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SCM Annual Report 2007
 

SCM Annual Report 2007

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    SCM Annual Report 2007 SCM Annual Report 2007 Document Transcript

    • SCM PUBLIC REPORT 2007
    • KEY FINANCIAL INDICATORS, SCM Assets, US $ million +75% 19,903 11,372 2006 2007 Equity, US $ million +85% 9,668 5,220 2006 2007
    • EBITDA, US $ million +71% 2,715 1,585 2006 2007 Revenue, US $ million +42% 9,563 6,719 2006 2007 Profit for the year, US $ million +94% 1,366 704 2006 2007
    • 4 SCM Group Annual Report 2007 CONTENTS CEO STATEMENT 6 KEY EVENTS OF 2007 9 SCM: IN STEP WITH THE MILLENNIUM 12 THE HISTORY OF THE GROUP 13 MISSION, VISION, VALUES 16 GROUP MANAGEMENT 18 THE GROUP’S CORPORATE STRUCTURE 34 Management Structure 34 Business Structure 38 SCM GROUP’S BUSINESSES 42 CORE BUSINESS AREAS Mining and metals 43 Energy 48 Financial services 52 ALTERNATIVE COMMERCIAL DEVELOPMENT Telecommunications 54 Real estate 56 Media 58 Clay mining 60 Retail trade 61 Petroproduct retailing 63
    • Contents 5 SOCIAL RESPONSIBILITY AND SUSTAINABLE GROWTH 64 THE SIX CSR POLICIES OF THE SCM GROUP Business and corporate ethics 67 Working conditions 68 The environment 71 Local communities 73 Social investments 75 Sponsorships and charity 77 BEST INFORMATION ANALYSIS CENTER (BUREAU FOR ECONOMIC AND SOCIAL TECHNOLOGIES) 78 SHAKHTAR FOOTBALL CLUB 79 FOUNDATION FOR THE DEVELOPMENT OF UKRAINE 80 KEY DIRECTIONS: STRATEGIC GROWTH AREAS FOR 2008-2012 82 KEY EXPECTED EVENTS FOR 2008 86
    • 6 SCM Group Annual Report 2007 CEO STATEMENT Dear Colleagues and Partners, The management model we have chosen enables us to diversify our investment priori- I am proud to present to you the 2007 Public ties across six main areas: mining and metals; Report of the SCM Group, Ukraine’s largest energy; finance; telecommunications; media diversified holding company. For SCM, this and real estate. As well as being present in year was marked by the continued restructur- each of these areas as a strategic investor, we ing of the Group and the dynamic growth and also understand the specifics of each industry strengthening of our positions in our priority and possess a wide range of resources to real- markets. From this report, you will find out ize their full potential. We paid special attention about SCM’s most important development this year to the structuring and development of milestones, achievements of the businesses we our telecommunications and media businesses, invest in, as well as our strategic plans. as well as to laying the foundation for success- 2007 was a year of tremendous growth op- ful development in real estate. portunities for SCM, of which we have taken By rigorously following our balanced diversifi- full advantage. In 2007 we have completed cation strategy, in 2007 we focused on strength- our main goal – we laid the firm foundation of ening our positions in the six priority areas our long-term sustainability that will allow us through both organic growth and new acquisi- to remain effective both in times of dynamic tions. To achieve this goal, SCM as a strategic growth, as 2007 demonstrated, as well as in investor, contributed to our target markets’ less favorable times. development financially and by soliciting the In 2007, SCM Group made a further step necessary skills and expertise from the best towards completing the large-scale corpo- professionals. rate restructuring program, launched in 2006. We also made a number of important steps in The expected results of this program, to be new business areas in 2007. As of this moment, achieved by 2008, are a transparent share- these areas are not strategic for SCM, but we holding structure for the Group, a corporate regard them as having significant long-term governance system in line with the world best growth potential. In particularly, we entered practice, and a well-balanced investment the retail sector, structured our assets in clay portfolio. mining, and began the restructuring process in petroleum products retail.
    • CEO statement 7 In 2007 SCM Group started a second pivotal process – exiting from businesses that do not meet our investment strategy. We sold our shareholding and exited the boards of sev- eral machine-building enterprises, as well as withdrawing from the baking business. We also started the preparations for withdrawal from the brewing business. To fully realize our development plans, we entered the international debt capital markets and secured syndicated loans. We did, however, remain true to our rather conservative ap- proach to soliciting external funding. The share of debt in SCM Group’s capital structure is relatively small. This year we publicly presented SCM Group’s corporate social responsibility strategy. As Ukraine’s largest company, SCM contributes to the social and economic development of its regions of presence and recognizes its respon- sibilities to Ukrainian society. We pay significant attention to advancing our social policy and reporting system, allowing us to harmonize business interests and development priorities at both national and regional levels. Within its corporate responsibility strategy, SCM Group initiated and actively participated in several public events dedicated to introduc- ing the ISO 26000 standard on CSR which is currently being developed and promoting best practice in corporate social responsibility in Ukraine. Implementing CSR best practices allows us to increase our assets’ productiv- ity. To further implement the SCM Group CSR strategy, responsible employer practices were introduced at all Metinvest and DTEK enterpris- es, including employee professional develop- ment, and performance based compensation and bonus systems.
    • 8 SCM Group Annual Report 2007 At the end of 2007 we can definitely say that Each day we discover new opportunities before SCM Group has systematically achieved the us, allowing us to build the future day by day. goals set before us in 2006. To keep up the pace We embrace the rapidly changing world around and remain focused on the key business goals, us, as well as understand the scale of those we have defined the Group’s strategic develop- changes and we are ready for the challenges ment areas for the next five years. Those entail: ahead. We are prepared to perform in any further improvement of corporate governance circumstances and – we are willing to walk the and ongoing asset portfolio structuring; devel- road to leadership together with our part- opment of the Group’s industrial businesses ners. Our goal for the next five years will be to (mining, metals and energy) and active invest- enhance SCM Group’s competitiveness and ef- ment in non-industrial, opportunity businesses; fectiveness on both a national and global scale. as well as enhancing our businesses’ manage- ment teams by recruiting leading profession- als. In addition, we are constantly aware of our responsibility to society and this motivates us to abide by the highest performance standards at all levels. OLEG POPOV Chief Executive Officer
    • Key events of 2007 9 KEY EVENTS OF 2007 JANUARY SCM became an industry partner of the World Economic Forum in Davos, the leading international talk shop for global development issues. Today, SCM is one of only two Ukrainian companies that are represented in the international economic club. SCM representatives participated in meetings with top managers of the leading mining and metal companies in the world, where discussion focused on development trends in the sector for the next 5 to 10 years. MARCH SCM signed an agreement with BNP Paribas (Suisse) for a 4-year credit line worth US $400 million. This money will be drawn on to finance the further expansion of the SCM Group’s businesses. MAY SCM and BNP Paribas (Suisse) successfully completed the first stage of credit syndication estab- lished two months earlier raising US $545 million. As a result of the syndication, four leading inter- national banks became the sub-underwriters of this loan. Those banks were: NATIXIS, Raiffeisen Zentralbank Osterreich, Standard Bank, and Bayerische Hypo- und Vereinsbank (UniCredit Group).
    • 10 SCM Group Annual Report 2007 JULY Metinvest Holding, which manages SCM Group’s mining and metal businesses, received a syndi- cated loan worth US $1.5 billion. The lead managers of the loan were the prominent international banks: ABN AMRO, BNP Paribas, Deutsche Bank, and ING. BNP Paribas was the creditor and docu- ment coordinator. This credit will be issued in two tranches, the first of which was for pre-export financing (lending collateralized by export contracts) that was transferred on July 23 in the amount of US $1.0 billion. The second tranche worth US $500 million is a revolving line of credit. This loan is unique in many aspects. Firstly, it is the largest loan ever issued to a private Ukrainian company. Secondly, Metinvest Holding received the most favorable terms ever given to a private Ukrainian company: interest on the syndicated loan is LIBOR+1.7%. AUGUST SCM became a member of the European Business Association (EBA). The EBA is one of the leading international business associations in Ukraine, bringing together around 750 European, Ukrainian, and international companies. This organization sees itself as an instrument for the open and trans- parent representation of business interests by lobbying government policy-makers. The participa- tion of a major player on the Ukrainian market, such as the SCM Group, with an active presence on European Union markets, in the EBA not only strengthens the position of this business association, but can also foster the process of European integration of Ukraine. SEPTEMBER In September, a steel company on a global scale was formed in Ukraine when SCM and Smart Hold- ing agreed to merge their mining and metal assets. During the course of negotiations concerning a joint modernization of Makeyevka Steel Plant, a decision was made to expand SCM’s cooperation with Smart Holding in the mining and metal business. As a result of the merger, Smart Holding will become the second shareholder in Metinvest Holding, in exchange for its stake in Makeyevka Steel Plant, Ingulets Mining and Enrichment Plant (InGOK) and Promet Steel in Bulgaria. The planned merger will help strengthen the position of the domestic steel industry on world markets, will sup- port the growth of Ukraine’s economy, and will give the country a higher profile in the global steel sector.
    • Key events of 2007 11 PricewaterhouseCoopers completed its review of the consolidated financial statements of SCM Group for 2006. The Consolidated Statement was presented in compliance with International Financial Reporting Standards. This is the third consolidated statement issued by SCM Group that complies with IFRS and passed an international audit (the Group issued its first such statement for 2004). OCTOBER SCM Group launched a new business - retail trading. The Ukrainian Retail company made a public presentation of its plans to develop its own chain of stores under Brusnytsya brand name. NOVEMBER А decision was made to set up a television media holding company on the basis of the TRK Ukraine Television Channel. In addition to its own channel, TRK Ukraine, the new media company will also set up specialized television channels, such as News (an information channel with an accent on social and regional issues) and Football. In November, Metinvest Holding signed an agreement with the Malacalza Group (Italy) to acquire a 100% stake in two companies: Trametal (Italy) and Spartan UK (Great Britain). The future plan is to combine the two companies with the Ferriera Valsider steelmill, which is part of the Metinvest Holding. It is also planned to consolidate milling capacities into a single company with an output capacity of more than 1 million tonnes of thick rolled steel a year for EU markets. This will improve the position of the domestic steel industry on world markets and support the growth of Ukraine’s economy. Metinvest’s long-term strategy is to form a balanced steel company that will be a major player on European and world markets. Expanding the holding’s rolling capacities will make it pos- sible to maximize the use of raw materials and the Group’s production capacities. It will also bring significant added shareholder value through synergies and a stronger global competitive edge for SCM’s business and for Ukraine’s entire mining and metal complex.
    • 12 SCM Group Annual Report 2007 SCM: IN STEP WITH THE MILLENIUM
    • SCM: in step with the millennium | The story of the group 13 THE HISTORY OF THE GROUP System Capital Management (SCM) was founded in 2000 in Donetsk. Its main purpose is to invest strategically in key sectors of the Ukrainian economy. These are primarily mining and metals, energy, telecommunications, banking, insurance, real estate, media, clay mining, retail, and petroleum retail sectors. Since its foundation, SCM has been building up its business areas based on the industrial assets it owns and making large-scale investments, both in Ukraine and abroad. Today, the history of the Group can be presented in four major stages. 2000–2002 GROWING THE PORTFOLIO The first stage of SCM’s development concentrated on expanding the Group’s investment portfolio. It was during this period that the company acquired most of its businesses and began to introduce a single standard of management across the Group. 2002–2004 INVESTING During this period, the main focus was on establishing world standards of business management at all of the company’s key assets. Meanwhile, enterprises were modernized and production indicators were raised, where possible, using experience and know-how accumulated by SCM professionals. The company began to implement its long-term growth strategy and to increase the effectiveness of its business. This meant building vertically-integrated industrial organizations at the company’s two main holdings (Metinvest and DTEK) and forming a team of world-class managers capable of running them. 2004–2006 EXPANDING Banking and insurance businesses joined the list of key areas SCM was expanding into. During the same period, SCM began actively expanding its telecom business. With this goal in mind, the company acquired Farlep Invest and Optima Telecom. A strategic investment was made in Astelit, a mobile telecoms business operating under the life:) brand. The company instituted the preparation of consolidated financial statements in accordance with international financial reporting standards (IFRS) and began the process of building a transparent business and management structure for the Group. 2007–TODAY LOOKING AT THE FUTURE SCM group continued the implementation of large-scale corporate restructuring program, launched in 2006. An expected result of this programm to be completed in 2008 will be clear and transparent group shareholder structure. SCM group has formulated a clear development strategy. The company plans to expand its business based on organic growth and also through new acquisitions in important areas of the economy and industry (metal, energy, financial services, telecommunications, real estate, retail trade, and so on). The goal is to make SCM not only the leading financial industrial group (FIG) in ukraine and a national business leader, but also a truly competitive and successful global business.
    • 14 SCM Group Annual Report 2007 KEY EVENTS IN THE EVOLUTION OF SCM 15 November 2000 System Capital Management company is registered. 30 June 2003 SCM Group acquires Pavlogradugol Mining & Extraction Complex. 28 August 2003 SCM acquires a controlling stake in the Khartsyzsk Pipe Plant. 27 January 2004 SCM gets the green light from the Anti-Monopoly Committee to acquire Vostokenergo, an energy generation utility. 19 July 2004 SCM Group acquires a controlling stake in the Northern and Central Ore Mining and Enrich- ment Plants (SevGOK and CGOK). 20 August 2004 SCM acquires three companies that were part of UkrRudProm State Joint Stock Company (Dokuchayevsk Flux and Dolomite Plant, Novotroitskoye Ore Mining (NTRU), and Krivbass- vzryvprom Explosives Company), an ore conglomerate, through privatization tenders. 25 February 2005 SCM Group increases its stake of shareholder capital in the First Ukrainian International Bank from 49% to 99%. 6 July 2005 SCM Group forms DTEK, a holding company, to manage its enterprises in the energy sector. 27 September 2005 SCM acquires a 91% stake in Farlep Invest. 10 October 2005 SCM concludes a deal to acquire Leman Commodities (Switzerland), a metal trader. 25 November 2005 SCM acquires a controlling stake in Ferriera Valsider, an Italian engineering rolled steel producer. 6 December 2005 Oleg Popov becomes General Manager of SCM. 17 April 2006 SCM purchases 100% ownership stake in Optima Telecom. 21 April 2006 SCM becomes one of the founding members of the UN Global Compact in Ukraine. 30 May 2006 SCM Group forms SCM Estate to manage its enterprises in the real estate sector, later re- named ESTA Holding. 6 June 2006 SCM Group forms Metinvest Holding to manage its enterprises in the mining and metal complex. 7 June 2006 SCM announces the merger of Optima Telecom and Farlep Invest into a single telecom group.
    • SCM: in step with the millennium | The story of the group 15 20 July 2006 SCM becomes the general sponsor of Shakhtar Football Club. 2 November 2006 For the first time, a consolidated financial statement is published for SCM Group in accor- dance with IFRS (audited by PriceWaterhouseCoopers). 21 December 2006 SCM Group purchases a 100% ownership stake in Avlita Stevedoring Company. This pur- chase expands the raw materials import opportunities for for the Group’s metal companies, as well as product export opportunities for Metinvest Holding companies. 26 January 2007 SCM Group becomes an industry partner of the World Economic Forum in Davos. 2 March 2007 United Minerals Group (UMG) is formed, to manage SCM Group’s assets in the clay mining sector. 6 March 2007 SCM signs an agreement with BNP Paribas (Suisse) for a syndicated loan worth US $545 million. 11 July 2007 SCM Group approves its long-term business development strategy and announces its inten- tions to invest more than US $6.2 billion in the expansion of its business over the next five years. 26 July 2007 Metinvest Holding signs a syndicated loan worth US $1.5 billion. 25 September 2007 SCM and Smart Holding announced the intention to combine their assets in mining and me- tals, within the framework of Metinvest Holding. 6 October 2007 Metinvest Holding is the first Ukrainian company to become a permanent member of the International Iron and Steel Institute (now the World Steel Association), the leading global association in this sector. 12 October 2007 DTEK is given a long-term credit rating of B2 by Moody’s. This offers the company direct ac- cess to world capital markets. 17 October 2007 SCM Group presents a new business venture, Ukrainian Retail, to manage a shopping chain under the Brusnytsya brand. 12 November 2007 Metinvest Holding signs a deal to acquire two steelmills, Trametal (Italy) and Spartan UK (Great Britain). 11 December 2007 Metinvest Holding completes the restructuring of its sales division. This allowes the consoli- dation of sales by region into the four channels, provided by different companies.
    • 16 SCM Group Annual Report 2007 MISSION, VISION, VALUES THE SCM MISSION: SUCCESS, TOGETHER We invest in the continuous growth and improvement of our businesses, and through this support the economic and social development of society as a whole. THE SCM VISION: CREATING THROUGH DEVELOPMENT We build effective businesses and manage them according to best world standards and practice, ensuring long-term growth in the value of our investments and participating in the multifaceted development of the regions, in which we have a presence.
    • SCM: in step with the millennium | Mission, vision, values 17 OUR VALUES: EFFECTIVENESS, PROFESSIONALISM, ACCOUNTABILITY Effectiveness as a means to achieve the best results in everything that we do. For us, effectiveness is: • reaching the goals we set • using contemporary technologies and approaches to doing business • constantly improving the processes and methods of doing business • rational allocation and use of resources • seeking new opportunities • being ready for change Professionalism in doing business, including investing in people and stimulating innovation and enthusiasm towards work. For us, there is particular importance in: • meeting the highest standards • stimulating initiative and innovation • investing in professional development • attracting and keeping highly qualified employees Accountability to our employees, our partners, our communities, and society as a whole.
    • 18 SCM Group Annual Report 2007 GROUP MANAGEMENT Roman Vodolazkyy Chief Financial Officer Ilya Arkhipov Oleg Popov Business Development Chief Executive Director Officer
    • SCM: in step with the millennium | Group management 19 Jock Mendoza-Wilson International and Investor Relations Director Nikolai Nesterenko Natalia Yemchenko New Business Roman Bugayov Public Relations and Com- Development Director munications Director Corporate Rights and Foreign Asset Management Director
    • 20 SCM Group Annual Report 2007 Oleg Popov Chief Executive Officer CEO OF SCM SINCE DECEMBER 2005. 2001-2005 – EXECUTIVE DIRECTOR. 2000 – HIRED BY SCM AS DEPUTY TO THE CEO. 1992-2000 – WORKED IN VARIOUS GOVERN- MENT OFFICES AND PRIVATE COMPANIES. CHAIRMAN OF THE BOARD FOR FC SHAKHTAR. REPRESENTS SCM INTERESTS ON THE BOARDS OF DTEK, FIRST UKRAINIAN INTER- NATIONAL BANK, DONGORBANK, UKRAINIAN RETAIL, AND ON THE METINVEST HOLDING AUDITING COMMITTEE. AREAS OF RESPONSIBILITY: TAKING AND CONFIRMING KEY FINANCIAL, INVESTMENT AND PERSONNEL DECISIONS, BOTH DIRECTLY AT SCM AND IN THE GROUP ASSETS, AS WELL AS EVALUATING THE PERFORMANCE OF THE MANAGERS OF THESE ASSETS. EDUCATION GRADUATED FROM DONETSK STATE UNIVER- SITY IN 1996. GRADUATED FROM DONETSK POLYTECHNICAL INSTITUTE IN 1990.
