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System Capital Management is the leading Ukrainian financial and industrial company, which owns, manages and controls assets in the metallurgical, machine-building, energy-generating, coal, telecommunication, banking, insurance, media and other industries. SCM's industrial enterprises are among those now powering Ukraine's fast-growing economy.
Founded in 2000, System Capital Management (SCM) is based in Donetsk, Ukraine . It is one of the Europe's leading industrial holdings and plays a vital role in the economy of Ukraine and Eastern Europe. With over 90 companies under control of our shareholding (including intermediate ownership) and over 160,000 employees, SCM is one of the largest domestic investors in the Ukrainian economy. Website: www.scm.com.ua
ENCOURAGING INVESTMENTS IN UKRAINE SCM GROUP OVERVIEW SCM focuses on four key areas: Metals & Mining; Energy Generation: Banking & Insurance and Telecoms. SCM's Metals and Mining subholding, Metinvest, is a vertically integrated coke, iron ore and steel producer which includes
two iron ore mining and processing plants, or GOKs;
a coking coal mine;
Avdeevskiy coke-processing plant, the biggest in Europe
two metallurgical plants Enakievo and Azovstal
a rolling mill based in Italy
a major international metal trader Leman
In 2005, SCM's metallurgical plants contributed 8.2 mln tons or 21% of the total (38.65 mln tons) steel production of Ukraine. We are the biggest steel producer in Ukraine, and importantly, Metinvest's raw materials needs for steel production are covered 1.5-2.0 times by the iron ore and coke we produce. SCM's Energy Subholding, DTEK, is a vertically integrated thermal power generator which includes
steam coal mines
coal enrichment plants
thermal power generation stations
energy distributors
In 2005, SCM contributed 18% (12,363 out of 75,506 GWH) to the total electricity generated by thermal stations in Ukraine. Again, SCM's thermal coal needs for power generation are more than covered by our coal production as we contribute 20.8 mln tons or 26% to Ukraine's coal output (both coking and steam coal). SCM Banking and Insurance, SCM Finance, brings together our interest in the financial sector with two banks and two insurance companies with offices and customers across Ukraine. We are planning to become a leading national powerhouse in banking and financial services and to occupy leading positions in retail and corporate banking as well as business, personal and life insurance. SCM Telecommunications is the newest subholding of the Group. We are aiming to become a real alternative to the state monopoly providing voice and data transmission services to businesses and consumers. SCM is also a partner in Ukraine's third largest mobile operator, Astelit, which operates under the brand name, Life:). SCM invests in a wide range of businesses and we are constantly searching for undervalued companies, possible turnarounds or new business opportunities. One example of a business opportunity and possible future subholding within SCM is SCM Real Estate . We started a new five star hotel chain under the brand DP, and I invite everybody to stay at our pilot five star premises the Donbass Palace in Donetsk while visiting us and learning more about the SCM Group. The last but not the least, we are in the football game. While it may not yet be a Manchester United or Chelsea, SCM's Football Club, Shakhtar, were Ukrainian champions in 2003, and 2005. And last week we completed the feat of retaining the title by becoming the 2006 Champions. We believe you will be hearing more about Shakhtar as a strong force in European football shortly. SCM is a young and dynamically growing Group which was set-up at the same time as Ukraine began moving towards a true market economy and democracy. Since official establishment of SCM in the year 2000, we have been working on fine-tuning of our businesses and improving their management and transparency. In 2005, we introduced consolidated IFRS reporting and as of today we have 2004 data available for your review. The net sales on consolidated basis are 4.2 bln USD with net profit over 1.2 bln dollars. The book value of our assets is 5.2 bln USD and represents only a fraction of the market value of the Group. In 2005, we requested an independent valuation of our assets, and we expect to see the fair value of our major assets in 2005. We believe the Group is largely underleveraged with Debt-to-Equity ratio of 1-to-3. The Group's auditor is PriceWaterhouseCoopers. We expect to have audited 2005 data available shortly. At the first glance, we could say that we have strong growth with the highest growth rates being 29% and 17% in physical terms achieved in coke production and iron ore mining respectively. This consistent growth has been made possible by our extensive investment program. SCM is a major investor in Ukraine with 0.4 and 0.7 bln USD CAPEX in 2004 and 2005 respectively. SCM CAPEX aimed
To improve efficiency and quality
To use resources more efficient
To reduce ecological impact
Further, our goal for the next five years is to invest 4.4 bln USD in efficiency improvements and the expansion of our metallurgical and energy assets as well as improving and extending our banking and telecoms services. We expect these investments to improve EBITDA, to expand sales volumes, and to improve competitive positions, thus, boosting the value of the businesses. GROWTH AND VALUE CREATION Selected steps to continue growth and to increase shareholder value are:
Increasing transparency
Improving corporate governance
Consolidating financial reporting
TRANSPARENCY - OLD OWNERSHIP STRUCTURE The former ownership structure was complex making it challenging for investors to understand. It included cross-ownership and numerous SCM companies as the owners for each asset. The reasons for the structure were historical factors such as
privatization tender requirements
cross-border capital transfer regulation
availability of cash on the accounts of SCM member companies at the moment of purchase
other factors
TRANSPARENCY - TARGET OWNERSHIP STRUCTURE We have now developed a road-map to make it easier to understand the ownership structure and to separate "apples" from "oranges". SCM is moving from a historically formed complex ownership structure to a new streamlined structure where subholdings will own and manage assets by industry or by value chain. The graph below presents our long-term target structure. Transparent ownership is a necessary step to improve Capital Structure because
Investors require a premium for understanding a more complex structure
Complex ownership increases Legal and Service costs by increasing the amount of paperwork for several pledgers and guarantors, etc.
