ABOUT THE REPORT G4-17

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1 Annual Report 2015

2 ABOUT THE REPORT THE OMK ANNUAL REPORT FOR 2015 INCLUDES INFORMATION ABOUT OMK S PERFORMANCE. REPORTING PERIOD FROM 1 JANUARY 2015 TO 31 DECEMBER THE FINANCIAL INFORMATION IN THE ANNUAL REPORT HAS BEEN CONSOLIDATED IN ACCORDANCE WITH RUSSIAN ACCOUNTING STANDARDS (RAS). OPERATIONAL DATA IS PROVIDED ACCORDING TO AN INTERNAL COMPANY ORDER. INFORMATION ABOUT OMK S ACTIVITIES IS PRESENTED IN ACCORDANCE WITH THE GRI G4 SUSTAINABILITY REPORTING GUIDELINES. G4-17

3 CONTENTS ABOUT THE COMPANY 1.2 BEST PIPELINE PROJECTS 1.3 RESULTS FOR THE YEAR 1.4 MESSAGE FROM THE CHAIRMAN OF THE BOARD 1.5 MAIN EVENTS IN MISSION 2.2 VISION 2.3 PRIMARY AREAS FOR DEVELOPMENT 2.4 OMK BUSINESS PRINCIPLES 2.5 BUSINESS MODEL 2.6 IMPLEMENTATION 2.7 INVESTMENT AND R&D 2.8 STRATEGIC VISION AND OBJECTIVES 2.9 MARKET GLOBAL ECONOMY DOMESTIC MARKET PROSPECTS FOR EXPANSION OF EXPORTS 3 CORPORATE GOVERNANCE 3.1 APPROACH TO CORPORATE GOVERNANCE 3.2 STRUCTURE 3.3 BOARD 4 AND ANALYSIS 4.1 MESSAGE FROM THE DIRECTOR OF THE ECONOMICS AND FINANCE DEPARTMENT AND MEMBER OF THE BOARD 4.2 FINANCIAL PERFORMANCE 4.3 MESSAGE FROM THE PRESIDENT 4.4 COMPANY OPERATING RESULTS IN 2015 LARGE DIAMETER PIPE DIVISION OIL AND GAS PIPE DIVISION TRUBODETAL PLANT BLAGOVESHCHENSK VALVES PLANT APP DIVISION RAILWAY WHEELS DIVISION CHUSOVOY DIVISION NORTH AMERICA DIVISION 5 ACTIVITIES 5.1 MESSAGE FROM THE DEPUTY CHAIRMAN OF THE BOARD 5.2 APPROACH TO 5.3 PERSONNEL 5.4 OCCUPATIONAL SAFETY 5.5 ENVIRONMENTAL PROTECTION 5.6 DEVELOPING OPERATING REGIONS 5.7 RESPONSIBLE PROCUREMENT 6 APPENDICES A AND B APPENDICES C 7 3

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5 1.1 ABOUT THE COMPANY OMK is an integrated high-tech producer of steel, rolled sheet, pipes, pipeline valves and fittings, railway wheels, and automotive springs. Our products enable safe and efficient transportation of freight and passengers. THE GROUP CONSISTS OF SEVEN LARGE INDUSTRIAL PLANTS: VYKSA STEEL WORKS (NIZHNY NOVGOROD REGION) CASTING AND ROLLING MILL (NIZHNY NOVGOROD REGION) BLAGOVESHCHENSK VALVES PLANT (REPUBLIC OF BASHKORTOSTAN) TRUBODETAL PLANT (CHELYABINSK) ALMETYEVSK PIPE PLANT (REPUBLIC OF TATARSTAN) CHUSOVOY STEEL WORKS (PERM TERRITORY) OMK TUBE (HOUSTON, USA) RUSSIA USA G4-3 G4-5 G4-6 5

6 1.1 ABOUT THE COMPANY OMK s business includes six divisions and two subsidiaries LARGE DIAMETER PIPE DIVISION, Vyksa Thick-Plate Mill 5000 (Mill 5000) producing hot-rolled thick sheet VSW electric pipe welding shop No. 4 producing large diameter pipes OIL AND GAS PIPE DIVISION, Vyksa Casting and rolling mill producing hot rolled sheet VSW electric pipe welding shop No. 2 producing water and gas pipes and small sections VSW electric pipe welding shop No. 3 producing oil and gas pipes and large sections VSW electric pipe welding shop No. 5 producing casing pipes RAILWAY WHEELS DIVISION, Vyksa VSW Steel Works producing blanks for railway wheels VSW Wheel Plant producing railway wheels TRUBODETAL PLANT*, Chelyabinsk Producing pipe fittings CSW DIVISION, Chusovoy Chusovoy Steel Works producing automotive springs BLAGOVESHCHENSK VALVES PLANT*, Blagoveshchensk Producing pipeline valves * A direct subsidiary since 2015 APP DIVISION, Almetyevsk Almetyevsk Pipe Plant producing oil and gas pipes, water and gas pipes and shaped pipes NORTH AMERICA DIVISION, Houston Pipe shop producing casing and tubing pipes Finishing shop for pipe finishing G4-4 6

7 1.1 ABOUT THE COMPANY OMK is the largest supplier of pipes for trunk oil and gas pipelines. We supply more than half of all railway wheels and more than two thirds of all truck springs in Russia. OMK s strategic partners include leading Russian and foreign oil and gas, transportation, and machine building companies: Gazprom, Transneft, Gazprom Neft, Lukoil, Rosneft, NOVATEK, Sibir, Shell, ExxonMobil, Russian Railways, Kamaz, GAZ, UAZ, MAZ, etc. RUSSIAN MARKET POSITION AND SHARE * IN PRODUCTION OF LARGE DIAMETER PIPES,RAILWAY WHEELS AND AUTOMOTIVE SPRINGS OMK IS NO. 1 NOT ONLY IN RUSSIA, BUT THROUGHOUT EUROPE COMPANY SHARE OF DOMESTIC TUBULAR GOODS MARKET 20% 1st place 2nd place Significant market share Large diameter pipes Water and gas pipes Shaped pipes 39% 14% 7% Railway wheels Pipe fittings Pipeline valves 56% 15% 13% Springs Casing pipes Oil and gas pipes 68% 23% 18% * All the data, that is published in the annual report, including the company s market shares, supply and production volumes, etc., are based on OMK s expert estimates, if other sources are not mentioned. OMK G4-8 Annual Report

8 1.2 BEST PIPELINE PROJECTS OMK pipes are used in the construction of the largest oil and gas pipelines. Bovanenkovo Ukhta Sakhalin Khabarovsk Vladivostok Yug petroleum product pipeline Syzran Novorossiysk thou thou thou 620 tonnes 340 tonnes 40 tonnes East Siberia Pacific Ocean Ukhta Torzhok Almaty Taldykorgan thou thou thou 570 tonnes 340 tonnes 30 tonnes Southern Corridor Pisarevka CS Russkaya CS Power of Siberia thou thou 495 tonnes 215 tonnes 20 Development of Orenburg gas field thou tonnes Nord Stream km of large diameter pipes OMK was one of the winners of the international tender to supply large diameter pipes for two additional legs. Shipments are due to begin in Q Nord Stream Baltic Pipeline System Dzhubga Lazarevskoye Sochi thou thou thou 470 tonnes 85 tonnes 20 tonnes Central Asia China Filanovsky field pipeline Filanovsky field Kalmykia thou thou 370 tonnes 55 tonnes 15 Novy Port field pipeline Novy Port field Cape Kamennyy thou tonnes deliveries in 2015 deliveries ongoing G4-9 8

9 1.3 RESULTS FOR THE YEAR FINANCES PRODUCTION PERSONNEL Revenue RUB billion 161 EBITDA RUB billion % +44% Total tubular goods thou tonnes Large diameter pipes thou tonnes Pipeline fittings thou tonnes Wide sheet thou tonnes Social programmes for personnel (payments, benefits, etc.) RUB million 2, % +15% +8% Percentage of personnel under 30 1, % +30% +32% Profit RUB billion 10 Railway wheels Rolled products (rolls and sheets) thou units thou tonnes 320 1,181 Pipeline valves Automotive springs thou tonnes -29% +15% thou tonnes % -21% Number of employees persons > 24,000 9

10 1.4 MESSAGE FROM THE CHAIRMAN OF THE BOARD DEAR FRIENDS, COLLEAGUES AND PARTNERS, LAST YEAR WAS ONE OF OMK S MOST PRODUCTIVE AND PROFITABLE YEARS, BUT IT WAS ALSO STRESSFUL AND DIFFICULT. WITH AN ACUTE SENSE OF THE IMPACT OF GLOBAL ECONOMIC DIFFICULTIES, WE DEVOTED SIGNIFICANT EFFORTS TO MAINTAINING THE FINANCIAL STABILITY OF OUR PLANTS AND THEIR PERSONNEL. WE CONCENTRATED ON IMPROVING PRODUCTION AND EFFICIENCY, USING RESOURCES WISELY, AND UNWAVERING COMPLIANCE WITH THE STRICTEST PRODUCT QUALITY REQUIREMENTS. AS A RESULT, OMK DEMONSTRATED GOOD OPERATING RESULTS, INCLUDING IN TERMS OF REVENUE, EBITDA, AND NET PROFIT. These outstanding indicators were the result of more than ten years of consistent investment in expanding domestic production. We created a unique complex for the production of line pipe and pipelines at the highest level of technology and an entirely Russian manufacturing chain for large diameter pipes. The project became one of the largest in the field of import substitution, and rightfully won the Best Import Substitution Project category in the Russian Union of Industrialists and Entrepreneurs Leaders of Russian Business: Dynamics and Responsibility 2015 national competition. Our carefully selected strategy, aimed at producing goods able to compete on an equal footing with foreign imports, enabled us to increase sales over all previous years and become a world leader in the large diameter pipe market. This is further reflected in the deliveries we have made for the most high-profile pipeline projects currently under way. Today, we are continuing production of large volumes of pipes, including for the largest trunk pipeline in history, the Power of Siberia. We are also preparing to supply the Nord Stream 2 project. Every OMK employee has been affected by the investments we have made in modernizing our existing production facilities and building new ones. The majority of our employees work with twenty-first-century equipment, where the conditions, level and results of the problems solved meet the highest global standards. This enables employees not only to keep their job, but also to grow and develop, show initiative and take a creative approach to their work. 10

11 1.4 MESSAGE FROM THE CHAIRMAN OF THE BOARD We are committed to our goal of expanding our area of operations, while doing everything possible to ensure stability for our employees and allowing revenues to account for current economic conditions. In 2015, we launched a number of new social partnership projects, continued charitable investments and expanded professional education and cultural initiatives. In all, the company has contributed more than RUB 5 billion to social development over the past five years. Since current macroeconomic conditions remain difficult, it is incumbent on us to work consistently to improve the competitiveness of each OMK plant. We tie our future prospects to both achieving and further increasing potential in pipe production and expanding our integrated offerings for the oil and gas sector. We are also working to qualitatively change the level of products and replace imports in the pipeline fittings and pipeline valves segments, and are expanding our offerings in springs for foreign haulers operating in Russia. These tasks have required us to revise our investment strategy and plan for a serious increase in investment to expand production in I want to emphasize that our future outlook is optimistic as we aim to improve the business of our company and our partners. Our goal is to become more efficient and to be competitive in periods of both high and low market demand. In conclusion, I would like to express my profound gratitude to our partners: Gazprom, Transneft, Rosneft, Lukoil, Gazprom Neft, Russian Railways, and many other business leaders for their productive cooperation. We are also grateful to Sberbank, Gazprombank, Rosbank, UniCredit Bank, Nordea Bank, and other banks for their comprehensive support. And, finally, as is traditional, I would like to address my warmest words to our OMK employees. In less than a year, in 2017, OMK will celebrate its 25th anniversary. We are approaching this quarter-century mark as a friendly and unified team. With OMK s high degree of professionalism, we will always achieve our most ambitious goals. I am absolutely confident that together we can handle any challenges that come our way! ANATOLY SEDYKH G4-1 11

12 1.5 MAIN EVENTS IN 2015 BUSINESS SOCIAL RESPONSIBILITY OMK produced 1.38 million tonnes of large diameter pipes. The Thick-Plate Mill 5000 produced 937,000 tonnes of product. Both figures represent company records OMK supplied pipes for the following pipeline projects: Power of Siberia, Ukhta Torzhok, Bovanenkovo Ukhta, and others OMK and NLMK extended the contract for supply of slabs for production of rolled sheet and large diameter pipes for a further five years OMK successfully tested pipes and pipeline fittings made from the new 05KhGB steel grade Large shapes with cross section up to 300х300 mm are being produced at Vyksa Steel Works With financial support from OMK, the 10th Victors Ball in honour of veterans was held at the Museum of the Great Patriotic War on Poklonnaya Hill in Moscow The first OMK Partnership competition for social and charitable projects was held. OMK financed 101 initiatives in its operating regions. The company spent RUB 13 million on the projects The Blagoveshchensk Valves Plant built a year-round, two-storey sports facility with a standardized playing court and modern fitness equipment for local residents More than 500 children and adults participated in the We the Children of Victory competition for the best readings of poetry about the Second World War organized by OMK More than a million pine trees were planted in the burned-out forests in Vyksa with the active involvement of OMK employees Four blood donation drives were held in OMK s Moscow office in Employees of OMK companies and partners donated more than 100 litres of blood OMK held the fifth Art Ravine festival in Nizhny Novgorod Region OMK has created a Strategic Projects Centre, tasked with the development of new products and the creation and promotion of complex integrated offerings 12

13 1.5 MAIN EVENTS IN 2015 AWARDS OMK was declared the best employer among Russian companies in the mining and metallurgical industry by the Randstad Award 2015 The encyclopaedia Metallurgy and Time, a joint project of OMK and the Moscow Institute of Steel and Alloys was declared the best book publishing project at the Best Books and Publishers 2014 national awards The Ministry of Culture of Russia awarded a prize to the Batashevykh-Shepelevikh farms restoration project in Vyksa The OMK Casting and Rolling Mill was declared the best metallurgical plant in the country in terms of labour productivity Clients declared the Blagoveshchensk Valves Plant the best facility for pipeline valve production in the country VSW won the Russian Mining and Metallurgical Industry Facility with High Social Efficiency national competition in the Occupational Health and Safety category 13

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15 2.1 MISSION PRODUCTION OF HIGH VALUE ADDED METAL PRODUCTS FOR THE FUEL AND ENERGY INDUSTRY, WHICH BEST SATISFY CLIENT DEMAND BY OFFERING AN OPTIMAL PRICE-TO-PERFORMANCE RATIO 15

16 2.2 VISION OMK IS A MANUFACTURER OF HIGH VALUE ADDED METAL PRODUCTS OMK IS THE LARGEST PRODUCER OF STANDARD PARTS AND AN INTEGRATED SUPPLIER OF PRODUCTS AND SOLUTIONS FOR RUSSIAN FUEL AND ENERGY INDUSTRY COMPANIES OMK HAS ASSEMBLED THE BEST TEAM OF PROFESSIONALS AMONG METALLURGICAL COMPANIES IN RUSSIA 16

17 2.3 PRIMARY AREAS FOR DEVELOPMENT In 2015, OMK continued its chosen strategy of becoming a key supplier of integrated solutions for the oil and gas industry. This model is based on developing the company s high-tech products to meet the strictest requirements of clients. IMPROVING OPERATIONAL RETAINING OUR POSITIONS EFFICIENCY AND REVENUES IN TRADITIONAL SEGMENTS, INCLUDING BY INCREASING OUR SHARE OF NON-STANDARD PRODUCTS AND VALUE-ADDED PRODUCTS Developing the production system Eliminating bottlenecks Using available reserves to lower operating and non-operating expenses EXPANDING OUR PRODUCT LINE, ENTERING NEW PRODUCT SEGMENTS, AND INCREASING OUR PRESENCE IN THE OCTG SEGMENT Applying an integrated approach: we devote significant attention to environmental protection and improving safety and working conditions CREATING A NEW 4 5 BUSINESS MODEL Integrating products and facilities Developing and using synergies Undergoing certification of production facilities according to leading international standards EMPLOYING CRITICAL RISK 17

18 2.4 OMK BUSINESS PRINCIPLES 1. HIGH-TECH We invest in developing high-tech, high value added products with high barriers to entry 2. RELIABILITY Procurement reliability. We procure raw materials and components by establishing mutually profitable long-term relationships with suppliers that offer an optimum price-quality ratio Delivery reliability. We develop reliable long-term relationships with consumers, using a long-term formula pricing system that ensures reliable company revenue Production chain reliability. We have a predictable order filling chain from raw materials to delivery of the product to the consumer with minimum process losses We comply with ISO social and environmental standards 3. SYNERGY We invest in those business areas that enable the most efficient use of the production and intellectual capital accumulated in the company and the possibility for cooperation between divisions 4. OPERATIONAL LEADERSHIP When it comes to our flagship products, we are the leaders in Russia in terms of unit cost of production We consider operational efficiency to be the main driver of OMK s future development 5. INVESTMENT LEADERSHIP Our investment policy is aimed at earning maximum profit or covering unacceptable risks We have the best per-unit capital expenses per unit of capacity of all similar facilities We have the best ROI of all Russian pipe manufacturers 6. OMK EMPLOYEES OUR PRIORITY Human capital is our most important asset We create teams of professionals first and invest further resources second Employee safety is the company s priority 7. SOLVENCY We always meet our obligations to creditors We maintain a reliable company debt-to-income ratio (debt/ebitda), which ensures that we can reliably meet our obligations and are attractive to creditors 8. PRIORITY OF BUSINESS MODEL OVER PRODUCT 9. SAFETY AND ENVIRONMENT Adhering to precautionary principles, we create safe working conditions for personnel and contractors and guarantee the environmental safety of our products 10. BUSINESS RESPONSIBILITY The company complies unwaveringly with all legal requirements and adheres to the principles of ethical behaviour in its interactions with internal and external interested parties, following the principles of accountability and transparency in our operations G