    • SCM: in step with the millennium | Group management 21 — WHAT EVENTS WOULD YOU SAY WERE KEY TO THE GROWTH OF THE GROUP IN 2007? — The main event was the merger of Metinvest Holding with the metallurgical assets of Smart Holding, within the framework of Metinvest Holding. This was an important launching pad for the further development of the Group’s metal business because we strengthened our position in supplying iron ore and now we have the opportunity to expand our steel making capacities. In addition, in 2007 we embarked on areas of business that were new for us: real estate and retail trade. Plus, we made a decision to get out of some of our non-core areas. For instance, we sold a minority stake in the Ukrainian Industrial Transport Company and prepared to exit the baked goods business. Altogether, 2007 was a year in which we actively worked on structuring our port- folio of assets. — WHAT, IN YOUR OPINION, IS THE MOST IMPORTANT ACHIEVEMENT IN SCM’S CORPORATE POLICY? — The most important point when we were in the midst of such major corporate transformations was that the best and the brightest professionals remained with the Group, both in SCM Company and in the holdings. We’ve been able to create a highly effective team. — WHAT ARE THE GROUP’S KEY STRATEGIC GROWTH OBJECTIVES? — First, to improve the management of Metinvest Holding and DTEK. Second, to invest in attrac- tive sectors, such as: telecom, media, real estate, and so on. Third, to decide on the future of other businesses in our portfolio, that is to continue the process of structuring. Fourth, to look for new opportunities for investing. Today, these are our four strategic growth objectives.
    • 22 SCM Group Annual Report 2007 Roman Vodolazkyy Chief Financial Officer CFO OF SCM SINCE JUNE 2005. FEBRUARY-JUNE 2005 – SENIOR FINANCIAL MANAGER (TITLE CHANGED TO CFO). 2002 – BEGAN AT SCM AS MANAGER FOR THE GROUP’S METAL DIVISION. OCTOBER 2000-SEPTEMBER 2002 – AUDITOR FOR PRICEWATERHOUSECOOPERS IN KIEV. MARCH 1999-OCTOBER 2000 – WORKED IN THE FINANCIAL DEPARTMENT OF MCDONALD’S UKRAINE. 1994-1999 – ACCOUNTANT AND CHIEF ACCOUN- TANT FOR VARIOUS UKRAINIAN COMPANIES. REPRESENTS THE INTERESTS OF SCM ON THE BOARDS OF DTEK AND FC SHAKHTAR. CHAIRS THE AUDITING COMMITTEES FOR MET- INVEST HOLDING AND DTEK. AREAS OF RESPONSIBILITY: MANAGING THE GROUP’S FINANCIAL DEPARTMENT, BUDGETING, PREPARING FINANCIAL REPORTS, TREASURY FUNCTIONS, AND INTERNAL AUDIT. UNDER HIS LEADERSHIP, SCM HAS SHOWN ITSELF TO BE A COMPANY WITH IMPECCABLE FINANCIAL REPORTING THAT HAS BEEN APPROVED BY TOP INTERNATIONAL AUDITING COMPANIES. AS RESULT, THE GROUP STRENGTHENED ITS REPUTATION IN INTERNATIONAL CREDIT MAR- KETS AND WAS ABLE TO ORGANIZE THE FIRST SYNDICATED LOAN FOR SCM AT THE HOLDING COMPANY LEVEL IN THE GROUP’S HISTORY. EDUCATION MBA FROM INSEAD (FRANCE), A TOP EUROPE- AN BUSINESS SCHOOL IN 2007, AND MEMBER OF THE BRITISH ASSOCIATION OF CERTIFIED CHARTERED ACCOUNTANTS (ACCA) SINCE 2004. GRADUATED FROM THE KHERSON STATE TECHNICAL UNIVERSITY AS A SPECIALIST IN ACCOUNTING AND COMPUTER SOFTWARE IN 1998.
    • SCM: in step with the millennium | Group management 23 — WHICH EVENTS IN 2007 WOULD YOU SAY WERE THE MOST IMPORTANT FOR THE GROUP’S DEVELOPMENT? — 2007 was a dynamic year filled with important milestones. Among the main ones, I would name two huge steps in the development of the Group. First, in 2007, SCM went to foreign credit markets for the first time, as a holding company. Second, at the end of the year, the decision was made about the merger of SCM Group’s mining and metal assets with those of Smart Holding. — WHAT KEY ACHIEVEMENTS IN THE FINANCIAL DEPARTMENT WOULD YOU SINGLE OUT FOR 2007? — First of all, the support of BNP Paribas (Suisse) SA in our bid for a syndicated loan worth US $545 million. Borrowing on foreign markets is an enormous task, and one that we were already looking at in 2006. In 2007, we started a project to automate the process of preparing consoli- dated financial reports, according to international standards. This is a very challenging task that requires serious resources, and we will continue it in 2008. — WHAT OPPORTUNITIES FOR FURTHER GROWTH DO YOU SEE? — We plan to secure a credit rating for SCM as a holding company, which should offer us much broader options for borrowing. We also intend to continue our expansion into capital markets.
    • 24 SCM Group Annual Report 2007 Ilya Arkhipov Business Development Director BUSINESS DEVELOPMENT DIRECTOR FOR SCM SINCE OCTOBER 2005. 2001-2005 – CONSULTANT, MCKINSEY & CO, MOSCOW. 2000-2001 – OPERATIONS MANAGER FOR RUSSIA’S LARGEST ON-LINE AUCTION SITE, MOLOTOK.RU FOR NETBRIDGE, AN INTERNET COMPANY. 1995-2000 – CONSULTANT, COOPERS & LY- BRAND AND PRICEWATERHOUSECOOPERS, MOSCOW. REPRESENTS SCM INTERESTS ON THE BOARDS OF FARLEP INVEST, FIRST UKRAI- NIAN INTERNATIONAL BANK, DONGORBANK, UASK ASKA, SEGODNYA MULTIMEDIA AND THE TRK UKRAINE TELEVISION CHANNEL. AREAS OF RESPONSIBILITY: PARTICIPATING IN DETERMINING THE OVERALL PORTFOLIO STRATEGY OF THE GROUP, AS WELL AS IN CORPORATE RESTRUCTURING. IN PARTICU- LAR, MR. ARKHIPOV IS INVOLVED IN DEVE- LOPING SCM’S BUSINESS STRATEGY REGAR- DING TELECOMS, BANKING AND INSURANCE SERVICES, AND THE MEDIA. EDUCATION: MBA FROM INSEAD (FRANCE), A TOP EURO- PEAN BUSINESS SCHOOL, IN 2004. GRADUATED FROM THE PLEKHANOV ACAD- EMY OF ECONOMICS IN RUSSIA AS A SPECIA- LIST IN ENTERPRISE MANAGEMENT IN 1999.
    • SCM: in step with the millennium | Group management 25 — WHICH EVENTS IN 2007 WOULD YOU SAY WERE THE MOST SIGNIFICANT IN THE HISTORY OF THE GROUP? — When it comes to SCM Group, then the most important event was the decision to merge mining and metal assets with Smart Holding. This was a major business event in Ukraine and the world of metallurgy as a whole. As to those areas that I’m in charge of, then I would say that 2007 was a breakthrough year for the development of the Group’s telecommunications business. In addition to that, our insurance busi- ness maintained its share and developed positively in a rather competitive market. We also began forming the publishing holding, Segodnya Multimedia, and we now have a centralized publi- shing business that includes one of the most popular Ukrainian papers, Segodnya, and a range of regional publications in Eastern Ukraine. — IN 2007, SCM ACTIVELY INVESTED IN THE TRK UKRAINE TELEVISION CHANNEL. WHAT ARE THE RESULTS OF THAT? — Firstly, we completed the team with top foreign specialists. Secondly, we continued to work on program content so that our channel would be interesting to a wide range of audiences. We’ve been making considerable efforts and we’ve had matching results, as the channel’s ratings have picked up considerably. — PLEASE, NAME THE MOST IMPORTANT GROWTH PLANS IN YOUR AREAS. — The main focus for television business, I would say, is on forming a media group that becomes one of Ukraine’s leaders by 2009. This means that a range of thematic channels will be estab- lished, our own production of original programming will be set up, as well as we will draw on new creative resources. In telecommunications business – it will be further securing the market posi- tions of our fixed-line operator and expansion of our geography of presence. In finances, we are also aimed at strengthening the market positions of our financial institutions, as well as expand- ing the product lines of our banks (including the introduction of retail products) and insurance companies.
    • 26 SCM Group Annual Report 2007 Nikolai Nesterenko New Business Development Director NEW BUSINESS DEVELOPMENT DIRECTOR AT SCM SINCE SEPTEMBER 2007. 2002-2007 – SENIOR MANAGER FOR STRATEGY DEVELOPMENT IN A RANGE OF THE GROUP’S COMPANIES. WITH THE GROWTH OF SCM GROUP, THIS AREA BECAME MORE AND MORE SIGNIFICANT AND A DECISION WAS MADE TO INSTITUTE THE POSITION OF DIRECTOR FOR NEW BUSINESS DEVELOPMENT. 2001 – STARTED AT SCM AS MANAGER OF THE FINANCIAL CONTROL DEPARTMENT. 1997-2001 – WORKED AT KERAMET INVEST, RISING FROM STOCK BROKER TO GENERAL MANAGER. AREAS OF RESPONSIBILITY: DETERMINING STRATEGIC BUSINESS DEVELOPMENT IN REAL ESTATE, MACHINE-BUILDING AND TRANS- PORT SECTORS AT SCM; SEEKING NEW AREAS OF INVESTMENT. GENERAL MANAGER OF ESTA HOLDING, WHICH MANAGES SCM GROUP PROJECTS IN REAL ESTATE. EDUCATION: MBA FROM INSEAD (FRANCE), A LEADING EUROPEAN BUSINESS SCHOOL, IN 2007. GRADUATED FROM THE FINANCIAL AC- COUNTING DEPARTMENT OF DONETSK STATE UNIVERSITY IN 1998.
    • SCM: in step with the millennium | Group management 27 — WHAT PROJECTS AND MANAGEMENT BODIES ARE YOU INVOLVED IN AT SCM? — My main area of responsibility at SCM is business development in real estate. Being General Manager of ESTA Holding and a member of the Investment Committee under the Holding’s Board, I have a fairly broad remit in business development in this area at SCM. — WHAT KEY ACHIEVEMENTS WOULD YOU NOTE IN THIS SPHERE? — What is most important is the consolidation of SCM property assets under the various holdings. We began this process in 2006 and we’re still working on it. We’ve put together a solid team and we’ve worked out the corporate procedures for these activities. Among 2007’s projects, I would say that three were key: developing a concept for the Pushkinskiy Multi-functional Complex in Donetsk, acquiring a 50% stake in the Leonardo project, and starting construction of a warehouse and distribution center in Dnepropetrovsk. — What are your future plans at ESTA? — We’re moving in three major directions. First, concentrating our operations in the Ukrainian market, which is promising but not fully developed. Second, we’re planning to actively develop management of outside projects, that is, managing property in the broadest sense. Third, we’re preparing the launches of a number of our own projects. It’s wonderful how many major develop- ment opportunities the Ukrainian property market represents.
    • 28 SCM Group Annual Report 2007 Jock Mendoza-Wilson International and Investor Relations Director INTERNATIONAL AND INVESTOR RELATIONS DIRECTOR AT SCM SINCE 2006. 2005-2006 – DIRECTOR OF CORPORATE COM- MUNICATIONS FOR THE SCM GROUP. 1989 – LAUNCHED HIS OWN PR CONSULTANCY IN LONDON AND ADVISED US GOVERNMENT AGENCIES ON THEIR PUBLIC DIPLOMACY PROGRAMS IN THE MIDDLE EAST. 1984 – BEGAN HIS CAREER WITH THE FORD EUROPE COMPANY. AREAS OF RESPONSIBILITY: DEVELOPING AND IMPLEMENTING COMMUNICATIONS STRATE- GIES AND PROGRAMS AIMED AT ESTABLI- SHING CONTACTS WITH BOTH GOVERNMENT OFFICES AND NGOS; DEVELOPING RELATIONS WITH INTERNATIONAL GOVERNMENTS, INSTI- TUTIONS, BUSINESSES, AND MEDIA, AS WELL AS BUILDING RELATIONS WITH THE INVEST- MENT AND FINANCE INDUSTRY. EDUCATION: GRADUATED AS AN ECONOMIST FROM HERI- OT-WATT UNIVERSITY IN EDINBURGH IN 1984.
    • SCM: in step with the millennium | Group management 29 — WHAT ARE SOME OF THE INTERNATIONAL ORGANIZATIONS SCM WORKS WITH? — As a business leader in Ukraine, SCM is involved in many global and regional initiatives. Among others, the Group signed an agreement on a strategic partnership with the United Na- tions regarding the development of corporate social responsibility (CSR) in Ukraine. SCM is also a member of the European Business Association and an industry partner of the World Economic Forum in Davos. — WHAT ARE SCM’S MAIN ACCOMPLISHMENTS IN CSR? We put considerable emphasis on developing policy and accountability in the company in terms of corporate responsibility. For us, it is not just a passing fad. We see major benefits to the manage- ment and value of our business from implementing a systematic approach to corporate respon- sibility, which we believe will lead to sustainable growth. In 2007, we prepared a CSR report that will be published in 2008, and we established a system for regular internal CSR reporting within the Group. — WHAT ARE SCM’S PRIORITIES IN THIS AREA? — One important goal for 2008 is to bring our CSR reporting in line with international standards. We will be improving and developing the principles underlying the company’s environmental policy and projects to promote health and safety in the work place.
    • 30 SCM Group Annual Report 2007 Natalia Yemchenko Public Relations and Communications Director PUBLIC RELATIONS AND COMMUNICATIONS DIRECTOR AT SCM SINCE DECEMBER 2006. 2005-2006 – PUBLIC RELATIONS MANAGER FOR SCM GROUP. 2003 – BEGAN WORKING FOR SCM GROUP AS MANAGER OF A SECTOR GROUP. 2001-2003 – DIRECTOR, KERAMET INVEST. 1998-2001 – FINANCIAL MANAGER OF KOLO, AN INVESTMENT COMPANY. CHAIR OF THE AUDITING COMMITTEE OF THE TRK UKRAINE TELEVISION CHANNEL. AREAS OF RESPONSIBILITY: COMMUNICATING WITH TARGET AUDIENCES, INCLUDING THE MEDIA, EMPLOYEES, RESIDENTS OF REGIONS WHERE THE COMPANY HAS A PRESENCE, THE GOVERNMENT, COMMUNITY ORGANIZATIONS, AND THE GENERAL PUBLIC, AS WELL AS MANAGING THE COMPANY’S REPUTATION. EDUCATION: GRADUATED FROM DONETSK NATIONAL UNI- VERSITY AS A SPECIALIST IN FINANCE AND CREDIT IN 1998.
    • SCM: in step with the millennium | Group management 31 — WHICH EVENTS DO YOU CONSIDER THE MOST IMPORTANT IN THIS REPORTING YEAR? — First of all is the restructuring of the Group’s core business areas, then the merger with Smart Holding, and the formation of holding companies for new business areas. One significant event I think was starting to work on the Brusnytsya retail chain. — WHAT ARE THE PRIORITY DEVELOPMENT AREAS FOR THE GROUP? — In its evolution, SCM holds to the principle of deliberate diversification, which means both gro- wing our industrial holdings and activating alternative areas of investment, especially our presence on the services market. Of course, we’re also talking about working effectively in capital markets. Yet another important point is improving our standards of corporate governance. Ukraine is and will remain the main ‘address‘ for SCM investments. — WHAT WOULD YOU SAY WAS SCM’S BIGGEST ACHIEVEMENT IN CSR IN 2007? WHAT SPECIFIC AREAS ARE PRIORITIES WHEN IT COMES TO CORPORATE SOCIAL RESPONSIBILITY? — Among our main accomplishments, I would distinguish the Foundation for the Development of Ukraine, under whose aegis we’ve launched a range of comprehensive charity programs, as well as simply more active corporate philanthropy and cooperation with international organizations. One of SCM’s policy priorities is ecology and an environmental program in the regions where it has a presence, ensuring on-the-job safety, as well as the development of local communities. Naturally, the company’s development strategy includes social investment not only on the national level, but also in the regions.
    • 32 SCM Group Annual Report 2007 Roman Bugayov Corporate Rights and Foreign Asset Management Director CORPORATE RIGHTS AND FOREIGN ASSET MANAGEMENT DIRECTOR AT SCM SINCE SEP- TEMBER 2007. 2005–2007 – MANAGER OF THE CORPORATE RIGHTS DEPARTMENT FOR SCM GROUP. 2003 – JOINED SCM GROUP AS AN ECONO- MIST. 2002-2003 – ECONOMIST AT KERAMET INVEST. 1996-2002 – WORKED IN THE DONETSK OBLAST OFFICE OF THE ANTI-MONOPOLY COMMITTEE OF UKRAINE AS A SPECIALIST, SENIOR SPECIALIST, THEN DEPARTMENT MANAGER. REPRESENTS SCM INTERESTS ON THE BOARD OF DTEK. SITS ON THE AUDITING COMMITTEES OF THE TRK UKRAINE TELEVISION CHANNEL AND BU- REAU OF ECONOMIC AND SOCIAL TECHNOLO- GIES (BEST) ANALYTICAL CENTER. AREAS OF RESPONSIBILITY: DETERMIN- ING AND IMPLEMENTING COMPANY POLICY REGARDING THE MANAGEMENT OF CORPO- RATE RIGHTS, ORGANIZING AND HANDLING OPERATIONS INVOLVING CORPORATE RIGHTS BELONGING TO THE COMPANY AND ITS SUB- SIDIARIES, AND ORGANIZING THE ACTIVITIES OF FOREIGN COMPANIES BELONGING TO SCM. EDUCATION: GRADUATED FROM THE DONETSK INSTITUTE OF ENTREPRENEURSHIP AS A SPECIALIST IN ORGANIZATIONAL MANAGEMENT IN 2000, WITH MAJOR IN THE ECONOMIC AND LEGAL ASPECTS OF COMMERCIAL ACTIVITY.
