Annual Report 2013
Transcription
Annual Report 2013
Moving Ahead Annual Report 2013 MOVING AHEAD // Contents SOLLERS: MOVING AHEAD 06 08 12 14 16 Chairman’s Statement CEO’s Statement About the Company Project Mapping Key Performance Indicators Business & Strategy 20 29 34 36 Market Overview and Sollers’ Product Portfolio Our Strategy Our Business Model Business Projects and Key Assets Corporate Governance 48 50 54 55 60 62 What does Corporate Governance Mean to Sollers? The Profiles of Sollers’ Directors Board of Directors’ Meetings Board Committee Reports The Profiles of Sollers’ Managers Risk Management and Principal Risks Corporate Social Responsibility RUB 61.3 bln consolidated revenue in 2013 >20 new products were launched by SOLLERS together with its partners SOLLERS is one of the leading Russian automotive companies and works in partnership with global automotive producers such as Ford, SsangYong, Toyota, Mazda and Isuzu SOLLERS // Annual Report 2013 68 69 70 71 73 74 75 75 76 Responsible Business Principles in All Our Operations Increasing the Company’s Shareholder Value Growth Through Long-Term Partnerships Continuing Development Improving the Quality of Our Products and Services Improving Employee Competences Contributing to the Social and Economic Development Increasing Operating Safety and Monitoring Reducing Our Impact on the Environment Shareholders’ Equity & Securities 80 80 80 81 81 Share Capital Major Shareholders’ Market Share Price & GDR Investor Relations Calendar 2014 Investor Relations Department Financial Reporting 86 Independent Auditor’s Report 87 Sollers Group Consolidated Financial Statements 91 Sollers Group Notes to the Consolidated Financial Statements at 31 December 2013 Additional Information 124 Glossary 125 Corporate Information and Key Contacts www.sollers-auto.com For more info... This Annual Report is also available on our website, www.sollers-auto.com MOVING AHEAD BUSINESS & STRATEGY CORPORATE SOCIAL RESPONSIBILITY CORPORATE GOVERNANCE SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 2 MOVING AHEAD // 2013: SOLLERS’ Major Achievements Strengthening positions and internal efficiency Retail Sales SsangYong retail sales grew by 9% Y-on-Y to 34.1 k units. The brand was included in the top 20 most popular car brands in Russia, according to the Association of European Businesses. This growth was driven by Actyon, which was restyled in August 2013. SSANGYONG UAZ Domestic market Export ISUZU FORD SUVs 34.1 k units 51.6 k units 10.4 k units 1.3 k units 17 k units +9% –15% +37% +71% TRIPLED versus 2012 versus 2012 versus 2012 versus 2012 The launch of the new generation UAZ Patriot has helped to maintain a solid demand for UAZ SUVs and is proving itself to be a good substitute for the old UAZ model range. versus 2012 Ford Sollers JV tripled its retail sales of Ford SUVs in 2013 Y-on-Y to over 17 k units, due to the launch of the new Kuga and increased production of the Explorer. Further localisation of Ford SUV models and new launches will increase the competitiveness of the Ford brand in the SUV segment and improve production efficiency. › For more information about SOLLERS’ market position and business structure see PAGE 13. Our Year in Brief APRIL 05 > SOLLERS-ISUZU JV starts assembly of the ISUZU ELF 9.5, a new chassis with a payload of 6.6 tonnes, in Ulyanovsk JANUARY FEBRUARY FEBRUARY 18 > SOLLERS-BUSSAN JV starts production of the Toyota Land Cruiser Prado at its Vladivostok production site MARCH APRIL 12 > MAZDA SOLLERS JV starts production of the Mazda6, the second SKYACTIVE-equipped vehicle from Mazda, at the Vladivostok production site APRIL APRIL 11 > Ford Sollers JV starts assembly of the Ford Explorer SUV from completely-knocked-down (CKD) kits at its plant in Elabuga, where it also welds and paints bodies JUNE 14 > Ford Sollers JV starts assembly of the Ford Tourneo Custom MPV MAY JUNE › Our CEO discusses our year’s performance AUGUST 6 > UAZ starts the production and sales of a new UAZ Patriot model with a Dymos transfer gearbox (Korea) and new interior JULY MAY 14 > Ford Sollers JV starts building its first engine plant in Tatarstan, which will be opened in December 2015. The joint venture will also launch Ford EcoSport crossover utility vehicles in the second half of 2014 AUGUST SEPTEMBER and future priorities on OCTOBER AUGUST 23 > Launch of the SsangYong Actyon 2014 with a restyled exterior and interior at MAZDA SOLLERS JV in Vladivostok Key Financial Indicators Revenue RUB 61,317 mln SOLLERS // Annual Report 2013 NOVEMBER PAGE 8. DECEMBER OCTOBER 16 > Ford Sollers JV starts assembly of Ford Kuga crossover utility vehicles from completely-knocked-down kits at its plant in Elabuga › More KPIs can be found on EBITDA RUB 6,387 mln Net Debt RUB 3,491 mln Net Debt/ EBITDA 0.6 www.sollers-auto.com Net Profit RUB 3,625 mln Free Cash Flow RUB 6,923 mln PAGE 16 3 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE SOLLERS-BUSSAN JV Start of operations in the Russian Far East with the launch of Toyota