • Inventory Control • Extended Terms Global Footprint Already Exists

  40. Preferred Supplier DevelopmentOpen New Doors New Supplier Targets - Coils: Protect Emerson From Potential Trade Cases Trials Underway

  41. Preferred Supplier DevelopmentOutsource Wherever Feasible New Supplier Development - Laminations: Opportunities Exist Within Motor Company, EGS, Tool Company, and Liebert Opportunities Will Be Touched in FY07 – EMC, Tool Co, EGS

  42. Logistical DevelopmentOcean Program Expansion, Inland Freight Opportunities Corus Bao Novo Sumitomo JFE Bao China Wuhan Specific Opportunities for Review in FY07-08 How Can We Replace Brokers and Traders (Reduce Costs) With Internal Resources Can Emerson Ocean Freight Program Be Expanded to Include Local Warehousing Negotiations

  43. Supply Chain DevelopmentMexican Demand Forecasts - Waterfalls ELAM RLAM Standard Mill Lead-Time Standard Mill Lead-Time Customer EDI Already in Place Proposed Pilot: ELAM • Push Lean Initiative All the Way to our Customers • Create Demand-Driven/Pull Systems • Forecasting Mechanisms & Tools, IT

  44. Electrical Steel InventoryLetting Suppliers Carry the Load Hylsa Inv Build Avg 13 Days JFE FY11 Target 4 DOH Developing Demand Systems Prior to JFE and Hylsa, Avg = 10 Days • Forward Strategy: • GrowJIT Programs at: RLAM, ELAM, Paragould, ISE, Russellville, Mena • Elimination of Consignment-Trip with Hylsa (Effective Oct ’06) • Lean Initiative with US Steel  LSNA, Russellville • Expand Distribution Opportunities (Mitsui, Marubeni, Hyundai) into Asia • Streamline Forecasting Mechanism – CopelandHMDSuppliers

  45. Targeted Electrical Steel InitiativesTimeline Thru 2008 Chinese CRML Trials Backup Sourcing: DUO-Core, Mena Implement Demand-Driven Systems w/ Key Vendors Develop Additional Asian Import Lines to NA and Europe Japanese CRML Trials-RLAM European Mill Visits Implement Demand-Driven Systems w/ Largest Customers Establish Backup Plan on All Parts Russian Trials @ LSNA Lamination ES Events Renew Regla Octava Permit RLAM Brazilian Mill Visits Open FY08 Negotiations

  46. Results of Targeted Initiatives 2007 thru 2011

  47. Key TakeawaysHow We Will Lead the Pack • Move Toward Global Commonality, Interchangability • Re-Align Existing Supply Base • Develop New Coil and Lam Suppliers w/ Best ROTC Impact • Establish New Global Logistics/Supply Chains • Create Demand-Driven Supply Systems • Reduce On-Hand Inventory

  48. Key TakeawaysHow We Will Lead the Pack • Move Toward Global Commonality, Interchangability • Re-Align Existing Supply Base • Develop New Coil and Lam Suppliers w/ Best ROTC Impact • Establish New Global Logistics/Supply Chains • Create Demand-Driven Supply Systems • Reduce On-Hand Inventory

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