    • SCM: in step with the millennium | Group management 33 — WHAT WOULD YOU SAY WERE THE MOST IMPORTANT EVENTS IN 2007? — We undertook the structuring of our sectoral holdings, and I consider four events of utmost signifi- cance in this area. Firstly, handing over the bulk of corporate rights to the Group’s mining and metal businesses to Metinvest Holding. Secondly, handing over corporate rights to those of our companies that are involved in extracting and processing thermal coal to DTEK. Thirdly, setting up the UMG hol- ding, which manages companies involved in mining clay. Last, but not least, we began to work on forming a publishing holding based on the company Segod- nya Multimedia. — NAME THE KEY ACHIEVEMENTS IN THE DEVELOPMENT OF ALTERNATIVE AREAS OF COMMER- CIAL ACTIVITY. — We started the process of setting up new holdings in telecommunications, in real estate and in retail trading of petroleum products, as well as of transferring corporate rights over our compa- nies that work in those areas of business. — WHAT ARE THE PRIORITY AREAS FOR FURTHER DEVELOPMENT IN THE GROUP? — In 2008, plans are to complete the transfer of corporate rights of our mining and ore companies to Metinvest Holding. We hope to finish establishing new holdings in real estate and in petroleum products retail trading.
    • 34 SCM Group Annual Report 2007 THE GROUP’S CORPORATE STRUCTURE MANAGEMENT STRUCTURE THE GROUP’S ASSET MANAGEMENT key features and the basic principles on which SYSTEM it is built. Until the beginning of 2006, when the deci- The key features of SCM’s system of corporate sion was made to restructure the business, governance are: SCM Group saw itself as the conglomeration of different assets that were directly run by the • simplicity and intelligence, clearly-defined are- company. The program of corporate transfor- as of competence along all the links in the chain mation that was approved has the institution a • effective decision-making processes modern, understandable system of corporate governance and the switch to a targeted corpo- • suitability for the business’s target structure rate structure as its goals. for managing corporate rights SCM Group’s target business model provides, • compliance with best world standards first and foremost, for a change in the role of SCM Group’s system of corporate governance the SCM Company in the system of manage- is based on the principles of transparency and ment: a switch from operational management compliance with the law that lie at the heart of of individual enterprises to strategic manage- all its activities. ment of newly-formed sectoral holdings or Group business areas. In accordance with RESTRUCTURING SCM GROUP’S the program approved in 2006, the process of BUSINESSES combining the Group’s operational companies SCM Group undertook reform of its asset within the framework of specific sectoral hol- management structure during 2007, with the dings began. Those holdings received the right objective of increasing the effectiveness of to own and manage SCM assets in their specific enterprise management and forming focused sectors. The sectoral holdings were also tasked sectoral holdings. The Group’s holding system with managing the assets that were handed of structuring business is in line with its vision over to them, including devising and imple- of the development of SCM as a professio- menting their business development strategies. nally managed company, as well as in line with This new business structure and the important global corporate standards. change in the role of the SCM Company in the deci- sion-making system, as well as SCM’s unswerving THE SYSTEM OF CORPORATE determination to match international standards GOVERNANCE drove the switch to what was, for SCM, a funda- SCM’s system of corporate governance is mentally new system of corporate governance. oriented towards the highest international In working on formulating a target structure standards and is based on best world practice. of corporate governance, SCM studied best For this reason, SCM is able to quickly and international practice and clearly designated its effectively make the decisions necessary to en-
    • SCM: in step with the millennium | The group’s corporate structure 35 sure the dynamic growth of each of our sector of internal and external audits; and the process holdings and the Group’s business areas. of ensuring compliance with the laws and norms governing business ethics. Based on the approved program of corporate transformation, the company began a radi- The Strategy and Investment Committee cal restructuring of its business in 2006. This prepares and submits for review to the Su- particular program called for a transition from pervisory Board recommendations regarding the historical structure of managing corporate opportunities for the holdings to be involved rights and decision-making system to a new in investment projects and exit strategies for business model. One of the key components specific projects; recommendations regarding of the program was the establishment of a the strategic goals and objectives of the various contemporary, transparent, and highly effective holdings, and the implementation of agree- system of corporate governance. ments on mergers and acquisitions (M&A). As the majority shareholder and main inves- The Appointment and Compensation Commit- tor, SCM decides who will represent it on the tee recommends to the Supervisory Boards Boards of the various sectoral holdings. candidates for management positions in the sectoral holdings. With this purpose in mind, The participation of minority shareholders the Committee organizes interviews with in the governing of these holdings is also applicants for specific positions and decides executed through their representatives on the whom to recommend for those positions. The Board. Committee also prepares recommendations re- The Supervisory Board governs the sectoral garding the rotation of top managers within the holdings. For individual areas of business sectoral holdings, proposes ways to incentivize where there are no sectoral holdings, the top managers, and participates in shaping the system of corporate governance works through corporate culture and staffing, in determi- the immediate Supervisory Boards of these ning the prospects for personal development of operating companies. These Boards include managers, and so on. representatives of SCM, minority shareholders The General Manager of a sectoral holding is and independent (external) experts. The mem- appointed by the Supervisory Board in order to bers of each Board vote to elect a Chair from manage the holding’s operations. As a member among their number. The Boards determine of the Board, this person takes an active part in business development areas and the standards the strategic planning of the holding’s activities. for engaging in specific businesses; they ap- prove strategies, budgets and major contracts The Executive Council is the highest body in and oversee their implementation; they track the operational management of a holding. Each business indicators, appoint top managers, es- holding’s Executive Council is established col- tablish incentives for them, and evaluate their legially. The Chair of the Executive Council is performance. The members of the Supervisory the General Manager of the holding. Boards, together with independent experts, The Supervisory Boards of operating com- may also participate in specialized committees panies are responsible for their sustainable including: the Audit Committee, the Strategy financial and commercial growth, greater effec- and Investment Committee, and the Appoint- tiveness in their activities and increased com- ment and Compensation Committee. petitiveness. They keep track of the upholding The Audit Committee prepares recommenda- of shareholder rights, make decisions about tions for the Supervisory Boards regarding the when to hold General Shareholders’ Meetings, approval of accounting policy and procedures establish the agenda for such meetings, draft for preparing financial reports; the depth and corporate policy, and so on. accuracy of financial reporting provided by The members of the Supervisory Boards of each holding; the reliability and effectiveness operating companies are appointed by their exe- of the internal auditing system, internal over- cutives and approved by the Supervisory Board sight, and risk management; the independence of the relevant sectoral holding.
    • 36 SCM Group Annual Report 2007 CORPORATE GOVERNANCE STRUCTURE OF SCM GROUP SCM Minority shareholders Supervisory Boards of holding companies Audit Strategy and Appointment and Committee Investment Compensation Committee Committee
    • SCM: in step with the millennium | The group’s corporate structure 37 Holding company Supervisory for sectoral Boards of operating holding companies General Operating Holding Board Manager companies of holding In cases where a decision is made to form a holding company. In cases where a decision is made not to form a holding company.
    • 38 SCM Group Annual Report 2007 BUSINESS STRUCTURE CORE BUSINESS AREAS Mining and metal As part of restructuring its business, in 2007, stakes in certain of the Group’s mining and metal enterprises that belonged to SCM and its subsidiaries – SCM Ltd. (Cyprus) and USH (cyprus) – were transferred to Metinvest Holding, which handles the strategic management of SCM Group’s mining and metal business. Specifically, Metinvest Holding was given the shares of northern ore mining and enrichment plant (SevGOK), Avdeyevka coke and chemical plant (AKHZ), Yenakiyevo steel plant (YeMZ), Azovstal steel plant (AZOVSTAL), Khartsyzsk pipe plant (KhTZ), and Prometei. At the end of 2007, the restructuring of SCM Group’s mining and metal businesses remained in progress and will be completed in 2008. Energy As part of restructuring SCM Group’s business, DTEK, which manages the Group’s energy assets, was given the shares of Pavlogradugol, Oktyabrskaya and Dobropolye central enrichment plants (CEP). At the end of 2007, the restructuring of SCM Group’s energy businesses remained in progress and will be completed in 2008. Financial services Previously, the financial assets of the SCM Group were combined under the aegis of a managing company called SCM Finance. As part of the further restructuring of the Group’s business, SCM took certain steps in 2007 to strengthen its financial institutions. This process was accompanied by the delegation of a range of key functions from the holding com- pany to the Group’s financial institutions and, as a result, a change in the role of SCM Finance. These measures meant that SCM Finance was no longer at the center of key strategic decision-making, retaining only the function of corporate center.
    • SCM: in step with the millennium | The group’s corporate structure 39 ALTERNATIVE COMMERCIAL DEVELOPMENT Telecommunications In 2007, the consolidation of fixed-line telecommunications assets was begun in relation to the Group’s Farlep Optima company. The shares of all telecom assets related to the Group’s fixed line business were consolidated through Farlep Invest as the managing company. This year was spent focusing on strengthening the Group’s presence in the telecoms business by acquiring new assets. The formation of a Telecom Holding will be concluded in 2008. SCM Group is also one of the shareholders in Astelit, a company that provides mobile communications services under the brand life:) and which is among the top three mobile operators in Ukraine. Real estate To provide effective management of property assets, the SCM Estate Holding was set up in 2006. Later, it was renamed ESTA Holding. Today, SCM Group has a major portfolio of real estate properties, land bank, and developments, which have considerable investment appeal. Media In 2007, the process of organizing media assets continued, with the aim of improving the effectiveness of their commer- cial activities. Given the fundamental differences in the natures of print media and television broadcasting, the Group established two major media holdings: Segodnya Multimedia and the TRK Ukraine Broadcasting Company. Clay mining In 2007, SCM Group strengthened its presence in the clay mining business by increasing its stake in enterprises that belong to the Group. Those were consolidated into a sectoral holding called United Minerals Group, which was given the right to own and manage three clay mining assets: Ogneupornerud, Vesko, and Druzhkovskoye Mines Management. Retail trade In 2007, SCM Group began to expand into a new area of business, retailing, with the establishment of Ukrainian Retail. The development priority for the Group’s retail chain is a “neighborhood store” format, which operates under the Brus- nytsya brand. Ukrainian Retail plans to open 400 stores over the next five years in a chain that will cover all of Eastern Ukraine. Petroproduct retailing SCM Group’s companies have been successfully wholesaling and retailing petroleum products for more than 12 years. This business area is represented by a network of filling stations under the Parallel, Gefest and PitStop brand names. SCM owns 70 gas stations, mostly located in Eastern Oblasts of Ukraine and in Crimea.
    • 40 SCM Group Annual Report 2007 STRUCTURE OF SCM GROUP ASSETS AS OF 2007 * Mining & Metal Energy Financial (Metinvest (DTEK) Services Holding) MIning Coal and Coal Mining Power & Metal Coke and Generation Banking Division Division Enrichment Northern Ore Mining Krasnodonugol Pavlogradugol Vostokenergo First Ukrainian and Enrichment Plant International Bank (SevGOK) Komsomolets Tekhrempostavka Avdeyevka Coke Donbassa Dongorbank Central Ore Mining and Chemical Plant and Enrichment Plant Pavlogradskaya CEP (CGOK) Avlita Stevedoring Mospino Coal Power Inguletsky Ore Processing Insurance DIstribution Mining and Company Enrichment Plant Steel and (InGOK) Rolled Dobropolye CEP Products Service Invest ASKA Dokuchayevsk Division Oktyabrskaya CEP Flux and Dolomite Plant (DFDK) Kurakhovskaya CEP PES Energougol ASKA–Life Azovstal Novotroitskoye Steel Plant Mines Management Khartsyzk Pipe Plant Krivoy Rog Mining Equipment Ferriera Plant Valsider Krivbassvzryvprom Prometei Explosives Company Skif Shipping Sales YEMZ Group Metinvest Yenakiyevo Int. Steel Plant Metinvest Metalen Ukraine Metinvest SMTs Metinvest Eurasia
    • SCM: in step with the millennium | The group’s corporate structure 41 Clay Mining Telecom Real Estate Trade in (United Retail Trade (Farlep– (ESTA Media Petroleum Other Assets Minerals Optima) Holding) Products Group) Optima Leonardo Vesko TRK Ukraina Ukrainian Retail Parallel Telecom Television (retail chain Druzhkovskoye Channel under Brusnytsya Gefest Farlep Mines brand) Management Segodnya PitStop IP Telecom Hotels Multimedia Ogneupornerud Ucomline Vilcom Donbass Palace Opera Other Properties Under Development Heavy Sarmat Engineering** Group Druzhkovka Krym*** *The chart does not include businesses Heavy Engineering Plant where SCM Group is a minority shareholder. Lugansk Brewery*** Gorlovskiy Mashinostroitel Engineering Plant ** SCM Group’s machine-building restructuring Dnipro*** process will be continued in 2008. Donetskiy Energozavod Poltavpyvo*** Engineering Plant *** These assets are to be sold in 2008 to outside investors as part of the restructuring of the Group. Sverdlovskiy Heavy Engineering Plant
    • 42 SCM Group Annual Report 2007 SCM GROUP’S BUSINESSES
    • SCM Group’s businesses | Core business areas 43 CORE BUSINESS AREAS MINING AND METALS: METINVEST HOLDING THE MINING AND METAL COMPLEX IS THE FOUNDATION OF MUCH OF UKRAINE’S ECONOMY. METAL OUTPUT ALONE AC- COUNTS FOR NEARLY A QUARTER OF ALL OF UKRAINE’S INDUSTRIAL PRODUCTION. DURING 2006–2007, METALS WERE ONE OF THE ENGINES DRIVING UKRAINE’S ECONOMIC PROGRESS: ANNUAL GROWTH IN THIS SECTOR WAS AROUND 8–9%. THE MINING AND METAL COMPLEX IS ONE OF UKRAINE’S CONTRIBUTIONS IN THE GLOBAL ECONOMY. UKRAINE IS 8TH IN THE WORLD AMONG STEEL PRODUCERS AND IS THE THIRD LARGEST EXPORTER, AFTER CHINA AND JAPAN. FERROUS AND NON-FERROUS METALS AND METAL PRODUCTS CONSTITUTE CLOSE TO 40% OF ALL OF UKRAINE’S EXPORTS. IN 2007, THE GROWTH IN WORLD MARKETS AND FAVORABLE PRICES FOR RAW MATERIALS HAVE OPENED UP GOOD OPPORTUNITIES FOR UKRAINE’S MINING AND METAL BUSINESSES. Metinvest Holding includes all SCM Group’s as- sets in the mining and metal complex, as well as companies that service it. The Holding is the biggest vertically integrated mining and metal company in Ukraine, with a total of 110,000 employees across all its companies. Metinvest Holding is highly diversified in terms of its sales markets. This helps provide protec- tion for the company against fluctuations in any of these markets. At the same time, Metinvest Holding is focusing on the dynamic domestic market. In 2007, the share of income from the Ukrainian market in the holding’s turnover was over 33%, up from 30% in 2006. Geographic breakdown of Metinvest Holding sales in 2007 33% UKRAINE 24% EUROPE 15% MIDDLE EAST & NORTH AFRICA 13% CIS (INCL. RUSSIA) 11% SOUTHEAST ASIA 4% OTHER COUNTRIES
    • 44 SCM Group Annual Report 2007 To improve effectiveness in managing the • Dokuchayevsk Flux and Dolomite Plant assets of the vertically-integrated Metinvest (DFDK) is the largest producer of fired metal- Holding, the business is organized into three lurgical dolomite in Ukraine and the only plant divisions: producing powders for converter firebricks. Annual output capacity of the company is 7.7 • the iron ore division mn tonnes of finished product. • the coal and coke division • Novotroitskoye Mines Management (NTRU) • the steel and rolled products division extracts metallurgical alums and dolomite with annual capacity of 2.7 mn tonnes of finished THE IRON ORE DIVISION product. The main objective of the Iron Ore Division of • Krivoy Rog Central Ore Mining Equipment Metinvest is to supply the holding’s companies Repair Plant (KCRZ-KZGO) is one of the lea- with iron ore as a raw material. This division ding companies in Ukraine producing a wide manages seven assets: selection of mining, enriching and transporting • Northern Ore Mining and Enrichment Plant equipment and spare parts. (SevGOK), one of the largest mining companies • Krivbassvzryvprom Explosives Company in Europe with a closed production cycle for provides detonation services in the mining and iron ore concentrate and pellets. Annual output extraction industry and produces explosive capacity at SevGOK is 13.4 mn tonnes of iron materials. ore concentrate and over 11.0 mn tonnes of iron ore pellets. THE COAL AND COKE DIVISION • Central Ore Mining and Enrichment Plant The Coal and Coke Division provides a critically (CGOK) is a unique enterprise in Ukraine, important resource – coking coal – for holding combining opencast and shaft mining for the companies. The Division manages three key extraction of ores, and recycling enrichment assets: wastes. Annual output capacity at the CGOK is • Krasnodonugol is one of the biggest compa- 6.9 mn tonnes of iron ore concentrate and 2.2 nies in Ukraine extracting and enriching high mn tonnes of pellets. energy coal for coke production. This produc- • Inguletsky Ore Mining and Enrichment Plant tion conglomerate includes seven mines and (InGOK) uses a technology that is unique for ore plants, two enrichment plants, and service Ukraine, flotation concentration. The company departments. Total volume of extracted coal is became part of the Metinvest Holding portfo- up to 5.7 mn tonnes per year, which is nearly lio at the end of 2007, based on an agreement 20% of all coking coal extracted in Ukraine. with Smart Holding. Annual output capacity at InGOK is 14 mn tonnes of iron ore concentrate. Key indicators for Metinvest Holding 2006 2007 Change Sales volume, mn $ 5,271.0 7,425.0 +40.9% Asset value, mn $ 7,063.0 12,439.0 +76.1% EBITDA, mn $ 1,482.0 2,279.0 +53.8% Net profit, mn $ 813.0 1,321.0 +62.5% Iron ore output, mn tonnes 16.8 18.5 +10.1% Steel output, mn tonnes 8.6 9.1 +5.8% Rolled steel output, mn tonnes 9.2 9.5 +3.3%
    • SCM Group’s businesses | Core business areas 45 • Avdeyevka Coke and Chemical Plant (AKHZ) market of ferrous scrap metals. It supplies the is the largest high-technology company in holding’s companies with raw materials. Europe’s coking coal industry. Annual output of • Skif Shipping is a logistics company that pro- coke is over 3 mn tonnes. vides the entire range of services for transpor- • Avlita Stevedoring Company controls two ting, loading and documenting cargo. deep water berths in Sevastopol Bay that are • Spartan and Trametal are key players in the open all year round. The company specializes in European market for thick sheet steel: total an- handling dry cargo (metals, grains). nual capacity between the two pants is 530,000 tonnes of high-quality thick rolled sheet. Met- THE STEEL AND ROLLED PRODUCTS invest Holding reached an agreement with the DIVISION Malacalza Group concerning purchasing from The Steel and Rolled Products Division controls the family-owned Italian group 100% ownership the final links in the added-value process at stakes in Spartan and Trametal companies in Metinvest Holding: smelting steel, manufactu- November 2007. The expansion of the holding’s ring rolled products and selling finished goods. rolling capacity will provide for the most effec- This division includes both Ukrainian and for- tive usage of the Group’s mining and production eign assets: potential. As well as it will lead to significant • Azovstal Steel Plant is a modern, high-tech- growth in the Group mining and metal assets’ nology company that produces a wide assort- value due to the potential synergies and will ment of metal products and is among the top increase the competitiveness of the SCM Group three steelmakers in Ukraine in terms of output business and of the Ukrainian mining and metal volume. Annual production capacities for the complex as a whole. Approval from the Euro- company are 6.4 mn tonnes of pig iron, 6.4 mn pean Commission is expected at the beginning tonnes of steel, and 4.7 mn tonnes of rolled of 2008. steel. In 2007, Metinvest Holding completed the reor- • YeMZ Group includes Yenakiyevo Steel Plant ganization of its sales department in the Steel and the Joint Venture Limited Liability Company and Rolled Products Division. As a result, four Metalen, which have a consolidated produc- sales channels provided by four different com- tion cycle. YeMZ Group produces various types panies have been established to ensure sales of rolled steel (rods, cast billets, rolled bars, in the regions. At the same time, efforts were graded sections). Annual output capacity is 2.8 undertaken to unify standards and business mn tonnes of steel. processes across sales departments. Today, four companies handle sales of the holding’s • Khartsyzsk Pipe Plant (KHTZ) is the biggest products: producer of straight-seam electro-welded large diameter (478–1,420 mm) piping in the CIS, • Metinvest International (previously Leman which is primarily used in the oil and gas in- Commodities) is a wholesale channel, respon- dustries. Annual production capacities are over sible for external markets outside the CIS. Its 1.5 mn tonnes of piping, including up to 700,000 headquarters are in Geneva, with representa- tonnes of pipes with anticorrosion coating. tive offices in 11 countries, which allows the company to cover the largest steel markets in • Ferriera Valsider (Italy) is a plant that makes the world. structural rolled steel. Its supply of raw materi- als is 80–90% provided by the Azovstal plant. • Metinvest Ukraine is a wholesale channel that Annual production capacity is around 500,000 sells the holding’s products in Ukraine and CIS tonnes of thick sheet steel and 700,000 tones of countries, with the exception of Russia by the hot rolled coil. railcar load quantities (from 65 tons). • The Prometei Financial Industrial Company • Metinvest Eurasia is the channel for sales of is one of the largest operators on the Ukrainian the division’s steel and rolled steel in Russia.