LC Prado production in Vladivostok CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION MOVING AHEAD // Ford Sollers JV The largest SOLLERS’ JV project with a revenue of over RUB 82 bln in 2013 and production capacity up to 350 k units per year SOLLERS: Moving Ahead We are moving ahead with our partners in fast-growing market segments, aspiring to market leading positions and keeping a focus on business efficiency SOLLERS // Annual Report 2013 4 www.sollers-auto.com 5 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 6 MOVING AHEAD // Continuing to Make Progress Chairman’s Statement SUV segment’s share of the PC market SOLLERS’ EBITDA margin SOLLERS’ Net Debt/ EBITDA 36% 10.4% <0.6 makes Russia the largest SUV market in Europe We continued to make progress at SOLLERS in 2013, not just in terms of preparing our business to move ahead when market growth returns but also ensuring that we will be able to do so in a robust and sustainable way. We remain committed to working towards best practice standards, ensuring high levels of governance and ethics whether in our fullyowned businesses or joint ventures and whether in buoyant or more challenging trading conditions. 2.77 million new passenger cars and light commercial vehicles were sold in the Russian Federation in 2013, 5.8% below the record level of 2012. Viewed from a global perspective, however, this decline was modest. While the EU passenger car market fell by just 1.7% in the same period, EU sales have now been in decline for six years in a row, making 2013 the worst year in the EU since 1995. The coming year is unlikely to see a return to growth, and SOLLERS believes that a further decline of several percentage points is likely. However, healthy growth is expected to resume in 2015 with a compound annual growth rate (CAGR) until 2020 of between 3% and 5%. This growth will be driven by a number of factors, alongside general economic ones: the relatively low level of car ownership, only about half the average of OECD countries, has the potential to improve; despite rapid sales growth in recent years, the average age of the domestic fleet is 13 years and consumers will be looking to upgrade old vehicles or replace obsolete ones; and the level of credit financing is likely to continue to grow. compares favourably with our peer group both in Russia and globally Nearly all global automotive groups have now undertaken large investment programmes in the Russian Federation and are governed by Regulation 166 which rewards the creation of value-added activities and which has become even more important, given the decline in value of the Russian rouble. The Ford Sollers JV partnership, involving three modern and efficient assembly plants, is set to become one of the largest and most successful of these ventures. It will benefit from Ford's extensive knowledge of platform technology, as well as SOLLERS’ experience and commitment to working with existing and new suppliers in Russia. All these activities are designed to create a manufacturing base which will be competitive on a global scale. Equally, SOLLERS’ continued development of its own range of Sport Utility Vehicles (SUVs) and other all-wheel drive vehicles under its own brand, UAZ, is clearly responding well to the needs of Russian consumers. The SUV segment’s share of the total passenger car market, at 36%, makes Russia the largest SUV market in Europe. SOLLERS continues to modernise its plant in Ulyanovsk, its paint process for example, and invest in its own engineering capability. At the same time, successful partnerships for the assembly and distribution of SsangYong and Isuzu products are developing well, as are the other assembly projects in the Far East plant (Vladivostok), also involving Toyota and Mazda. Despite difficult trading conditions in 2013, SOLLERS managed to achieve an EBITDA margin of 10.4%, which compares favourably with our peer group both in Russia and globally. Our Net Debt/ EBITDA ratio at year end was an historic low of below 0.6. Our share price in the period considerably outperformed the market and continues, together with our dividend payments, to justify the investment community’s positive view of SOLLERS. The Board of SOLLERS continues to be dedicated to the highest international standards of corporate governance, with a majority of independent directors, who chair all Board Committees. SOLLERS also benefits from a transparent management system based on merit. These factors contribute to the Company's leading ability to secure effective partnerships with international technology providers and to work effectively with Government, suppliers and customers alike. We work in an exciting industry whose strategic importance is recognised and supported by the Russian Government. Together with our commitment to best practice in all that we do, we believe we offer excellent and rewarding opportunities to existing and future employees to be part of our long-term commitment to shareholder value creation. DAVID J. HERMAN CHAIRMAN