19 2.5 BUSINESS MODEL Divisions Raw materials OMK Group assets redistribution and integration Finished products LARGE DIAMETER PIPE DIVISION Slabs TPM 5000 Sheet EPWS4 Large diameter pipes Hot-rolled wide sheet OIL AND GAS PIPE DIVISION EPWS2 Oil and gas pipes Water and gas pipes Scrap Casting and Rolling Mill Roll EPWS 3 EPWS 5 Casing pipes Shaped pipes Hot-rolled sheet Finishing Centre 1 Oil and gas pipes APP DIVISION Roll Pipe production Water and gas pipes Shaped pipes NORTH AMERICA DIVISION OCTG Roll Pipe Shop Green Pipe Finishing Shop Smooth pipes RAILWAY WHEELS DIVISION Scrap, Steel Works Wheel Rolling Plant Railway wheels Cast iron CLIENTS CSW DIVISION Blanks Section rolling mill Automotive spring shop Springs Rolled sections TRUBODETAL PLANT Pipes, components, sheet steel Large Diameter Pipes and Large Diameter Pipe Division sheet Trubodetal Pipeline fittings BLAGOVESHCHENSK VALVES PLANT Scrap, rolled stock Blagoveshchensk Valves Plant Pipeline valves 1 The Finishing Centre is a planned OMK project which will enable the company to enter the new segment for casing pipes with diameters in excess of 245 mm. 19

20 2.6 IMPLEMENTATION In 2015, OMK production and sales took place against the background of a persistent economic decline and a drop in production indicators across a number of industries that use the company s products. Nevertheless, production increased in a number of segments, primarily tubular goods, while in other segments the decrease was less than in the corresponding market segments. This was the result of coordinated teamwork by the company s commercial and production departments, as well as the effect of the decrease in the exchange rate of the rouble and the process of substituting imports with domestic products. We implemented a number of management and production projects in 2015: PIPES The Strategic Projects Centre was founded at OMK. This new unit will expand the ability of the company s facilities to produce new products, create and promote complex integrated solutions in line with the corporate strategy, implement import substitution programmes, and penetrate new sales markets, including export markets. The functions of the Centre include planning and management of interdivisional projects, from development of the business model to series production of products Today, OMK s divisions are independent units capable of initiating and completing investment projects and systematically addressing tasks to improve efficiency To improve efficiency, it was decided to close down the OMK Pipeline Fittings and Pipeline Valves Division. The directors of the Trubodetal Plant and Blagoveshchensk Valves Plant will henceforth be directly subordinate to OMK President Vladimir Markin OMK introduced a CRM system to achieve a new and improved level of interaction with clients. This innovation made it possible to increase the transparency of sales processes and their efficiency, as well as the quality of client service A new grade of steel, 05KhGB, with improved operational reliability was developed, and the production of large and medium diameter pipes from this steel was perfected. Production of 1420 mm diameter pipes with wall thickness of 32 mm for Gazprom from our own sheet on the Thick-Plate Mill 5000 was perfected Production of rolled sheet on the Thick-Plate Mill 5000 and pipes 720 mm in diameter with wall thickness of 26 and 28 mm from grade 08GFBU for development of the Gazprom Neft Orenburg gas field was developed Production of strength class K52 K60 rolled sheet and oil and gas line pipes 530 mm in diameter with wall thickness of 8 12 mm was developed Production of shaped pipes used in construction with cross sections of mm, mm and mm was mastered on the modernized rolling mill at Vyksa Steel Works Pipe Shop No. 3 (previously the maximum shape size was mm). This resulted in the production of 1,500 tonnes of new products with various wall thickness G4-СПМ 20

21 2.6 IMPLEMENTATION PIPELINE VALVES PIPELINE FITTINGS STEEL AND ROLLED PRODUCTS A new flaskless moulding line was commissioned at the Blagoveshchensk Valves Plant which enabled automation of the process of fabricating boxless moulds made of a cold hardening mix for the manufacture of pipeline valve bodies. Castings with nominal internal diameter up to 250 mm will be produced on the new line. In comparison with traditional casting methods, the new line provides castings of higher quality, more comfortable working conditions for the mould operators, and higher productivity A number of new standard sizes were developed and placed in production as part of our project to expand the range of standard sizes in new segments (wellhead and ball valves) New standard sizes of safety relief valves have been developed with increased capacity (sixth-generation spring-loaded safety relief valves) The existing designs of wedge gate valves and check valves have been optimized to improve their specifications The Blagoveshchensk Valves Plant has continued its project to expand capacity for production of large valves over 500 mm in diameter and valves for cogeneration plants, while simultaneously modernizing the existing equipment A facility for cold bending of taps has been installed at the Trubodetal plant. It enables production of products with diameter from 1020 to 1420 mm, wall thickness up to 41 mm and strength class K65. The plant already had equipment for such diameters, but with lesser pipe wall thickness. The new facility enables the plant to supply products for complex strategic gas pipelines with strict requirements The plant also commissioned a new unit for machining branch pipe ends and spoolers for pipelines with diameter from 32 to 325 mm. It will operate to fill orders for production of modular assemblies for the energy industry SPRINGS The Chusovoy Steel Works has developed 48 new types of spring, including 20 for foreign models. Sales volume in this segment has more than doubled. The range of complex springs, including half springs (arms) for air suspensions, has been expanded. Design time has been reduced The first stage of the Pure Steel project has been successfully implemented at the Casting and Rolling Mill, resulting in waste reduction from etching blister and scab defects The company has started production of superthin 1 mm thick rolled stock and pipes made from it. Combined roll shearing and slitting line No. 1 entered operation following modernization, making it possible to provide more reliable delivery of strips for VSW Pipe Shop No. 3. The entire pipe product line made from our own rolled sheet on the Thick-Plate Mill 5000 has been certified for the Nord Stream 2 project The technology has been developed for producing rolled stock mm thick and electrically welded pipes mm in diameter with strength classes K48-K50 made of grade 08GBF-U steel with strict requirements on ductility, cold resistance, and resistance to sulphide stress cracking RAILWAY WHEELS OMK began production of wheels for Lastochka highspeed trains 21

22 2.7 INVESTMENT AND R&D We maintained a conservative investment policy in the reporting year due to adverse external factors. We concentrated on key projects in the production of oil and gas line pipes and railway wheels. We also made important Investment RUB billion R&D expenditure RUB million decisions in 2015 for the medium-term perspective, aimed at further developing the pipe facility and expanding the range of high-demand pipeline fittings and pipeline valves meeting our clients strictest requirements PRIMARY COMPANY INVESTMENT PROJECTS INITIATED IN 2015: Constructing a high-tech casing pipe finishing centre at Vyksa Modernizing the blank shop at the wheel rolling facility to switch to billets Upgrading and expanding casing pipe cutting capacity Setting up shops for applying various types of coatings (silicate-enamel, polyurethane foam, and preservative) to small and medium diameter pipes Expanding the capacity of the unit for volume heat treatment of small and medium diameter pipes in VSW Shop No. 3 Developing modular designs for mineral developers PRIMARY AREAS FOR R&D IN 2015: Developing technology for fabricating pipes from our own rolled stock for participation in the Nord Stream 2 pipeline project Optimizing the chemical composition of the steels for fabrication of rolled stock on the Thick-Plate Mill 5000 and at the Casting and Rolling Mill Developing technology for fabricating railway wheels from billets Developing technology for fabricating wheels for high-speed trains Improving the specifications of pipeline fittings Reducing the content of non-metallic inclusions in steel Developing resource-efficient steelmaking technologies Developing modular designs for oil and gas field development Developing technology for production of pipeline fittings for pressures up to 32 MPa Perfecting production technology at all stages, including smelting, casting, rolling, pipe processing, welding, etc. to improve the properties and increase finished product output G4-СПМ 22

23 2.8 STRATEGIC VISION AND OBJECTIVES LARGE DIAMETER PIPES OMK will retain a large share of the Russian market in the near future. The company plans to participate in major projects by Gazprom, Transneft, and oil companies, and to supply large diameter pipes for production and workover needs. There are also plans to increase pipe exports as part of the project to build two new legs of the Nord Stream 2 pipeline (OMK was one of the winners of the tender and will supply 745 km of pipes). In addition, OMK plans to participate in tenders for projects in the CIS nations (the Central Asia China pipeline, etc.) RAILWAY WHEELS In the medium term, OMK will continue to hold a leading position on the domestic market, with at least a 50% market share. OIL AND GAS PIPES We expect to increase the share of cut high-strength pipes and pipes with premium and semi-premium class threaded joints in our portfolio. 23

24 2.8 STRATEGIC VISION AND OBJECTIVES WATER AND GAS LINE PIPES AND SHAPED PIPES OMK intends to ensure reliable filling of orders for complex deliveries and to increase the volume of work on direct orders from small consumers. The company is striving to enter the high-volume market with stable annual production volumes and to develop the fastest-selling standard sizes for construction. It plans to develop thin-walled shaped pipes, and to enter the flat-oval and oval pipe segments in the future. SPRINGS We have set a course to develop new types of springs for imported vehicles as part of our import substitution programme. OMK is expanding production of springs for imported vehicles, undergoing certification as a supplier for conveyors for imported automotive equipment in Russia, entering foreign markets, working to improve Chusovoy brand awareness, including among clients abroad, and to create a new brand of springs for imported models. ROLLED FLAT PRODUCTS The company s plans include starting production at the Casting and Rolling Mill of high-strength rolled products 4 12 mm thick for heavy construction machinery and certification of rolled products according to building codes. There are plans to start production on the Mill 5000 of a range of high-strength products for heavy industry and construction. Measures implemented at the Casting and Rolling Mill and the Mill 5000 will improve product properties by optimizing their chemical composition and rolling conditions. PIPELINE FITTINGS We are introducing factory-ready modular equipment for oil and gas field development, process vessels, and reactor columns, which will enable us to hold our leading positions in the market for pressed and welded medium diameter pipe and high frequency current manufactured parts and assembly units. PIPELINE VALVES We plan to increase sales of new types of pipeline valve by developing promising new designs and technologies. G4-СПМ 24

25 2.9 MARKET THE COMPANY S PRIMARY SALES MARKETS ARE RUSSIA AND THE CIS NATIONS DUE TO THE STABLE DEVELOPMENT OF THE OIL AND GAS INDUSTRY, THE ACTIVE DEVELOPMENT OF HYDROCARBON FIELDS, AND THE CONSTRUCTION OF NEW DOMESTIC AND EXPORT PIPELINES. THE COMPANY S BUSINESS IS HIGHLY DIVERSIFIED. The primary OMK sales markets are Russia and the CIS nations, but the company supplies products to more than countries worldwide 25

26 2.9.1 GLOBAL ECONOMY GLOBAL IMPACTS ON WORLD MARKETS IN 2015 INCLUDED: Drop of 50% in annual average oil prices, and a 25 40% fall in commodity prices. Consequently, world steel prices dropped 20 40% depending on the region Strengthening of the US dollar Lifting of international sanctions on Iran Hardening of protectionist policies in all regions Reciprocal sanctions between Western nations and Russia WORLD STEEL PRICES FELL BY: 25 40% According to a World Bank estimate, world GDP growth remained practically unchanged (2.5% in comparison with 2.6% in 2014). Economic growth rates in emerging economies remained at 4.4%. According to World Steel Association (WSA) data, world steel production in 2015 was 1.6 billion tonnes, 2.8% lower than in 2014, of which: China produced 50.3% of the total Russia produced 4.4% World steelmaking capacity utilization decreased from 72.5% to 64.6% in RUSSIA S SHARE IN WORLD STEEL PRODUCTION IN 2015: 4.4% WORLD STEELMAKING CAPACITY UTILIZATION FOR 2015: 64.6% 26

27 2.9.2 DOMESTIC MARKET SHRINKAGE OF THE MARKET FOR VARIOUS TYPES OF PIPE IN % TOTAL PRODUCTION CAPACITY OF RUSSIAN PIPE COMPANIES 15 million tonnes TOTAL CAPACITY OF DOMESTIC PIPE MARKET 10.8 million tonnes In 2015, as in 2014, various trends were observed in the segments of the domestic market in which OMK operates. Consumption of large diameter pipes increased 30% to 3.3 million tonnes due to strategic projects (data from the Pipe Industry Development Fund). However, a decrease was recorded for almost all other types of pipe (7% for casing pipes, 10% for oil and gas line pipes, 11% for shaped pipes, and 20% for water and gas line pipes). As a result, the total capacity of the domestic pipe market increased insignificantly (+1% relative to 2014) to 10.8 million tonnes, with production capacity in the order of 15 million tonnes. In 2015, the sharp drop in world oil prices was an adverse factor for the market, and led to a reduction in the investment programmes of the largest oil companies in Russia. Oil and gas producers were forced to re-examine and extend the schedules for a number of projects to modernize refinery equipment. The Blagoveshchensk Valves Plant, one of the few Russian full-cycle plants with its own casting and blank production, was affected by the adverse impact of Chinese pipeline valve suppliers on the market. The railway wheels market continued to shrink in Russia, the CIS, and the 1520 mm gauge market as a whole. The significant drop in railway wheel production at VSW has entered its third year. Against the background of the drop in consumption in the Eurasian Economic Union (EAEU), wheel supplies from Ukraine at dumping prices further aggravated the situation. An anti-dumping investigation was conducted on this case, which resulted in a 4.75% duty on imports of one-piece rolled wheels from Ukraine to the EAEU in addition to the existing import tariffs. Customs tariff regulations have also changed as of 1 January 2016 due to the decision by Russia to stop levying a 0% import duty on its trade with Ukraine. Currently, Russia applies standard tariffs like those on imports from overseas to imports of goods, including one-piece rolled railway wheels from Ukraine. The automotive springs market, in which OMK is the leader in Russia, also shrank due to the adverse impact of economic factors and, as a result, the decrease in automotive freight shipments and truck production. 27

28 2.9.3 PROSPECTS FOR EXPANSION OF EXPORTS AFRICA MIDDLE EAST EUROPE OMK has successful experience in supplying tubular goods to the African continent. In particular, more than 30,000 tonnes of large diameter pipes were shipped in for the construction of the OML 58 gas pipeline in Nigeria by Total and the national government. The region has significant potential for oil and gas projects. However, high political and economic risks are typical, and therefore development of the majority of large oil and gas fields and pipeline construction were halted in Egypt, Algeria, Angola, Mozambique, and Tanzania may become the primary growth markets for hydrocarbon production in the coming years. We view this region as one of the most promising tubular goods sales markets, especially since the sanctions on Iran have been lifted. In 2015, our representative office in the UAE participated in many tenders to supply pipe for pipeline construction, in Iraq and Saudi Arabia in particular. The change in the political and economic situation (the drop in oil prices and the wars in Iraq and Syria) led to a temporary suspension of sales for these projects. OMK s primary competitors in the Middle East are manufacturers from Turkey, Saudi Arabia, and Iran. The drop in world energy and commodity prices had a positive impact on Europe s economy. As a result, European GDP grew by 1.9% in Nevertheless, the region faces serious risks, including the high unemployment level in the developed nations, a decline in trade, political instability in a number of countries, etc. The region is promising for OMK from the viewpoint of supplying large diameter pipes for trunk gas pipelines. A decision was made in 2015 to develop a project for two additional pipeline legs on the Baltic seabed the Nord Stream 2 project. Elsewhere, construction of the TAP gas pipeline began. This pipeline will tie into the TANAP system and deliver natural gas from Turkmenistan, Azerbaijan, and possibly Iraq to Southern Europe. 28

29 2.9.3 PROSPECTS FOR EXPANSION OF EXPORTS ASIA USA CENTRAL AND SOUTH AMERICA The slowdown of economic growth in China continues to be the main influencing factor on the status of this region. China s GDP increased by 6.8% in China fell behind India (+7.3%) on this indicator for the first time in a long time. Due to its excess steel capacity, China was forced to announce reductions of million tonnes until The share of Chinese steel exports to its domestic production increased from 11% to 14%. Overproduction of oil and a high level of imports of cheap products led to the filling up of existing storage facilities and forced the US Government to cancel the prohibition on oil exports which was imposed 40 years ago. The number of drilling rigs in operation dropped steadily, falling 60% by the end of 2015, leading to shrinkage of the OCTG market. Local manufacturers could not withstand the competition from cheaper imports, and steel mills were forced to shut down. The difference in the rates of development of the two primary customs blocs became even more prominent in Slowdowns or recessions were observed in the Mercosur countries (Venezuela, Brazil, and Argentina), which continue to adhere to protectionist principles. However, the members of the Pacific Alliance (Chile, Peru, Colombia, etc.) retain more stable rates of development and are striving to increase trade volumes by reducing customs tariffs and reaching new markets. The drop in energy prices aggravated the internal problems of the major oil and gas companies on the continent: Petrobras in Brazil and YPF in Argentina. As a result, a decrease in investment in energy projects is being observed in the region. 29