    • 46 SCM Group Annual Report 2007 It handles both wholesale and retail sales of • Metinvest SMTs is a retail channel for the metal products in Russia, which is one of the holding’s products and those of other CIS main markets for Ukrainian steel products. companies in Ukraine and Eastern Europe. This network of companies includes 11 metal centers. IN 2007, SCM GROUP AND SMART HOLDING MADE A DECISION REGARDING THE MERGER OF THEIR MINING AND METAL ASSETS. THIS WAS THE FIRST SECTORAL AGREEMENT OF SUCH A SCALE IN THE CIS.THE JOINT COMPANY WILL TAKE SECOND PLACE IN THE CIS REGION IN TERMS OF IRON ORE OUTPUT AND FOURTH PLACE IN TERMS OF SMELTED STEEL. 2007 through the prism of Metinvest Holding’s investment projects Completed: • Construction of two new sections at the ore enrichment facility #1 at Northern Ore Mining and Enrichment Plant (SevGOK). Result: annual volumes of iron ore concentrate increased by 750,000 tonnes. Total invest- ment: $6.2 mn. • Launch of a facility for preliminary enrichment of settled sands in the slurry ponds at Central Ore Mining and Enrichment Plant (CGOK). Result: improved operational efficiency, increased production of concentrate, and increased processing of production wastes. According to the results of 2007, the project allowed to grow the volume of production wastes processing by 60%. Total investment: $5.7 mn. • Construction of the blast furnace №5 at Yenakiyevo Steel Plant (YeMZ). Result: additional output of 1.05 mn tonnes of pig iron per year. Total investment: $140 mn. • Launch of a new facility at Yenakiyevo Steel Plant (YeMZ) for production of technical oxygen from air. Result: steel production capacity growth and quality enhancement potential increased. Total investment: $45 mn. • Launch of a new facility at Azovstal Steel Plant for production of technical oxygen from air. Result: annual steel production capacity growth increased by 1.5 mn tonnes. Total investment: $72 mn. • Construction of the first part of the large diameter pipe production line at Khartsyzsk Pipe Plant (KHTZ). Such pipes are used for main gas and oil pipelines construction. Result: single-joint tubes of up to 1,420 cm in diameter can now be produced. Total investment: $24.3 mn. Launched: • Upgrade of two sections at the №1 ore enrichment facility of Northern Ore Mining and Enrichment Plant (SevGOK). Expected result: annual volumes of iron ore concentrate increased by 750,000 tonnes. Total in- vestment: $46.8 mn. Completion: Q2 2008 • Installation of the 5th stage of magnetic separation at the №1 ore enrichment facility of Northern Ore Mi- ning and Enrichment Plant (SevGOK). Expected result: better quality iron ore concentrate. Total investment: $4.6 mn. Completion: Q2 2008 • Repair of the №3 blast furnace at Azovstal Steel Plant. Expected result: greater efficiency in the blasting conversion, reduced negative impact on the environment. Total investment: $31 mn. Completion: Q2 2008 • Construction of a new №3 blast furnace at Yenakiyevo Steel Plant (YeMZ). Expected result: increased vo- lumes of smelted pig iron output, greater production efficiency, reduced negative impact on the environment. New blast furnace planned production capacity is 1 mn tones of pig iron per year. Total investment: $262 mn. Completion: 2010 • Reconstruction of the benzol scrubber in the capturing facility №1 at Avdeyevka Coke and Chemical Plant. Expected result: greater energy efficiency in the process of benzol extracting and reducing exhaust into the air. Total investment: $2.4 mn. Completion: Q1 2008
    • SCM Group’s businesses | Core business areas 47 Investment in Metinvest Holding up-to-date equipment Development Strategy Vertical integration Strengthening positions on highly Minimal costs profitable markets We are We can ensure a leader long-term in efficiency competitiveness SUCCESS We are an We are a safe and important company friendly company For employees On-the-job safety For consumers Minimal For partners environmental and investors impact Greater social responsibility
    • 48 SCM Group Annual Report 2007 ENERGY. DONBASS FUEL & ENERGY COMPANY (DTEK) THE FUEL & ENERGY COMPLEX IS A MAJOR COMPONENT IN THE INFRASTRUCTURE OF UKRAINE’S ECONOMY. AL- THOUGH UKRAINE IS A NET IMPORTER OF FUELS, THE COUNTRY HAS A STRONG ENERGY SECTOR AND RANKS 7TH IN THE WORLD FOR CONFIRMED COAL RESERVES. UKRAINE HAS ENORMOUS POTENTIAL IN TERMS OF ELECTRICITY AND IN TERMS OF THE VARIETY OF FUEL RESOUR- CES. THE RATIO BETWEEN THE VOLUMES EXTRACTED AND CONFIRMED RESERVES IS CONSIDERABLY LOWER THAN THE AVERAGE IN THE WORLD TODAY. STILL, THESE OPPORTUNITIES ARE NOT BEING TAKEN ADVANTAGE OF SUFFI- CIENTLY. EXTRACTION OF FUEL AND ENERGY MATERIALS CONTRACTED BY 2% IN 2007, AGAINST OVERALL INDUSTRI- AL GROWTH OF 10.2% FOR THE YEAR. PRODUCTION OF READY COAL SHRANK EVEN MORE, BY 4.5% IN 2007. ENERGY GENERATION IS ALSO LAGGING IN GROWTH, COMPARED TO AVERAGE INDICATORS FOR INDUSTRIAL OUTPUT. IN A SITUATION WHEN THE GLOBAL TREND IS TOWARDS HIGHER PRICES FOR FUEL AND ENERGY, IT BECOMES CRITI- CALLY IMPORTANT TO INCREASE ENERGY EFFICIENCY USING INNOVATION. THIS APPROACH IS PARTICULARLY SIG- NIFICANT FOR UKRAINE, WHOSE ECONOMY IS ONE OF THE MOST ENERGY INTENSIVE IN THE WORLD. DEALING WITH SUCH CHALLENGES IS WITHIN THE CAPACITIES OF VERTICALLY-INTEGRATED COMPANIES WITH HIGHLY EFFECTIVE MANAGERS, AS THEY ARE THE MOST INTERESTED IN MINIMIZING COSTS ON PRIMARY RESOURCES IN THEIR OWN VALUE-ADDED CHAIN. The Donbass Fuel & Energy Company combines DTEK’s TESs boast one of the lowest indicators all SCM Group’s assets in energy. This hol- for the share of gas in fuel consumed, with only ding is the first and largest vertically-integrated 1%, whereas the Ukrainian average is 9.7%. company in this sector in Ukraine. Its share In order to maximize the effectiveness of the of extracted coal is 21%, its share of energy way these assets are managed, DTEK has de- generation 27%, and its share of electricity fined three main areas of business: distribution in Ukraine is over 5%. More than 50,000 people are employed by the holding’s • coal extraction and enrichment; companies. • energy generation; DTEK’s thermoelectric generating stations • energy distribution. (TES) are protected from an anticipated increase in the price of imported natural gas in Ukraine to match European prices. Key indicators for DTEK 2006 2007 Change Sales volume, mn $ 1,000.0 1,776.0 +77.6% Asset value, mn $ 1,736.0 2,654.0 +52.9% EBITDA, mn $ 233.0 477.0 +104.7% Net profit, mn $ 98.0 236.0 +140.8% Coal extracted, mn tonnes 15.3 15.8 +3.3% Energy generated, KWH 16.3 18.1 +11.0%
    • SCM Group’s businesses | Core business areas 49 COAL MINING AND ENRICHMENT • Mospino Coal Processing Company is a The main objective of the coal extraction and producer of enriched coal and concentrate for enrichment business is to ensure that the hol- TESs. Annual output capacity is 2 mn tonnes of ding’s TESs have reliable fuel supplies. This coal. area includes nine assets: • Dobropolye Central Enrichment Plant (CEP) is • Pavlogradugol is the largest coal extraction a producer of enriched energy coal for coking. enterprise in Ukraine. In 2007, the company Annual output capacity is 2.6 mn tonnes of coal. produced 12.4 mn tonnes of coal or 16.4% • Oktyabrskaya Central Enrichment Plant (CEP) of the total coal extracted in Ukraine. The is a producer of coking and thermal coal for company owns 10 mines, as well as transport electrical generation. Annual output capacity is and production infrastructure. In addition to 2.4 mn tonnes of coal. thermal coal, the company also extracts coking coal. • Kurakhovskaya Central Enrichment Plant (CEP) produces coal concentrate for TESs. An- • Komsomolets Donbassa Mine is one of the nual output capacity is 1.9 mn tonnes of coal. largest producers of thermal coal in Ukraine. In 2007, it produced 3.4 mn tonnes of coal or 4.5% • Ekoenergoresurs is an ancillary company that of total extraction. The enterprise has its own provides cleaning services for the tailing ponds coal enrichment plant. at Pavlogradskaya Central Enrichment Plant (CEP). • Pavlogradskaya Central Enrichment Plant (CEP) is one of the biggest coal enrichment • Pershotravensk Repair and Mechanics Fac- enterprises in Ukraine. Annual output capacity tory is the biggest enterprise in the Western is 5.3 mn tonnes of coal. Donbass region that specializes in repairing underground mining equipment. 2007 through the prism of DTEK’s investment projects Completed: • Capital repairs of the power generating unit №3 at Kurakhovskaya TES and the power generating unit №9 at Luganskaya TES. Result: greater efficiency and reliability, as well as 6 year-long increase in lifespan. Total investment: $13.5 mn. • Comprehensive reconstruction of the Yenakiyevo substation, owned by Service Invest. Result: lower risk of accidents, reduced annual operating costs. Total investment: $5.9 mn. Launched: • Reconstruction of the power generating unit №5 at the Kurakhkovskaya TES. Expected result: in- creased capacity, range of maneuverability, lower relative cost for nominal fuels, lower electricity costs for own use, extended lifespan. Total investment: $30.6 mn. Completion: Q4 2008 • Expansion of capacity, range of maneuverability, lower relative cost of nominal fuels, lower electricity costs for own use, extended lifespan. Total investment: $15.4 mn. Completion: Q4 2008 • Comprehensive work on the use of methane at Komsomolets Donbassa Mine. Expected result: using methane gas in the mine to provide electricity to the company, participating in projects under the Kyoto Protocol. Total investment: $7.2 mn. Completion: Q4 2012
    • 50 SCM Group Annual Report 2007 ELECTRIC ENERGY GENERATION ELECTRIC ENERGY DISTRIBUTION The energy generation business generates The final link in the system of adding value in electricity at energy stations that belong to the the vertically-integrated chain is energy distri- SCM Group. This area involves two assets: bution. This area is represented by two assets: • Vostokenergo is a private energy-generating • Service Invest, which manages 67 substa- company. The company’s output capacity is tions in Dnepropetrovsk and Donetsk Oblasts. handled by three thermal power plants (TESs): In 2007, the company transmitted 11.1 bn kWh Zuevskaya, Kurakhovskaya, and Luganskaya. of energy. These plants have a total of 18 power gene- rating units between them, whose combined • Energougol Energy Grid Company, which energy output is 4,060 MWt, of which 17 power manages 75 substations in Dnepropetrovsk and generating units are used to generate electri- Donetsk Oblasts. In 2007, the company trans- city, for a total output capacity of 3,785 MWt. mitted 11.1 bn kWh of energy. The company is the biggest producer of thermal The main consumers of electricity generated electricity in Ukraine. In 2007, the three TESs by DTEK are major industrial enterprises in belonging to Vostokenergo supplied Energory- Eastern Ukraine, including Azovstal Steel Plant, nok, the state-owned energy wholesaler, with a Yenakiyevo Steel Plant, MMZ Istil, and Northern total of 18.1 bn kWh of electricity or 27% of all Ore Mining and Enrichment Plant (SevGOK). the thermoelectricity generated in Ukraine. The The holding is oriented towards large and company’s share of total electricity gene- promising enterprises that can generate a high rated in Ukraine, including nuclear power, profit rate and stable sales. hydro power, and others, is 10%. • Tekhrpompostavka is handling the moder- nization and reconstruction of energy equip- ment at the Zuevskaya, Kurakhovskaya, and Luganskaya TESs in order to increase their technical and economic efficiency, as well as to improve the maneuverability of the equipment. 20% 62% Breakdown of sales by sector at DTEK in 2007 62% METALLURGY 16% 20% OTHER 16% COAL & MINING 2% UTILITIES 2%
    • SCM Group’s businesses | Core business areas 51 DTEK Development Strategy Building a transnational company Diversifying that combines Ukraine, Russia, and supply base the EU in a single electricity cycle Developing alternative energy sources Leadership Stability SUCCESS Growth Efficiency Expanding generating Raising the capacities efficiency of power generation Acquiring targeted assets in Ukraine, Russia and the EU Cutting line losses Minimizing impact on the environment and raising job safety standards
    • 52 SCM Group Annual Report 2007 FINANCIAL SERVICES: BANKS AND INSURANCE COMPANIES THE FINANCIAL SERVICES MARKET IN UKRAINE HAS SHOWN ONE OF THE FASTEST RATES OF GROWTH IN THE WORLD. IN 2007, BANK ASSETS INCREASED BY 76%, AND GROSS PREMIUMS AT INSURANCE COMPANIES ROSE BY 30%. AT A TIME WHEN THE COUNTRY WAS EXPERIENCING STEADY DYNAMIC MACROECONOMIC GROWTH, A STEEP RISE IN DISPOSABLE INCOMES, AND A RELATIVELY UNSATURATED MARKET FOR FINANCIAL SERVICES, COMPANIES IN THIS SECTOR WERE PRESENTED WITH EXCELLENT OPPORTUNITIES FOR GROWTH. SCM Group has assets in the financial services • Dongorbank is one of the larger Ukrainian sector in both banking and insurance. banks, ranked 28th by assets. It specializes in corporate clients. The key regions in which it SCM owns two assets in the banking sector: operates are the Eastern Oblasts and Kiev. • First Ukrainian International Bank is one of In the insurance business, SCM Group owns the largest banks in Ukraine that, according two main assets: to National Bank of Ukraine (NBU) data, ranks 13th in size by assets. First Ukrainian Interna- • UASK ASKA is one of the leading insurance tional Bank is a diversified banking institution companies in Ukraine and the country’s first serving both corporate and consumer clients as non-government insurer. ASKA has licenses to well as handling investment banking. The bank provide 16 types of optional insurance and 10 is national in scale and has a diverse country- types of mandatory insurance. wide network. Key indicators for the Group’s financial assets Banking assets FUIB DONGORBANK 2006 2007 Change 2006 2007 Change Assets, mn $ 1,045.0 2,207.5 +111.3% 592.8 1,050.1 +77.2% Capital, mn $ 182.6 482.7 +164.4% 69.9 106.5 +52.3% Commercial loans, mn $ 610.2 1,281.7 +110.0% 278.3 493.8 +77.4% Personal loans, mn $ 91.0 402.8 +342.5% 44.8 135.6 +202.4% Insurance assets ASKA ASKA-life 2006 2007 Change 2006 2007 Change Assets, mn $ 44.4 66.3 +49.3% 17.0 23.9 +40.9% Capital, mn $ 30.5 42.6 +39.8% 2.6 3.3 +30.3% Insurance premiums, mn $ 42.9 66.2 +54.4% 5.6 6.1 +9.2% Insurance payouts, mn $ 15.1 45.2 +199.5% 1.1 0.2 -78.5%
    • SCM Group’s businesses | Core business areas 53 • ASKA-Life is one of the market leaders in life ternational Bank to develop as a national bank insurance, providing a full range of services. that specializes in corporate and consumer accounts. Dongorbank is positioning itself as STRATEGIC ORIENTATION IN THE a strong regional bank that is among the top DEVELOPMENT OF SCM GROUP’S banks in Eastern Ukraine and Kiev, which is FINANCIAL ASSETS where the major industrial corporations and The development strategy for SCM Group’s their parent companies are located. banking and insurance assets is based on long- One of the main strategic indicators for deve- term value growth. SCM works continually to loping SCM’s insurance business is to maintain increase the efficiency and competitiveness of and support leadership positions on the insu- its financial institutions. Together with metal- rance market. The bulk of the capital planned lurgy and electricity, the financial business is for investment in the insurance business will one of the core areas of SCM Group’s activities. be directed at developing a sales network and Over 2008–2010, the Group plans to invest at expanding ASKA’s regional presence. Particular least $1bn in growing its financial business. attention will be paid to introducing and up- The Group’s banking assets are focused on grading information technology, motivating and clients in specific, targeted segments. The training personnel, increasing capitalization confirmed strategy plans for First Ukrainian In- and creditworthiness, as well as marketing. 2007 through the prism of innovative projects by the Group’s financial assets Completed: • First Ukrainian International Bank successfully completed the certification process for Visa International and Master- Card Worldwide payment systems in 2007, using EMV technology and concluded its pilot project, issuing chip cards. With the Visa Classic Unembossed product, the bank completed a co-branding program with Azovstal Steel Plant. • In the course of expanding the model line of terminal equipment for its acquiring network, First Ukrainian Interna- tional Bank and its partner banks at the processing center successfully certified new models of VeriFone and Ingencio POS terminals. • The systems for credit risk management at the bank underwent changes in 2007 in the process of crediting SME clients within vertically-integrated corporate businesses. The system of internal reporting on retail risk management was improved. To provide an all-encompassing analysis of its credit portfolio. First Ukrainian International Bank be- gan using historical analysis. This makes it possible to calculate the level of delinquency, according to groups of credit operations, based on the time that the operation appeared on the bank’s balance. This kind of analysis also allows the company to track the migration of delinquent debts, which shows the likelihood that overdue debts will be switched from their original category to a category that has a longer delinquency period. • To secure its information systems, First Ukrainian International Bank was first, not only in Ukraine, but in the entire CIS, to use the context analysis electronic mail system called IQ.Suite from Group Technologies. Launched: • The switch to broadband (1-2 MB) communication channels between First Ukrainian International Bank head office and its branches was begun in 2007. This considerably raised the productivity of banking operations. • ASKA began to introduce the INSIS accounting system, which considerably expands the options for analytical accoun- ting, automating accounting processes and monitoring the completeness of insurance contracts and their compliance with legal standards. • ASKA–Life began to introduce LISA software for tracking insurance activities. LISA will provide more options for ana- lytical accounting and the automation of accounting processes for the entire life of an insurance contract.