SOLLERS // Annual Report 2013 record low Net Debt/ EBITDA ratio demonstrates our strong financial position www.sollers-auto.com 7 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 8 MOVING AHEAD // Taking on Challenging Tasks CEO’s Statement Growth of SOLLERS’ and Ford Sollers JV’s retail sales for new SUVs Market share of the SUV segment Ford Sollers JV’s market share of the C segment 24% 8.0% 12% Y-on-Y from 60.7 k vehicles in 2012 to 75.2 k vehicles in 2013 HOW WOULD YOU SUMMARISE YOUR 2013 RESULTS? In 2013 we progressed well in line with our growth strategy. We took another step towards gaining leadership positions through our full-scale partnerships with leading international automakers. To summarise the strategic progress we made I will focus on four principal milestones in 2013. ›› Successfully incorporated all joint ventures into the new Group structure. In January 2013, we started operations at the SOLLERS-BUSSAN JV. This represented the completion of our Group restructuring programme and our first full operating year under this Group structure. I would like to express my gratitude to our shareholders and all of SOLLERS Group’s stakeholders, including customers, employees, international partners, suppliers and local communities for their sustained support and loyalty, as well as the Board of Directors for their professionalism, enthusiastic work and courage to take on challenging tasks. SOLLERS // Annual Report 2013 ›› Expanded our product range, increased localisation at the joint ventures and improved our sales network. One of the key achievements in our consolidated businesses was the remodelling of the UAZ Patriot. This best-selling UAZ SUV is now equipped with a Hyundai-Dymos transfer gear, a new, more ergonomic interior and a range of modern options, making it an excellent alternative to the old UAZ model range. We have great expectations for this affordable and well-equipped SUV and plans for its gradual makeover are already in place. We also contributed to the success of SsangYong models in Russia. In October we started selling the restyled Actyon and orders surpassed our expectations, with retail sales in 2013 reaching 20.1 k units and shattering all previous records. The model was extremely well received and contributed substantially to its brand popularity in Russia. According to the Association of European Businesses, in 2013 SsangYong’s outperformance in the market made it one of the 20 best-selling brands in Russia. We consider this to be a great achievement, as only 10 years ago its brand awareness in Russia was very low. versus 7.1% in 2012 Alongside product launches in our consolidated business, SOLLERS’ joint ventures also expanded their model range, adding global leading products to their portfolio in several market segments. SOLLERS-BUSSAN JV had a successful start to the year, commencing assembly of the Toyota Land Cruiser Prado in the Far East of Russia. This is the first time that Toyota assembly has been outsourced to a third party and this fact alone demonstrates the excellence of our production sites and technical ability to live up to Toyota’s high quality standards and controls. In April we also saw the launch of the new D-class Mazda6 sedan in Russia. The assembly is carried out by MAZDA SOLLERS JV, located in Vladivostok. In April 2013, SOLLERS-ISUZU JV started the production of a new ISUZU ELF 9.5 chassis with a payload of 6.6 tonnes in Uliyanovsk. This launch has helped revive ISUZU retail sales, which increased by 71% to 1,295 trucks in 2013. The joint venture is investing in production capacity in preparation for CKD–assembly planned for 2014. In March 2013, Ford Sollers JV launched the new Kuga at the Elabuga plant, and in October CKD assembly started. In April, CKD assembly kits also started to be used for the production of the Explorer. Ford Sollers JV is on track with its localisation plans, introducing CKD-production in Elabuga and its R&D centre which will adapt Ford vehicles for Russia and create special versions of LCVs tailored to the local market. The company continues to strengthen its supply chain with its strategy now focused on Tatarstan, where the joint venture is actively developing a supplier base and already sourcing components from over 50 companies in Russia. We are continually improving our sales network and quality of our service. The UAZ and SsangYong sales network grew from 254 dealerships in 2012 to 266 in 2013. We are creating new credit and leasing tools to help finance our vehicles through new partnership programmes with leading banks. www.sollers-auto.com In 2013, the Ford Focus became the market leader of the C segment in Russia ›› Sales strengthened in the growing market segments and leadership maintained in the large saturated market segments. In 2013, SOLLERS’ and Ford Sollers JV’s retail sales in the Russian market for new SUVs grew 24% Y-on-Y from 60.7 k vehicles in 2012 to 75.2 k vehicles in 2013; total market share in the SUV segment is 8.0% (versus 7.1% in 