TUBOS REUNIDOS : IS INITIATING THE 360º VALUE CREATION PLAN WHICH WILL ENABLE US TO INCREASE EBITDA BY 45 MILLION EUROS IN 24 MONTHS

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22/06/2017

TUBOS REUNIDOS IS INITIATING THE 360º VALUE CREATION PLAN WHICH WILL ENABLE US TO INCREASE EBITDA BY 45 MILLION EUROS IN 24 MONTHS

• The Company intends to implement a new business model that will ensure its sustainability, recover the cash generation capacity of the business and profitability for the shareholder and achieve a target ROCE in excess of 7 percent.

• Tubos Reunidos has embarked on Value Creation 360º as an accelerated path to achieve its goals with the immediate objective of increasing EBITDA by 45 million euros over the baseline EBITDA (calculated on the 2014 production volumes and 2017 prices) within 24 months.

• The priority is return on the investments already made by the Company in its catalogue of high-end products and the new industrial configuration through the following policies:

- Implementation of a sales and marketing strategy focussed on providing cutting-edge technological solutions for the end client.

- Attaining the productivity and efficiency improvements required to position Tubos Reunidos near the top quartile of worldwide competitiveness.

Tubos Reunidos held its Annual General Meeting in Bilbao today and all motions put to the vote were duly carried.

With the addition of the Guillermo Ulacia to the management team, the Company has started out on the road map to boost its profitability and cash generating levels in order to ensure a sustainable future as a high-end non-welded piping manufacturer in the Basque Country.

During the already completed first phase the Company undertook a 360º in-depth analysis of all its areas and measured their performance against the best practices in the sector worldwide. This enabled us to detect the potential for an improvement in the operating margin (EBITDA) OF 45 million euros over the 2017 baseline and that it could be implemented in a period of 24 months by taking the following measures:

• A third of the target amount will be achieved through a new margin-oriented sales and marketing management model: driving engineering that adds value for the client, a new and simplified product portfolio focussed on the top market bracket, implementation of a pricing policy in line with the service level and a new online sales function, among others.
• The other two-thirds will be achieved through improved productivity and cost control:
  • Production efficiency: by implementing lean manufacturing methods with an increase in the overall efficiency of the industrial machinery and equipment, improved productivity per employee and efficient maintenance.
  • Optimisation of technical processes: with improvements in consumption and harnessing of raw materials, energy and consumables and reduction of process downtime.
  • Reduction of procurement costs: through improvements in procurement processes and enhanced control of scrap, energy, consumables and other supplies.
  • Reduction of overheads by optimising the business management and support processes.

In a second phase, Tubos Reunidos is in the process of deploying initiatives, with the involvement of the entire organisation, which will implement the plan to execute the identified potential by means of a new business model.

Guillermo Ulacia, Deputy Chairman of Tubos Reunidos: 'We cannot assume that the environment of the first quarter of 2017 in terms of demand and prices represents the new reality; with a sense of urgency, we must establish and develop a strategy to boost profits by rapidly adapting to current market trends. We must harness our strengths (existing investments) by implementing a cost-effective, world-class manufacturing system and by providing a new value proposal for our customers'.

The definition and elaboration of the Value Creation 360º is based on the reality of the sector and the competitive environment with new structural dynamics:

• Overcapacity for non-weld piping mainly due to the abundant supply from Asian producers and the growing production from emerging economies.
• Increasing customer demand for more sophisticated products while prices for piping manufacturers are not keeping pace with this tendency.
• Falling pipe prices and reduction of the differential between commercial piping and top quality products.
• Significant increase in demand for high added-value services and premium solutions as an opportunity for differentiation.

Key aspects of the new business model:

The new business model implemented by management in this new stage is based on the following key concepts:

1) Safety- we will become leaders in occupational health and safety practices (zero accidents)

2) Client-oriented - simplification of the product catalogue in the new high-end portfolio and modification of the sales and marketing strategy with implementation of value engineering proposals for end clients

3) Competitive in terms of costs - positioning ourselves close to the first quartile for competitiveness

4) Flexible - to reduce the risks associated with business cycles

5) Profitable - to generate cash flows that ensure fulfilment of our financial obligations and to obtain a ROCE>WACC (vs. the current ~-7 percent)

125 years of history

This year Tubos Reunidos celebrates its 125th Anniversary since was founded in 1892, when it was known as Tubos Forjados.

During this time the Company has experienced all kinds of economic and social situations. Today, however, Tubos Reunidos continues to maintain the main core of founding shareholders, with all its implications in terms of loyalty and ownership of the Company, and has always been able to rely on stable, fully committed Boards of Directors and management teams.

The keynotes of this long journey were, among others, the Company's early pioneering commitment to internationalisation that has enabled us to compete with the world's leading players as a global company, its ability to constantly adapt its production resources to the latest manufacturing technologies and its vision when managing corporate transactions to achieve the current structure.

The values that have accompanied Tubos Reunidos on this journey are widely recognised and have been forged by all the men and women who have formed part of the company.

2016 Financial Year

Like 2015, 2016 was characterised by a deep recession in the market in both volume and in prices. The chain reaction caused by cancellation of works projects deriving from falling oil prices reached 23% worldwide and 48% in the United States and the significant excess production capacity, above all from Asia, affected the activity of a Company's that devotes more than 75% of its products to the energy sector.

At the same time, Tubos Reunidos had to face internal challenges on which future growth is based such as completing the plan to modernise the facilities and implementation of new industrial structures in both Spain and the United States.

In this turbulent environment the Group made the following important decisions during the year:

• To concentrate resources on the core business of piping by selling the automotive business and holding the distribution business for sale.
• Acquisition of the industrial assets of Rotary Drilling Tools (RDT) in the USA for 19.6 million euros.
• Drafting of a plan to restructure the financial debt that culminated in May with signature of a syndicated credit with a banking pool for 208 million euros and an additional agreement for another 90 million to finance working capital.
• Renewal of the product catalogue by both our own research and development and by harnessing the differential products acquired through the purchase of RDT.
• Consolidation of the strategic alliance with Marubeni Itochu Steel Inc. thanks to the progress made at the Subillabide Plant in terms of both the learning curve and achievement, in record time, of approvals and certifications of the processes of the technological conglomerate JFE.

These measure, along with others such as reduction of the workforce, implementation of efficiency plans, reduction of the salaries of the management committee and a good part of the employees not affected by the collective agreement have not been enough to prevent the outcome of 2016 being one of the worst years in the Company's history. Turnover barely reached 195 million euros, 30 percent less than in 2015. EBITDA was negative by 15.5 million euros and the final net outcome was a loss of 50.2 million euros.

2017 Financial Year

A new and more positive trend was became evident at the beginning of 2017 thanks mainly to the extraordinary turnaround in U.S. investment in non-conventional technologies, start-up of the RDT facilities in America and the progress of the TRPT plant in Spain.

Thus at the end of the first quarter Tubos Reunidos has broken a run of seven consecutive quarters with losses and achieved a positive EBITDA of 11 million euros and a 53% year-on-year increase in turnover to reach 80 million euros. In this context, the Group expects to maintain positive EBITDA throughout 2017.

However, we are well aware that these results are not sufficient in themselves and of the profound structural changes that have occurred in the sector. Therefore, the context of the first quarter cannot be considered to constitute the new reality and Tubos Reunidos will continue to focus its efforts on execution of the 360º Value Creation Plan as the core strategy for a secure future.