30 3 CORPORATE GOVERNANCE 30

31 3.1 APPROACH TO CORPORATE GOVERNANCE OMK is not a public company, but its corporate governance system is built on the basic principles of the Corporate Governance Code, including: The company shall ensure equal and fair treatment of all shareholders as they exercise their right to participate in governance of the company Shareholders shall be provided equal and fair opportunities to share in the company s profits by receiving dividends The corporate governance system and practice ensures equal conditions for all shareholders owners of shares of one category (type), including minority shareholders and foreign shareholders, and equal treatment of them by OMK Shareholders have been provided with reliable and effective means for accounting for rights to shares, as well as the opportunity to dispose of the shares belonging to them freely and without encumbrance The company s corporate secretary is responsible for conducting all ongoing communications with shareholders, coordinating actions to protect the rights and interests of shareholders, and supporting effective action by the board of directors The level of remuneration paid by the company shall be sufficient to enable it to attract, motivate, and retain employees who have the required skills and qualifications The system of remuneration for members of the executive bodies and other key executives of the company shall provide for their remuneration to be dependent on the company's performance and their personal contributions to achieving it The company shall organize an internal audit to ensure a systematic, independent evaluation of the reliability and effectiveness of the company's risk management and internal control system and its corporate governance practices OMK s operations are sufficiently transparent for shareholders, investors and other interested parties The company shall disclose complete, up-to-date and reliable information about itself on a timely basis to allow its shareholders and investors to make informed decisions OMK shall provide information and documents at the request of shareholders in accordance with the principle of equal and unhindered access Any actions that may materially affect the company's share capital structure and its financial position and, accordingly, the position of its shareholders ( material corporate actions ) shall be taken under fair terms and conditions that ensure that the rights and interests of shareholders as well as other interested parties are observed The company shall provide a procedure for material corporate actions which allows shareholders to receive timely and complete information on such actions, provides them with the opportunity to influence decision making about such actions and ensures compliance and an adequate level of protection of shareholder rights in the performance of such actions G

32 3.1 APPROACH TO CORPORATE GOVERNANCE THE OMK CORPORATE GOVERNANCE SYSTEM IS BASED ON THE FOLLOWING CORPORATE VALUES: ENSURING MAXIMUM PROFITABILITY IS OBTAINED FROM SHAREHOLDER CAPITAL DEMONSTRATING RESPECT FOR AND TRUST IN EMPLOYEES AND PARTNERS SUPPORTING INNOVATIONS AND CONSTANTLY IMPROVING PRODUCT QUALITY MAINTAINING A BALANCE BETWEEN THE INTERESTS OF SHAREHOLDERS, AND EMPLOYEES In its operations, OMK is focused on best global practices and corporate governance standards. An important aspect of OMK s corporate governance is that OMK uses its non-public status not to ensure secrecy about its operations, but rather to respond more promptly to the challenges and needs that the company might face. Among OMK s functional strategies, which are reflected in the constituting documents of the corporate governance system, is the Declaration of Corporate Ethics. The basic objective of this document is to ensure that members of the Management Board, managers, and company employees adhere to high standards of corporate ethics, take action in the event of conflicts of interests, and conduct business in a responsible manner. An important feature of the system of internal documentation is its consistency and flexibility. Any external and internal challenges are quickly reflected in the provisions of local regulations. In particular, a new version of the OMK Declaration of Corporate Ethics was approved in 2015 (effective as of 1 April 2015), demonstrating the company s flexibility on issues of corporate governance. OMK adheres to a sustainable development policy aimed at accomplishing its mission, supporting the company s strategy, and streamlining and standardizing sustainable development operations across all companies controlled by OMK. The document describes the basic priorities in sustainable development, requirements for reporting and analysis of operations, as well as the allocation of responsibilities for implementing the policy. 32

33 3.2 STRUCTURE The most recent optimization of OMK s management structure began in 2015 and was completed in January This measure was aimed at improving efficiency and speed in strategic decision-making and ensuring that issues are reviewed in a timely manner. The ensuing structure has increased the personal responsibility of each manager for performance results. Chairman of the Management Board Anatoly Sedykh exercises the authority of the Sole Executive Body. Company operations are managed by the Chairman of the Management Board (Sole Executive Body) and the collegial executive body the Management Board, which consists of eight elected members. Some of the authorities for managing the company are delegated to President Vladimir Markin and Deputy Chairman of the Management Board Natalya Eremina. The authorities of Chairman of the Management Board Anatoly Sedykh include management of strategic issues, expansion of the company, new projects, investment, marketing, and efficiency. The company plans to complete the work on delegation of authorities and definition of the areas of responsibility between members of the Management Board and to more precisely define the competencies of the managing directors in Thus, the management system in the OMK Group is constantly being perfected to improve the efficiency of group operations in all significant aspects. The Russian company OMK Holding controls all OMK companies (the subsidiaries VSW, Trubodetal, APP, BVP, OMK-Project and OMK), since it owns the majority of the equity capital. The controlling company, OMK, managed the routine operations of the primary companies in the group (VSW, OMK Steel, Trubodetal, APP, CSW, BVP and OMK-Project) in 2015, being given the functions of the sole executive body of these companies. OMK is a 100% subsidiary of OMK Holding. OMK provides corporate governance for the OMK Group. The role of the President focuses on managing production, one of the most important areas of management. The directors of production units are subordinate to the President. Deputy Chairman of the Management Board Natalya Eremina is responsible for overall management of other areas of operations. G4-7 33

34 3.2.1 AND OVERSIGHT STRUCTURE External auditor (elected by shareholders) The sole shareholder of OMK is OMK Holding (General Director Anatoly Sedykh) Revision Committee (elected by shareholders) Sole executive body Chairman of the Management Board (Anatoly Sedykh) Internal Audit Service (documents regulating the activity of the Internal Audit Service are approved, and the director is appointed, by the Chairman of the Board; internal audit procedures are approved by the shareholder) Collegial executive body OMK Management Board 34

35 3.3 BOARD ANATOLY SEDYKH In 2015, 112 meetings of the Management Board (40 in person and 72 in absentia) were held, during which issues on more than 190 topics were considered. The key areas were improving the efficiency of facilities, budgeting and achieving objectives, implementation of social programmes in areas where the company operates, strategic development, and future projects. Chairman of the Management Board Anatoly Sedykh was elected Chairman of the OMK Management Board at the General Meeting of Shareholders on 29 January He has held leadership positions in the company since Initially, he headed Vyksa Steel Works and led the company out of crisis. Subsequently, he was appointed OMK Director General and Chairman of the Board of Directors of VSW. In 2002, he was elected Chairman of the Board of Directors of the Company, and was OMK President between 2003 and Anatoly Sedykh is a member of and heads the following committees: efficiency management, HR, audit, financial, strategic development, information technology, and economic security. He was born in 1964 and graduated from the Moscow Institute of Steel and Alloys (Ph.D. in Economics). VLADIMIR MARKIN President Vladimir Markin rose from pipe finishing subforeman at the Vyksa Steel Works to OMK President, a post he has held since April He has held management positions in the company since He has been Director General of OMK Technical Centre, OMK Marketing and Sales Director, Deputy Large Diameter Pipe Shop Foreman, Marketing and Sales Manager, and Deputy General Director. Vladimir Markin is a member of the following committees: efficiency management, HR, audit, financial, strategic development, economic security. He heads the operational activity and occupational safety committee. He was born in 1954 and graduated from the Moscow Institute of Steel and Alloys with a degree in Metallurgical Engineering. 35

36 3.3 BOARD NATALYA EREMINA Deputy Chairman of the Management Board Natalya Eremina joined OMK as the Head of the Controlling Department in In 2004, she was appointed Director for Corporate Finance and Investor Relations. She was appointed OMK Vice President in She previously worked at Metallinvestbank as Head of the Interbank Credit Department, Head of the Lending Division, and Deputy Chairman of the Management Board. Natalya Eremina is a member of the following committees: efficiency management, HR, audit, financial, occupational safety, strategic development, information technology, and economic security. She heads the government relations committee. She was born in 1971 and graduated from the Department of Mechanics and Mathematics at Lomonosov Moscow State University. DMITRY CHERNYSHEV Member of the Management Board, Director of the Asset Development and Investment Department Dmitry Chernyshev was appointed Director of the Asset Development and Investment Department in February He was appointed Vice President and Director for Research and Strategy in November He has been working with the company since 2002 as Project Manager and First Deputy Director General of APP and Director for Strategic Development of VSW. Throughout , he held different positions in the business development divisions of various Russian industrial companies. Dmitry Chernyshev is a member of the following committees: HR, financial, strategic development, and government relations. He was born in 1974 and graduated from Lomonosov Moscow State University and the Academy of the National Economy of the Government of the Russian Federation with a degree in Strategic Management. EDUARD STEPANTSOV Member of the Management Board, Head of Commercial Department Eduard Stepantsov has been the Head of the Commercial Department since February Previously, he was appointed Vice President in December He joined OMK in 1999 as OMK Technical Centre Director General. In 2001, Eduard Stepantsov was appointed OMK Deputy Director General and Director for Commercial Issues. He worked in the investment business from 2003 to Eduard Stepantsov is a member of the following committees: financial, occupational safety, strategic development, and government relations. He was born in 1963 and graduated from the Irkutsk Institute of the National Economy with a degree in Economics and Procurement Planning. 36

37 3.3 BOARD YULIA SHKHIYANTS Member of the Management Board, Director of the Economics and Finance Department Yulia Shkhiyants has been the Director of the Economics and Finance Department since February She was previously appointed OMK Vice President in February Yulia Shkhiyants joined the company in May 2007 as Director for Economics and Finance. She previously served as Chief Financial Officer of Greenoak Holdings, Finance Director of Zepter International, and as a senior auditor at KPMG. Yulia Shkhiyants is a member of the following committees: efficiency management, audit, financial, information technology, and government relations. She was born in 1975 and graduated from the Peoples Friendship University of Russia with a degree in Economics. SVETLANA NIKOLASHINA Member of the Management Board, Director of the Human Resources Department Svetlana Nikolashina has been the Director of the Human Resources Department since February She was appointed HR Director in 2003 and Vice President in February From 2002 until 2003, Svetlana Nikolashina was HR Director of VSW. She previously worked for Severstal in project teams and as HR Director in the company s subsidiaries. Svetlana Nikolashina is a member of the HR and occupational safety committees. She was born in 1979 and graduated from the St. Petersburg State University of Engineering and Economics with a degree in Finance and Credit and the Academy of National Economy of the Government of the Russian Federation with an MBA in Strategic Management. She has also taken HRM training courses. ALEXEY MITENKOV Member of the Management Board, Director for IT and Intelligent Security Systems Alexey Mitenkov has been Director for IT since February In February 2016, he was appointed Director of the new Intelligent Security Systems Department, which is tasked with preventing risks and investigating fraud. Alexey Mitenkov worked as Director General of OMK-Audit from February 2009 until February He joined the company in April 2008 as Deputy Director for Economics and Finances. From 2000 to 2008, he worked at KPMG. Alexey Mitenkov is a member of the information technology committee. He was born in 1977 and graduated from the Finance Academy under the Government of the Russian Federation with a degree in Finance and Credit. 37

38 4 38

39 4.1 MESSAGE FROM THE DIRECTOR OF THE ECONOMICS AND FINANCE DEPARTMENT AND MEMBER OF THE BOARD DEAR FRIENDS, COLLEAGUES AND PARTNERS, THIS PAST YEAR HAS NOT BEEN AN EASY ONE. SIGNIFICANT CURRENCY VOLATILITY WAS OBSERVED IN RUSSIA AND THE COUNTRY SUFFERED UNDER THE IMPACT OF ADVERSE FACTORS, INCLUDING SANCTIONS. LIQUIDITY IN THE BANKING SYSTEM WAS LOW, ESPECIALLY EARLY IN THE YEAR, AND THIS HAD A NEGATIVE IMPACT ON THE AVAILABILITY AND COST OF CREDIT. Nevertheless, OMK achieved good financial results in OMK experienced growth in the key pipe segment of the business. The Large Diameter Pipe Division was especially successful, nearly doubling revenues in comparison with the preceding year. At the same time, there was a decrease in revenues from pipeline fittings (due to the change in sales structures) as well as from railway wheels, due to the falling demand for this product. In 2015, OMK continued to work to improve efficiency and reduce costs, which, together with the increase in production volumes, made it possible to increase EBITDA by 44% in comparison with 2014, to RUB 36 billion, and once more achieve a net profit, of RUB 10 billion. This profit was significantly impacted by: Negative trends in exchange rates in the amount of RUB 5 billion Write-offs of expenses in the amount of RUB 2.8 billion due to the Chusovoy Steel Works construction project, cancelled as a result of the sharp changes in the macroeconomic situation, which impacted our investment capabilities We maintained our chosen strategy to reduce our credit portfolio and improve the company s liquidity. Net payoff of credits in 2015 was RUB 10 billion, or nearly half of the free cash flow. The ratio of net debt to EBITDA dropped to 1.7 (compared with 2.5 in 2014). We are taking a positive view of our prospects for 2016, despite the difficult market situation and the fact that the Russian economy has still to reach a trajectory of growth. A reduction in expenses and participation in our strategic partners forthcoming major projects will enable us to further reduce debt and improve the company s financial stability. Yulia Shkhiyants 39

40 4.2 FINANCIAL PERFORMANCE Revenue Net profit EBITDA RUB billion RUB billion RUB billion Percentage of total revenues Large Diameter Pipe Division 52% 2,5% Railway Wheels Division Oil and Gas Pipe Division 28% 2% Trubodetal Plant Almetyevsk Pipe Plant 4,5% 4,5% 2% Chusovoy Steel Works Blagoveshchensk Valves Plant 3% 1,5% North America Division Other G4-ЕС1 40

41 4.3 MESSAGE FROM THE PRESIDENT DEAR COLLEAGUES, OMK OVERCAME THE ECONOMIC CRISIS IN 2015 AND POSTED GOOD RESULTS IN A NUMBER OF AREAS. THIS WAS GREATLY AIDED BY THE IMPROVEMENT OF THE PROCESS SYSTEM AND THE MORE INDEPENDENT OPERATION OF DIVISIONS AS PRODUCTION UNITS, WHICH WERE PROVIDED WITH THE NECESSARY RESOURCES AND GIVEN THE CAPABILITIES TO INITIATE AND IMPLEMENT INVESTMENT PROJECTS. The Large Diameter Pipe Division showed good results, producing more than 1.3 million tonnes of product. The key to success here, in my view, is our improvements to the efficiency of process management: from delivery of raw materials to production and shipping. We significantly improved order filling reliability, reduced production time, and improved quality. According to feedback from our leading consumers, including Gazprom and Transneft, OMK was recognized as the best pipe industry supplier in The teams at the Large Diameter Pipe Division and Vyksa Steel Works deserve major credit for this. The Oil and Gas Pipe Division also finished the year with growth in comparison with 2014, despite the crisis in the consuming industries and market shrinkage. I would also like to note the improvement of its client relations: both production and delivery times were reduced. We continued to expand our capabilities with regard to integrated offerings for the oil and gas industry. The company created the Strategic Projects Centre, which will coordinate work to develop promising types of product, implement import substitution projects, and enter new sales markets. It will also expand interdivisional projects: from development of business models to the organization of series production. Production of springs and railway wheels decreased due to falling demand. But, thanks to the professionalism of staff in the sales units, the Railway Wheels Division and Chusovoy Steel Works were able to partially compensate for the decrease. We significantly increased wheel exports, including to the USA, India, and the European Union, and made our first deliveries to Cuba. Production of springs for foreign haulers operating in our country increased significantly. 41

42 4.3 MESSAGE FROM THE PRESIDENT We made a number of important decisions to improve efficiency in the reporting year. These included the further expansion of the production system, improving equipment reliability, and reducing down time. Due to the introduction of a target-setting system, the efficiency of the teams increased: from production line personnel to managers. Roadmaps were developed for the divisions (with measurable targets for a period of up to three years). This will enable the business units to look more confidently towards the future and better plan their resources and development. The company is methodically increasing the percentage of its efficient suppliers. To this end, we have developed a system of supplier certification and qualification. OMK also switched to category management in 2015, in order to supply our plants more efficiently. To best satisfy client requirements, we introduced a CRM system that enabled us to improve the transparency of sales processes, work more efficiently, and significantly improve relations with partners. Competition is increasing in our key industries, especially the pipe industry. OMK will continue to develop projects to reach new product niches in 2016, for example, by expanding production of springs for imported trucks, modular valves, and shaped pipes with large cross sections for steel construction. We are participating in Russian and international strategic pipeline projects; in particular, we are supplying pipes for the Power of Siberia and Nord Stream 2 pipelines, and increasing deliveries abroad to the CIS and Africa. I would like to thank all OMK employees for their conscientious work and commitment. Your knowledge and experience, dedication, and constant development will create a foundation for the success of the entire company! Vladimir Markin 42

43 4.4 OPERATING RESULTS IN 2015 LARGE DIAMETER PIPES RAILWAY WHEELS SMALL AND MEDIUM DIAMETER PIPES 1, % % 1,034 thou tonnes thou units thou tonnes +2.5% CASING PIPES WATER AND GAS PIPES OIL AND GAS PIPES 284 thou tonnes -5% 167 thou tonnes +1% 410 thou tonnes +4% 43

44 4.4 OPERATING RESULTS IN 2015 SHAPED PIPES PIPELINE FITTINGS ROLLED PRODUCTS (ROLLS AND SHEETS) % 16-15% 1,181 thou tonnes thou tonnes thou tonnes +15% PIPELINE VALVES WIDE SHEET AUTOMOTIVE SPRINGS 6.7 thou tonnes +5% 937 thou tonnes +32% 43.4 thou tonnes -21% 44