2012). Sales of C segment passenger cars were affected more strongly by the market deterioration than others. However, the C segment is the second largest segment in the Russian passenger car market and also one of the most competitive. And we are pleased to announce that in 2013 the Focus became market leader of the C segment in Russia, across all models, with almost 12% market share of this segment. ›› Solid financial position and sound profitability achieved despite the adverse operating environment. SOLLERS Group’s Revenue in 2013 amounted to RUB 61,317 million (RUB 65,549 million in 2012). The deterioration in revenue of 6.5% is due to the decrease in UAZ sales volumes, the deconsolidation of the ISUZU business and the discontinuation of FIAT sales. EBITDA margin for 2013 was 10.4%, compared to 11.7% in 2012. The decline in EBITDA margin performance was largely driven by the restructuring of the Group’s income in 2013. The decrease in consolidated operating profit and EBITDA was due to the transfer of SsangYong production to the MAZDA SOLLERS JV, which resulted in the deconsolidation of its operating profit margin. This decline in operating profit is compensated for at the net profit level. Therefore, if calculated on a like-for-like basis there would be no impact on EBITDA margin. Net profit for the year was RUB 3,625 million compared to RUB 5,843 million in 2012. The fall in net profit is mainly explained by gains from one-off transactions in 2012 and a decline in operations in 2013. Free cash flow generated by SOLLERS’ consolidated entities was a key factor to the Company’s ability to reduce Net debt, which was at a record low level of RUB 3,491 million at the end of 2013 (down by 56% Y-on-Y). This low leverage is an indicator of the financial stability of the Company and enabled us to propose dividends. 9 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 10 MOVING AHEAD // CEO’s Statement (continued) SOLLERS Group’s Consolidated Revenue in 2013 EBITDA margin for 2013 Net profit for the year Net Debt decreased by Proposed dividend Total declared dividend payment RUB 61.3 bln 10.4% RUB 3.6 bln 56% RUB 52.52 per share RUB 1.8 bln WHAT IS THE MOST IMMEDIATE PRIORITY FOR THE COMPANY? Market SOLLERS plans to grow further in the SUV segment in Russia. The plan to produce the Ford EcoSport in Tatarstan will significantly increase Ford Sollers JV’s presence in the only growing segment of the Russian market. Localisation Further localisation of vehicle components eliminates our exposure to foreign exchange risk, which is important in the current environment of a weakening rouble. It also increases our business operating efficiency through logistics benefits. Ford Sollers JV is on track with its localisation plans and remains committed to comply with Regulation 166 targeting the level of 60% by 2016. Product development We plan to develop the UAZ model range, alongside increasing production efficiency, by utilizing UAZ’s spare production capacity for contractual assembly and rental contracts. The 2015 Patriot model range will have a new exterior and a number of technological upgrades, improving passenger comfort and vehicle safety. In 2016, we plan to continue innovating the Patriot range by introducing a Euro 5 compliant turbo engine and Dynamic Stability Control (DSC). The product development will be accompanied with investments to optimize UAZ plant’s logistics, stamping and painting, which will increase the quality of the product and its warranty terms. SOLLERS // Annual Report 2013 WHAT IS YOUR OUTLOOK FOR THE OPERATING ENVIRONMENT IN 2014? WHAT IS YOUR APPROACH TO DIVIDENDS? With continued Russian macroeconomic instability the future still remains uncertain. Unfortunately, the Russian automotive market is highly dependent on the USD/ RUB exchange rate. At the current exchange rate, we anticipate a further decline in the automotive market of 7-10% in 2014. Maintaining a balanced approach to dividends is always a complex decision for the Board of Directors. Historically the Board of Directors proposes a dividend if the Net Debt/ EBITDA is lower than 1.5 and the Group has performed well financially in the year. The Dividend Yield is also an important ratio that the Board of Directors considers when making a proposal to the AGM. Despite this situation, if the rouble valuation is corrected and GDP revived, the Russian automotive market has all the fundamental reasons to show growth: ›› low car penetration ›› old car fleet ›› high potential of credit financing. In 2013, the Group’s Net profit for the year amounted to RUB 3,625 million while Net Debt/ EBITDA fell to a record low of 0.6. Taking into account the Group’s stable financial position and its strong cash flow, the Board of Directors proposed to the Annual General Meeting of Shareholders a dividend of RUB 52.52 per share, which will make a total declared dividend payment of RUB 1,800 million. We forecast the SUV segment to attain a 50% share of the total car market in the medium term; this is the only large segment that is forecast to show sustainable growth in 2014. The main reasons behind this growth trend are the harsh climatic conditions and the change in Russian consumers’ preferences. The recent emergence of light crossovers, the cheapest SUV category, has also contributed to the segment’s popularity. We believe that steady dividend payments will be viewed positively by the market and indicate a strong rationale for the long-term growth potential of SOLLERS’ market capitalisation. 