    • 54 SCM Group Annual Report 2007 ALTERNATIVE COMMERCIAL DEVELOPMENT TELECOMMUNICATIONS: THE FARLEP OPTIMA GROUP* THE UKRAINIAN TELECOMS MARKET CONTINUES TO GROW STEADILY. IT HAS BEEN GROWING AT AN ANNUAL RATE OF 15%. MOREOVER, THE GROWTH OF DIFFERENT SEGMENTS OF THIS MARKET VARIES. FOR INSTANCE, THE GROWTH OF VOICE COMMUNICATIONS SERVICES IS TAPERING OFF (WHICH MATCHES GLOBAL TRENDS), WHILE THE DATA TRANSMISSION AND BROADBAND ACCESS SEGMENTS ARE SHOWING CONSIDERABLE POTENTIAL AND ARE GROWING AT AROUND 40–50%. THE SITUATION IN UKRAINE TODAY CAN BE DESCRIBED AS A BOOM IN BROADBAND ACCESS SERVICES SIMILAR TO THAT WHICH OCCURRED IN DEVELOPED ECONOMIES ABOUT FIVE YEARS AGO. TOGETHER WITH GROWING DEMAND AMONG UKRAINIAN CONSUMERS FOR QUALITY TELECOM SERVICES, THE LONG-TERM PROS- PECTS FOR GROWTH IN THIS SECTOR ARE ALSO ON AN UPSWING. 2007 through the prism of Farlep Optima Group investment projects Completed: • Modernization and expansion of municipal communication networks. Result: The launch of telephone routers with capacity for 882 E1, 206,000 telephone ports, a broadband access network for the ports, a broadband access network for 23,000 ADSL ports, a transport network for 314 SDH hubs. Total investment: $4.4 mn. • Construction of a national MPLS multiservice transport network. Result: Improved hubs in the transport networks of Dnepropetrovsk, Donetsk, Kherson, Krivoy Rog, Kiev, L’vov, Mariupol, Nikolayev, Odessa, and Zaporozhye. Total invest- ment: $0.9 mn. • Modernization and expansion of the intercity telephone network. Result: contemporary communications infrastructure in Dnepropetrovsk, Donetsk, Ivano-Frankovsk, Kharkov, L’vov, Nikolayev, Sevastopol, Simferopol, and Zaporozhye. Total investment: $0.8 mn. • Construction of corporate IT infrastructure. Result: own corporate network in cities where Farlep Invest has a presence, with a data processing center in Kiev. Total investment: $0.7 mn. • Introduction of a system to manage mutual settlements with communications operators. Result: a system that ensures transparency of account settlements with communications operators and timely billings. Total investment: $0.5 mn. Launched: • Construction of a national transport network. Expected result: company’s own main fiber-optic trunk line of 4,700 km with hubs in 20 oblast capitals in Ukraine. Total investment: $11.8 mn. Completion: 2009. • Launch of a network in new cities where the company has a presence. Expected results: the launch of services in 23 populated areas Total investment: $3.9 mn. Completion: 2009 • Introduction of a customer billing system. Expected result: centralized, efficient management of service rates and rate packages. Total investment: $1.1 mn. Completion: 2009 • Introduction of internet protocol television services. Total investment: $1.0 mn. Completion: 2009 *In 2008 company name changes to Vega.
    • SCM Group’s businesses | Alternative commercial development 55 Farlep Invest is the company that manages SCM The Farlep Optima Group of companies Group’s fixed line telecommunications assets, con- solidated under Farlep Invest company. The Farlep Development Strategy Optima Group of companies constitutes the largest Seeking syngeries, providing a wide range of services private sector operator of fixed line communica- Doubling customer base and covering 53 cities by 2012 Raising operational efficiency tions in Ukraine and serves 8% of the market. Ensuring annual profits of 20% Seeking economies of scale Farlep Optima is second in the country after the national operator, Ukrtelecom, for telephony services and among the top three leaders for broadband services. Farlep Invest manages five telecommunications assets in the SCM Group: Growth Efficiency • Optima Telecom is a company that provides fixed line telecommunications services and internet ac- cess in Kiev, Odessa, Dnepropetrovsk, Zaporozhye, and other Ukrainian cities - altogether 20 urban areas. SUCCESS • Farlep is a company that provides fixed line tele- communications services and internet access in Kiev, Odessa, Donetsk, Dnepropetrovsk, L’vov, and other Ukrainian cities - altogether 12 urban areas. Products • IP Telecom is a prominent internet services provider in Kiev and Odessa. • Ucomline is an internet and IP telephony service provider that serves businesses and organizations (B2B segment). • Vilcom Telephone Company is a provider of fixed Concentrating on highly profitable services (internet access, data transmission) line telecommunications services in Kharkov and Developing Fiber To The Building (FTTB) technology Kharkov Oblast. to provide Triple-Play services to private individuals Raising the quality of services, oriented at customer needs By the end of 2007, Farlep Invest companies rendered the following services: 2006 2007 Change Fixed telephone lines, individual clients 350,531 396,352 +13.0% Fixed telephone lines, corporate clients 217,092 265,021 +22.0% Broadband XDSL access lines 36,454 71,161 +95.2%
    • 56 SCM Group Annual Report 2007 REAL ESTATE: ESTA HOLDING THE ESSENTIAL FEATURE OF THE 2007 UKRAINIAN PROPERTY MARKET WAS A HIGH LEVEL OF UNSATISFIED DE- MAND, WHICH OFFERED GOOD OPPORTUNITIES FOR GROWTH. COMPARED TO EUROPEAN CITIES, UKRAINIAN CITIES HAVE MUCH LOWER LEVELS OF OFFICE, RETAIL, AND HOTEL SPACE AVAILABLE PER HEAD OF POPULATION. BY COM- PARISON, THE WORLD’S MAJOR CITIES HAVE SIGNIFICANTLY MORE COMMERCIAL SPACE AVAILABLE. THIS SHORTAGE OF SPACE IS A PROBLEM IN ALL SEGMENTS, FROM RESIDENTIAL TO SHOPPING AND ENTERTAINMENT, FROM CLASS A TO CLASS C OFFICE SPACE, FROM LUXURY CLASS TO ECONOMY CLASS HOUSING. THIS SITUATION OFFERED EXCEL- LENT OPPORTUNITIES FOR GROWTH AND INVESTMENT, AS WELL AS HIGH PROFIT MARGINS FOR DEVELOPMENT PROJECTS. ESTA Holding, known as SCM Estate prior to SCM Group manages a number of assets in this 2008, is the sector holding, which manages sector: SCM Group’s assets in the property and hotel • The Donbass Palace Hotel is a five-star hotel business. The holding was established in May in the center of Donetsk. The World Travel 2006 in order to consolidate all SCM assets in Awards Association named it the best hotel in real estate under a single managing entity. Ukraine in 2005, 2006 and 2007. Total rooms: This area of business is key for the diversified 129. development of the Group. It is the focus of • The Opera Hotel is a five-star hotel in the increased attention, as the property market in center of Kiev. In 2007, it was recognized as Ukraine continues to develop actively and real the best new business hotel in Europe. Total unsatisfied demand for world class services in rooms: 138. the office and hotel segments continues. • The Leonardo Business Center is a multi-use complex in the center of Kiev, not far from the Opera Hotel. In 2007, SCM Group acquired a 50% ownership stake in this asset’s capital. Total area: 38,000 square meters. • Other assets that are in the development stage. ESTA Holding’s major development projects • Pushkinskiy Multi-use Complex in Donetsk. A Class A facility in the center of the city with a total area of 52,600 square meters. Total investment: $130 mn. Expected completion: 2011. • Zhovtneviy Multi-use Complex in Kiev. A Class A facility with a convenient location and easy access to trans- port. Overall area: 3 hectares. Total investment: $500 mn. • Suburban residential development south of Kiev. A unique property with a total area of 43 hectares, located on the banks of an open body of water. Total investment: $200 mn.
    • SCM Group’s businesses | Alternative commercial development 57 ESTA Holding Development Strategy Identifying the most promising market segments for profitability Setting up a professional client service Forming an optimized portfolio of projects (to organize building construction) and in terms of profitability and risks managing company (to service buildings) Focus Efficiency SUCCESS Growth Maximizing opportunities to acquire undervalued properties that are up for privatization Forming long-term partnerships with the best professional market players Growing the value of net assets of companies with average annual growth of at least 10–15%
    • 58 SCM Group Annual Report 2007 MEDIA. SEGODNYA MULTIMEDIA PUBLISHING HOLDING AND TRK UKRAINA TELEVISION CHANNEL IN 2007, THE MEDIA BUSINESS WAS GROWING RAPIDLY IN UKRAINE. ACCORDING TO THE UKRAINIAN ASSOCIA- TION OF PERIODICALS PUBLISHERS, UKRAINE BOASTED NEARLY 2,400 NEWSPAPERS AND OVER 1,700 MAGAZINES. BOOMING GROWTH IN CABLE TELEVISION SERVICES AND BROADBAND INTERNET ACCESS LED TO INCREASE IN THE NUMBER OF UKRAINIANS WHO USED ELECTRONIC MEDIA - TELEVISION AND WEB RESOURCES. NEARLY 96% OF UKRAINIAN FAMILIES HAVE A TELEVISION. ACCORDING TO GEMIUS UKRAINE, THE COUNTRY’S AUDIENCE FOR THE INTERNET SEGMENT IS OVER 6 MILLION USERS AND IS GROWING STEADILY AT ABOUT 4–5% A MONTH. ACCORDING TO CORTEX, ADVERTISING SPENDING GREW BY 27% IN 2007 IN UKRAINE. THE TOTAL VOLUME OF MEDIA ADVERTISING BUDGETS WAS ESTIMATED AT $1,071 MN, OF WHICH TELEVISION TAKES A 44% MARKET SHARE IN UKRAINE. Media assets managed by SCM Group fall into In the publishing business, SCM Group’s assets two companies that operate in the television are consolidated into Segodnya Multimedia, a and publishing. publishing holding that includes: In the television business, SCM Group owns • Segodnya newspaper that is #1 in Kiev and TRK Ukraine Television Channel, one of the #2 in Ukraine among dailies leading national channels, covering all viewer • Vecherniy Donetsk groups (information and analysis, current af- fairs, culture and arts, documentary, sports, • Donetskiye Novosti and children’s programs). Broadcast coverage • Kurier is around 91% of the population of the coun- try. According to GfK Ukraine’s people meter • Salon panels, TRK Ukraine is 6th among Ukraine’s • RIO channels with national coverage (in 2007, the channel’s average audience share was 5.14%). • Priazovskiy Rabochiy • Mariupolskaya Nedelya • Dom Sovietov • and an educational publication for young people called Priviet, Rebyata! 2007 through the prism of SCM Group media assets’ investment projects • Update of the TRK Ukraina Television Channel’s equipment and facilities. Result: higher quality television broadcasting, the creation and launch of information and entertainment programs, the start of new TV projects. Total investment: $8.3 mn. • Technical re-equipping of the Vyshgorod print plant. Result: increased productivity and efficiency in managing the production process. Total investment volume exceeded $2 mn. • Securing the rent of land in Dnepropetrovsk to be further used for building a printing plant. Total investment: $1.8 mn.
    • SCM Group’s businesses | Alternative commercial development 59 In addition, Segodnya Multimedia manages web resources, including: the www.segodnya. ua information and news portal (9–10th place among Ukrainian web-based news offerings for number of hits), www.dnews.donetsk.ua, www. pr.ua, and www.salon.donetsk.ua portals. The holding also has its own production facili- ties with a unique newspaper printing press in Vyshgorod. STRATEGIC DEVELOPMENT AREAS FOR SCM GROUP’S MEDIA ASSETS TRK Ukraine Television Channel faces a num- ber of strategic goals and objectives: • to improve the channels competitive position on the Ukrainian television market by expan- ding program content; • expanding the channel’s market share • increasing production capacities in Kiev and Donetsk; • launching thematic television channels and further combining them into a holding; • strengthening the channel’s brand. The strategic goal of Segodnya Multimedia for the next five years is to actively participate in the main segments of the market for print publications. In order to become the unques- tionable leader in terms of mass circulation in Ukraine, Segodnya Multimedia will develop a network of regional editions of the Segodnya daily by setting up regional offices. Plans are to continue to improve quality and content of printed periodicals with the objective of making Segodnya Multimedia the absolute leader of Ukraine’s media market.
    • 60 SCM Group Annual Report 2007 CLAY MINING: UNITED MINERALS GROUP CLAY MINING IS A BUSINESS WITH CONSIDERABLE POTENTIAL FOR DIVERSIFIED SALES. AS A RAW MATERIAL, CLAY CAN BE USED BOTH ON THE B2C (HOUSEHOLD) MARKET SECTOR AND ON THE B2B (INDUSTRIAL ENTERPRISES) SECTOR. THE NUMBER OF ENTERPRISES THAT USE CLAY AS A RAW MATERIAL IS HUGE, RANGING FROM MAKERS OF HOUSEHOLD CERAMICS TO INDUSTRIAL FIREPROOFING, FROM INSULATORS TO BRICKS. GROWING DEMAND FROM USERS IN 2007, BOTH IN UKRAINE AND AROUND THE WORLD, FOR HOME RENOVATION AND THE DEVELOPMENT OF INFRASTRUCTURE, COMBINED TO SPUR RAPIDLY ESCALATING DEMAND FOR PRODUCTS FROM CLAY MINING ENTER- PRISES. United Minerals Group (UMG) manages SCM ceramics, china and fireproofing industries, Group assets in the clay mining complex. The as well as the extraction of formation sand. company is one of the largest suppliers of clay It is the biggest supplier of formation sand in for ceramics, porcelain and fireproofing indus- Ukraine and of clay in Belarus, as well as one tries in the world. In 2007, UMG’s share of clay of the biggest suppliers of clay to Italy, Spain mining in Ukraine was 50% of the local market, and Turkey. Annual volume of extraction is 0.8 while its share of sales in the same market was mn tonnes. 34%. • Ogneupornerud specializes in clay mining for The products made by UMG companies are sold the ceramics, china and fireproofing industries. in 20 different countries, including Ukraine, Annual volume of extraction is 0.5 mn tonnes. Russia, Italy, Spain, Turkey, India, and Poland. Thus, 87% of sales are generated abroad. The STRATEGIC DEVELOPMENT AREAS FOR company makes clay under brands such as UNITED MINERALS GROUP Vesko Keramik, Vesko Granitik, Vesko Prima, DN-1, DN-2 and others. SCM Group’s clay mining area has a clear strategy of expanding its business through At this time, UMG controls the shares of three capital construction of new quarries, developing major mining companies: transportation infrastructure and acquiring • Vesko specializes in mining and processing clay deposits with unique chemical and plastic clay for the ceramics, china and fireproofing qualities. By 2012, United Minerals Group plans industries. It is the biggest supplier of clay in to increase the annual volume of clay mined Ukraine and Russia, and one of the biggest in to 4 mn tonnes. UMG intends to analyze the Italy, Spain, Turkey, India and the United Arab market of other useful deposits for the ceramic Emirates (UAE). Annual volume of extracted and building industries, as well as to consider clay is 1.7 mn tonnes. the benefits of building a ceramics plant in Ukraine. • Druzhkovskoye Mines Management special- izes in mining and processing clay for the Key indicators for United Minerals Group* 2007 Sales volumes, mn $ 77.4 Asset value, mn $ 57.0 EBITDA, mn $ 32.0 Net profits, mn $ 23.5 Clay mining, mn tonnes 3.0 * Since the holding was formed in 2007, there is no comparative data for 2006.
