Case Studies

Vadim Saveliev, Senior Vice President, Corporate Communications

During 2009, Severstal took a major step forwards in its development, establishing its corporate mission, vision and values. These form the basis of our long-term strategy and are the starting point for the creation of a corporate culture. The launch of a new brand in 2009 supported these developments.

Why a new corporate culture? Our Company is developing rapidly. In 15 years we have grown from being a large regional enterprise to a leading national Company, and are now a leading international steel and mining Company. Our vision, brand and corporate culture need to develop alongside this transformation and reflect this growth.

Severstal derives competitive advantage from three important strengths: striving for excellence, the experience and dedication of our people, and our vertically integrated value chain. The philosophy of our new brand interconnects with our mission, which is to become leaders in value creation. Our slogan, Achieve more together, has an important role to inspire call to action, uniting everyone across Severstal.

Having set a direction for our development, we are establishing a new Severstal Business System, encompassing a number of strategic projects designed to bring our mission and vision to life. Each project is managed by a specific functional area of our operations and all of them are critical for achieving our goal of being an industry leader. Severstal Business System is based on our corporate values of safety, customer care, efficiency and agility, respect for employees and teamwork.

Having launched these projects in 2009, we are already seeing progress. Each project means changing existing business processes, looking at things from the standpoint of our values, and devising solutions to the challenges we face.

Cultural change is impossible without good internal communication, and we worked hard at this during 2009. Our intranet became a single conduit for informing our employees about our Company and its many developments. The chief executive and heads of divisions now regularly communicate with employees in each region by videoconferencing, and any employee can now ask the chief executive the most demanding of questions.

In summary, the work carried out in 2009 has laid the foundations for the future. In 2010 and the years ahead we will witness the development of a radically new Company. Three key words underpin our new brand: People, Excellence and Unity. They lay the basis for the success that we will achieve together in the future.

Alexander Grubman, CEO of Severstal Resources

For both our Resources division and the entire Company, 2009 was a fairly difficult year – to cope with an unprecedented price slump on the market, we had to take drastic steps to enhance our operating efficiency. I am pleased to report that we reduced our total costs by more than 30%.

All world mining enterprises had to reduce costs and enhance competitiveness to stay afloat during the economic crisis. Severstal’s vertical integration had an important role to play in this, helping us overcome the crisis with fewer losses. There were many elements to our survival strategy. We had to curtail investments, learn how better to save energy and fuel, talk with suppliers about reduced prices for materials and equipment, and reduce administrative costs. Occasionally we had to take unpopular, yet necessary, measures such as restructuring and job cuts. However, we believe we managed to retain the maximum possible number of jobs, and at no time did we have arrears in paying wages and salaries.

At Vorkutaugol, for example, we set up a special task force to prepare a 3-year programme to optimise energy costs. This helped us reduce electricity consumption by 3.5% in 2009 alone, saving 50 million roubles. Heat consumption dropped by approximately 9%, saving another 80 million roubles. At the Severnaya mine we are planning a generator plant that runs on coal mine methane, a double-winner which makes it possible for the mine to create its own electric power, while at the same time reducing greenhouse gas emissions.

Throughout the division we continued with our priority of improving industrial safety, the accident rate dropping by 29%. We will continue to work along those lines until we eradicate occupational injury.

Despite all the problems of the crisis, and maybe owing to them, last year provided the basis for our further growth. We will continue to improve our team, implement modern production technologies, and develop Severstal’s mining business toward our common Company goal of leadership in value creation.

Andrey Laptev, Head of Strategy Department

Our Strategic Development project involves experts on corporate strategy working at the Corporate Centre and those developing market strategies in business units. Its major goals are to develop long-term, stable business models for the Company, to improve our strategic planning processes and to update our corporate strategy. It will enable us to set up a sustainable and coherent asset structure, meet our strategic financial goals, and accomplish our mission to become one of the leaders in the global steel industry.

In 2009, the project accomplished many critical tasks to help us achieve our goals:

• We developed the basic provisions of our corporate strategy, achieved alignment around these goals by the corporate top management and communicated our new strategy to the TOP-100. Communication to the rest of the employees, and our investors, is scheduled for June-July 2010.
• Our strategic financial and industrial goals were approved, and should be taken into account for all investment decisions. The financial goals include an increase in profit (to be among the world industry’s leaders by EBITDA), resilience to the business cycle (EBITDA margin), and in efficiency of capital use (return on capital employed – ROCE and net debt-to-EBITDA ratio), which will help us cope with cyclical volatility. Currently, we are evaluating all M&A and organic growth projects on the basis of our strategic goals.
• Developing the corporate strategy and business unit strategies will take place regularly, resulting in up-to-date advice on attractive investment projects, compliance of the business unit strategies with corporate goals, and communication of our strategy around the Company. As part of this process, we carry out strategic stress testing of our assets to analyse their resilience to the cycle, and to identify strategic weaknesses and possible remedies.
• We defined our business models and started work on their improvement. Currently, we are exploring the possibilities to create a large vertically integrated complex in emerging markets with local steelmaking raw materials, to develop a mini-mill business model in areas well-supplied with scrap, as well as to build up a global resource asset portfolio.
• We began work to set up a joint team of the Corporate Centre and Severstal Resources to look into increasing our presence in attractive regions for steel and raw materials businesses, such as the rapidly developing markets of Asia, Africa and Latin America.
• In 2010, major work under the Strategic Development project will entail external communication of our corporate strategy, further improvements on the regular process of strategic analysis and development of business strategies, and also widening the opportunities for the practical implementation of the new strategy.

Daria Kim, Head of Treasury Department

The significant reduction in prices and capacity utilization at the end of 2008, and the consequent dip in earnings, acted as an alarm bell, awakening us to the fact that ‘business as usual’ was not an option. I would like to share with you how we used the challenges of 2009 to our advantage, to position Severstal for further strategic growth and prosperity.

Our efforts were focused on maintaining adequate liquidity and managing the risks associated with complying with financial covenants. Our aim was to make sure that the Company is well-positioned to weather a long downturn and, should the markets improve, we would only benefit from this. Therefore, we introduced a more conservative treasury approach, one that contemplates a number of initiatives:

• Reducing debt: As bad as 2009 was, we reduced consolidated gross debt by over US$1 billion, to US$7.2 billion. At the same time net debt decreased by US$0.5 billion, from US$4.8 billion to US$4.3 billion by the year end. As earnings are recovering, we are well on track to meeting our long term target of net debt to EBITDA being below 1.5 times.
• Tight working capital management: This Company-wide initiative yielded impressive results, releasing US$1.7billion to support our liquidity during the challenging times.
• Maintenance of significant cash balances: We finished the year with US$2.95 billion of cash and deposits on hand (more than covering all short term obligations), helping us to retain financial flexibility despite the depth of the crisis. As visibility improves we will be reviewing our policy regarding the size of the cash balance.
• Safeguarding available cash holdings: As volatility persisted and bank defaults were a possibility, we shifted our cash holdings to the most stable and credible banks in the market. Our deposits are well diversified across financial institutions, thus reducing the risks. We review the bank list and reset the limits quarterly.
• Monitoring FX trends: In anticipation of FX volatility, at the end of 2008 we converted the majority of our cash into euro and dollar denominated deposits. This proved to be the correct approach, as we saw ruble devaluation at the beginning of 2009. The stabilization of the rouble later in the year allowed us to increase the share of the rouble holdings.
• Proactive covenant management: It is no secret that 2009 put a lot of pressure on borrowers to comply with financial covenants. We also had our challenges, but I am proud to report that we successfully renegotiated all relevant agreements, increasing our covenant headroom and giving us greater financial flexibility. We achieved this through a proactive approach, and open communications with lenders. I would like to thank all our banks for their partnership and support.

As financial markets started recovering, good quality borrowers like Severstal were able to access the market again. In September 2009 we successfully closed exchange bond placements of 15 billion roubles – a first among our Russian metals and mining peers. We have also significantly improved the quality of our existing credit portfolio, extending the average duration, reducing the security coverage and cost of funding, and harmonising the terms of agreements.

I believe 2009 challenged us to change the status quo and adopt new approaches to efficiency and risk management. This year we started an ambitious new project – cash pooling. Its aim is to create a leaner organisation with more effective use of cash and liquidity. Our treasury team is committed to ensuring adequate liquidity for day-to-day operations and for the Company’s strategic growth, while adhering to sustainable financial metrics. We will achieve more together.

Yuriy Shehovtsov, Business Standard ERP-project Director

In November 2009 we launched the Business Standard Programme across our business units, implementing business processes based on a unified ERP system (SAP). The aim is to make it possible to achieve integrity and excellence in our operations, and achieve our major goal of being among the world leaders in the sector.

The project will be a powerful force for changing the entire Company. Mr. Mordashov says: “We believe we can achieve not only classical results such as reducing costs, boosting sales and changing business processes, but also bring our business processes in line with our cultural values, which is to a certain degree new for projects like this. And we believe that this system, once introduced, will help us achieve a new quality of performance in Severstal and ensure the cultural transformation we need.”