2014 is going to be quite a challenging year for the Ford Sollers JV due to the continuing contraction of the C segment and high exposure to foreign exchange risk. Nevertheless, the JV is continuing to implement its investment plans, which could boost sales in the future. Specifically, the launch of the new Ford Transit and Ford EcoSport at the Tatarstan production sites is seen as the key growth factor for Ford Sollers JV in 2014. WOULD YOU LIKE TO SAY ANYTHING TO SHAREHOLDERS, CUSTOMERS AND EMPLOYEES IN CONCLUSION? Going forward, we aim to manage the Group’s core strengths to create a resilient business that will not be significantly affected by exchange rate movements and macroeconomic uncertainty, and to improve shareholder value. We will continue to make competitive and high quality products that provide the best solution in each market segment, focusing on specific customer needs and moving our brands into leading positions on the Russian market. I would like to thank our shareholders and investors, and all our stakeholders, for their continued support and cooperation. We will continue to make competitive and high quality products that provide the best solution in each market segment, focusing on specific customer needs and moving our brands into leading positions on the Russian market. VADIM SHVETSOV CHIEF EXECUTIVE OFFICER www.sollers-auto.com 11 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION SOLLERS: Moving Ahead 12 MOVING AHEAD // Strengthening Positions and Internal Efficiency About the Company SOLLERS is one of the leading Russian automotive companies and works in partnership with global automotive producers such as Ford, SsangYong, Toyota, Mazda and Isuzu. In 2013, our consolidated turnover was in excess of RUB 61 billion. In 2013 we diversified our model mix to create one of the best SUV portfolios in the Russian market. In 2013 we diversified our model mix to create one of the best SUV portfolios in the Russian market. SsangYong retail sales grew by 9% Y-on-Y to 34.1 k units. The brand was included in the top 20 most popular car brands in Russia, according to the Association of European Businesses. This growth was driven by Actyon, which was restyled in August 2013. The launch of the new generation UAZ Patriot has helped to maintain a solid demand for UAZ SUVs and is proving itself to be a good substitute for the old UAZ model range. Further localisation of Ford SUV models and new launches will increase the competitiveness of the Ford brand in the SUV segment and improve production efficiency. In 2013, we remained focused on the overall efficiency of the business. SOLLERS’ consolidated Net Debt decreased by 56% to RUB 3,491 mln, which led to a record low level of Net debt/ EBITDA ratio of 0.6. We achieved effective capacity management through ongoing cost-cutting and resource allocation to maintain a sustainable level of consolidated EBITDA margin of 10.4%. Ford Sollers JV tripled its retail sales of Ford SUVs in 2013 Y-on-Y to 17.0 k units, due to the launch of the new Kuga and increased production of the Explorer. Business structure as of 31.12.20131 SOLLERS assembles a wide range of vehicles, which are sold in the fastestgrowing and most in demand segments of the Russian automotive market, and operates a strong distribution and service network across the country. SOLLERS owns production facilities which produce Russian UAZ off-road vehicles, Japanese ISUZU trucks (controlled by SOLLERSISUZU JV), and both petrol and diesel engines. Alongside its fully-owned businesses, SOLLERS has partnerships with leading global automakers. In 2011, we set up a joint venture, Ford Sollers JV, the exclusive producer and distributer of Ford vehicles in Russia. The Ford model range in Russia includes eight vehicles assembled locally, of which six were launched in the Republic of Tatarstan in the last two years. The industrial cluster in the Russian Far East, Vladivostok, includes MAZDA SOLLERS JV, the producer of the Mazda CX-5 and Mazda6, and SOLLERS-BUSSAN JV, which at the very start of 2013 began assembling the Toyota Prado. SOLLERS // Annual Report 2013 The production facility in Vladivostok assembles Korean SsangYong off-road and crossover vehicles. Since it was founded SOLLERS has gained leading market positions across multiple segments of the Russian automotive market; launched together with its partners over twenty new products; increased manufacturing capacity to around 550,000 vehicles a year; and become one of the most efficient companies