45 4.4 OPERATING RESULTS IN 2015 LARGE DIAMETER PIPE DIVISION Production of large diameter pipes (thousand tonnes) 1,030 1, ,380 PRODUCTS: Wide sheet steel for production of large diameter pipes, heavy industry, shipbuilding, and construction. Width: mm Thickness: mm Production of wide sheet for large diameter pipes on Thick-Plate Mill 5000 (thousand tonnes) Maximum capacity: up to 1.2 million tonnes per year Straight-seam and single-seam ERW pipes for trunk oil and gas pipelines with inner and outer anti-friction or anti-corrosion coatings. Strength class: up to Х80 Diameter: mm Maximum capacity: up to 2 million tonnes per year OMK produced 1.38 million tonnes of large diameter pipes in The Thick-Plate Mill 5000 produced 937,000 tonnes of product. Both numbers represent company records. In particular, we have increased the volume of supplies to Gazprom, Transneft, and various oil company projects. Supplies of line pipes for the Power of Siberia, Bovanenkovo-Ukhta, and Southern Corridor gas pipelines continued, and large diameter pipes were fabricated for the first time for the Ukhta-Torzhok gas pipeline (second leg, Gazprom), Yug petroleum product pipeline (branch to the Komsomolsk Refinery, Transneft), development of the Orenburg field (Gazprom Neft), and the gasification project in Macedonia. We anticipate that the large diameter pipe market will remain strong in 2016 as a result of major strategic projects. In particular, shipments of large diameter pipes for construction of the Nord Stream 2 pipeline, for which OMK will supply 745 km of pipes, are expected to begin in Q3. Photo: gazprom.ru 45

46 4.4 OPERATING RESULTS IN 2015 OIL AND GAS PIPE DIVISION Division s tubular goods production PRODUCTS: volume* (thousand tonnes) Hot rolled flat sheet steel in rolls and sheets for small and medium diameter pipes. Can also be used in shipbuilding, heavy industry, and construction. Width: mm. Thickness: mm. Maximum capacity: up to 1.2 million tonnes per year Oil and gas, water, shaped, and casing pipes For a detailed list, see Appendix B. * Including pipes 508 and 530 mm in diameter for VSW Electric Pipe Welding Shop 3 Casting and Rolling Mill production volume (roll and sheet), (thousand tonnes) 1,077 1,100 1, ,181 Demand for oil and gas pipes in Russia fell by 10% in Nevertheless, due to the well-coordinated work of the commercial and production departments, OMK was able to increase production in a shrinking market. A 7% drop in demand for casing pipes was also recorded. Consumption volumes fell against a background of difficult economic conditions for the majority of industries in which water, gas, and shaped pipes are used. The most noticeable decline occurred in the construction sector. As a result, demand for water and gas pipes dropped by 20%, while consumption of shaped pipes fell by 11%. OMK s active and effective sales policy made it possible to partially neutralize the impact of adverse factors and ensure a moderate increase in production of this product. Photo: gazprom-neft.ru 46

47 4.4 OPERATING RESULTS IN 2015 TRUBODETAL PLANT Pipeline fittings production volume PRODUCTS: (thousand tonnes) Pipeline nodes, cold and hot bent branches, stamped and welded pipeline parts: bends, T-bends, reducers, and ends. Used in construction of trunk pipelines, pipelines for the development of oil and gas fields, distribution and pumping stations, gas processing plants and oil refineries, nuclear power plants, and thermal power plants. Diameter: mm Maximum capacity: up to 30,000 tonnes per year The drop in pipeline fittings sales volumes in 2015 was due to the high base effect in 2014, when the Trubodetal Plant supplied this product for the construction of Southern Corridor gas pipeline facilities. These are thickwalled products designed for operation at extremely high pressures. Accordingly, they have a higher mass than traditional products. and thermal power industries expanded the size range of stainless steel and high temperature grades of steel, and developed a number of modular designs for oil and gas fields. In the reporting year, the Trubodetal Plant supplied products for construction of the Power of Siberia and Bovanenkovo-Ukhta (both Gazprom), Yamal LNG (NOVATEK), and East-West (Turkmengaz, Turkmenistan) pipelines. In 2015, the Trubodetal Plant continued to establish production of products for the energy industry particularly corrosion resistant parts for the nuclear Photo: gazprom-neft.ru 47

48 4.4 OPERATING RESULTS IN 2015 BLAGOVESHCHENSK VALVES PLANT Pipeline valve production volume PRODUCTS: (thousand tonnes) Cast wedge gate valves, spring-loaded safety relief valves, rotary check valves, changeover valves, safety relief valve assemblies, wellhead and shutoff valves, etc. Applications: oil and gas extraction, oil and gas processing, petrochemicals, thermal power generation Diameter: mm. Maximum capacity: up to 13,900 tonnes per year In 2015, BVP delivered products to the following companies: Gazprom, Transneft, Tatneft, Bashneft, Rosneft, Gazprom Neft, Surgutneftegas, Sibir, TAIF, RussNeft, Irkutsk Oil Company, etc. The plant s products were used for the largest oil refinery construction and modernization projects at: Kirishinefteorgsintez, Kuibyshev Refinery, Ryazan Refinery, Novokuibyshevsk Refinery, Gazprom Neftekhim Salavat, Omsk Refinery, Moscow Refinery, Antipinsky Refinery, Nizhegorodnefteorgsintez, Volganeftepererabotka, Permnefteorgsintez, Tobolsk- Neftekhim, Tanenko, Ufa Refinery, Ufaneftekhim, etc. The main consumers of BVP products abroad were the Mozyrsky Refinery (Belarus), Turkmenneft (Turkmenistan), and CAEPCO (Kazakhstan). Photo: gazprom-neft.ru 48

49 4.4 OPERATING RESULTS IN 2015 APP DIVISION APP tubular goods production volume PRODUCTS: (thousand tonnes) Water and gas pipes ERW single-seam, including with external polyethylene coating. Applications: oil and gas industry, water supply and heating, construction, agriculture. Diameter: mm. Wall thickness: mm. Length: 6 12 m Shaped tubes with square cross section. Used in machinery and tractor production, construction, furniture production, and other industries. Cross section: 15х15 180х180 For the first time in the past five years, the annual production volume of the Almetyevsk Pipe Plant decreased by 4% in comparison with the previous reporting year. This trend was the result of the general decrease in pipe consumption in the Russian market, including in the Volga region, a key region for the plant. Photo: sibur.ru 49

50 4.4 OPERATING RESULTS IN 2015 RAILWAY WHEELS DIVISION Railway wheel production volume (thousand units) PRODUCTS: One-piece rolled railway wheels and wheel centres for freight and passenger trains, including Lastochka high-speed trains. Diameter: mm, 140 sizes. Maximum capacity: 850,000 units per year Demand in the 1520 mm gauge market dropped significantly under the impact of adverse factors, causing a drop in production of railway wheels at Vyksa Steel Works. The drop was partially compensated for by the expansion of exports, which tripled in 2015 in comparison with Production of a new product, wheels for Lastochka high-speed trains, was also launched at the plant. One-piece rolled railway wheels for fast and high-speed trains. Maximum capacity: 10,000 units per year 50

51 4.4 OPERATING RESULTS IN 2015 CSW DIVISION Spring production volume PRODUCTS: (thousand tonnes) More than 800 sizes of springs using the latest designs, including parabolic, as well as arms for air suspensions. Supplier to key Russian (KamAZ, Ural, NefAZ, etc.) and foreign truck manufacturers. Capacity: 110,000 tonnes per year The decrease in production at Chusovoy was caused primarily by the shrinkage in the springs market. Nevertheless, the plant successfully introduced an import substitution programme. The prices of springs for imported trucks increased sharply due to the increase in prices for imported spare parts. Against this background, during the reporting year Chusovoy expanded its product line for springs for imported vehicles, which are equal in quality to foreign springs, but cheaper. Chusovoy offers products equal in quality to their foreign counterparts. By responding promptly to client requests, Chusovoy more than doubled production of springs for imported vehicles. The plant improved its relationships with dealers so as to best satisfy customer demands. 51

52 4.4 OPERATING RESULTS IN 2015 NORTH AMERICA DIVISION Production volume (thousand tonnes) PRODUCTS: Casing and tubing for oil and gas field development and well construction. Diameter: mm. Wall thickness: mm. Maximum capacity: up to 200,000 tonnes per year Average oil prices fell by 50% in 2015 compared with the previous year, which led to a 60% decrease in the number of drilling rigs operating in the USA. The demand for casings dropped 50% as a result, leading to a decrease in production at the company s American plant, OMK Tube. The factory switched to production of tubing with premium and semi-premium fittings and signed contracts with several new dealers. 52

53 5 SUSTAINABLE DEVELOPMENT ACTIVITIES 53

54 5.1 MESSAGE FROM THE DEPUTY CHAIRMAN OF THE BOARD DEAR COLLEAGUES, THE SITUATION IN THE STEEL MARKETS HAS BEEN DIFFICULT RECENTLY, IMPACTED BY A COMPLEX MACROECONOMIC SITUATION. THE INDUSTRY HAS ENCOUNTERED A NUMBER OF CHALLENGES, WHICH WERE REFLECTED IN OUR OPERATIONS AND DEVELOPMENT PLANS. IN RESPONSE, OMK HAS DEVELOPED A SUBSTANTIAL PROGRAMME TO IMPROVE EFFICIENCY AND CUT COSTS. TO RETURN TO A SUSTAINABLE GROWTH TRAJECTORY, WE ARE NOW REDUCING EXPENSES, OPTIMIZING INTERNAL PROCESSES, AND REDUCING NOMINALLY FIXED COSTS. OUR EMPLOYEES REMAIN THE KEY ELEMENT IN EFFICIENCY HERE; THE QUALITY AND DELIVERY SCHEDULES FOR OUR PRODUCTS DEPEND ON THE WORK THEY PUT IN EVERY DAY. WE ARE THEREFORE CONTINUING TO FOCUS ATTENTION PRIMARILY ON EMPLOYEE GROWTH AND RETRAINING, AND SOCIAL AND CHARITABLE PROGRAMMES. During the reporting year, OMK contributed more than RUB 825 million to charitable and sponsorship projects in the regions where it operates, including support for popular and elite sports, assistance to children s institutions and war veterans, patriotic education, and support for educational and cultural projects. Expenditure on social programmes for personnel, including employee payments, benefits, wellness, and other corporate projects increased by 8%, to RUB 747 million. We are building a corporate culture in which the life and health of our employees are a priority. In the reporting year, we continuously refined our occupational safety and industrial safety systems, and worked to minimize the environmental impact of our facilities. G4-1 54

55 5.1 MESSAGE FROM THE DEPUTY CHAIRMAN OF THE BOARD We are actively developing new forms of charitable cooperation. In addition to traditional tools based on targeted assistance and sponsorship, we are expanding social partnership and involving local communities and our employees in initiatives. In 2015, we conducted the first OMK Partnership charitable and social projects competition, in which employees of our facilities, non-profit organizations, and federal and municipal institutions participated. As a result, 101 projects obtained company financing and support, while the total budget for the programme was RUB 13 million. This initiative will continue in 2016, and the second competition will gain momentum. We are continuing to pursue our chosen corporate strategy. In the future, we will actively invest further in our operating regions, carry out charitable and cultural projects, improve working conditions, and care for the environment. Developing our social responsibility is of fundamental importance for us, because we know that our employees lives do not stop at the plant entrance. I am very grateful to the entire OMK team, from rank and file employees to members of the Management Board, for the great work they did last year to support the stability and development of the company. I hope that 2016 will prove to be a successful year for everyone, full of great achievements! Natalya Eremina OMK CONTRIBUTIONS TO SPONSORSHIP AND CHARITABLE PROJECTS 825 million roubles EXPENDITURE ON SOCIAL PROGRAMMES FOR PERSONNEL 747 million roubles 55

56 5.2 APPROACH TO THE COMPANY IS GUIDED BY INTERNATIONAL BEST PRACTICES IN THE SPHERE OF CORPORATE SOCIAL RESPONSIBILITY AND STRIVES TO INTEGRATE THE PRINCIPLES BEHIND THEM INTO ALL BUSINESS PROCESSES. OMK S PRINCIPLES ARE ACCOUNTABILITY, TRANSPARENCY, ETHICAL CONDUCT, RESPECT FOR THE POSITIONS OF STAKEHOLDERS, RULE OF LAW, AND COMPLIANCE WITH INTERNATIONAL STANDARDS FOR CONDUCT AND HUMAN RIGHTS. PERSONNEL OMK strives to help its employees reach their full potential in work. To achieve this, the company devotes efforts to creating safe and comfortable working conditions, as well as opportunities for professional and career growth. Management is actively expanding social dialogue with employees and their representatives. COMMUNITY INVOLVEMENT AND DEVELOPMENT The company is a responsible employer in every region in which it operates. OMK invests in the expansion of local initiatives in sports, healthy lifestyle, culture, arts, education, environmental programmes, and land improvement projects. HUMAN RIGHTS OMK understands the particular importance of respecting human rights in all of our operating regions. We bear accountability for acting with due caution to promptly identify, prevent, and take action on actual or likely human rights violations. RESPONSIBLE BUSINESS PRACTICES The company complies unwaveringly with all legal requirements and adheres to the principles of ethical behaviour in its interactions with internal and external interested parties, following the principles of accountability and transparency in our operations. OMK s efforts are aimed at preventing corruption and supporting fair competition. THE ENVIRONMENT Following precautionary principles, OMK creates safe working conditions for personnel and contractors and guarantees the environmental safety and high quality of its products. To achieve this, new, safer management techniques and technologies are introduced every year at OMK facilities, and equipment is installed to minimize environmental impact. The company invests in environmental protection measures, prevents accidents and improves its readiness to deal with them, develops responsible resource management, and takes actions to mitigate and adapt to climate change. CONSUMER RELATIONS OMK plants produce safe and reliable products meeting Russian and international quality standards. In its consumer relations, the company abides by the principles of product safety and open access for consumers to objective information for making informed management decisions, and protects against dishonest or deceptive advertising or labelling. 56

57 5.3 PERSONNEL WORKFORCE AT END OF 2015 persons WAGES AND PAYMENTS TO EMPLOYEES AND TAXES FROM PAYROLL FUND 24, % 17, % 747 million roubles EXPENDITURE ON SOCIAL PROGRAMMES FOR PERSONNEL million roubles +8.4% WORKFORCE PRODUCTIVITY % million roubles (revenue per person) INVESTMENT IN TRAINING AND PERSONNEL DEVELOPMENT 127 million roubles -44.1% PERCENTAGE OF PERSONNEL UNDER 30 (INCLUSIVE) 24% -2% PERCENTAGE OF ENGAGED EMPLOYEES 50% +7% PERSONNEL TURNOVER 11% OMK G4-10 Annual Report

58 5.3 PERSONNEL PERSONNEL STRUCTURE Number of personnel Personnel structure by category (persons) Workforce for ,107 5,788 1,661 4,857 Workforce as of 31 December ,767 2,058 2, ,077 14, ,635 1,949 2, ,790 14,242 19,127 17,730 APP Trubodetal BVP CSW OMK Tube MC* Others VPS Managers Specialists Blue-collar * Managing company workers Gender balance, % Percentage of women in personnel categories, % Age group, % Men Women Managers Specialists Blue-collar workers under 30 years years 50+ years G4-LA12 58

59 5.3 PERSONNEL OMK HR SERVICE DEVELOPMENT The increasing competition in the steel industry requires contribute actively and sensibly to the life of the company high productivity, engagement, thoughtfulness and new is especially important under these conditions. suggestions for improving efficiency from each employee. All of this was reflected in the HR strategy approved A focus on creating an environment where personnel can at the end of Primary HR processes Contribution to company development (HR Value) Management of HR indicators Integration of HR processes, HR analytics Target groups (talent pool) and career planning Corporate KPI system was translated into employee targets Evaluation of personnel performance and competencies Transparent and consistent HR decisions Proactive selection and development Personnel management in unanimity with managers Managing engagement HR Service tasks values development: Effectiveness (cost/benefit) Competence (I can do it) Engagement (I try) Service (HR partnership) Strategic partner Organizational structure Personnel planning Personnel adaptation Personnel development Managing turnover Managing HR budget Business partner Personnel training Personnel selection Pay system Personnel rating HR service/consulting HR record keeping Staff chart Wage payment Mandatory training HR Department

60 5.3 PERSONNEL PRINCIPLES FOR IMPLEMENTATION OF HR 1. Focus on business results, 2. Synergy from integration rather than on individual HR tasks of various HR processes PRIORITIES FOR IMPROVING THE PERSONNEL DEVELOPMENT SYSTEM 3. Systems approach to problem solving in which valuable employees know their importance and role in achieving company objectives SERVICE EFFECTIVENESS COMPETENCE ENGAGEMENT Priorities Formation of HR partnership structure Personnel record keeping using modern information systems Social support system operating according to best practices Optimizing OMK s organizational structure: Reducing span of management Optimum number of personnel Centralization of functions Projects to improve efficiency and performance Improving the payroll system: Wage indexing Performance standards Improving the efficiency of social facilities: Developing key performance indicators for facilities Internal benchmarking Improving professional skills and competencies: Annual goal setting and evaluation cycle A management and professional career at OMK Training and development programmes run by internal experts and instructors Evaluation of professional knowledge using test assignments developed by internal experts Professional events to share experience and results Professional skill competitions Increasing engagement Studying personnel engagement Developing and implementing plans to improve engagement Social accountability: Introduction of SA8000 social accountability standard Creation of OMK ethics commission and VSW ethics committee Creation of OMK social council Improving personnel awareness: Creating OMK newspaper Expanding charity and sponsorship initiatives Developing a strategy for expanding sponsorship and charity initiatives Expanding corporate volunteerism 60