The project has the following major objectives:

• Changing policy and processes with the help of global best practices and our mission and values.
• Transparency, leading to quality managerial decisions, as well as development of a more efficient managerial model and risk management model.
• Considerable cost savings through unifying and simplifying business processes and eradicating inefficiency.
• Cultural transformation in line with the Company’s values.

We have already run the initial pilot schemes in various parts of the Resources Division, in Vorkutaugol, Olcon and Karelsky Okatish, and we are now expanding the programme. Its scope – both functional and organisational – is fairly large, across the whole Resources Division apart from the gold businesses, and the entire Russian Steel Division. The programme includes two major parts – processes which are Company-wide and those at either the division or business unit level. The Company-wide processes include finance, HR administration and purchase management. We will also consider unifying our processes for timekeeping, remuneration and wage and salary payment.

Management accounting and repairs management are among the processes changing at division and business unit level, as they are specific to each unit because of the difference in operations and product. As for sales, products differ from division to division and even between segments in the same division, so sales will also be specific to each particular segment.

The programme team contains about 120 of our best employees, and three companies with a great experience in projects of this type – IBM, I-teco and BearingPoint. So we have a combination of the best national and international resources available for large-scale ERP projects. The programme is scheduled for completion by mid-2011.

Dmitry Goroshkov, Sales Director, Cherepovets Steel Mill OAO Severstal

We defined customer focus as one of the key values of the Company and have been working on this. By customer focus we mean our ability to derive additional profit through a deeper understanding of customer requirements, and thus being able to satisfy them.

We conduct our customer care project based on world best practice and through our staff’s interaction with customers. We believe this activity will help us significantly increase our competitiveness, improve customer satisfaction and expand our market share.

Alexey Soldatenkov, Continuous Improvement Project Director

Severstal’s Continuous Improvement Program was launched in October 2009. The goal of the project is to strengthen the Company’s competitive advantage by implementing a unified production model ensuring constant operational improvement. Specific objectives include:

• Increase net profits by improving labour and equipment efficiency and product quality; and reducing operational losses, working assets and other costs.
• Realize continuous on-site improvements through staff development and improved individual and collective results based on a top quality performance management system.
• Development of a competitive advantage by ensuring the implementation of a performance culture throughout the organization that would be difficult for competitors to replicate.

The Program consists of 3 focus areas: the operating system, management system and underlying behaviours and mentalities. In the operating system, major emphasis is placed on introducing lean production tools and standardized production processes. Work in the management system includes improving performance management and motivational systems, as well as developing a continuous improvement infrastructure. On the behavioural change side, emphasis is being placed on developing the ability of managers to increasingly take on coaching roles, and the efficiency and quality of problem solving.

Three production areas at the Cherepovets Steel Mill – continuous casting, the slab warehouse, and the hot rolling mill – were chosen to pilot the Program. They all play key roles in the plant’s production process. A diagnostic phase identified significant potential to increase overall equipment effectiveness, reduce unnecessary losses and improve product quality. The results were formulated into ambitious improvement targets to be realized over the next 18 months. Specific targets include: a 40% increase in the overall equipment effectiveness (OEE) for the continuous casting machines, a 20% OEE increase for the hot rolling mill and a 25% increase in the turnover rate of the slab processing racks.

With these goals in mind, specific operational improvements are being implemented. For example, concrete measures are being taken to increase casting speed and reduce scheduled downtime in order to produce the same amount of output on four casters that is currently being produced on five. Similarly in the hot rolling mill, rolling speed is being standardized and increased, changeover times reduced and quality losses decreased. Effective management is ensured via a new system for visualizing operating performance and evaluation of results.

The Program invests heavily in improving managers’ skills by training them to use a wide range of lean production and problem solving tools to facilitate constant improvement on the shop floor. At the same time, a culture of increased trust is being fostered among the staff, with an emphasis on the open discussion of problems, teamwork and respect for others.

Based on the results in the pilot areas, the Program will be rolled out across all production areas and service companies of the Cherepovets Steel Mill by 2013, as well as throughout all divisions of Severstal.

Tom Marchak, Vice President, Commercial, Severstal North America

In 2010, steel buyers demand more than ever before: more innovation, more flexibility, and more speed to help them succeed while they reinvent their own businesses. To be successful in our marketplace, our customers and prospective customers must view Severstal as a single steel producer with world class flat-roll product capabilities.

With our history as five separate companies, we needed to change our customers’ perceptions and create visibility as “ONE SEVERSTAL”. So, in mid 2009, we prepared to launch the Severstal “ONE” campaign.