Different jurisdictions impose different rules and restrictions on capital transfers, this complicates a credit facility thus increasing costs of borrowing
The new structure takes into account legal and tax issues, financial market requirements, interests of minority shareholders and third parties. We have created subholdings - the companies, which own and manage SCM assets within the same industry or a value chain. Each subholding has full set of corporate functions. IMPROVING CORPORATE GOVERNANCE Each holding has a General Director or CEO and a Supervisory board. As the majority shareholder, SCM appoints the CEO and members of the Supervisory board. Minority shareholders could also be represented by a director or directors on the Supervisory board. We appoint independent directors as members of the Supervisory Board. SCM believes that independent directors should be respected experts in their field, have an international reputation, and should bring added expertise, management resources and networks to the Group. The General Director is ultimately responsible for all corporate functions: day-to-day operations, reporting, business strategy, development, etc. The Supervisory Board should:
Set the aims and objectives for a subholding
Agree the business strategies prepared by a subholding management team
Supervise the management team
Review the business performance
Our target is to make an efficient and transparent corporate governance structure matching the best world standards and complying with the requirements of the investment community. Creation of subholdings also enables us to improve financial and managerial reporting. CONSOLIDATING FINANCIAL REPORTING Last year, we introduced unified accounting policies under IFRS and have completed our first managerial consolidated report under IFRS. IFRS reporting was introduced in order to:
Have complete and verified results of operations and the state of the business
Be able to consolidate reports on subholdings and Group levels
Fulfill the requirement of international financial markets
Establish unified reporting standards and dates within the Group
Better manage the individual businesses
SCM is the first major Ukrainian holding company to disclose its consolidated financial results. INCREASING SHAREHOLDERS VALUE The goal of these steps is to maximize the value of the business by
Finding the optimal capital structure for the business and, thus, reducing the cost of capital. SCM is highly underleveraged. We believe that more debt in SCM's capital structure brings extra value to shareholders, ensures further growth, and as we are a major player in the country's economy this should also have a positive impact on Ukrainian economy overall.
The next step to maximize the value of the business is eliminating required premium for understanding a more complex structure. We plan to borrow on the entities which have a straight-forward ownership structure, robust business model, name recognition, and credit history to receive the cheapest possible rates. The task is really tough considering investors' perception of the risks associated with Ukraine.
SCM cannot impact political and economic stability of Ukraine, but we could and we should optimize SCM internally to change investors' perception of risk associated with the Group. We feel that SCM is a black-box for investment community, and we welcome everybody to learn about the Group, to visit our facility, and to do business with us. We are ready to Provide increased disclosure in order to Access a broader investment base and enter international financial markets complying with Regulation S in the short-term and Regulation 144A and Sarbanes-Oxley Act in the long-term.
Separately, we are working on improving EBITDA, revising our business processes and improving quality of management and investment decisions.
CONTINUED INVESTMENT To wrap-up, SCM remains committed to being the major investor in the Ukrainian economy in Metals & Mining; Energy Generation: Banking and Insurance, Telecoms, Real Estate and other sectors. We are constantly looking for attractive targets: undervalued companies, possible turnarounds, and new business opportunities to invest in. We are working hard to make SCM companies attractive for investors by
Increasing transparency
Improving corporate governance
Consolidating financial reporting
We sincerely welcome cooperation with everybody committed to the economic growth of Ukraine. Particularly, we would like to welcome investment community to contact us and discover Ukraine as a land of business opportunities.