61 5.3 PERSONNEL INTEGRATING HR PROCESSES INTO THE GOAL-SETTING SYSTEM To achieve the maximum efficiency from employees, the company strives to ensure a high degree of openness. The goal of re-engineering the HR Service is to integrate all processes so that they operate as a single mechanism. However, building the system is only half the result; the synergy of the processes must be made transparent and evident. The main process is efficiency management. The entire HR partnership chain must be directed towards this goal. Goal setting Company goals Department goals Employee goals Job description Qualification profile Official grade Organizational design Evaluation of results of work and competency HR committee selection Selection of high-potential employees Achievement of goals, competency level Correction of Development Training as Feedback, development, Solutions: total in key groups required and support motivation, target groups comprehensive income (TCI) Payment of bonuses Selection and adaptation Standards for target group Non-financial recognition 61

62 5.3 PERSONNEL THE GOAL-SETTING SYSTEM AT OMK IS AIMED AT GIVING GREATER ASSURANCE THAT STRATEGIC OBJECTIVES WILL BE ACHIEVED. SINCE 2014, THE SYSTEM HAS BEEN DEVELOPED IN PARTNERSHIP WITH THE HR SERVICE ON THE BASIS OF THE AUTOMATED SUCCESS FACTORS SYSTEM (SAP), FOR WHICH TECHNIQUES FOR CALCULATING 250 BASIC KPIS WERE AGREED IN AN EFFICIENCY COMMITTEE AND AN OFFICE FOR GOAL-SETTING AND PERFORMANCE EVALUATION DIRECTLY SUBORDINATE TO THE CHAIRMAN OF THE BOARD WERE CREATED TO COORDINATE THE EFFORTS OF VARIOUS DEPARTMENTS. Number of employees included in goal-setting system No. Personnel category (plan) Total Senior managers Office/shop managers Senior foremen/department managers (production and maintenance) 4 Blue-collar workers IMPROVING THE EFFICIENCY CULTURE SUMMARY INDEX 49% +7% The study of personnel engagement showed that the efficiency culture summary index rose by 7% to 49%. The index includes the evaluation by employees of goal setting in the company, feedback on performance, and the relation between performance and remuneration, as well as the goals themselves. It must be noted that the study reflects the opinion of all employees, not only those categories of managers included in the goal-setting process. Thus, the efficiency culture is transmitted by managers to their subordinates. This has a systemic impact on the quality of management in the company. 62

63 5.3 PERSONNEL IN ACTION The attention of the HR department in 2015 was concentrated on optimizing expenditure, improving workforce productivity, updating techniques for the annual goal-setting and evaluation cycle, expanding target groups of personnel, and organizing and motivating employees. Managing personnel engagement and developing an active production environment a desire for continuous improvement, initiative, and commitment to a common cause was an important task in OMK began re-engineering the HR Service in 2015 to improve the HR services provided to the business. HR partners are the main link in the new structure. Through a single window format, they provide advice to managers on personnel management issues, suggest solutions to emerging problems, and share responsibility for the result. In fulfilling their role, HR partners hire specialist experts and correct the actions of service functions (such as HR record keeping, standardization, mass selection, and organization of training). The introduction of HR partners enables our company to conform to the best practices in organization of HR management systems. To become an HR partner, an employee must have extensive knowledge of HR management, understand the challenges of the business, and be able to respond quickly to changes in the external and internal environment. A school for HR partners was created to train such specialists in So far 25 people have been trained, including plant HR directors. The programme consisted of three modules: Seminars on HR functions to acquire knowledge in all fields related to HR management Business case solution Training courses in public speaking, change management, and working with internal clients The HR Committee plays a significant role in effective company management. Created in 2013, this collegial advisory body answers directly to the Chairman of the Board, makes decisions regarding the appointment of senior managers, and evaluates their performance. 63

64 5.3 PERSONNEL Career guidance OMK companies provide career guidance for school and university students to: Increase the popularity of technical specialities among young people and students Create a positive perception among young people of technical professions, thereby increasing the prestige and attractiveness of specialities in the metallurgical industry Create a new type of employee a successful person who operates twenty-first-century, high-tech equipment and has a steady salary, breaking the stereotype that a blue collar worker does unskilled labour Improve the level of education of young people enrolling in vocational training schools Improve the level of education of students in vocational training schools All company plants offer field trip opportunities: more than 1,000 students participated in such trips during the reporting year. Events for senior students are conducted jointly with training institutions to encourage graduates to choose professions in the steel industry. Career guidance events were held for year old pupils in Vyksa municipal district: the fourth Industry business simulation and the second Trajectory professional self-determination academy. The objective of the events was to help students choose their future profession. Approximately 3,000 students aged 5 16 participated in the fourth Magic of Science and Creativity technical festival, the goal of which is to help young schoolchildren select a technical field according to their abilities and preferences. The first career guidance magazine for students in the Vyksa municipal district was launched at VSW. Students can learn a lot about metallurgical professions from the magazine, including from VPS specialists, as well as about the educational institutions where these professions can be learned. University partnership programmes VSW The plant runs the OMK Campus corporate programme in welding jointly with the Peter the Great St. Petersburg Polytechnic University In cooperation with Nizhny Novgorod State Technical University, 22 employees were trained in additional programmes on electric power supply and welding Training of 39 shift foremen in primary bachelor s vocational education programmes began at the branch of the National University of Science and Technology MISiS in 2015 More than 400 students of higher educational institutions (Vyksa Branch of National University of Science and Technology MISiS, National University of Science and Technology MISiS, Nizhny Novgorod State Technical University, Murom Institute of Vladimir State University, Bauman Moscow State Technical University, and STANKIN Moscow State Technical University) received practical training in production departments The Vyksa Branch of the National University of Science and Technology MISiS received financial support in the amount of RUB 17,759,000 to improve student education in Effectiveness of career guidance programmes in Vyksa Ninth grade students (14 15 year olds) enrol in technical schools and colleges in the area 65% (of these, 80% enrol in technical specialities) continue to the tenth grade 35% Graduates of secondary education enrol in specialized technical colleges 50% Graduates of basic technical schools and colleges find jobs in VPS departments more than 60% CSW A specialized machinery, metallurgy, and metalworking department of the First President of Russia B.N. Yeltsin Ural Federal University operates at the plant. The department provides special student training, with continuation of production, pre-diploma practice under the supervision of the plant s leading specialists. The project is funded equally by the company and the university. OMK expenditure in 2015 amounted to RUB 1.86 million. 64

65 5.3 PERSONNEL Managing organizational structure and workforce planning Material incentives RESULTS OF PROCESS OPTIMIZATION IN 2015 REDUCTION IN MANPOWER OVER THE YEAR (staff positions) 1,000 PROJECT AT VSW AUTOMOTIVE SHOP (million RUB) 64 VSW-TECHNO PROJECT (million RUB) 83-7% The employees laid off (140 persons) were offered jobs, retraining, and pensions. Manpower was also reduced due to the fact that the company did not hire new employees to replace those dismissed for disciplinary reasons (approximately 150 persons). Closure of the pipe steel smelting facility project Due to the sharp change in the macroeconomic situation, the decision was made to close the project in Chusovoy to construct a pipe steel smelting facility. The personnel, including four senior managers, were offered positions at other OMK facilities in various regions. Some Trubodetal employees in Chusovoy working on the project were laid off and were paid compensation in accordance with legal requirements. Personnel turnover Turnover at OMK facilities remains at 11%, which is 19% lower than the industry average. As before, turnover at the major facilities (VSW, CSW) remains in the 4 6% range. We have set a goal of retaining highly qualified employees, and we have been successful. The improvement of the payroll system in the company is based on developing and applying valid and accurate criteria for paying remuneration according to the contribution of divisions and each specific employee to the common cause. The semi-constant component of OMK employee wages is approximately 70% and depends on time worked and working conditions (harmful conditions, at night, etc.). The variable bonus component accounts for 30%. Bonuses are paid according to evaluation of collective shop indicators or product quality, workforce productivity on a shift, consumption of primary raw material (metal), or other expense items (for example, electricity). Employees may also receive one-time payments for contributions to company projects for improving efficiency and work as an efficiency expert. For managers, there is a goal-setting system: key performance indicators which determine the annual bonus amount. Senior managers, supervisors subordinate to senior managers, and certain key employees receive annual bonuses. Indicators with target values are approved for each position for a year. These are both financial (EBITDA), and functional (for example, efficiency in use of equipment, market share of product, engagement of personnel). Development tasks are also set: development of new types of product, introduction of an ERP system, etc. 65

66 5.3 PERSONNEL Ratio of average wage in controlled companies and average wage in region, %* Facility Region VPS Nizhny Novgorod Region 1.2 CSW Perm Territory 0.9 BVP Bashkortostan 1.1 APP Tatarstan 1.0 Trubodetal Chelyabinsk Region 1.4 * Rosstat data (not including small businesses) were used in the calculation. Expenditure on social programmes at OMK s Russian facilities (RUB million) Item Direct social payments Housing programme 7 14 Medical assistance Nongovernmental pension support Sanatorium and resort treatment and wellbeing for employees and their family members Meal provision Sports 3 2 TOTAL The drop in expenditure on social programmes was due to various organizational changes at the facilities and the reduction of the company workforce as a whole. The company strives to support the health of its employees by providing them with good hot meals. Consequently, subsidies were introduced for BVP (they had been already introduced at other facilities). In , the company also actively enlisted employees to participate in various nongovernmental pension support programmes via the Nongovernmental Pension Fund Gefest on parity terms with the employer as part of a programme for state co-financing of the creation of pension funds and Gefest corporate programmes. 66

67 5.3 PERSONNEL Pension contributions Various nongovernmental pension support programmes are in place at OMK via the Nongovernmental Pension Fund Gefest. The basic principle is that the company doubles the voluntary contributions of its employees, and the employees determine the amount of their contributions independently. As at the end of 2015, more than 6,000 employees participated in nongovernmental pension support programmes, and 2,200 people participated in voluntary pension support programmes (three parties in equal shares: the employee, the employer, and the state). Pension payments from Gefest amounted to RUB 15 million RUB in 2015 and remained at the previous year s level. The additional pension was between 2% and 9% of the state pension for OMK operating regions in Company Average corporate pension from Nongovernmental Region Average state pension for region (RUB/ month) Corporate pension as a percentage of state pension Pension Fund Gefest in 2015 (RUB/ month) VSW 1,108 Nizhny Novgorod 11,900 9 Region CSW 863 Perm Territory 11,800 7 Almetyevsk Pipe Plant 171 Tatarstan 11,400 2 Trubodetal 277 Chelyabinsk Region 11,800 2 OMK Steel 219 Nizhny Novgorod 11,900 2 Region Blagoveshchensk 437 Bashkortostan 11,250 4 Valves Plant OMK 515 Moscow 13,500 4 OMK Audit 240 Nizhny Novgorod Region 11,

68 5.3 PERSONNEL Non-financial incentives Number of rewards and bonuses received by employees during the reporting year National government 3 Departmental 55 Regional 56 Municipal 58 Corporate 80 Awards to OMK facilities 535 Total 787 Batashev Prizes The 12th Ivan and Andrey Batashev* Prize awards ceremony was held in Vyksa on 9 April. Altogether, 84 candidates and five main production teams were nominated in 11 categories, five of which were intended for representatives of working specialities. The finalists included representatives from all OMK facilities, as well as from OMK IT, OMK Ecometal, and the Moscow office. * Andrey Rodionovich (died 1799) and Ivan Rodionovich ( ) Batashev were major Russian industrialists and factory owners who built many metallurgical plants, including the Vyksa plant (1766). Professional 2015 Competition OMK held the company-wide Professional 2015 competition among representatives of 11 professions and specialities in The goal of the competition was to raise the prestige of professions, improve employee professionalism, and increase employees interest in the professions that are most in demand by the business and have either a shortage of specialists on the job market or a low level of training in educational institutions. The 134 finalists drawn from plant competitions demonstrated their knowledge of occupational safety, the production system, corporate culture, and the operations of the company as a whole. The final challenge involved the competitors doing hands-on work at various work positions or on multimedia simulators. Talent management A highly talented employee at OMK is an employee who gets results, who plans to continue working at the company and achieve new results, and who is also willing to move to a different city. Employee supervisors and HR Department representatives are involved in selecting potential employees, in a process which consists of several stages. Due to the focus on the business, 6% of employees in the company have been identified as having high potential, which corresponds to the industry average (Training Index). The company s leadership devotes significant attention to talent management and improving the efficiency of management teams. A diagnosis of managerial potential was conducted for managers and specialists in production specialities. Through the evaluation process, the performance of 755 employees was reviewed, their competencies and behaviours evaluated (using the 360 degrees technique), their motivational profile assessed, and their abilities to analyse information tested. The evaluation showed that 24% of employees (of the total number of managers) were capable of ensuring continuity of management that is, one out of five employees is capable of replacing his supervisor. 68

69 5.3 PERSONNEL INCREASING ENGAGEMENT The primary tool for obtaining feedback from employees is the annual study of personnel engagement, conducted using the international Aon Hewitt methodology. In the study, employees are asked both standard questions specified by the technique, covering such areas as salary, career possibilities, and attitude towards management, and questions from the company about the level of satisfaction with the cafeterias, social facilities, etc. The study is part of the annual cycle for improving working conditions. Managers use the results of the quantitative (survey) and qualitative (focus groups) studies to draw up plans for improving engagement; once these are implemented, further surveys are conducted. The 2015 study, the third in the company s history, showed an increase in the percentage of engaged employees to 50%. The average indicator for metallurgical companies in Russia (47%) was exceeded for the first time. Employee participation in the study rose from 75% to 87%. Work on the managerial skills of line managers was the primary focus of plans to increase engagement developed using the results of the 2014 study carried out at the company s plants and among management. According to data provided by the international consultant Aon Hewitt, 70% of personnel engagement is dependent on direct managers. The company arranged training in communicating with team members for team leaders and other managers; customized manager checklists were prepared, and additional options were made available for acknowledging services and giving feedback: meeting schedules for production sections and honour boards, including through the corporate portal. The 2015 personnel engagement study showed an increase in employee satisfaction with the focus factors. The plans for 2016 are focused on improving employee satisfaction with the scope of work, improving the management skills of managers (as in 2014), and targeted work with units that showed a relatively low level of engagement. A pilot project showed the promise of this approach. It was conducted in 2015 in one department of the Moscow office, and included an additional survey and a group session on preparing change plans. The 2015 study also revealed that impolite communication was a problem among teams. A decision was therefore made at the end of the year to create an OMK Ethics Commission to review employee complaints regarding inappropriate behaviour and human rights violations as a whole. Complaints are received via an OMK hotline, which previously only specialized in reports of theft and other crimes. Employees themselves decide which resource to contact. Communications with management are also possible via the Reception Desk section of the corporate portal, which has been operating since These resources were created due to the requirements of the SA8000 social accountability standard, which is being introduced at OMK facilities focus factors OMK 2014 OMK 2015 Line managers 49% 56% Recognition 33% 35% Feedback 39% 43% Breakdown of submissions to corporate portal Reception Desk in 2015, % ,500 submissions production system, medical services, relationships within teams wages transportation of employees from place of residence working conditions at plants During the reporting period, 2,500 submissions were reviewed, 20% more than in OMK G4-26 Annual G4-27 Report

70 5.3 PERSONNEL Meetings with management Employees can tell and demonstrate to a managing director, division director, or shop supervisor how the production process is going in his or her section, what has been done to improve it and what problems exist, and immediately receive feedback. Such meetings are also held regularly during the managing director s tours of the production facility or in planned shop meetings. Plant conferences and information days are also held regularly, to which interested parties (representatives of local government administrations and law enforcement bodies) may also be invited. Corporate media The primary channel for informing employees is the corporate portal (120,000 views during the year, a 10% increase over 2014). The company created a single weekly corporate newspaper OMK Territory in October This decision made it possible to create a common information space at OMK, within which all production sites are represented. The list of subjects covered by the newspaper was developed according to employee wishes expressed during a special survey in summer It has a circulation of 15,500 copies. The newspaper is published weekly and distributed at the Almetyevsk, Blagoveshchensk, Vyksa, Moscow, Chelyabinsk, and Chusovoy sites. The magazine OMK Command is aimed at managers and has a circulation of 2,000. Five issues were published during the reporting year. Conferences Functional conferences Fourteen internal functional conferences were held in 2015 to share experience, best practices, and information on current trends in the corresponding professional fields. Approximately 800 employees received information on the company s strategy through the conferences. Predicting the future and scientific discoveries More than 50 company employees involved in the development of new technologies, strategy, and new markets participated in the corporate conference Predicting the Future and Scientific Discoveries in Annual scientific and practical conference for young specialists The objective of this conference is to identify and mobilize the creative potential of the company s young specialists to solve technological problems and improve production, reduce costs, and increase profit. More than 120 employees from all of the company s facilities, as well as students from Bauman Moscow State Technical University and the Vyksa branch of the National University of Science and Technology MISIS participated in the event. Two thirds of the suggestions made at previous conferences have been applied in production. 70