    • SCM Group’s businesses | Alternative commercial development 61 RETAIL TRADE: UKRAINIAN RETAIL THE RETAIL TRADE SEGMENT IS GROWING QUICKLY IN UKRAINE: IN 2007, RETAIL TURNOVER GREW BY 28.8%. THE MAIN ENGINE DRIVING THIS DYNAMIC TREND IS THE IMPRESSIVE GROWTH OF REAL DISPOSABLE INCOMES AMONG UKRAINIAN CONSUMERS, WHICH ROSE BY 12% IN 2007. A CONSIDERABLE CONTRIBUTION TO THE EXPANSION OF TRADE ALSO CAME FROM DYNAMIC CONSUMER LENDING, WITH LOANS ISSUED TO UKRAINIANS DOUBLING IN 2007. IN ADDITION TO A GENERALLY HIGH GROWTH DYNAMIC, UKRAINIAN RETAIL SECTOR IS UNDERGOING STRUCTURAL CHANGES. FOOD AND GENERAL PRODUCT STORES ARE BEING REPLACED BY MODERN RETAIL FORMATS, SUCH AS SUPERMARKETS, LEASED RETAIL CHAINS, AND SO ON. In 2006, SCM Group made a decision to enter The Brusnytsya chain operates in two formats: the retail trade market by settingup company • Convenience (or ‘neighborhood’) store: floor named Ukrainian Retail. The company’s goal space of 300–400 sq m; selection of 4,500 is to establish one of the biggest retail chains items. in Ukraine under the Brusnytsya brand. The plan is to gain consumer trust and loyalty by • Handy supermarket: retail space of 800–1,200 selling only high-quality products at a competi- sq m; selection of 5,500 items. tive price in the most convenient retail format Already in 2007, effectively in its first year of and with an appropriate level of service. The operations, Ukrainian Retail has a 0.5% share overall investment made in Ukrainian Retail in of the grocery market in Donetsk Oblast. The 2007 was $40 mn. Most of this capital went into main competitive advantages of the Brusny- buying the property and equipment necessary tsya chain include: compact space, carefully to put this project into operation. selected products, variety, optimal number The first store opened on March 10, 2007 and of staff, high level of service, and personal, by the end of the year Brusnytsya chain boasted prompt responses to shoppers’ requests in 15 stores in Donetsk and Donetsk Oblast. Food every specific area (something large stores dominates in the stores with an 80% share, cannot afford to do). while 20% of sales come non-food items.
    • 62 SCM Group Annual Report 2007 STRATEGIC DEVELOPMENT AREAS FOR OVER 2008–2012, TOTAL INVESTMENT IN THE UKRAINIAN RETAIL DEVELOPMENT OF THE GROUP’S RETAIL CHAIN 200 The business development strategy is aimed WILL AMOUNT TO at evenly covering populated areas in Dnepro- petrovsk, Donetsk, Kharkov, Lugansk, and Zaporozhye Oblasts with at least 15,000 resi- dents. Over the next five years, the company plans to open around 400 retail points, thus, covering whole of Eastern Ukrainian region: $ Dnepropetrovsk, Donetsk, Zaporozhye, Lu- gansk, and Kharkov Oblasts, in total amounting MN to 15,5% of Eastern Ukrainian market. Over 2008–2012, investment in the development of the Group’s retail chain will be $200 mn. Retail and non-retail space at Ukrainian Retail, ’000 square meters* 120 100 80 60 40 20 0 2007 2008 2009 2010 2011 NON-RETAIL SPACE RETAIL SPACE * 2007 – current retail and non-retail space 2008-2011 – planned retail and non-retail space
    • SCM Group’s businesses | Alternative commercial development 63 TRADE IN PETROLEUM PRODUCTS IN 2007, IN TERMS OF VOLUME OF CARS SOLD, THE UKRAINIAN MARKET RANKED SEVENTH IN EUROPE, BUT ITS PACE OF GROWTH PUT IT IN SECOND PLACE. DURING THAT YEAR, UKRAINE SAW NEARLY 542,000 NEW CARS SOLD, WHICH WAS 46% MORE THAN IN 2006. ACCORDING TO INDUSTRY ANALYSTS, CAR SALES WILL CONTINUE TO GROW IN THE NEXT YEAR, WHICH MEANS THAT FOR THE RETAIL PETROLEUM PRODUCT BUSINESS, THE FUNDAMENTALS ARE THERE FOR LONG-TERM GROWTH. SCM Group companies have been working suc- customers high quality, branded gasoline. cessfully for more than 12 years in the whole- The main suppliers to Group companies are sale and retail markets for petroleum products. Mazeikiu Nafta (Lithuania) and the Kremenchug This business area is represented by a network Oil Refinery (Ukraine). In 2007, the selection of of filling stations operating under the Parallel, gasoline at Parallel filling stations was expan- Gefest and PitStop names. SCM Group owns ded to include a high-quality premium-class fuel 70 filling stations, mostly in Eastern Oblasts of named Perfekt, which was offered in the entire Ukraine and in Crimea. The Group’s share of line of gasoline and diesel fuels: Perfekt 92, the Ukrainian market for petroleum products is Perfekt 95, Perfekt 98, and Perfekt Diesel. This 2%, although in Donetsk it is the leader in sales. fuel is processed jointly by Parallel and interna- In 2007, 150 mn liters of mid-range gasoline tional chemicals giant BASF. The fuel under- and 65 mn liters of premium class gasoline went testing by prominent Donbass car dealers, were sold. SCM Group companies have a fuel who recommended the new fuel to drivers. quality control laboratory and petroleum sto- In 2007, the companies invested UAH 24.3 mn rage with a capacity of 68,000 tonnes, 25 gas in reconstructing filling stations with the pumps, 23 modern retail shops with annual change of the Gefest brand to the Parallel sales of $400,000 each. SCM lab was a finalist brand and the expansion of the range of ser- in the Fourth All-Ukrainian 100 Top Products vices. UAH 6.1 mn went to purchase petrol tank in Ukraine Quality Goods Competition in the trucks, while UAH 3.3 mn went to reconstruct category for Laboratory services for petroleum petroleum storage tanks. products quality verification. Gas stations operating under the Parallel brand are oriented towards the premium segment of the mar- STRATEGIC BUSINESS ket and work with both wholesale and retail DEVELOPMENT AREAS customers. Customers at Parallel gas stations By 2012, the company plans to continue ex- can take advantage of special services such panding its presence in Zaporozhye, Kharkov, as mini-markets and car washes. The Paral- Dnepropetrovsk, and Lugansk Oblasts and in lel chain of filling stations covers Donetsk and Crimea, as well as to enter the Kiev Oblast Donetsk Oblast. market. During this time, it expects to double The medium-range network of gas stations its sales for petroleum products and triple operates under the Gefest name and offers the volumes of sales of ancillary products and a wide selection of fuels of different brands. services. The gas station network under Gefest brand is The rebranding of a part of Gefest gas stations primarily focused on serving corporate clients. to Parallel will continue, with further deve- Gefest stations are located in Dnepropetrovsk, lopment of the chain of mini markets and car Donetsk, Kirovograd, Kharkov, Lugansk, Sumy, washes (20 filling stations in 2008). and Zakarpatye Oblasts and Crimea. In addition, the companies plan to invest in a The target customer of the PitStop brand of customer loyalty program and to improve brand gas stations is “young in spirit” consumer who perception. likes to drive fast. The PitStop brand offers its
    • 64 SCM Group Annual Report 2007 SOCIAL RESPONSIBILITY AND SUSTAINABLE GROWTH
    • Social responsibility and sustainable growth | The six CSR policies of the SCM Group 65 THE SIX CSR POLICIES OF THE SCM GROUP SCM GROUP HAS A MAJOR IMPACT ON THE SOCIAL AND ECONOMIC DEVELOPMENT OF UKRAINE AND FULLY RECOG- NIZES ITS OBLIGATIONS TO UKRAINIAN SOCIETY. IMPLEMENTING THE PRINCIPLES OF CORPORATE SOCIAL RESPON- SIBILITY (CSR) IS A CORE ELEMENT OF SCM’S BUSINESS STRATEGY. SCM GROUP MAINTAINS A PHILOSOPHY THAT ALLOWS THE HARMONIOUS INTEGRATION OF BUSINESS WITH BASIC HUMAN VALUES AND NATIONAL DEVELOPMENT PRIORITIES. SCM FOLLOWS THE HIGHEST STANDARDS AND APPLIES BEST WORLD PRACTICE IN CORPORATE SOCIAL RESPONSI- BILITY, ADAPTED TO MEET UKRAINIAN CONDITIONS. THE GROUP’S CSR ACTIVITIES HAVE LED TO LONG-TERM, STABLE PRACTICAL RESULTS THAT FOSTER THE DEVELOPMENT OF LOCAL COMMUNITIES IN THE REGIONS WHERE SCM IS PRESENT, AS WELL AS THE DEVELOPMENT OF UKRAINIAN SOCIETY AS A WHOLE. THE COMPANY’S CORPORATE SOCIAL RESPONSIBILITY IS REFLECTED IN SIX KEY AREAS: BUSINESS AND CORPO- RATE ETHICS, WORKING CONDITIONS, THE ENVIRONMENT, LOCAL COMMUNITIES, SOCIAL INVESTMENT, SPONSOR- SHIP, AND CHARITY. EVERY COMPANY AND ORGANIZATION THAT IS PART OF SCM MAKES ITS CONTRIBUTION TO THE GROUP’S MISSION IN TERMS OF CORPORATE SOCIAL RESPONSIBILITY. Business Working and corporate conditions ethics Local communities 6 CSR POLICIES The environment Social Sponsorships investments and charity
    • 66 SCM Group Annual Report 2007 In terms of realizing SCM’s policies in corpo- In 2006, SCM Group joined the United Nations’ rate social responsibility, the company has Global Compact, the largest global initiative been assisted by research and analysis under- for implementing and promoting CSR. In April taken by the Bureau of Economic and Social 2007, SCM presented its CSR strategy during Technologies (BEST), and its social investment the first international conference on Corporate projects were developed and implemented by Responsibility in Ukraine, organized by the the Foundation for the Development of Ukraine. leading Ukrainian business magazine, Expert. SCM Group invested a total of UAH 224 mn in social development in 2007 47% INVESTMENT IN THE REGIONS OF PRESENCE 36% CHARITY 16% NATIONAL-LEVEL SOCIAL INVESTMENTS 1% SPONSORSHIP 36% 47% 16% 1%
    • Social responsibility and sustainable growth | The six CSR policies of the SCM Group 67 BUSINESS AND CORPORATE ETHICS SCM GROUP RUNS ITS BUSINESSES IN AN OPEN AND TRANSPARENT MANNER, UPHOLDING ALL LEGAL AND NORMA- TIVE STANDARDS. THE COMPANY RECOGNIZES ITS RESPONSIBILITY BEFORE ITS EMPLOYEES, ITS BUSINESS PART- NERS, ITS INVESTORS, UKRAINIAN SOCIETY, AND LOCAL COMMUNITIES FOR ACTIONS RELATED TO ITS BUSINESS ACTIVITIES. SCM GROUP COMMUNICATES OPENLY WITH ALL STAKEHOLDERS ABOUT ITS BUSINESS ACTIVITIES AND OPERATIONS, WHILE RESPECTING THEIR RIGHTS AND POINTS OF VIEW. SCM RUNS ITS BUSINESSES PROFESSIONALLY TO THE HIGHEST INTERNATIONAL STANDARDS, INVESTING IN PEOPLE AND STIMULATING BOTH INNOVATION AND AN ENTHUSIASTIC APPROACH TOWARDS WORK. ONE OF THE KEY ELE- MENTS OF ITS CONCEPT FOR RAISING THE STANDARDS OF BUSINESS AND CORPORATE ETHICS IS INTRODUCING A TRANSPARENT, OBJECTIVE SYSTEM OF INCENTIVES. SCM HAS A POLICY OF FAIR PAY FOR WORK BASED ON INDIVIDU- AL CONTRIBUTIONS TO THE OVERALL BUSINESS. KEY EVENTS indicators (KPIs). This programs has been most successfully introduced at DTEK, where In November 2007, SCM became one of the the corporate center switched to rewarding sponsors in Ukraine of the development of managers, based on these KPIs. In 2007, a ISO 26000, the new international standard of pilot version of a KPI-based bonus system was social responsibility, which is in the process of launched at Pavlogradugol. being drafted by the International Standards Organization (ISO) in Geneva. The new stan- Since October 2005, a program called “Setting dard will become a global template for social up a fair, transparent and competitive system responsibility. SCM has provided funding for and policy of incentives” has been operating Ukrainian organizations including business, at Azovstal Steel Plant. The purpose has been unions, NGOs, and government agencies to to increase the motivation of workers at the participate in the development of the standard plant. The system is based on an evaluation of and to raise awareness of the standard, and of tasks, according to three criteria: knowledge CSR in Ukraine. and skills, the complexity of the job that needs handling, and responsibility. Depending on the In 2007, modernizing and automating the evaluation for each job and specialization at the production process at Pavlogradugol resulted factory, a range of pay is set with an appropriate in staff layoffs. In order to offer them outplace- minimum and maximum wage. With the intro- ment support, the Center of Social Adaptation duction of the new system, the payroll budget was founded. Its functions were to teach and has grown 8% and its distribution has become assist workers in finding employment, to dis- more transparent and effective. In 2007, this seminate information about available vacancies method, whose effectiveness has been proven at State Employment Centers, at Pavlograd at Azovstal, was introduced at the Northern Ore enterprises, and Pavlograd region. In 2007, the Mining and Enrichment Plant (SevGOK). As a center had served 50 individual clients. result, on the average in 2007 wages at SevGOK The company is developing a system of bonuses increased by 20.6% and by 21.3% – at the Cen- for workers on the basis of key performance tral Ore Mining and Enrichment Plant (CGOK).