in the Russian automotive industry. At SOLLERS we have an excellent track record of integrating innovative ideas into and finding solutions for all projects that we undertake, whether targeting exciting high growth market segments or focusing on improving our operational efficiency. We are well-positioned to move ahead, taking advantage of our focused, strategic actions in this challenging market. SOLLERS Manufacturing capacity >550 k vehicles p.a. The Ford model range in Russia 8 vehicles CONTROLLED ASSETS SsangYong Distribution of SsangYong vehicles3 Production site: Vladivostok UAZ Production and Distribution of UAZ vehicles and parts Production sites: ZMZ & UAZ assembled locally, of which 6 were launched in the Republic of Tatarstan in the last two years PARTNERSHIPS2 FULL SCALE JOINT VENTURES Ford Sollers JV (50:50 Joint Venture) SOLLERS-ISUZU JV (50:50 Joint Venture) Production and Distribution of Ford vehicles Production sites: Vsevolozhsk, Naberezhnye Chelny, Elabuga Production and Distribution of Isuzu trucks Production site: Ulyanovsk INDUSTRIAL PARTNERSHIPS SOLLERS-BUSSAN JV (50:50 Joint Venture) MAZDA SOLLERS JV (50:50 Joint Venture) Production of Toyota vehicles Production site: Vladivostok Production of Mazda and SsangYong vehicles Production site: Vladivostok SOLLERS-FINANCE JV (50:50 Joint Venture) Joint Venture with Sovkombank offers a full range of car leasing services 1 Company source 2 Partnerships are equity-accounted under IFRS www.sollers-auto.com 3 In 2013, the production of SsangYong vehicles was transferred to MAZDA SOLLERS JV 13 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION Moving Ahead with Our Partners Project Mapping Our strategic partnership with Korean SsangYong was established in 2005. Since then, SOLLERS has been the exclusive producer and distributor of SsangYong vehicles in Russia, has developed production facilities in Vladivostok, and achieved one of the leading positions in the Russian SUV market with over 34,000 vehicles sold in 2013. In 2013 SsangYong production was transferred to the MAZDA SOLLERS JV to benefit from economies of scale and investment sharing. SOLLERS-ISUZU JV was established in 2007 as the first Russian-Japanese joint venture for the production and distribution of ISUZU commercial vehicles. In June 2012, the production of ISUZU trucks was transferred to the Ulyanovsk production facility. SOLLERS’ overall capacity >550 k units p.a. › For more information about SOLLERS- directly owned or through JVs ISUZU JV, please see PAGE 44. SOLLERS-BUSSAN JV is a joint venture established by Mitsui & Co. (Japan) and SOLLERS in 2011. In February 2013 the industrial joint venture started production of the Toyota LC Prado SUV at the production site in Vladivostok. Vsevolozhsk › For more information about SOLLERS- › For more information about SsangYong, BUSSAN JV, please see PAGE 41. MOSCOW please see PAGE 38. UAZ Holding manufactures SUVs and commercial vehicles. Since 1942, UAZ has been a traditional Russian OEM, developing large-scale production facilities, including the production of engines and automotive components, forging and aluminium casting. › For more information about UAZ, please see 14 MOVING AHEAD // Zavolzhye Ulyanovsk MAZDA SOLLERS JV is a joint venture established by Mazda Motor Corporation and SOLLERS. Since September 2012, the joint venture has been producing Mazda CX-5 crossovers in Vladivostok. At the very beginning of 2013, SOLLERS transferred the production of SsangYong vehicles to MAZDA SOLLERS JV. In April 2013, the joint venture started assembly of the new Mazda6 sedan. Naberezhnye Chelny Elabuga PAGE 36. › For more information about MAZDA Ford Sollers JV was established by Ford Motor Company and SOLLERS. Since October 2011, Ford Sollers JV has been the exclusive producer, distributor and provider of automotive components for all Ford cars in Russia. The three production facilities, financed by the joint venture partners, have a total production capacity of 350,000 vehicles per year. SOLLERS JV, please see PAGE 40. SOLLERS-FINANCE JV is a financial company, initially founded by SOLLERS in 2008, which specialises in leasing services. In December 2010, it was transformed into a 50:50 joint venture between Sovkombank and SOLLERS. Vladivostok › For more information about Ford Sollers JV, please see PAGE 42. › For more information about SOLLERS FINANCE JV, please see PAGE 45. UAZ ZMZ SOLLERS-ISUZU JV FORD SOLLERS JV VSEVOLOZHSK 100 k units p.a. 200 k units p.a. 5 k units p.a. FORD SOLLERS JV ELABUGA FORD SOLLERS JV NABEREZHNYE CHELNY 350 k units p.a. MAZDA SOLLERS JV & SOLLERS-BUSSAN JV 100 k units p.a. Production capacity Production capacity Production capacity PRODUCT LINES: PRODUCT LINES: PRODUCT LINE: PRODUCT LINES: PRODUCT LINES: PRODUCT LINE: PRODUCT LINES: ›› UAZ SUVs ›› UAZ LCVs ›› Petrol engines ›› Diesel engines ›› ISUZU trucks, N-series ›› Ford Focus ›› Ford Mondeo ›› ›› ›› ›› ›› ›› ›› To be launched in 2H2014 ›› Ford EcoSport ›› ›› ›› ›› SOLLERS // Annual Report 