71 5.3 PERSONNEL Evaluation In 2015, as part of the annual personnel performance evaluation, evaluation results were supplemented with an evaluation of performance by competencies ( 360 degree technique). Previously, in , the evaluation of competencies covered primarily managerial tasks and quality (planning, systemic thinking, and setting objectives for subordinates). Leadership skills, such as, for example, the ability to acknowledge the contributions of employees and to maintain feedback with subordinates regarding their performance, became an important addition in A project for professional testing of OMK employees was implemented in Internal experts developed more than 60 professional tests that were administered to more than 8,000 employees. The test results were used to create functional training and career development programmes for ELECTRONIC LIBRARY Company employees were given access to the electronic library of one of the leading publishers of business literature in 2015, for independent study and acquisition of additional professional knowledge. Employees downloaded over 50,000 copies of more than 400 titles. Training OMK managers and specialists underwent training aimed at improving personal effectiveness and knowledge relating to their job descriptions and specific roles in Category In-person training (persons/courses) The training was held in-person (seminars, training sessions and conferences) and remotely (online tests, reading materials, and webinars). Distance learning (persons/courses) Managers 6,194 22,000 Managerial Minimum Specialists 6, ,078 (pre-certification training: 1,078 electronic Blue-collar workers 43,018 (including 5,490 external and 37,528 internal) textbooks and 350,000 standard operations and steps for performance of operations) Distance learning proved to be both popular and effective in A team of distance learning tutors was created and trained at all OMK facilities to develop the programme. More than 1,000 managers were trained as part of the Managerial Minimum target corporate programme aimed at the continual development and improvement Target programmes for training foremen and team leaders to improve personal effectiveness and economic literacy were introduced at OMK Group facilities. In addition to mandatory recertification training, target courses on technology and maintenance of high-tech equipment were conducted for workers. of managerial skills. Ninety percent of students evaluated the programme as good or excellent from the viewpoint of its benefit for the business (according to questionnaire results). The cost savings from the use of distance learning (in comparison with classroom training) were RUB 4.06 million. Likewise, distance learning was used Training expenditure was reduced because expensive employee training projects (MBA, one-time measures), as well as retraining to prepare for work on major new projects, came to an end in for English language training for 80 OMK employees who work with foreign colleagues and partners. G4-LA9 G

72 5.3 PERSONNEL Trade unions The trade union organizations at OMK facilities represent various trade unions in the Federation of Independent Trade Unions of Russia: the Miners and Metallurgical Workers Union of Russia (VSW, Trubodetal, CSW), the Russian Nuclear Power and Industry Worker s Union (BVP), and the Russian Agribusiness Workers Union (APP). In addition, a workers collective council operates at the Casting and Rolling Mill in Vyksa (a branch of OMK Steel). Therefore, interaction takes place mainly at the facility level. A social council was created at the OMK level in 2015 to coordinate relations. All mandated legal conditions for the operation of trade unions have been provided at the company s facilities. The reasoned opinion of trade unions is considered in all cases stipulated by the Labour Code of the Russian Federation. Joint commissions on labour disputes are in operation and employee appeals on labour relations issues are granted review. Trade unions participate in the distribution of benefits as well as in a number of the company s social projects: they participate in the expert commissions for the OMK Partnership social and charitable projects competition; they work with facility management to develop plant action plans according to the findings of engagement studies; and they participate in arranging sporting and cultural events. Collective bargaining agreement Major work was done in 2015 to change the benefits for employees in harmful and hazardous production jobs. All workstations at OMK facilities underwent a special working conditions evaluation. Negotiations were conducted with trade unions, new three-year collective bargaining agreements were concluded, and supplementary agreements were signed with more than 10,000 employees. There were no collective labour disputes during the reporting period. Social council A social council was created at OMK in 2015, on the initiative of the trade unions at the Group s facilities. This new advisory body, which includes trade union leaders, plant HR directors, and company management representatives, was called upon to make relations more systematic and ensure that the interests of the parties in the social partnership received consideration. At the July meeting, the parties agreed to introduce a social chart that makes it possible to determine, visualize, and rank (according to decision level) the social and labour problems in labour collectives. The pilot project began at Trubodetal, and the spread of this practice to other OMK facilities is expected in The social council also supported the introduction of the SA8000 social accountability standard and reached an agreement on trade union participation in measures to study personnel engagement, as well as in employee health management measures. Rewards The Vyksa Steel Works and the Trubodetal plant won the annual Mining and Metallurgical Facility with High Social Effectiveness competition, conducted jointly by the Miners and Metallurgical Workers Union of Russia and the Association of Mining and Metallurgical Industry Owners of Russia. For the second time, HR Director Svetlana Nikolashina topped the rating of HR directors (in the metallurgical and mining industries) conducted jointly by the newspaper Kommersant and the Association of Managers. In 2015, OMK was consistently among the top twenty Russian companies in the Very High Level of Social Accountability monthly social accountability rating produced by the Agency for Political and Economic Communications. OMK was declared the best employer among Russian companies in the metallurgical and mining industries according to the Randstad Award 2015, which carries out an independent study of the brand attractiveness of an employer. G

73 5.3 PERSONNEL INTRODUCTION OF SA8000 SOCIAL ACCOUNTABILITY STANDARD In 2015, OMK continued to introduce the SA8000 social accountability standard as a result of the obligations set forth in the company s constitution, its desire to improve personnel engagement, and international market requirements for suppliers of tubular goods. In the initial stage, the standard will be applied to the Vyksa Steel Works, the Casting and Rolling Mill, and company management. A self-evaluation of compliance with this standard was conducted at these facilities in January and February, and did not reveal any critical nonconformities. In order to harmonize the management system with the standard s requirements, the company developed a plan for introducing the standard, consisting of roughly a hundred measures. As of the end of the reporting period, 85% of these measures have already been implemented. The majority of the measures pertained to documenting rules and procedures which, being legal requirements, were already in use by the company. In addition, the company established an OMK Ethics Commission and VSW Ethics Committee in order to meet the standard s requirements on internal review procedures for complaints concerning violations of employee rights. An OMK Social Council was also created to fulfil requirements for a team responsible for dialogue between management and employees on social issues. Training was also conducted: 17 employees and managers took an introductory course on the SA8000 standard, while ten people underwent training on internal auditing on the basis of the standard. The participants received certificates. G

74 5.4 OCCUPATIONAL SAFETY OCCUPATIONAL SAFETY SYSTEM Health, safety and environment policy COMPANY OMK bylaw on the Occupational Safety Committee Management Board Bylaw and order of the managing director Occupational Safety Committee (members of the Management Board and managing directors of facilities) FACILITIES, DIVISIONS Monitors practical implementation of the company s objectives, development strategy, and policy in the sphere of environmental protection, occupational safety, and industrial safety The integrated occupational safety and industrial safety assurance system at OMK facilities is based on engaging employees in the decision-making process and management of workplace safety. This approach makes it possible to maintain a high level of compliance with safety principles at all management levels and in the workplace. Facility Safety Coordinating Committees (managing directors of facilities Initiate, direct, coordinate, and verify the overall efforts of management in the sphere of safety on the basis of industry and legal requirements The OMK Occupational Safety Committee is joined by the facilities occupational safety coordinating committees and shop working groups to form a unified managerial hierarchy. and divisions, area managers, and shop supervisors) Shop safety working groups (shop supervisors, foremen, and team leaders) OMK G4-DMAAnnual Report

75 5.4 OCCUPATIONAL SAFETY Expenditure in 2015 (RUB million) Expenditure on occupational safety Expenditure on fire safety 79.0 Expenditure on industrial safety 21.1 Expenditure on radiation safety 7.7 Total Number of industrial safety audits in subsidiaries and contractor companies in 2015 Number of industrial safety audits in subsidiaries 15 Number of industrial safety audits in contractor companies 672 Introduction of OHSAS Occupational Health and Safety Management system Corporate standards adopted in 2015 Contractor management in the field of occupational safety and environmental protection Handling hazardous materials Performing highly dangerous work Working at height ACHIEVEMENT OF Frequency of overall (industrial+domestic) injuries in OMK Group, Ff* Actual in Actual in Goal for 2015 The requirements of the OHSAS international occupational health and safety management system were introduced at VSW, CRM, APP, Trubodetal, and CSW. All these facilities have certificates of compliance with these requirements. It is planned that these processes will be introduced at the Blagoveshchensk Valve Plant in 2016 and certification obtained. Percentage of incidents for which an internal investigation was conducted Goal, %* Incidents Internal investigations of compliance Actual, %* with STK Extraordinary 7 7 Significant Insignificant Total * Total injury frequency factor. * 100%/total number of incidents recorded. G

76 5.4 OCCUPATIONAL SAFETY Percentage of managers, specialists, and white-collar workers who took the Conscientious Safety Management course Goal* Number of trainees 2015 (actual)* Total over 5 years 85% 909 4,227 5,436 7,645 4,293 22, % * Of average workforce for 2015 (25,327 persons). Special evaluation of working conditions at workplaces 2015 goal, %* Special evaluations of working conditions conducted in 2015 (workplaces) 2015 (actual), % 100 8, * Of total number of workplaces (10,353). In 2015, special evaluations of working conditions were not conducted fully due to the introduction of new positions, changes in existing positions, and reorganization of shops and sections. SUPPLY OF PERSONAL PROTECTIVE EQUIPMENT TO PERSONNEL In 2015, OMK introduced a new edition of the corporate standard Personal Protective Equipment for Employees of OMK and Controlled Companies. Work was done on the basis of this standard to determine a sole supplier of personal protective equipment (PPE) for OMK Group facilities. An expert council on PPE was set up (three meetings were held). Eleven technical specifications were developed for the fabrication of men s and women s summer clothing, as well as for winter clothing to protect against low temperatures and general contamination. All personal protective equipment issued to company employees meets the following criteria: Prevents or reduces the impact of hazardous and harmful factors Complies with technical aesthetic and ergonomic standards Includes instructions describing the rules for using and storing PPE and stating its shelf life Includes labels which comply with GOST and other standards regulating the labelling of PPE Has been evaluated for compliance with hygienic, physiological, protective, and operating requirements All personal protective equipment is selected according to the gender, height, and clothing and footwear size of the employee, as well as the specifics of the work they are performing. 76

77 5.4 OCCUPATIONAL SAFETY SPECIAL EVALUATION OF WORKING CONDITIONS Pursuant to Federal Law No. 426-FZ Special Evaluations of Working Conditions, from 2014 all companies are obligated to conduct special evaluations of working conditions in place of the previous workplace certification procedure. Special evaluations of working conditions were conducted at all OMK facilities in Summary lists obtained from special evaluations of working conditions are available on the websites of OMK facilities. Scope of special evaluation of working conditions in 2015, persons Number of employees Classes of working conditions VPS 9,638 1,855 2,896 4, APP Trubodetal 1, BVP 1, CSW 2,

78 5.4 OCCUPATIONAL SAFETY REDUCTION OF INDUSTRIAL INJURIES AND WORK-RELATED ILLNESSES A total of 92 people were injured in accidents, which is 25.8% lower than in the previous year. A zero level of fatalities was not achieved. There were two fatal incidents in 2015 (at VSW and BVP). To reduce the risks associated with industrial accidents, OMK regularly monitors the implementation of safety measures Primary causes of accidents over 12-month period introduced as a result of accident investigations. The primary causes of injuries in 2015 were: Violations of occupational safety requirements by employees (casualties) and failure of direct supervisors to comply with occupational safety requirements Lack of the necessary tools and accessories (employees use improvised tools and accessories or untested and faulty ladders) -32% -42% -55% +70% -33% -80% Catching (jamming) between stationary and moving parts of machinery and equipment Falling or stumbling when walking on the premises, in the shop, or on a slippery surface Impact from flying parts and fragments of equipment, injuries and cuts from tools and equipment Falling of heavy objects or equipment during operation or when moved manually Falling of a person from height (from a maintenance platform, ladder, etc.) Effect of open flame, molten metal, hot equipment parts, or steam Work with hoisting mechanisms G4-LA6 78

79 5.4 OCCUPATIONAL SAFETY Indicator PROGRAMMES TO MAINTAIN EMPLOYEE HEALTH Fatal injury frequency rate (FIFR): Number of fatalities as a result of accidents/total number of hours worked by all personnel x 1,000,000 Lost time injury frequency rate (LTIFR): Number of persons injured as a result of accidents with loss of work time/total number of hours worked by all personnel x 1,000,000 Note: The industrial injury rate includes fatal accidents Work-related illness rate: Number of newly identified work-related illnesses/total number of hours worked by all personnel x 1,000,000 Total number of newly identified and confirmed work-related illnesses Number of newly identified work-related illnesses/number of working personnel x 10,000 (this type of calculation is standard Russian practice) Lost workdays rate:* Number of workdays lost as a result of accidents/total number of hours worked by all personnel x 1,000, The health management policy adopted by the company is based on the requirements of Russian law and the recommendations of the International Association of Oil and Gas Producers (IOGP), as well as the best practices of major Russian and international companies. The policy provisions are implemented in a manner that seeks to introduce a uniform standard for emergency medical response, expert review of fitness to work, and the process for establishing a responsible attitude towards health in all OMK facilities. The following measures were planned as part of implementation of the policy: Introduction of an emergency medical response system in the workplace Improvement of the first aid training programme in compliance with Russian law and the recommendations of the European Resuscitation Council (ERC) Development of a corporate standard for evaluating fitness to work on the basis of updated regulations (Russian Ministry of Public Health Order No. 302n) Development of a corporate programme for prevention of cardiovascular disease Development of Health School technical programmes in the following areas: Eating Healthily, Hypertension, and Diabetes Organization of health days at facilities * Only scheduled workdays are considered in the calculation of lost workdays. Calculation begins on the day the employee is injured, i.e., on the day the sick note begins. 79

80 5.4 OCCUPATIONAL SAFETY REDUCING THE ABSENTEE RATE Scheduled periodic medical examinations of employees involved in work with harmful and hazardous working conditions were conducted at OMK facilities in The groups of employees requiring follow-up observation and rehabilitation were determined. All recommendations from the periodic medical examinations regarding follow-up observation of employees were fulfilled. Employees are treated at health care facilities (at CSW, APP). IDENTIFICATION OF KEY INDUSTRIAL SAFETY RISKS In 2015, specialists in the occupational safety directorate of the parent company and industrial safety specialists at the facilities conducted audits of the industrial safety management system at all facilities according to the following criteria: The presence of a register of highly hazardous objects and equipment at the facilities Maintenance of records of the specified service life of equipment Industrial safety expert reviews of equipment are carried out Identification of accidents, availability of accident response plans, conducting of drills Recording, investigation, and consideration of incidents and steps taken in response to investigation results Compliance with requirements for training in regulated jobs The presence of a register and procedure for performing highly hazardous work Compliance with requirements for oversight of hazardous industrial facilities Fulfilment of orders issued by oversight and regulatory authorities For all identified instances of noncompliance, the company furnished managers with recommendations for correction, and developed improvement measures. An occupational safety programme and procedures for internal investigations of incidents were developed and introduced at APP. Audits of the occupational safety management system were conducted at APP; the results were submitted to facility management and an action plan was developed. The programme will be completed in COMPLIANCE WITH INDUSTRIAL SAFETY REQUIREMENTS AND OCCUPATIONAL SAFETY BY CONTRACTORS The corporate standard Contractor management in the field of occupational safety, environmental protection, and fire safety was introduced to ensure compliance with industrial safety and occupational safety requirements. This standard establishes the requirements for interaction with contractors to ensure safe working conditions and compliance with environmental requirements when organizing work to be performed at company facilities or at other facilities where it has an interest. Training is conducted on this standard. Work is under way to create a uniform database of unscrupulous contractors. Evaluation of a contractor on the basis of the requirements of the standard begins at the selection stage. The evaluation of the contractor according to established criteria is documented. Contractor employees undergo new-hire training, and records are kept, prior to starting work. During the training, contractor employees are informed of the occupational safety and environmental protection requirements; environmental protection, health and industrial safety policy; and procedures for access to and movement around the facility site, including in vehicles. During contract work, OMK specialists regularly inspect contractors. In the future, a database of vendors, contractors, and workers will be created and placed on the corporate portal. G

81 5.4 OCCUPATIONAL SAFETY FIRE SAFETY A fire safety management system has been created at OMK in compliance with current legal requirements. Regular audits of the fire safety management systems at facilities were conducted in 2015, on the basis of which action plans to eliminate the most likely risks were created. The current fire safety system is aimed primarily at preventing fires. In emergencies, employees of the fire service ensure the safety of persons and property. There were no fire incidents in The fire safety management system includes ten elements: Readiness of the nearest fire department Accountability for fire safety Compliance with state fire inspectorate instructions Emergency situations and fire safety commission Organization of open flame work Organization of training Organization of work on fire protection systems Procedure for notification, response, record keeping, and investigation of incidents Organization of fire prevention work Systemic fire safety issues at company facilities TRAINING ON THE DEVELOPMENT OF AN OCCUPATIONAL AND INDUSTRIAL SAFETY SYSTEM Safety Management. Systems Used by Facility Managers seminar for senior managers. Duration of seminar 2 days (16 hours), 1 day practical audit at production site. Training is provided for managing directors, department managers, and shop supervisors. Expected result: managers understand the need for changes in the occupational safety and industrial safety field and become acquainted with the primary elements of an occupational and industrial safety management system. Seminar for line managers: Effective Safety Management Techniques with Training and on Behaviour-Based Safety Audits Duration of seminar 2 days (16 hours), 1 day practical audit at production site. All managers, specialists and white-collar workers at a facility undergo the training. Expected result: line managers who undergo the training understand the changes to be introduced and participate in them. G

