Annual Report & Accounts 2013
Severstal Annual Report 2013 Home > Strategy > Management Q&A
 

Management Q&A

Why have you modified the company’s strategy and introduced FCF as a KPI?

“In the current environment we believe that a key measure of success is our ability to produce front-loaded FCF which should be used to pay stable dividends and deleverage the balance sheet rather than to invest into risky growth projects.”

Severstal’s Q3 and Q4 2013 financial results have beaten the earnings consensus: how have you achieved those results?

“Enhancing efficiency across the Group has been a major strategic focus over the last three years and we are now seeing good results from our efforts. We started the roll out of the Business System of Severstal in 2010. It has taken us three years to move from the “investment stage” of the Business System to the “harvesting stage”. Our recent financial results are a good indicator that our continuous improvement programmes have started to deliver. Our principle is not to leave any stone unturned. Our efforts range from cultural transformation to the smarter use of financial resources. The target now is to ensure that these results are sustainable.”

What makes you different to the domestic peer group?

“Severstal was very fast to react. In volatile markets quick decisionmaking determines success. With our development of the Business System which is aimed to support our competitive advantage though cultural transformation we intend to create a differentiated production and management system. Thanks to this, the company hopes to generate higher earnings than the market average in the coming years.”

What are your capital expenditure plans for 2014?

“CAPEX is an important moving part of company financials. We approach CAPEX from two sides: making our maintenance as efficient as possible; and limiting our development CAPEX to some US$400 mln a year, giving priority to the highest return projects that help us to remove bottlenecks and decrease costs. This still allows Severstal to grow at a speed that is reasonable in this challenging market environment. Our major steel and mining investment projects are nearing completion and consequently we do not need to cut or put on hold any key projects. Our 2014 target CAPEX is around US$1 billion and it will be fully financed through our operating cash flow. We believe US$1 bln is a sustainable level of CAPEX in the medium term and do not currently intend to exceed that amount.”

What are the biggest long-term opportunities for Severstal in steel production or mining?

“We believe that our efficiency improvements provide strong upside potential to our business. In steel we do not plan expansion projects in crude steel capacity. The future of our steel business is in unique product niches, services and high value adding propositions for our clients. In mining, given the markets’ volatility, we believe that only the lowest cost projects are worth investment.”

What will be the level of your dividends in 2014?

“We cannot provide guidance on future dividends. Our dividend policy, however, remains consistent: we are committed to pay stable dividends and aim to pay a minimum of 25 per cent of the quarterly net profit. Our focus on FCF and our prudent approach to CAPEX may allow us to increase the dividend payout as we are not restricted to pay no more than 25 per cent.”

How do you view 2014 and what will be your focus?

“Rising lead economic indicators against low steel inventory levels suggest a reacceleration of demand, which could create a recovery in steel pricing regardless of the supply side. However, since overcapacity remains in steel and steel-related mining, our strategy will be to further reduce costs, minimise CAPEX and support only projects with the highest return, prioritising customer care initiatives. In addition, we maintain a prudent financial policy with restrictions on cash-based M&A in the current environment.”

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