2013 Total production capacity of Ford Sollers JV Ford Transit Ford Explorer Ford Kuga Ford S-MAX Ford Galaxy Ford Edge www.sollers-auto.com Production capacity SsangYong SUVs Mazda CX-5 Mazda6 Toyota LCPrado Headquarters Fully Controlled Assets Joint Ventures 15 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 16 MOVING AHEAD // Moving Ahead Constantly Key Performance Indicators SOLLERS’ Consolidated Wholesales, thousand units 2009 2010 2011 2012 2013 Change % 35.1 57.0 63.7 70.3 62.9 (7.4) -11% SUVs 16.7 25.7 30.2 32.1 27.7 (4.4) -14% LCVs, MPVs 18.4 31.3 33.5 38.2 35.2 (3.0) -8% SsangYong 7.9 14.3 24.8 32.7 35.2 2.5 8% TOTAL 43.0 71.3 88.5 103.0 98.1 (4.9) -5% FIAT5 14.4 23.7 29.8 5.1 - (5.1) -100% UAZ EBITDA, RUB mln Total Sales, RUB mln 80,000 60,000 40,000 7,652 8,000 69,531 65,549 55,266 61,317 6,000 34,743 6,923 5,747 6,000 2,000 0 0 2010 2011 2012 2013 2009 –2,000 2010 2011 2012 2,277 Net Debt, RUB mln 5,843 6,000 4,594 4,000 25,000 3,625 2,000 23,205 –494 2011 2012 2013 30 25 20,000 15 0 10,000 –2,000 –1,815 –6,000 –5,027 2009 7,880 5,000 –4,000 2011 2012 2013 3,491 14.0 2009 2010 2011 2012 2013 6,8 5,8 6,1 5,0 5,1 Production and related workers 17,4 16,9 14,4 14,7 14,2 TOTAL 24,2 22,8 20,5 19,8 19,3 25.7 2012 2013 17.1 5 2010 2011 2012 2013 2009 4 Attributable to owners of the Company. SOLLERS // Annual Report 2013 25.1 0 2009 19,3 10 0 2010 22.4 20 13,877 15,000 19,8 0 2010 Average Salary per Month, RUB thousand 21,442 20,5 10 White collar Net Profit (Loss)4, RUB mln 22,8 5 2009 2013 24,2 15 0 264 25 20 4,000 4,306 2,000 20,000 2009 7,903 8,000 6,387 6,269 4,000 Average Number of Employees6, thousand people Free Cash Flow, RUB mln www.sollers-auto.com 2010 2011 5 SOLLERS discontinued FIAT business in 2012. 6 Average number of employees at consolidated business. 17 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING 75.2 k units $350 mln Total SOLLERS’ and Ford Sollers JV’s retail sales in the Russian market for new SUVs in 2013 Investments made by Ford Sollers JV in new models and localisation in 2013 ADDITIONAL INFORMATION MOVING AHEAD // We work in partnership with global automative producers to generate synergies by combining key competencies into a single, multi-faceted business, enabling us to offer freedom of choice to our customers SOLLERS // Annual Report 2013 18 Business and Strategy www.sollers-auto.com 19 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 20 MOVING AHEAD // Moving Ahead even in Turbulent Markets Market Overview and SOLLERS’ Product Portfolio The SUV segment is the fastest-growing segment in the Russian automotive market, with a growth rate of +9% Y-on-Y, which outperforms passenger car sales. It is forecast to grow steadily over the medium term, with an average market share up to 40-50% of the total market. PASSENGER CARS (PC) ›› Based on 2013 figures, the Russian market remains the second largest in Europe (behind Germany) in terms of new passenger car unit sales; in 2010 Russia was the fifth largest market. ›› In 2013, market growth was seen in only two segments. Sales of SUVs and minivans increased by 9% and 61% respectively. All other segments fell versus 2012. ›› Foreign models assembled in Russia have dominated the market since 2011 and, in 2013, continued to increased their share (47% in 2013; 46% in 2012; 43% in 2011). ›› In 2013, sales by volume were down 6% while revenues stayed at the same level as in 2012 and the average purchase price of a car in Russia increased from USD 25,042 to USD 26,353 (+5.2%).13 Sales of Passenger Cars and Commercial Vehicles in the Russian Federation by Key Segment, thousand units Sales of Passenger Cars in the Russian Federation by Origin, thousand units12 2,943 3,000 2,646 2,000 Major Macro Trends7 In 2013, Russian industrial production increased 0.3%8 Y-on-Y. Within the industrial production sectors, the manufacturing sector demonstrated 0.1%9 annual growth over the year. The mechanical engineering sector was flat Y-on-Y.10 Automotive production volumes (including PCs, CVs, Trucks and Buses) fell in 2013 by 2% to 2,178 k units11. Russia’s automobile factories produced 1,916 k (-2.0% vs. 2012) passenger cars (PCs) and light commercial vehicles (CVs), 209 k trucks (-1.5%) and 52.9 k buses (-9.1%). This decline in production is a direct consequence of the reduced purchasing activity in the market. The Association of European Businesses (AEB) considers that the main reason for this is consumer concern about future economic instability. 7 The main source for market data in the paragraph is AEB, Association of European Businesses, unless otherwise mentioned. 8 Rosstat. SOLLERS // Annual Report 2013 2013 was a difficult year for the Russian automotive market: sales of new cars declined from February to November and the explosive growth witnessed in December was driven by unprecedented discounts and special offers that continued into 2014. The 2013 figures bear out this difficult year – 2,772 k vehicles were sold (incl. CVs), 6% lower than record figures of 2012 (2,943 k units) and 5% lower than in the pre-crisis year of 2008 (2,917 k units). The market was influenced by both positive and negative factors: ›› Deteriorating economic expectations ›› State car loan subsidizing programme ›› Exchange rate and oil price fluctuations ›› Decelerating GPD growth ›› Gradual saturation of demand in some segments ›› High interest rates. 