82 5.4 OCCUPATIONAL SAFETY Seminar for employees: Development of a Conscientious Attitude Towards Safety Duration of seminar 1 day (8 hours). All employees at a facility undergo the training. Expected result: employees understand the changes to be introduced in the occupational and industrial safety management system, support them, and participate in their introduction. At a minimum, each employee understands that the attitude towards safety in the company and at the facility has changed radically. Seminar on internal investigation of incidents: Investigation of Incidents and Analysis of Key Causes Duration of seminar 1 day (8 hours). Process shop and section supervisors undergo the training. The number is determined such that a minimum of two supervisors in each department are trained. Expected result: trained specialists capable of conducting internal incident investigations to prevent similar incidents in the future, conduct surveys, and seek key causes of incidents. Risk assessment seminar: Risk Assessment, Evaluation, and Management Duration of seminar 1 day (8 hours). All production shop supervisors undergo the training. Expected result: production supervisors understand the basis of the programme, are able to identify and manage risks, and work in the future with their subordinates to introduce this programme in the workplace. Managers and employees use the results of risk assessment to determine measures for effective protection while working and create high standards for safe working procedures. Seminar: Effective Working Procedures for Occupational Safety and Industrial Safety Management Office (Department) Specialists Duration of seminar 1 day (8 hours). All managers and occupational and industrial safety management office (department) specialists undergo the training. Expected result: occupational and industrial safety specialists understand their role in developing and introducing safety programmes. The accountability of line supervisors and occupational and industrial safety specialists for safety is defined; safety specialists know how to cooperate with the entire organization. Seminar: Behaviour-Based Safety Audits Duration of seminar 1 day (8 hours). All production section supervisors undergo the training. The seminar is conducted as necessary at the request of a shop manager. Expected result: supervisors obtain the following skills: 1. Ability to identify and prevent situations that might lead to adverse consequences 2. The art of convincing people to take precautions at work in the future 3. Ability to complete reports and analyse information on audits conducted 82

83 5.4 OCCUPATIONAL SAFETY PLANS TO DEVELOP SAFETY AND OCCUPATIONAL SAFETY SYSTEM Reducing industrial injuries (LTIFR)* Development of an occupational safety management system In the medium term, there are plans to continue projects aimed at: Changing the safety culture Monitoring the work of contractors Improving the safety of production processes Developing a transportation safety system Protecting the health of personnel Actual 2014 LTIFR Actual 2015 LTIFR Actual 2014 Actual System Target Target 2.13 was not evaluated % -10% -10% -10% -10% * LIFTR Lost Time Injury Frequency Rate. Development of an industrial safety management system Actual 2014 System was not evaluated Actual Target G

84 5.5 ENVIRONMENTAL PROTECTION KEY ENVIRONMENTAL INDICATORS GROSS ATMOSPHERIC POLLUTANT EMISSIONS GROSS POLLUTANT DISCHARGES INTO WATER BODIES GENERATION OF PRODUCTION WASTE % % 1,067.9 thou tonnes thou tonnes thou tonnes -10.7% Actual payments for adverse environmental impact ATMOSPHERIC EMISSIONS DISCHARGES INTO WATER BODIES WASTE DISPOSAL 0.4 million roubles -33.3% 11.2 million roubles -11.1% 29.4 million roubles -55.8% Total fines for violation of environmental protection laws thousand roubles Total consumption of energy used in production 153,500 16,542, GJ OMK G4-21 Annual Report

85 5.5 ENVIRONMENTAL PROTECTION Total investment in environmental protection (RUB million) Total Investment in capital assets for environmental protection, including: For capital construction of facilities relating to primary environmental protection For materials and equipment Miscellaneous Payments to state budgets at all levels associated with environmental protection and sustainable use of natural resources, including: Compensation for environmental damage Operating expenses for environmental protection, including: ,122.9 Air quality Wastewater collection and treatment Waste management Protection and remediation of land, surface water and groundwater Protection against noise and other physical nuisances 57 4 Preservation of biodiversity and protection of natural areas Research Miscellaneous (payment for environmental protection services, expenditure on major repair of fixed assets)

86 5.5 ENVIRONMENTAL PROTECTION Area of disturbed land in , hectares Total disturbed land Land not remediated and not rehabilitated Direct greenhouse gas emissions, tonnes of СО2-equivalent Quantitative record keeping of greenhouse gas emissions was not conducted in 2014, since СО2 emissions from fixed sources were not regulated by Russian law Total direct and indirect greenhouse gas emissions as the sum of direct and indirect emissions, including: 84, CSW 84,771.0 Trubodetal Direct greenhouse gas emissions from fuel combustion and leaks (coverage area 1), including: 84, Carbon dioxide (СО2) 84, Methane (СН4) 0.91 Nitrogen oxide (I) (N2O) 5.21 Indirect emissions associated with electricity purchased (coverage area 2) 0.0 G4-EN15 86

87 5.5 ENVIRONMENTAL PROTECTION Atmospheric pollutant emissions, tonnes Total weight of waste, tonnes Weight of atmospheric pollutant emissions, including: 6, , nitrogen oxides (NOx) 3, , sulphur dioxide (SOx) carbon monoxide (CO) 1, , benzo(a)pyrene volatile organic compounds (VOCs) hydrocarbons (not including VOCs) solids 1, miscellaneous Waste on hand at beginning of year 20,025, ,935, Waste generated during year ,075, Waste received from third parties (with and without transfer of ownership) 1,199, , Received from OMK business units , Waste utilized during year 86, , Used by third parties 80, , Waste neutralization and processing 591, , By third parties 610, , Total waste sent to landfill 35, , By third parties 206, , Ownership transferred 44, , Waste transferred to third parties 116, , To OMK business units 405, , Waste on hand at end of year 19,935, ,615, Change, % G4-EN23 87

88 5.5 ENVIRONMENTAL PROTECTION ENVIRONMENTAL SYSTEM OMK facilities base their environmental protection activities on uniform principles: Compliance with legal requirements regulating environmental protection activity Accident prevention and continuous reduction of adverse environmental impact Sustainable use of natural and energy resources Improving the knowledge and accountability of personnel with regard to environmental issues Each facility has its own occupational safety and environmental management programme, which is coordinated by specialist departments directly subordinate to the managing director. A special representative responsible for integrated systems management, who monitors compliance with the requirements of ISO 14001:2004, and also manages reporting on the results of the environmental management system, including making recommendations on improving it, is appointed by order of the facility managing director. Developing an integrated management system which complies with international standard ISO Environmental protection activity is coordinated by the OMK Occupational Safety, Environmental, and Quality Directorate using clear planning and regular monitoring and evaluation of operations. The parent company ensures that all OMK facilities act in accordance with the nature and scale of environmental risks, including by performing oversight functions and carrying out internal audits of current and planned projects. 88

89 5.5 ENVIRONMENTAL PROTECTION Function Monitoring of environmental risks, oversight and performance of internal audits of current and planned projects OMK Parent company (Moscow) OMK Occupational Safety, Environmental, and Quality Directorate Integrated management system OMK policy on environmental protection, health and industrial safety OMK management standards and performance in environmental protection Consolidation of business unit goals at the company level Monitoring achievement of goals, monitoring programme performance by business unit management Number of internal audits for compliance with environmental protection standards in 2015 Key production assets VSW CRM BVP CSW APP Trubodetal Environmental protection activity Occupational Safety and Environmental Office Environmental Safety Department, Occupational Safety and Environmental Office Occupational Safety and Environmental Department, lead environmental protection engineer, environmental protection engineer Managing Director, Occupational Safety and Environmental Department, lead environmental protection specialist Sanitary and Industrial Laboratory, Occupational Safety and Environmental Department Occupational Safety and Environmental Office Industrial and Environmental Safety Department, Occupational Safety and Environmental Office Technical Director Occupational Safety and Environmental Department, environmental protection engineer Occupational Safety and Environmental Department Lead environmental specialist, Occupational Safety and Environmental Department Monitoring of compliance with environmental protection laws, codes, and regulations Occupational Safety and Environmental Department, environmental protection specialist Presence of certificate of compliance with international environmental management system standard ISO 14001: 2004 G4-DMA G

90 5.5 ENVIRONMENTAL PROTECTION Objective Unit of measurement 2015 (target) 2015 (actual) Difference between planned and actual indicators for 2015 Target 2016 VSW Reduction of discharges into water bodies: tonnes/year - suspended matter, to petroleum products, to Reduction in volume of waste sent to landfill, to tonnes/year 28, ,990-11, ,141 CRM Reduction in volume of waste sent to landfill, to tonnes/year 77, , , ,157 Reduction in atmospheric pollutant (phenol) emissions, to tonnes/year BVP 5% reduction in volume of production and consumption waste sent to landfill, to tonnes/year Reduction in payments for exceeding maximum allowable concentration (MAC) of pollutants in wastewater to RUB thousand 1,690 1,490 CSW Reduction in quantity of waste from offices and amenities disposed in environment, to tonnes/year Bringing volumes of solid municipal waste disposed to standard level of generation per facility employee tonnes/year Bringing performance indicator for recycled and processed waste from total waste generation volume to not less than APP % Reduction in adverse impact on air quality: units 0 - replacement of filter sleeves in dust collector at exterior insulation section of electric pipe welding shop No. 2, units conversion of vehicles to natural gas fuel in automotive shop, units Achievement of percentage of recycled and processed waste % Trubodetal Reduction of copper content in wastewater mg/dm Reduction of environmental impact by introducing planned measures: Shutdown of hazardous industrial facility boiler plant No. 1 Replacement of oil-filled transformer HEIM-1370 by dry-type transformer SGB-1250 Replacement of gas scrubber with emission to atmosphere by local scrubbing on abrasive cleaning units units G

91 5.5 ENVIRONMENTAL PROTECTION THE GOALS SET FOR 2015 WERE COMPLETELY FULFILLED, EXCEPT IN THE CASE OF TRUBODETAL S TARGET TO REDUCE COPPER CONTENT IN WASTEWATER. IT WAS NOT POSSIBLE TO ACHIEVE THE TARGET INDICATOR OF MG/DM3, PRESUMABLY DUE TO THE COPPER CONTENT IN THE INCOMING WATER LINE. IT WAS DECIDED THAT WHEN CONDUCTING ANALYSES OF WASTEWATER IN 2016, THE INCOMING WATER LINE SHOULD ALSO BE ANALYSED TO OBTAIN A MORE OBJECTIVE PICTURE OF THE COPPER CONTENT IN THE WASTEWATER. ENVIRONMENTAL SAFETY MEASURES AT OMK FACILITIES VSW During 2015, the company conducted 492 studies of environmental protection targets in production departments, social facilities, industrial waste disposal facilities, and plant sites. Industrial emissions (2,911 analyses), air quality (1,638 analyses), noise levels (496 measurements), wastewater and natural water pollution (2,764 analyses), and soil conditions (156 analyses) were tested. In order to achieve the goal of reducing production waste sent to landfill, the facility developed a programme to design a system for separate waste collection. This called for a visualization of separate waste collection, a search for new waste processing technologies, and identification of new types of production by-products for recycling. The introduction of this programme at the facility reduced the volume of waste sent to landfill by 12,653 tonnes in The facility introduced centralized collection and storage of paper and cardboard waste. Collection of polymer wastes was introduced. An agreement was signed for the sale of process water treatment waste to a third party as secondary raw material. Remediation work was carried out on 22,683 m 2 of land affected by facility operations. BVP Two projects were implemented in 2015: Improvement and landscaping of the main site sanitary protection zone. Project completion September 2016 Site preparation for use of the lot for production operations. The government CSW environmental expert review finding is expected in March 2016 Eighteen measures were planned in The environmental programme achieved the following results: Savings of 10,520,000 kwh of electricity Savings of 21,520,000 m 3 of fuel Research was conducted on the application of ferroalloy production slag recycling technology to obtain material for remediation of disturbed land. This waste was eliminated from the list of current CSW waste. CRM In 2015, an agreement entered effect under which ferrous metal dust waste is, after processing, used for the remediation of disturbed land at solid domestic waste disposal sites and construction sites, as well as for the levelling of land disturbed during storage of industrial, construction, and domestic/municipal waste. CSW discharges process wastewater into the Chusovaya and Usba Rivers after treatment at local treatment plants; this has an adverse impact on water bodies, bioresources, and their habitats. 91

92 5.5 ENVIRONMENTAL PROTECTION The facility makes a quarterly payment to the Russian Federation government for this impact. In addition, the facility has a programme to artificially grow aquatic bioresources. Accordingly, 43,559 pike fry weighing up to three grams are released into the Kamskiy Reservoir every year. The damage to aquatic bioresources is being re-evaluated in due to the closure of a number of production facilities. Trubodetal In 2015, the following measures were conducted to mitigate adverse environmental impact: The Cojafex model ВР-1600 induction pipe bender was repaired, making it possible to reduce pollution of process wastewater Gas-fuelled boiler plant No. 1 was shut down temporarily, making it possible to reduce: nitrogen dioxide emissions by 1.6 tonnes/year and carbon monoxide emissions by 3.83 tonnes/year; water consumption by 400 m3 per year; and natural gas consumption by 6 million m 3 per year The oil-filled transformer HEIM-1370 was replaced by a dry-type transformer SGB Transformer oil consumption was reduced by 0.9 tonnes The obsolete gas scrubbers in shop No. 2 and the tool shop were replaced by UPV 2000А dust collectors, from which purified air is supplied to the shop work zone. The elimination of two sources of atmospheric emissions made it possible to reduce abrasive dust emissions by tonnes/year and ferrous oxide emissions by tonnes/year APP In 2015, the following measures were implemented to mitigate adverse environmental impact: The dust collector sleeves on three lines were replaced in electric pipe welding shop No. 2 Emission sources downstream of the combined cycle gas turbine and industrial emissions were monitored Harmful substances were monitored at the boundary of the sanitary protection zone Noise level monitoring Diagnostics of atmospheric emissions from vehicles Conversion of one vehicle to natural gas fuel Upgrading of exterior lighting Major overhaul of the shunting diesel locomotive Planting spruce trees Washing vehicles in specialized washes PRECAUTIONARY PRINCIPLE Evaluation of possible adverse consequences of current and planned operations at two facilities: CSW A procedure was introduced to identify potential accidents and emergencies that might have an environmental impact and determine responses to them. An accident response action plan is being developed on the basis of the government register of hazardous industrial facilities and the register of potentially hazardous industrial facilities at CSW. The register is created every year by specialists in the Industrial and Environmental Safety Department, endorsed by the head of the Civil Defence and Emergencies Department, and approved by the person authorized by plant management to take responsibility for the integrated management system. VSW Environmental protection is considered in modernization projects that might have an adverse impact on the environment. Maximum allowable concentrations are also measured at the facility and measures are conducted to mitigate environmental impact during adverse weather conditions. Oil spill response drills are conducted, involving the VSW environmental analysis laboratory. G

93 5.5 ENVIRONMENTAL PROTECTION STAKEHOLDER ENGAGEMENT VSW Facility specialists publish weekly reports on monitoring of the sanitary protection zone of the facility and natural reservoirs in the corporate newspaper. A press tour for media from Vyksa municipal district to the second construction site for the VSW solid domestic waste disposal site was organized in Specialists from the Environmental Safety Department prepared overviews for corporate media and the district newspaper Vyksunskiy rabochiy. CRM There were no environmental complaints or legal investigations relating to the operation of the CRM during the reporting period. BVP Public hearings on the site preparation project to use the lot for BVP production activity were held in August Materials on the project s environmental impact assessment were placed in the public receiving area for public review. On the basis of a complaint from a resident of Blagoveshchensk, the Federal Supervisory Natural Resources Management Service (Rosprirodnadzor) Directorate for the Republic of Bashkortostan sent notice No /07300, dated 3 December 2015, to the Blagoveshchensk Valve Plant, requiring the plant to submit the results of in-process environmental monitoring at BVP for steel smelting shop No. 3, concerning emissions in the gas scrubber from the steel smelting furnaces. All required documents were submitted on time. CSW Pursuant to current legislation, the company provides information on request to external stakeholders in the form of inspection and oversight bodies and local residents. Five articles on the environment were published in the newspaper Chusovoy metallurg in Seven articles on the environment were placed on the CSW production system portal. The plant did not receive any complaints regarding environmental protection issues in Trubodetal Pursuant to current legislation, the company provides information on request to external stakeholders. No complaints or requests were received from stakeholders in APP Pursuant to current legislation, the company provides information on request to external stakeholders. No complaints or requests were received from stakeholders in

94 5.5 ENVIRONMENTAL PROTECTION ENERGY CONSUMPTION AND ENERGY EFFICIENCY Energy consumption Energy consumption by business units Energy budget by facility (RUB million) Indicator Unit of measurement Electricity consumption (VSW) MWh 626, , Natural gas consumption (VSW) thousand m3 203, , Electricity consumption (CRM) MWh 800, , Natural gas consumption (CRM) thousand m3 58, , Electricity consumption (Trubodetal) MWh 20, , Natural gas consumption (Trubodetal) thousand m3 16, , Electricity consumption (BVP) MWh 42, , ,047 TOTAL 5,727 2,675 1,999 VSW CRM 2,529 2,170 Natural gas consumption (BVP) thousand m3 7, , Trubodetal 148 Electricity consumption (APP) MWh 29, , Natural gas consumption (APP) thousand m3 4, , Electricity consumption (CSW) MWh 87, , Natural gas consumption (CSW) thousand m3 82, , BVP APP CSW Total energy savings* Indicator Unit of measurement Electricity as a result of energy conservation programme MWh 18,140 11,746 Natural gas as a result of energy conservation programme thousand m 3 4, Total energy saved as a result of energy efficiency programme GJ 206,054 75,271 * using the new technique, the effect is calculated in terms of energy resources (gas and electricity) purchased. G4-EN3 94