    • 68 SCM Group Annual Report 2007 WORKING CONDITIONS SCM LOOKS TO HIRE THE BEST EXPERTISE AND TALENT IN EACH AREA OF ITS BUSINESS. THE GROUP HAS A TOTAL OF NEARLY 160,000 EMPLOYEES WORKING ACROSS ALL OF ITS BUSINESSES. SCM PAYS ALL ITS EMPLOYEES SALARY LEVELS IN ACCORDANCE WITH CURRENT LEGISLATION AND, AS A MINIMUM, MEETS LEGAL REQUIREMENTS ON SO- CIAL GUARANTEES TO EMPLOYEES. ALTOGETHER, SALARIES AT THE GROUP’S ENTERPRISES ARE HIGHER THAN THE AVERAGE IN EACH OF THE SECTORS WHERE SCM DOES BUSINESS. Average salary level comparison of those at SCM Group enterprises and industry average 3500 3000 2500 Salary, UAH 2000 1500 1000 500 0 1 2 3 4 5 6 7 Industries * 1 – Other industries AVERAGE BY INDUSTRY 2 – Machinery and equipment production 3 – Electric energy, gas, and water generation AVERAGE AT SCM GROUP and distribution 4 – Natural resources mining, (excluding fuel & energy) 5 – Steel and rolled metal 6 – Coal mining 7 – Finance * Industries are classified, in accordance with Ukrainian State Statistics Bureau
    • Social responsibility and sustainable growth | The six CSR policies of the SCM Group 69 The Group is committed to improving health TOTAL INVESTMENT OF SCM GROUP COMPANIES IN 286,4 and safety in the workplace and to lowering IMPROVING EMPLOYEE HEALTH AND SAFETY industrial injuries and occupational illnesses, as well as to having the necessary staff levels. SCM’s industrial businesses work to the best world practice, following the OHSAS 18001 series of international standards on health and safety. Total investment of SCM Group compa- nies in improving employee health and safety UAH in 2007 was UAH 286.4 mn, of which Metinvest Holding contributed UAH 209.9 mn and DTEK MN UAH 76.5 mn. SCM respects the right of its employees to establish a professional union and other as- with 20 highly qualified doctors and 42 medical sociations to represent their interests. SCM assistants. The medical section is equipped provides equal opportunities for all employees with modern diagnostic technology, a clinical and invests in the professional development laboratory, a day ward, a 24-hour emergency and learning of its employees to allow each department, a rehabilitation department, an individual the opportunity to realize their full ultrasound room, functional diagnostics, a potential. By doing so, SCM helps promote a massage room, and a room for internal exami- positive, results orientated corporate culture. nations. Last year, 2,712 individuals underwent preventive or regular examinations. In 2007, the KEY EVENTS company invested UAH 800,000 in new medical equipment. Pavlogradugol has instituted the practice of daily briefings for miners before they go on shift and has improved the quality of investiga- tions into accidents that have taken place. Prior to the start of a shift, the workers undergo video instructions and safety briefings in dedicated briefing rooms fitted out with audio visual equipment. In 2007, 10 videos were shot in-house on the subject of on-the-job safety and security. In 2008, a professional studio will be engaged to prepare videos on work safety issues and these videos will become the intel- lectual property of Pavlogradugol. Previously, Avdeyevka Coal and Chemical Plant (AKHZ) medical team was provided by the local hospital and consisted of emergency medical assistants and two GPs based at the plant. To- day, the plant has its own medical department
    • 70 SCM Group Annual Report 2007 In September 2007, Metinvest Holding gained Pavlogradugol has a training and accreditation the status of an Accredited ACCA Employer. center (NKK) in Ternovka, as well as 10 training Metinvest was the only Ukrainian company to points located at its mines. In 2007, the center be certified for “Professional Development” trained 1,697 people in different specializations. and “Continuous Education” during the year by Without interrupting their production work, the organization. ACCA accreditation provides 5,272 individuals improved their qualifications international recognition of the effectiveness while 5,837 underwent entry-level training. of training and the development on finance and accounting in accordance with highest interna- tional qualification standards. Industrial injury coefficient dynamics for SCM Group main businesses, 2004-2007 1.60 1.43 1.40 1.24 1.20 1.06 coefficient 1.00 0.93 0.80 0.60 0.40 0.20 0.00 2004 2005 2006 2007
    • Social responsibility and sustainable growth | The six CSR policies of the SCM Group 71 THE ENVIRONMENT SCM SEES ENVIRONMENTAL SUSTAINABILITY AS AN ESSENTIAL ELEMENT OF BUSINESS STRATEGY. THE GROUP MEETS ALL LEGAL REQUIREMENTS IN TERMS OF PROTECTING THE ENVIRONMENT AND CONSTANTLY STRIVES TO DELIVER PERFORMANCE ON ENVIRONMENTAL INDICATORS THAT EXCEED THE ESTABLISHED NORMS. SCM supports the introduction of interna- is based on best world practice on meeting tional environmental standards in Ukraine. For the ISO 14000 environmental standards. In instance, DTEK’s TESs meet European clean air accordance with ISO 14001 requirements, standards, which limit dust emissions to the at- Metinvest Holding has instituted and certified mosphere to no more than 50mg/m3. The Group environmental management systems at all is actively working on evaluating, tracking and six of its companies in the Ore Mining Division managing possible risks to the environment and also at the Khartsyzsk Pipe Plant (KHTZ). and to local communities, which could result Other companies in the Holding are currently from production processes. undergoing preparations to implement these standards. SCM is introducing new technologies and pro- cesses that have a positive impact on the local At DTEK, elements of the ISO 14001 system environment and public health. The company have also been instituted and all companies are also plans to reduce energy consumption and expected to receive ISO certification by the end use more energy-efficient technologies. Group of 2010. companies continually analyze their CO2 emis- SCM Group invested a total of over UAH 1 bn sions and those of other greenhouse gases, in in environmental protection measures at its order to effectively manage and reduce them. industrial enterprises during 2007, of which When implementing new investment projects, nearly UAH 920 mn was invested by Metinvest SCM introduces efficient and environmentally Holding and nearly UAH 90 mn by DTEK. friendly technologies. SCM actively cooperates with community SCM GROUP INVESTED IN ENVIRONMENTAL 1 organizations, governments and local com- PROTECTION MEASURES munities, in order to address environmental concerns, and also takes stakeholder opinions into account when reaching its own decisions. SCM Group management actively encourages employees to protect the environment and biodiversity. UAH Environmental issues are of primary impor- tance to the Group’s manufacturing enter- BN prises. Management of environmental issues
    • 72 SCM Group Annual Report 2007 5 KEY EVENTS IS EXPECTED TO BE INVESTED IN MODERNIZING PRODUCTION In October 2007, deputies from the City Council of Yenakiyevo unanimously approved a draft development program for the Yenakiyevo Steel Plant (YeMZ), in compliance with environmental requirements for 2007–2015. The draft contains two main parts: radical modernization of pro- $ BN duction equipment, including the installation of modern, environmentally friendly technologies, and the most efficient treatment and disposal of production wastes. sum used to install new gas particle filtering equipment. Implementing the moderniza- Companies in the coal mining sector of DTEK tion program and its stringent environmental have developed and now are implementing a protection measures will make it possible to comprehensive plan to utilize the multi-tonne reduce the release of harmful emissions into wastes from coal extraction to reclaim land the atmosphere by 25.1%, while at the same which was flooded or suffered from subsidence. time increasing output by 26.5%. The reclaimed area in 2007 amounted to 13.8 hectares. Metinvest Holding is also reclaiming A major program was undertaken at the land which was previously used for industrial Azovstal Steel Plant in 2007 to introduce purposes. Northern and Central Ore Mining and energy-saving technologies. A range of mea- Enrichment Plants (SevGOK and CGOK) formed sures was taken to improve the operation of a partnership with the Krivoy Rog Botanical equipment that uses significant amounts of Gardens to institute a long-term program of energy, for example, the systems for heating biological reclamation of iron ore waste spoils metallurgical and electrical equipment. This and disused quarries. In 2007, over 4,000 seed- allowed savings of 11.8 mn kWh of electricity lings were planted under the program. over the year, worth UAH 10 mn, and 15 mn cubic meters of natural gas, worth UAH 8 mn to At the Komsomolets Donbassa Mine, work has be made. begun to utilize coal bed methane gas. Methane 1,1 extracted from the mine will be used to fuel the TOTAL INVESTMENT WAS AROUND heating system at the mine during the winter heating season, while during the warm season the excess gas will be flared. Flaring methane and using it to fuel the mine’s heating system will make it possible to reduce emissions by 16,500 tonnes per annum. Altogether, DTEK UAH hopes to reduce its greenhouse gas emissions by 2.7% or about 600,000 tonnes, compared to MN 2006. In 2007, Metinvest Holding approved a develop- In 2007, a production line to recycle polymer ment concept for its Azovstal Steel Plant. For wastes was installed at the Khartsyzsk Pipe the period 2008–2020, over $5 bn is expected to Plant (KHTZ). The new, modern line makes it be invested in modernizing production, of which possible to produce polyethylene granules from $970 mn will be directed at investment projects the wastes created during the process of apply- that reduce the negative impact of produc- ing an anti-corrosion coating to large diameter tion on the environment, with - $117 mn of the pipes. Average monthly polyethylene wastes was 25-30 tonnes, and prior to the launch of the new production line, the disposal of this waste posed considerable problems. Total investment was around UAH 1.1 mn.
    • Social responsibility and sustainable growth | The six CSR policies of the SCM Group 73 LOCAL COMMUNITIES MANY COMPANIES AT SCM GROUP ARE THE LEADING EMPLOYERS IN THE CITY OR TOWN WHERE THEY ARE BASED AND SO PLAY A MAJOR ROLE IN THE LIVES OF LOCAL COMMUNITIES. SCM IS CONCERNED ABOUT THE ENVIRONMENT IN WHICH ITS EMPLOYEES LIVE AND WORK, AND GROUP COMPANIES PLAY AN ACTIVE PART IN TACKLING THE SOCIO- ECONOMIC PROBLEMS IN THE AREAS WHERE THEY ARE LOCATED. THEY DO THIS BY INVESTING IN THE DEVELOP- MENT OF LOCAL INFRASTRUCTURE, AND BY SUPPORTING LEISURE, HEALTH, AND EDUCATION FACILITIES. TO HELP IMPROVE THE QUALITY OF LIFE OF LOCAL RESIDENTS, SCM WORKS IN PARTNERSHIP WITH ALL INTEREST GROUPS AND WITH LOCAL GOVERNMENT TO IMPLEMENT PROJECTS. THROUGH JOINT EFFORTS, THEY PUT TOGETHER A CON- SENSUAL STRATEGY AND A PLAN WHICH FOCUSES ON DELIVERING SUSTAINABLE RESULTS AND REAL CHANGES. AT THE SAME TIME, THE COMPANY’S ENTERPRISES WELCOME AND SUPPORT THE DESIRE OF THEIR EMPLOYEES TO PARTICIPATE IN THE WORK OF LOCAL GOVERNMENT BODIES. Distribution of SCM Group investments in the regions of its presence, 2007 60.68% INFRASTRUCTURE 16.47% CULTURE AND SPORT 9.69% LOCAL COMMUNITIES 6.78% HEALTHCARE 5.96% EDUCATION 0.26% CHILDREN’S HOMES 0.16% OTHER 9.69% 16.47% 6.78% 5.96% 0.26% 0.16% 60.68%
    • 74 SCM Group Annual Report 2007 Investments by Group companies in the deve- TO IMPLEMENT THE LOCAL BOILER-ROOMS AND lopment of the regions where they are located HEATING SYSTEMS MODERNIZATION AND RECONSTRUCTION 30 in 2007 added up to UAH 103 mn. PROJECT, PAVLOGRADUGOL ALLOCATED OVER KEY EVENTS In December 2007, DTEK and USAID signed a Memorandum on Cooperation. According to this document, under the “Economic Development of Cities” project, DTEK and USAID agreed to UAH MN provide expertise and consultative support to City Councils where Group enterprises are located, namely Zugres, Kirovskoe, Kurakhovo, Pavlograd, Pershotravensk, Shchastye, and Ternovka. The purpose of the program is to cre- mn was given to implement this project, and ate strategic economic development plans at after its completion, the heating facilities were the local level, to develop the potential of local turned over to communal ownership. government bodies, and to improve the local At the beginning of 2007, an agreement on investment climate. socio-economic cooperation was signed In September 2007, Krasnodonugol trans- between the Azovstal Steel Plant and Mari- ferred the first tranche of UAH 650,000 under a upol City Council. Azovstal committed itself Social Partnership Agreement signed with the to provide organizational, financial and mate- Krasnodon City Council. This funding was to be rial assistance for municipal social programs used to prepare community properties and the intended to improve elementary, secondary and City Council for the winter heating season. The post-graduate educational institutions, and city used this money to acquire equipment and to foster the improvement of the city’s social materials, including boiler equipment, piping, facilities and the development of municipal electric motors, pumps, heating radiators, cor- infrastructure. rugated metal, plaster, bricks and so on, for the Dokychayevsk Flux and Dolomite Plant (DFDK) Teplo and Karsnodonteploenergo communal organized a recreational area in Dokuchayevsk. enterprises, the residential services bureaus, Just 10 years ago, the location had been an and the City Department of Education. abandoned children’s camp that slowly turned DTEK’s most significant and large-scale into a city dump. DFDK employees cleaned up social project in 2007 was the modernization the territory, planted trees and bushes, built and reconstruction of the boilers and heating walkways, put up a conservatory and a mini networks in the cities of Ternovka and Per- zoo, and also built a children’s railway. Every shotravensk in Dnepropetrovsk Oblast, where year, the company’s workers continue to im- the Pavlogradugol mines are located. UAH 30 prove the park area, which has become a real asset for the city. In 2007, the plant spent over UAH 1 mn to maintain and develop this recre- ation area. SPENT TO MAINTAIN AND DEVELOP 1 THE RECREATION AREA UAH MN
    • Social responsibility and sustainable growth | The six CSR policies of the SCM Group 75 SOCIAL INVESTMENT SCM HAS VOLUNTARILY TAKEN ON THE MISSION OF DIRECTING BOTH MATERIAL AND NON-MATERIAL RESOURCES TO IMPLEMENT SOCIAL PROGRAMS AT THE NATIONAL LEVEL, WHICH SUPPORT THE SUSTAINABLE GROWTH AND DEVE- LOPMENT OF UKRAINIAN SOCIETY. THE SOLE PURPOSE OF THE COMPANY’S SOCIAL INVESTMENTS IS TO IMPROVE THE QUALITY OF LIFE OF ORDINARY UKRAINIANS. AT THE HEART OF SCM GROUP’S STRATEGY TO HELP UKRAINE SWITCH FROM SOVIET-STYLE PATERNALISTIC SOCIAL POLICIES TO STRUCTURED SOCIAL INVESTMENTS IN IMPROV- ING THE LIFE OF THE SOCIETY THAT SCM IS PART OF. KEY EVENTS THE TOTAL VOLUME OF INVESTMENT, ALLOCATED TO IMPLE- 177 MENT THE UNIAN-HEALTH PROJECT IN 2007, AMOUNTED TO In 2007, the Bureau for Economic and Social Technologies (BEST) prepared a number of reports including two quarterly publications, “Ukraine: An Economic Perspective” and “So- cial Monitoring In Ukraine,” a monthly review of the economy and politics called “Trends and Comments”, and a 10-year macroeconomic 000 forecast for Ukraine and analytical review titled “Ukraine’s Investment Climate”. UAH SCM sponsored events dedicated to Europe Day In May 2007, the Foundation for the Develop- in Ukraine in 2007. This special day promotes ment of Ukraine, together with the independent closer ties between Ukraine and the European Ukrainian news and information agency UNIAN, Union and assists in a better understanding of launched a project called UNIAN–Health, which Ukraine’s role as a European nation. is a regular bulletin on healthcare issues. The on-line (http://health.unian.net/) publication’s SCM became a partner of PRESSzvaniye 2007 sections cover world, national and regional and sponsored the Business Competition for medical news, statistical data, results of stud- journalists working for Ukraine’s business and ies, thematic features, useful information, re- general media. The event promotes high stan- ferences and advice, as well as event an- dards in Ukrainian media. nouncements. Total investment into the project In June 2007, the Foundation for the Develop- in 2007 was UAH 177,000. ment of Ukraine’s “Stop Tuberculosis” cam- paign was launched. The project covers three main areas: devising and introducing mecha- nisms to overcome the tuberculosis epidemic in Ukraine; developing and introducing an effective system to combat tuberculosis in Donetsk Oblast; and running a relevant public awareness campaign. Plans are to complete the campaign in May 2012.
    • 76 SCM Group Annual Report 2007 In November 2007, the Foundation for the Over 14 years, First Ukrainian International Development of Ukraine funded the opening of Bank has been a partner to the famous Ukrai- the most up-to-date “digital journalism” studio nian ballet festival, Ballet Stars of the World. in Ukraine at the National University of Kiev- Every year, the bank also sponsors an inter- Mohyla Academy (NaUKMA). The university is national competition for young pianists in the also a partner in the project. Total investment birthplace of Sergei Prokofyev in the village of in this project in 2007 was UAH 2 mn. Krasnoe, Donetsk Oblast. One of SCM Group’s largest-scale social pro- THE TOTAL INVESTMENT VOLUME, ALLOCAT- jects in 2007 was the opening of a campus ED TO CREATE UKRAINE’S MOST MODERN of the Junior League Football Academy of “DIGITAL JOURNALISM” STUDIO IN 2007, Shakhtar FC in Yenakiyevo. More than 100 boys 2 AMOUNTED TO from Yenakiyevo and neighboring towns were able to play football at a renovated stadium, visit professional training sessions, and learn the principles of a healthy lifestyle. Total invest- ment in this project was $1 mn. UAH THE TOTAL INVESTMENT IN CREATING A MN CAMPUS OF THE JUNIOR LEAGUE FOOTBALL 1 ACADEMY OF SHAKHTAR FC AMOUNTED TO UAH MN
    • Social responsibility and sustainable growth | The six CSR policies of the SCM Group 77 SPONSORSHIPS AND CHARITY WORK SCM PROVIDES FUNDS FOR SPONSORSHIPS AND CHARITY PROGRAMS THAT ADDRESS THREE KEY AREAS: EDUCA- TION, HEALTHCARE, AND CULTURE. AS A RESPONSIBLE CORPORATE CITIZEN, SCM GROUP ALSO ALLOCATES FUNDS TO SPONSORSHIP AND CHARITABLE PROGRAMS, CONTRIBUTING TO THE SOLUTION OF SOCIAL PROBLEMS. OUR DONATIONS ARE SERIOUS CONTRIBUTIONS TO SOCIAL PROJECTS AND DIRECTED NEARLY UAH 82 MN INTO 82 CAMPAIGNS, AIMED AT HELPING TO DELIVER FINANCIAL RESOURCES TO CHARITABLE ORGANIZATIONS, WHICH SUPPORT COMMUNITIES AND CHARITY ACTIVITIES PEOPLE IN NEED. SCM ALSO PROVIDES TARGETED ASSISTANCE TO HELP PEOPLE WHO HAVE FOUND THEMSELVES IN DIFFICULT CIRCUMSTANCES AND FUNDS THE ACTIVITIES OF CHARITABLE ORGANIZATIONS. IN 2007, THE COMPANY AND THE GROUP ENTERPRISES DIRECTED NEARLY UAH 82 MN TO CHARITY UAH ACTIVITIES. MN SCM DOES NOT SPONSOR OR PROVIDE FUNDS FOR POLITICAL PARTIES, IN- DIVIDUAL POLITICIANS, OR POLITICAL EVENTS. SCM GROUP DOES NOT PROVIDE SPONSORSHIP FUNDING TO INSTI- TUTIONS, EVENTS OR CAMPAIGNS THAT SUPPORT A PARTICULAR RELIGION, OR TO ORGANIZATIONS WHOSE GOALS ARE PURELY COMMERCIAL IN NATURE, AND WHO EXPECT TO GAIN BENEFIT FROM SCM’S SUPPORT AS A SPONSOR. SCM Group sponsorship funds allocation, 2007 (SCM Group com- 18.4% panies contributed sponsorship funding worth UAH 3 mn) 19.5% 33.4% CULTURE AND ARTS 13,7% 19.5% CONFERENCES, SEMINARS 18.4% SPORT 13.7% BROAD-BASED NON-PROFIT ORGANIZATIONS 10.6% ISSUE-BASED NON-PROFIT 10.6% ORGANIZATIONS 4.1% INTERNATIONAL ORGANIZATIONS 0.3% ACADEMIC 4.1% 33.4% INSTITUTIONS 0.3%
    • 78 SCM Group Annual Report 2007 BEST INFORMATION ANALYSIS CENTER BEST IS AN INFORMATION ANALYSIS CENTER SPECIALIZING IN RESEARCH AND CONSULTING ON SOCIAL AND ECO- NOMIC POLICY ISSUES. THE CENTER’S OBJECTIVE IS TO FOSTER THE DEVELOPMENT OF A MARKET ECONOMY IN UKRAINE AND TO ENCOURAGE STABLE ECONOMIC GROWTH. BEST IS AN EXPERT PLATFORM FOR HOLDING PUBLIC DEBATE ON SOCIO-ECONOMIC POLICY ISSUES AND FOR ARRANGING DIALOG BETWEEN GOVERNMENT AND BUSI- NESS. BEST’S KEY RESEARCH AREAS INCLUDE: DETERMINING MACROECONOMIC POLICY, STRUCTURAL REFORMS, SOCIAL POLICY, AND THE DEVELOPMENT OF DEMOCRATIC INSTITUTIONS. MAIN AREAS OF ACTIVITY • Devising monitoring products, analyzing the dynamic of the country’s socio-economic deve- lopment at macro- and microeconomic levels, including regional and sectoral aspects. • Undertaking both theoretical and empirical studies on the issues of socio-economic policy. • Providing consulting services (developing consultative products on issues of socio- economic policy, corporate governance, and corporate social responsibility).
    • Social responsibility and sustainable growth | BEST, FC Shakhtar 79 SHAKHTAR FOOTBALL CLUB FC SHAKHTAR (DONETSK) HAS A 70-YEAR HISTORY OF ACHIEVEMENT AND HAS SKILLS AND PROFESSIONALISM OF ITS FOOTBALL PLAYERS AND TRAINERS, THEIR TEAMWORK AND FIGHTING SPIRIT TO THANK FOR ITS SPOR- TING SUCCESSES. SCM AND FC SHAKHTAR ARE TWIN LEADERS WHOSE COOPERATION IS DIRECTED AT DEVELOPING UKRAINIAN FOOTBALL AS A WHOLE. SHAKHTAR HAS A TRACK RECORD OF SUCCESS, HAVING WON THE UKRAINIAN CHAMPIONSHIPS (2002, 2005, 2006), THE UKRAINE CUP (1995, 1997, 2001, 2002, 2004), AND THE UKRAINE SUPER CUP (2005). THE CLUB’S BUDGET FOR THE 2006/7 SEASON WAS $73.5 MN. BOTH IN UKRAINE AND ABROAD, THERE ARE MORE THAN 90 ACTIVE FC SHAKHTAR FAN CLUBS OFFICIALLY REGISTERED. The football club has a well-developed athletic infrastructure that includes, among others, a modern training base that was originally opened in 1990 and a football academy. In 2006, the construction of a new 50,000-seat home stadium, named the Donbass Arena, was launched. It will be the first stadium in Eastern Europe to be designed and built to UEFA’s 5-star standard.