To set the foundation, the Commercial organization was reoriented and organized into a single, national sales force capable of selling all the products of all our production facilities in a single sales call.

As a result, our Account Managers now guide customers and prospects to the best product solution no matter where the product is produced: Columbus, Dearborn, Sparrows Point, Warren or Wheeling.

With the sales force in place, the ONE SEVERSTAL campaign was launched. The campaign has many dimensions including:

• Print and online ads in leading trade publications and print ads in local community publications to enhance our reputation with our customers and the communities in which we work.
• Web site messaging.
• And, a unique and innovative “Ask The Mill” monthly video series, sponsored with American Metal Market.

ONE SEVERSTAL is more than a theme. It is a way of life for us and a roadmap for how we interact with our customers. We have an incredible team supporting our vision to become the leader in value creation for our customers.

Chris Kristock, Vice President, Advanced Engineering, Severstal North America

Severstal has been working to develop high quality motor lamination, or electrical steels, for the appliance, automotive and consumer product industries.

A specific product development effort for these steels began at our Columbus facility in 2009 with customer input and process trials to assure capabilities.

Columbus has, so far, produced and successfully shipped several mid-grade motor lamination steels for our customer’s use in various appliance motors.

In developing these products, we found that the Compact Strip Production process in place at Columbus, has many advantages over conventional steel manufacturing processes when producing this specialty steel.

Further development, to extend Severstal’s capabilities into the higher grades of electrical steels is being planned.

Electrical steel products are an increasingly important part of the US market for steel with the advent of hybrid automobiles and more efficient electrical motors.

Severstal continues to develop these and other products to create value with both technology (technologically capable equipment) and favourable geographic locations.

Natalia Poppel, Head of Corporate Social Responsibility Department

In 2009, we continued to work in support of our basic principles of social responsibility:

• Development and social support of our employees.
• Industrial safety and environmental protection.
• Social and economic development in the regions where we operate.

The efficiency of this work was highly commended by several experts. The People Investor 2009 awards for assessing corporate investments in human capital gave us the Development of Local Communities nomination. The newspaper Vedomosti, together with PricewaterhouseCoopers and the Donors Forum, named us fifth most efficient charitable Company, up five places from 2008. We also won the Russian Union of Industrialists and Entrepreneurs nomination for Social Investments and Projects.

In 2006, we began our unique Road to Home programme, which focuses on the preventing child neglect, and working with orphans in Cherepovets. Child neglect is one of the most acute social problems in Russia, and the number of orphans in Russia grows yearly, and is now nearing 740,000, 3% of the total child population of the country. The Road to Home programme provides foster care for orphaned children and aims for early prevention of child neglect. It focuses on finding a solution to the underlying problems which cause neglect of children and crisis in family relationships. For example, the Foster Parents School supports those who would like to take a child into foster care, or experience problems with foster children. The School also focuses on preventing foster children being abandoned.

A Childhood telephone hotline is available, as well as the Psychological Advice Service, where anyone can get access to professional psychological help or information on the available social services. Additionally, a whole range of other initiatives are underway.

The Road to Home started as a joint project between Severstal, local authorities and social and psychological workers from a non-profit organisation in Cherepovets. Having proven its efficiency, in June 2009, it was given the status of a regional programme in the Vologda Region.

The programme also received a grant from the federal Russian Children In Need Fund. Therefore, the sum available for working with families in crisis in the Vologda Region now comes from three sources, and in 2009 exceeds $6.8 m:

• $780,000 from Severstal.
• $740,000 from the Russian Children In Need Fund.
• $5.3 mn from the Government of the Vologda Region.

Experts acknowledge that currently Cherepovets and the Vologda Region are among the best examples of a successful state-private partnership in resolving social orphan hood issues in Russia. The programme is unique in as much as it offers radically new approaches to social work and ensures that business, the authorities and society have pooled their efforts.

In 2009, the Road to Home programme brought:

• more than 800 instances where a threat to the health and life of a child was prevented.
• children taken into families (patronage, adoption, foster care) dropping by 67%.
• more than 5,000 calls to the Childhood hotline.
• about 14,000 calls to the Anti-Crisis Hotline.
• more than 1,000 emergency visits from the Social Ambulance.
• about 400 people taking training in the Foster Parents School.
• 250 people taking individual psychological consulting.
• about 100 people attending the support group for parents who lost their jobs.
• 11 cases of pre-birth child abandonment prevented.
• 19 children returned to their biological families.
• about 400 risk group teenagers taking training on the Socially Developing Course since 2006.
• three of nine orphanages closed, with an improved social climate in Cherepovets.