95 5.5 ENVIRONMENTAL PROTECTION In 2015, planned investment in energy conservation projects at all OMK facilities amounted to RUB million, with an effect equivalent to RUB million. Actual investment was RUB million, with an effect equivalent to RUB million. The deviation from the plan was due to a failure to implement some activities and a shift in the deadlines for the introduction of a number of measures. The energy conservation programme at OMK facilities in 2015 included 78 measures, the most significant of which were: In 2015, an energy conservation programme was developed for , with a planned annual effect of RUB million at the 2019 horizon and costs of RUB million. Plans are to obtain a cumulative total effect in the amount of RUB billion over the life of the programme ( ). The programme was developed primarily by OMK power engineers, since practice has shown the poor effectiveness of specialist companies hired to conduct legally mandated energy audits. Measure Investment, Savings, RUB thou- WATER CONSUMPTION VSW Modernization of lighting in VSW shops and sections RUB thousand sand Plan Actual Plan Actual 4, , , ,780.0 Water consumption (thousand m3) Parameter Unit of measurement Water intake from all sources, including: thousand m3 14, , VSW Investment project to supply liquid argon, oxygen, and nitrogen to VSW 5, , Water intake from underground sources thousand m3 4, , Water intake from surface sources thousand m3 9, , CSW Reduction of expenses, actual reduction of specific power requirements, elimination of inefficient consumption of energy resources, elimination of leaks in networks, and 1, , , ,110.0 Water supply from water supply networks of other entities thousand m Volume of recycled and reused water thousand m3 352, , Total water volume used thousand m3 367, , Percentage of recycled water supply % 96.04% 97.33% replacement of steam heating CSW with municipal heating water Replacement of two pumps at the onshore pumping station with lower power pumps 2, , ,906.0 Actions to improve energy efficiency were taken under the methodical supervision and oversight of the OMK Energy Development Office in compliance with the regulation Procedure for Development, Endorsement, and Oversight of Energy Conservation Programmes. Actions to improve energy efficiency at OMK facilities are managed by the chief power engineer; personnel at CSW, VSW, and the CRM conducted energy audits to improve energy efficiency in

96 5.6 DEVELOPING OPERATING REGIONS EXTERNAL SOCIAL POLICY An active social policy is an integral part of OMK s strategy. The company views social programmes as long-term investments in the stability of the local communities in the regions where it operates. We aim to ensure a decent standard of living for all OMK employees and we build relationships with state authorities and partners from big and small businesses. We form long-term relationships with society and maintain an open dialogue with non-governmental organizations. In 2015, OMK s priorities in its operating regions were: Maintaining economic stability Helping to stabilize the labour market Implementing social, cultural, educational, and environmental projects to meet the needs of a specific region Building relationships with regional partners OMK conducts socially-oriented projects both through its facilities and companies, and through charitable funds (OMK Participation and the Ivan and Andrey Batashev Fund). In pursuing social projects in our operating regions, OMK operates under the social partnership model. This is a modern model of interaction, reconciling the interests of state bodies, regional business, and public organizations. To develop local communities, the company launched the OMK Partnership social and charitable projects competition; introduced a corporate volunteerism programme; and developed a programme for expanding social entrepreneurship in the city of Chusovoy, which will be implemented in the first half of Meetings and workshops on the involvement of small and medium-sized business in the city of Vyksa were held at the Art Ovrag modern art festival in The company has involved business partners in its volunteer and charitable projects. The primary focus areas of our charitable programmes have traditionally been: Support of popular and elite sports Support for educational programmes Support for culture Social programmes (assistance to children s facilities and vulnerable segments of the population) Assistance to spiritual and religious organizations Military and patriotic education and assistance to war veterans G

97 5.6 DEVELOPING OPERATING REGIONS CHARITABLE PROGRAMME SYSTEM After analysing the effectiveness of charitable programmes during the period, the company decided to switch from traditional charity which was based on providing targeted assistance on request from those needing material support and patronage to a social investment model based on social partnership. COMPANY Approval of regulatory documents: Sponsorship and Charitable Activity at OMK, Corporate Policy on Management of External Social Programmes, and Strategy for Expansion of Sponsorship and Charitable Activity in Bylaw on the OMK Partnership competition Budget approval Budget requests and reporting BOARD Draft single budget for charity, reporting, and draft regulatory documents PUBLIC RELATIONS DIRECTORATE HR DEPARTMENT Procedural support and coordination In 2015, the company began to create a new model using a systemic approach to management of socially-oriented projects in our operating regions. Project funding FACILITY DEPARTMENTS DESIGNATED BY THE MANAGING DIRECTOR Appointing and inviting experts EXPERT COMMISSIONS FOR OMK PARTNERSHIP COMPETITION Requests for targeted assistance and reporting on projects Tender bids NON-PROFIT ORGANIZATIONS, FEDERAL GOVERNMENT BODIES, MUNICIPAL ENTITIES, AND OMK EMPLOYEES Project implementation CHARITY RECIPIENTS OMK G4-DMAAnnual Report

98 BUSINESS SUSTAINABLE DEVELOP- DEVELOPMENT MENT CONTACT 5.6 DEVELOPING OPERATING REGIONS EXAMPLES OF SOCIAL PROJECTS IN 2015 SUPPORT OF POPULAR AND ELITE SPORTS The company sponsors major tournaments and is expanding the sports infrastructure in the cities where it operates. The priority sports for OMK are sambo, skiing, and football. The following projects were implemented with OMK support in 2015: Tournaments and competitions: Battle of the Champions (Russian Martial Arts Association) Sambo tournament in honour of the Batashev brothers in Vyksa Plant Olympics Marital arts holiday Sports. Recognition. Success in Chusovoy Infrastructure development: Construction of sports venues in cities where the company operates Support for athletic organizations, associations, and initiatives: Metallurg, Volga, and CSW football clubs Sports Against Narcotics Programme (VSW) Prizes for high athletic achievements (VSW) Charitable assistance to fitness and popular sports institutions in regions where the company operates ASSISTANCE TO CHILDREN S INSTITUTIONS AND VULNERABLE SEGMENTS OF THE POPULATION OMK provides charitable support to disadvantaged children, young people, and senior citizens in its operating regions. ASSISTANCE TO RELIGIOUS AND SPIRITUAL ORGANIZATIONS In 2015, OMK provided assistance to the Vyksa bishopric of the Russian Orthodox Church and support for the construction of a shrine to the Virgin Mary in Chusovoy. SUPPORT FOR EDUCATIONAL PROGRAMMES AND INSTITUTIONS The company s primary tasks in this area are career guidance, education, and promotion and use of new technologies, tools, and techniques in education and training. For more details, see Career Guidance and University Partnership Programmes in the Personnel section. SUPPORT FOR CULTURE OMK supports projects aimed at restoring cultural heritage sites and popularizing current trends in contemporary culture and modern art. The fifth Art Ovrag festival of new urban culture was held in Vyksa in June The festival was attended by 8,000 city residents and guests and featured 50 theatrical, music, architecture, food, sports, and dance events. Over the three days of the festival, more than 2,000 people visited the master class given by the Moscow Museum of Modern Art and the Volga Branch of the Government Modern Art Centre. At other sites in the central park, cooking master classes, sports competitions and parkour, skateboarding, bicycle motocross, and street workout workshops, dance exhibitions, and rap battles. 98

99 5.6 DEVELOPING OPERATING REGIONS SUPPORT FOR VETERANS Since 2006, OMK has organized the Victors Ball charitable project jointly with the Central Museum of the Great Patriotic War on Poklonnaya Hill and the Maris Liepa Charitable Fund. Its main purpose is to express gratitude to the generation that strove for victory, and to unite veterans from various countries. The tenth Victors Ball to mark the seventieth anniversary of victory in the Second World War was held in Moscow in April The event was attended by 500 guests, including 120 Second World War veterans from Moscow, the Moscow area, Vyksa, Chelyabinsk, Chusovoy, Blagoveshchensk, Crimea, and Sevastopol, as well as countries of the former USSR, Eastern Europe, and Israel. Guests included Heroes of the Soviet Union and Russia, bearers of the Order of Glory and veterans of the armed forces. SOCIAL SUPPORT PROGRAMMES WHEN PRODUCTION FACILITIES ARE CLOSED When production sites downsize or are closed, the company s social policy aims to develop a constructive dialogue with stakeholders, increase charitable assistance to vulnerable groups of the population, create new jobs, and expand small and medium-sized business and social entrepreneurship. The veterans were congratulated by National Artist Andris Liepa, Director of the Central Museum of the Great Patriotic War Vladimir Zabarovskiy, and Chairman of the OMK Management Board Anatoly Sedykh. Famous artists performed for veterans and guests. National Artist of Russia Larisa Dolina, National Artist of Russia Alexander Morozov, and popular singer Alsou sang songs from the war years. 99

100 5.6 DEVELOPING OPERATING REGIONS Expenditure on charitable and social projects, RUB million Structure of expenditure on charitable projects in 2015, RUB thousand 304,649 Support of popular and elite sports 21,934 Miscellaneous expenditure and special projects 175,160 Assistance to religious organizations 15,246 Social programmes (assistance to children s institutions and vulnerable segments of the population) 25,499 Support for culture 35,189 Military and patriotic education and assistance to war veterans 10,923 Support for educational programmes 20,698 OMK PARTNERSHIP COMPETITION A long-term programme to support a social initiative, the OMK Partnership social and charitable projects competition, was introduced in Employees of OMK facilities, non-profit organizations, and government and municipal institutions from the company s operating regions were invited to participate. Four workshops on social project management, fundraising, and project promotion for potential grant recipients and five workshops on corporate volunteerism were held during the preparation for the competition. A total of 201 applications were received from five cites: Almetyevsk, Blagoveshchensk, Vyksa, Chelyabinsk, and Chusovoy. The technology for collecting and evaluating the applications and the system for evaluating the effectiveness of the company s social investments were successfully tested in The initiative was deemed a success. The second competition was announced in February The goal of the competition is to create possibilities for introducing innovative technologies to develop the regions where the company operates, employee involvement in social projects at their own initiative, and voluntary participation. The objectives of the competition are to improve the quality of life in cities where OMK operates, develop a systemic approach to solving social problems in the regions, ensure maximum transparency in the selection of priority projects, and submit the projects results to a qualitative evaluation. Grant fund, RUB million Fund volume 13.3 Distribution by city: Almetyevsk 1 Blagoveshchensk 1.8 Vyksa 4 Chelyabinsk 2.5 Chusovoy 4 Distribution by participant: Organizations 7.8 OMK employees results Roughly 30,000 people became the beneficiaries of the competition projects. Grant recipients received additional funding for projects (co-funding) in the amount of RUB 8 million. Number of competition projects Organizations OMK Total employees Approved by expert commissions Implemented G4-SO1 G

101 5.6 DEVELOPING OPERATING REGIONS Examples of projects run by non-profit organizations and federal and municipal institutions EXPANDING VOLUNTEERISM Caring Grandchildren A project by Chusovoy Technical School students to carry out minor repairs in the homes of senior citizens, veterans, and disabled persons. The project became preproduction practice for students. Hospital Mothers Volunteers were specially trained to become hospital mothers. They work at the Chusovoy City Hospital and care for orphans and abandoned children under long-term care. The Golden Years Life Goes On! Assistance to Second World War veterans and former Chusovoy Steel Works employees. The Perm Organization of Disabled Persons organized support groups. One hundred and fifty city veterans visited exhibitions, attended computer courses and financial literacy courses, studied Nordic walking, and learned how to live a healthy life. Support for Foster Families Programme This comprehensive programme improved parenting skills in foster families, including measures to avoid foster children being returned to orphanage facilities. Thirty specialists from the Pelican Centre in Vyksa and 30 foster families participated in the project. Young Entrepreneur A camp for older school pupils in the village of Novosineglazovskiy (Chelyabinsk), where they learned to create their own business projects, attended master classes, and took field trips to the Chelyabinsk business incubator. A sociological survey of employees was conducted early in the year and to determine their level of motivation for volunteer activities, the actions that most interested them, their readiness to take the initiative themselves, and preferred incentives for volunteers. Employees led volunteer projects as part of the OMK Partnership competition, donated blood, and participated in OMK Participation charitable fund events: Everyone Run, In Peace on the Christmas Tree, Together to School!, Children to Children, and Heart to Heart. They also planted trees, helped senior citizens and veterans, and participated in the Spiritual Bazar annual charitable fair. Altogether, 9,000 people volunteered at OMK facilities. Throughout the year, 91 volunteer events involving employees were held. Expansion of volunteerism helps to create mechanisms for long-term partnership with non-profit organizations and municipal institutions, to improve the quality of life in local communities, and to resolve social issues in the regions where we operate. 101

102 5.6 DEVELOPING OPERATING REGIONS EXAMPLES OF VOLUNTEER PROJECTS OUTSIDE THE GRANT COMPETITION Bountiful Garden This initiative is run in Chusovoy and Almetyevsk. The aim is for the plant to purchase surplus agricultural products from private gardeners and have volunteers create vegetable baskets for needy, unemployed senior citizens who are former employees of the plant. More than 100 people participated in the initiative. Spiritual Bazar charitable fair in Moscow For the first time, more than 40 company volunteers from various regions, joined by students from the National University of Science and Technology MISiS, participated in 200 creative master classes for children. With the support of volunteers, each fair participant was offered the opportunity to craft an original New Year s gift for friends and family. Employees and representatives of OMK s partners, Metallinvestbank and supervisors of the Russian Martial Arts Association and Maris Liepa Charitable Fund, participated in the events. The bank gave each guest the opportunity to order an individual bank card with a drawing done by his or her child in the master class. The cards were produced in partnership with the OMK Participation fund: the fund receives RUB 5 from each purchase. A total of 32 cards were created during the fair. Our Forest More than 600 VSW volunteers, together with residents and representatives of the administration of Vyksa, restored the forest around the city damaged by the 2010 fires. Charity in IT A project to transfer used computer equipment to various vulnerable groups for charity purposes was implemented for the first time. The project was led by a volunteer Legal Office Manager Aleksandr Domoratskiy. The goal of the project was to ensure long-term use of computer equipment, and to improve the equipment available to non-profit organizations in our operating regions. Two non-profits were the beneficiaries: the Boksitogorsk Municipal District Social Service Centre independent municipal institution (Leningrad Region) and the Nizhny Novgorod regional organization of disabled persons, the Russian Order of the Red Banner of Labour Association of the Blind. Four sets of computer equipment (monitors, system units, keyboards, and mice) were transferred as part of the initiative. Three computers were used for a computer class for senior citizens in Boksitogorsk. Twelve people have attended computer courses at the Boksitogorsk Municipal District Social Service Centre since 1 September At the Nizhny Novgorod Association of the Blind, the computer is used for office work. New Year s Presentation at the Nikulin Moscow Circus OMK and the OMK Participation charitable fund gathered guests at the Nikulin Moscow Circus on Tsvetnoy Boulevard for the thirteenth time in December More than 500 children from disadvantaged families received tickets, ice cream, and gifts. Volunteer OMK employees assisted in organizing and conducting the celebration. 102

103 5.6 DEVELOPING OPERATING REGIONS BLOOD DONATION DRIVES Expansion of the corporate blood donor movement continued in Since the project began, more than 300 company employees have become steady donors. OMK employees gave more than 140 litres of blood during the year. The company involved its partners in giving blood, including employees of Metallinvestbank, representatives of the Russian Martial Arts Association, and students of the National University of Science and Technology MISiS. As part of the OMK Partnership competition, the Irkorka Chelyabinsk city social movement to assist children suffering from cancer (village of Novosineglazovskiy) implemented the Only Man Can Save Someone s Life project, aimed at increasing the number of blood donors in Chelyabinsk Region and encouraging residents of the village and Trubodetal employees to give blood. The Everyone Can Be A Donor event was held in the square in front of the Novosineglazovskiy Palace of Culture: those who wanted to gave blood, there was a charity book fair and a performance by music and dance groups was also organized. Iskorka volunteers conducted an open lesson on How to Become a Donor and organized a drawing contest Give Blood Save a Life for students at Novosineglazovskiy schools. A total of 402 people participated in the project. II III III III AWARDS Second place in the Best Programme (Project) Promoting Expansion of Volunteerism in Russia category in the Leaders of Corporate Charity awards for the Programme to Expand Corporate Volunteerism in OMK Third place in the For Participation in Solving Social Problems in Regions and Expanding Corporate Charity category of the regional stage of the federal competition Russian Organization with High Social Effectiveness (VSW) Third place in the Donors Fund Objective Charity competition (OMK) A certificate from the Russian Ministry of Culture for the project to restore the Batashev-Shepelev gardens in Vyksa municipal district, Nizhny Novgorod Region (VSW) First place in the A Good Deed category in the Changing World competition for social achievements organized by the Chelyabinsk Region Assembly (Trubodetal) A certificate of the Russian Government Prize for quality at facilities with more than 1,600 employees (evaluation of a company s social policy and corporate social responsibility) (Trubodetal) A letter of appreciation from managers of the Russian Federation Civic Chamber s coordinating centre for organization, expansion, and popularization of voluntary blood donation (Trubodetal) 103

104 5.7 RESPONSIBLE PROCUREMENT CORPORATE PROCUREMENT TAKES PLACE IN A TWO-LEVEL SYSTEM: The procurement office of the parent company provides planning, methodology, control, development, and evaluation of procurement activity Processing is carried out by the facilities procurement offices The introduction of a new form of procurement category management began in This is presently the most progressive form of procurement operation, making it possible to handle the two most important tasks: management of the total cost of ownership of materials and equipment on the one hand, and the strategic orientation of procurement on the other. The new SAP SRM corporate electronic procurement system was introduced in With the introduction of this system in all business units, OMK manages procurement according to unified rules and a single base of vendors. Procurement volume over the year was more than RUB 90 billion at 2015 prices. In total, more than 85 90% of OMK s procurement comes from Russia. More than 6,000 suppliers are involved in procurement procedures, and the list of goods exceeds 50,000. G

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