    • 80 SCM Group Annual Report 2007 FOUNDATION FOR THE DEVELOPMENT OF UKRAINE THE KEY CHANNEL FOR THE GROUP’S SOCIAL INVESTMENT AND CHARITABLE ACTIVITIES IS THE FOUNDATION FOR THE DEVELOPMENT OF UKRAINE, A CHARITABLE FOUNDATION. THE FOUNDATION FOR THE DEVELOPMENT OF UKRAINE IS A NON-PROFIT ORGANIZATION FOUNDED JOINTLY BY SCM AND SHAKHTAR FC IN 2005. THE FUND’S MISSION IS TO SUPPORT THE SUCCESSFUL AND SUSTAINABLE DEVELOP- MENT OF UKRAINIAN SOCIETY BY INVESTING IN THE EDUCATION OF FUTURE GENERATIONS, PROMOTING PUBLIC HEALTH, AS WELL AS PRESERVING AND DEVELOPING UKRAINIAN CULTURE. THE FUND UNDERTAKES ITS OWN PRO- JECTS, PARTICIPATES IN FUNDING THE PROGRAMS OF OTHER CHARITABLE ORGANIZATIONS, AND PROVIDES SUP- PORT FOR COMMUNITY INITIATIVES. THE FOUNDATION FOR THE DEVELOPMENT OF UKRAINE’S ACTIVITIES ARE CAR- RIED OUT, FOLLOWING THE PRINCIPLES OF TRANSPARENCY AND OPENNESS. The Fund’s objectives are: • to cooperate with the government in pre- serving the national culture and strengthening • to help the most active, talented and educa- traditions, while supporting innovative projects ted young people, who are the most promising which develop contemporary Ukrainian culture. resource in Ukraine’s society, to realize their potential; to devise ways to support the best The Foundation for the Development of Ukraine educators in the school system; considers it extremely important to respond immediately and effectively to critical health is- • to introduce and support cutting-edge me- sues facing the Ukrainian nation: the spread of thods and technologies; to support institutional tuberculosis and the high level of illness among change in the healthcare system; to shape a children. In 2007, the Fund’s three main areas responsible attitude towards their own health of activities were the projects “Stop Tubercu- among the Ukrainian citizens; losis”, “Children’s Hospital of the Future”, and assistance to victims of natural disasters. Key Foundation for the Development of Ukraine charity programs for 2007, mn UAH All program events 60.8 Modern Education Program 3.0 The Health of the Nation Program, including: 30.6 Stop Tuberculosis 5.4 The Children’s Hospital of the Future 21.7 The Cultural Heritage Program 2.6 Targeted Assistance, including: 24.6 victims of natural disasters 22.3
    • Social responsibility and sustainable growth | Foundation for the development of Ukraine 81 The project “Stop Tuberculosis” was launched INTENSIVE CARE UNIT AT THE OBLAST 3,3 in June 2007. A comprehensive program for CHILDREN’S HOSPITAL countering the TB epidemic was developed jointly with several partners, including: the World Health Organization (WHO), the Donetsk Oblast Administration, Ukrainian media, and others. Donetsk Oblast was chosen to be the project pilot area. UAH In six months, the project managed two main achievements: MN • a 1.3% reduction in mortality. A decline in mortality was observed in 22 of Donetsk Oblast’s 40 territorial units; In 2007, the Foundation for the Development of Ukraine funded capital works at the Inten- • a 3.2% reduction in new cases of infection. sive Care Unit at the Oblast Children’s Hospital New cases fell in 11 out of 21 cities and 9 out of and Clinic in the city of Donetsk. The unit was 19 counties in Donetsk Oblast. equipped to the most up-to-date European medi- Nor did the Foundation for the Development cal standards. Under the educational provisions of Ukraine stand aside during two disasters in of the project, physicians in the unit were given 2007 - the destruction of an apartment buil- additional training and skills. Total investment ding in Dnepropetrovsk by a gas explosion and for this project in 2007 was UAH 3.3 mn. a major accident at Zasyadko mine in Donetsk. In 2007, the ongoing program “From Azovstal to Victims and the families of those who died were Our Kids,” in which the plant regularly provides provided assistance worth more than UAH 23 mn. assistance to boarding schools, the municipal child rehabilitation center and orphanages, KEY EVENTS continued. Altogether, Azovstal Steel Plant directed UAH 80,000 to charitable events for After an explosion destroyed an apartment children and underprivileged families. building in Dnepropetrovsk in October 2007, the Foundation for the Development of Ukraine di- Over the last 11 years, First Ukrainian Inter- rected UAH 11.7 mn to provide comprehensive national Bank has been supporting the Nadia assistance to the families of the dead and those (Hope) Pediatric Cancer Center in Donetsk. The injured or affected by the blast. The Fund also bank equipped the therapy unit and is upgra- responded to the tragedy at the Zasyadko mine ding the computer equipment and software at at the end of 2007, providing UAH 10.6 mn. In the Center, which will make it possible to pro- December 2007, Foundation for the Develop- vide more timely and accurate analysis results. ment of Ukraine also supported an initiative by The bank helps the Center resolve day-to-day the President of Ukraine and provided UAH 15 issues, regularly provides funding to supply the mn for the program “Support to Large Families.” Center with medication, and organizes charity drives to collect items for children who are suf- FOR THE PROGRAM “SUPPORT TO LARGE fering from leukemia. 15 FAMILIES” UAH MN
    • 82 SCM Group Annual Report 2007 KEY DIRECTIONS: STRATEGIC GROWTH AREAS FOR 2008-2012
    • Strategic growth areas for 2008-2012 83 KEY DIRECTIONS SCM Group intends not only to remain the growth for the next five years. The inter-related leader in the Ukrainian market, but also nature of these areas and their focus on results to strengthen its position on international and sustainable growth are guarantees that the markets. To reach this goal, the Group needs Group will be transformed into a leading world- a realistic and balanced growth strategy. SCM class managing company. has determined seven main areas of strategic 1. IMPROVING THE GOVERNANCE OF THE LARGEST SECTORAL HOLDINGS, METINVEST HOLDING AND DTEK BASED ON THE SIZE OF THEIR ASSETS, METINVEST HOLDING AND DTEK ARE THE KEY COMPONENTS OF THE SCM GROUP TODAY. NOTABLY, ON BOTH THE UKRAINIAN AND WORLD MARKETS, AND IN EACH INDUSTRIAL SECTOR, GENERALLY THE MOST POWERFUL PLAYERS ARE ACTIVE, AND COMPETITION IS TENSE. THE WINNER IN THIS COM- PETITIVE BATTLE WILL BE THE COMPANY THAT IS ABLE TO ENSURE THE HIGHEST LEVEL OF EFFICIENCY IN THE OPERATIONS OF ITS ASSETS AND TO ACHIEVE A HIGH LEVEL OF SYNERGY AMONG THEM. SCM GROUP INTENDS TO PRIORITIZE THE INTEGRATION OF THE RELEVANT ASSETS, BOTH INTERNALLY AND EXTERNALLY, TO IMPROVE COR- PORATE GOVERNANCE, AND TO REACH THE HIGHEST MANAGEMENT STANDARDS IN EACH LINK OF THE CHAIN, FROM THE PRODUCTION PROCESS TO THE BOARD. 2. INVESTING IN SECTORS THAT ARE ATTRACTIVE FROM THE POINT OF VIEW OF PROFIT- ABILITY AND LONG-TERM GROWTH. DEVELOPING WORKING SKILLS IN THESE SECTORS. THE GROUP PAYS CONSIDERABLE ATTENTION TO SUCH SECTORS AS TELECOM, FINANCIAL SERVICES, MEDIA, AND REAL ESTATE. THE GROUP IS SETTING UP SECTOR-BASED HOLDING COMPANIES TO ENSURE A HIGH QUALITY OF ASSET MANAGEMENT. THE GROUP HAS SET ITSELF A TARGET RATIO BETWEEN THE CORE HEAVY INDUSTRY (MINING, METALS, AND ENERGY) AND ALTERNATIVE AREAS IN ITS ASSET PORTFOLIO OF 70:30, RESPECTIVELY. THE CURRENT, RATIO IS AROUND 85:15.
    • 84 SCM Group Annual Report 2007 3. THE STRUCTURING OF PORTFOLIO ASSETS UNDER MANAGEMENT THE GROUP IS CURRENTLY IN THE PROCESS OF STRUCTURING ITS ASSETS. OVER 2007 (TO BE CONTINUED IN 2008), IN THE COURSE OF REVIEWING ITS INVESTMENT PORTFOLIO, THE GROUP HAS DECIDED TO OPTIMIZE THE STRUC- TURE OF ITS ASSETS. FOR INSTANCE, SCM EXITED THE BAKED GOODS AND BREWING BUSINESS, AS THOSE ENTER- PRISES DID NOT FIT SCM GROUP’S PROFILE, WHILE THEIR WEAK LINKS TO OTHER ASSETS MADE IT DIFFICULT TO FIND SYNERGISTIC VALUE. TODAY, ONE FOCUS FOR RESTRUCTURING IS THE GROUP’S MACHINE BUILDING ENTER- PRISES. SCM GROUP NOW HAS A STAKE IN A NUMBER OF MACHINE-BUILDING ASSETS AND IS FORMING A BUSINESS STRATEGY FOR THESE INVESTMENTS. 4. ENTERING NEW, ATTRACTIVE SECTORS AS A WORLD-CLASS MANAGEMENT COMPANY, SCM GROUP IS LOOKING FOR NEW OPPORTUNITIES TO INVEST. SPECIFICALLY, IT OPENED THE FIRST RETAIL STORES IN A MARKET SEGMENT THAT IS PROMISING FOR UKRAINE, THE “NEIGHBORHOOD STORE” OR CONVENIENCE FORMAT. THE SEARCH FOR NEW, ATTRACTIVE SECTORS TO ENTER THAT OFFER ACCESS TO CORE MARKETS WILL HAVE A POSITIVE IMPACT ON THE GROUP’S STABLE GROWTH AND THE DIVERSIFICATION OF ITS ASSETS. 5. BECOMING MORE ACTIVE ON DEBT CAPITAL MARKETS THE GROUP’S AMBITIOUS INVESTMENT PLANS REQUIRE FINANCIAL SUPPORT. THIS HAS SPURRED THE GROUP TO MAKE SURE THAT ITS SECTOR-BASED HOLDINGS ARE GIVEN CREDIT RATINGS AND CAN BORROW CAPITAL AT THE MOST FAVORABLE RATES. HOWEVER, IN ITS EXTERNAL BORROWING POLICY, SCM CONTINUES TO TAKE THE CONSER- VATIVE APPROACH. SCM GROUP IS AIMED AT MAINTAINING A HIGH LIQUIDITY LEVEL AND A RELATIVELY SMALL SHARE OF EXTERNAL BORROWING IN ITS CAPITAL STRUCTURE.
    • Strategic growth areas for 2008-2012 85 6. FORMING PROFESSIONAL MANAGEMENT TEAMS IN THE PROCESS OF ENSURING THE MOST EFFECTIVE MANAGEMENT OF THE GROUP’S ASSETS, THE KEY ROLE IS PLAYED BY HUMAN CAPITAL. SCM WILL CONTINUE THE DEVELOPMENT OF PROFESSIONAL MANAGEMENT TEAMS FOR ALL ITS BUSINESS AREAS BY ATTRACTING TOP SPECIALISTS AND HIRING THE MOST TALENTED INDIVIDUALS. 7. OFFERING A HIGH STANDARD OF CORPORATE SOCIAL RESPONSIBILITY (CSR) SCM IS CONVINCED THAT THE COMPANY’S SUSTAINABILITY LIES IN MAXIMIZING BENEFITS FOR NOT ONLY ITS OWN SHAREHOLDERS, BUT ALSO FOR A BROADER CIRCLE OF STAKEHOLDERS. FOR THIS REASON, THE COMPANY INTENDS TO CONTINUE TO DEVELOP ITS CORPORATE SOCIAL RESPONSIBILITY POLICY IN LINE WITH INTERNATIONAL STAN- DARDS. KEY PRIORITIES FOR THE GROUP IN THIS AREA ARE: ENVIRONMENTAL PROGRAMS IN REGIONS WHERE THE COMPANY HAS A PRESENCE, HEALTH AND SAFETY, AND THE DEVELOPMENT OF LOCAL COMMUNITIES.
    • 86 SCM Group Annual Report 2007 KEY EXPECTED EVENTS FOR 2008
    • Key expected events for 2008 87 REAL TIME PROGRESS: KEY EVENTS IN 2008 JANUARY The process of forming the Group’s publishing holding has begun. Its management will be handled by Segodnya Multimedia, in which SCM controls 100% of the statutory capital. At the first stage of developing this publishing holding, SCM transferred to Segodnya Multimedia the rights to own and manage the corporate rights to a range of the Group’s print assets. A new quality program content development concept was launched in 2008 at the TRK Ukraine Television Channel. This concept fully corresponds to the channel’s aggressive strategy and its ambitions to implement a wide variety of projects. Social issues are discussed at an investigative show called Critical Point. Viewers also saw an updated version of the channel’s debate show, Duel, whose presenter is now prominent Ukrainian journalist Serhiy Rakhmanin. New entertainment show formats have also been produced including: TV Star - Superstar, What’s That Tune? and the Verka Serdiuchka Show. Metinvest Holding received the green light from the EU anti-monopoly bodies to acquire controlling stakes in steel companies in Italy (Trametal) and Great Britain (Spartan UK). MARCH SCM Group launched sectoral holding, ESTA, formerly SCM Estate, which will manage the Group’s real estate investments. SCM Group obtained the go-ahead from the Anti-Monopoly Committee to acquire more than 50% ownership stake in TsOS an Odessa-based telecommunications company. In 2008, this asset will be integrated into SCM’s existing fixed-line telecommunications business sector. APRIL In April, a free newspaper called Vecherkom (part of Segodnya Multimedia publishing holding) came out in Kiev in a handy, innovative evening format.
    • 88 SCM Group Annual Report 2007 MAY DTEK signed an agreement to acquire the company’s first internationally syndicated loan, worth $150 mn. The money was lent at an annual rate of LIBOR+3% for a 24-month term, with an option to extend for another 12 months. Segodnya Multimedia publishing holding began a range of new projects. For instance, residents of Kharkiv and Donetsk began to read a localized edition of the national paper Segodnya, which clearly responds to reader requests and interests. JUNE First Ukrainian International Bank raised a syndicated loan worth $50 mn. The organizers of the loan were VTB Bank Europe, GarantiBank International, and ING Bank. Interest on the 12-month loan was set at LIBOR+1.85%. JULY SCM exited as a shareholder from Sarmat Group. Control of the brewer was transferred from SCM Group to a new owner, SABMiller, which is one of the leading international brewers. The Group sold its brewing assets for an excellent price, just as the value of Ukrainian assets peaked, prior to the downturn on stock markets. Also, within the framework of the brewing business exit strategy, SCM Group sold Krym Brewery in 2008. SCM Group also exited as a shareholder from Slavtyazhmash. The investment in this asset was a good portfolio match, but not strategic. The company had never been part of SCM Group, which held only a mi- nority stake and could therefore not have any serious influence on the company’s commercial operations. For that reason, the Group decided to exit from this asset. Incor & Co, a development and production union, joined the Coal and Coking Division of Metinvest Holding. This addition was part of the vertical integration strategy, designed to ensure much deeper processing of coke and chemical materials, in order to manufacture more competitive products with higher added value. DTEK completed the procedures for issuing domestic bonds worth UAH 500 mn. The securities were issued with a 36-month term, dividends payable by coupons with an annual interest rate of 10.5%. DTEK plans to use the money borrowed to replace collateralized loans on the Ukrainian market and also for other corpo- rate purposes. Fitch Ratings gave these securities an AA-(ukr) rating. At the moment, this is the first issue by a Ukrainian energy company with an international rating the issuer and the bonds, as well as the first hryvnya bond issue from an SCM Group company.
    • Key expected events for 2008 89 DTEK was granted a stand-by loan facility worth EUR 50 mn. The organizers of the loan were the interna- tional group Erste Bank and Erste Bank (Ukraine). DTEK has the option of using the facility either in the form of a credit, or as a certification and guarantee. The funds are planned to be used to buy additional manufacturing capacity in the coal industry and to acquire shares in energy companies. AUGUST SCM exited as shareholder of Donbass Trade Fleet and Azov Shipyard Plant. The decision was made within the framework of implementing SCM Group business development strategy, based on the effective invest- ment principle. SEPTEMBER Moody’s gave Metinvest Holding a rating of Ba3 with a positive outlook. This rating level was the result of consistently high financial indicators, based on the holding’s strong market positions in the metal produc- tion and steel-making segments; a positive situation on world raw materials and steel markets; and the company’s high level of protection against fluctuations in world prices for basic inputs. Other factors also taken into account in deciding upon the rating include: a two-year history of financial success and busi- ness expansion despite an unstable political and economic situation; changing tax policy and legislation in Ukraine; volatility on the semi-finished steel products market; and potential risks related to capital ex- penditure programs. For a private company to be awarded such a rating, which is higher than the country’s sovereign rating, is unprecedented for Ukraine’s financial market. From the moment the corporate rating given to Metinvest Holding was announced, it extends to all the holding’s companies and covers the corpo- rate ratings issued earlier, including that of Azovstal Steel Plant. The new football stadium being built in Donetsk, which will be home to Shakhtar FC, has been named Don- bass Arena. It will be one of the jewels in Ukraine’s staging of the Euro–2012 football championships which will be jointly hosted with Poland. SCM Group, Shakhtar FC’s general sponsor, considers the Donbass Arena to be important significant in the development of Ukraine as a European country. The Tvoye newspaper came out, which is a guide for Ukrainian consumers and a collection of daily advice for life and work. Tvoye is a project of Segodnya Multimedia publishing holding. OCTOBER ESTA Holding made a decision to enter as investor and developer into the modern multi-use complex con- struction project in the center of Kyiv, with a total are over 70 000 square meters. Total expected investment will exceed $200 mn.