9 Rosstat. 10 Ministry of Industry and Trade. 11 Rosstat. 2,000 1,909 1,461 1,500 1,000 1,000 500 500 0 2,596 2,462 2,500 2,500 1,500 2,753 3,000 2,772 1,768 1,357 0 2009 2010 2011 2012 2013 B 150 210 283 266 218 B+ 273 383 547 554 547 C 438 556 710 755 581 D 68 67 84 92 73 SUV+Pickup 320 432 670 883 959 CV (incl. CDV) 104 141 183 190 176 Others 108 120 169 204 218 TOTAL 1,461 1,909 2,646 2,943 2,772 Source: AEB, Association of European Businesses. 12 The numbers are different to those published in the 2012 SOLLERS Annual Report due to a retrospective correction of the origin of several car models later during the year 2013, which had actually been assembled locally. www.sollers-auto.com 2009 2010 2011 2012 2013 Russian brands 377 560 618 577 477 Foreign brands assembled in Russia 343 576 1,049 1,260 1,232 New imports TOTAL 636 632 796 917 887 1,357 1,768 2,462 2,753 2,596 Source: AEB, Association of European Businesses. 13 Company estimates. Sales data from AEB. Price monitoring from official OEM websites (Evitos-Inform agency). 21 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 22 MOVING AHEAD // Market Overview and SOLLERS’ Product Portfolio (continued) COMMERCIAL VEHICLES (CV) WITH A GROSS WEIGHT OF UP TO SIX TONNES The market for commercial vehicles comprises three major segments: car-derived vans (CDVs) or box carriers based on light motor vehicles with a gross vehicle weight (GVW) of up to 2,500 kg; light commercial vehicles (LCVs) or light trucks with a GVW of 2,500 kg to 3,500 kg; and multi-purpose vehicles (MPVs), mainly minibuses. ›› In 2013, CV sales declined by 7%. The Russian light commercial vehicles (LCV) market subsegment shrank for the first time since 2009. ›› In 2013, the LCV subsegment remained the largest within the CV segment, despite a fall in unit sales of 5% versus 2012. However, the decline in LCV sales was the lowest in the CV segment and the growth that this subsegment experienced in 2010 is expected to return. ›› The market for foreign brands assembled in Russia is dominated by Ford Transit. Ford Sollers JV is the only producer of foreign branded LCVs and MPVs in Russia, except for a small quantity of the Mercedes Sprinter Classic assembled at GAZ since mid-2013. In 2013, Transit retail sales grew by 13% versus 2012. Sales of CVs in the Russian Federation by Segment, thousand units 200 183 150 100 190 176 ›› An old car fleet and an accelerating replacement rate (the average age of the existing domestic car fleet is currently 13 years, with one third over 15 years old15) favours long-term growth; despite the successful implementation of an old-vehicle scrappage programme in 2011, many Russian car owners still have old vehicles that will soon be obsolete. ›› Foreign automakers’ investments in facility management in Russia will force OEMs to increase local production. ›› New industrial assembly aimed at supporting the localisation of foreign brands will enable manufacturers to increase their operating margins. ›› The growth in sales financed by credit increased from 25% in 200916 to 46%17 in 2013. In 2014 this share is expected to reach 50%. 104 SUV SEGMENT 1,000 ›› In 2012 the SUV segment became the largest car segment in the Russian market and, in 2013, it increased its share of PC sales to 36%. 50 2009 2010 2011 2012 2013 LCV 60 89 120 124 118 MPV 27 30 31 35 30 CDV TOTAL 17 21 33 31 28 104 141 183 190 176 Source: AEB, Association of European Businesses. 200 183 150 ›› The SUV segment is just one of a few segments in the Russian passenger car market (along with pickups and the F+S segment) where sales in 2013 surpassed the pre-crisis level of 2008; the SUV segment is forecast to grow steadily outpacing the overall market growth rate over the medium term with an average market share of 40-50%. ›› The main growth in the SUV segment is driven by a higher demand for cars with a “universal solution” (e.g. the ability to drive all year round in cities and rural areas); higher sales were also driven by the popularity of affordable foreign branded SUVs assembled in Russia (in 2013 these SUV sales increased by 19% versus 2012). Sales of CVs in the Russian Federation by Origin, thousand units 100 190 176 ›› The share of foreign brands assembled in Russia in the SUV segment grew from 23% in 2009 to 47% in 2013. ›› In the SUV segment, SOLLERS is represented by several brands: UAZ, SsangYong and Ford (through Ford Sollers JV). 141 104 ›› In 2013, SOLLERS’ and Ford Sollers JV’s retail sales in the Russian market for new SUVs were up 24% Y-on-Y from 60.7 k vehicles in 2012 to 75.2 k vehicles in 2013; total market share in the SUV segment is 8.0% (versus 7.1% in 2012). 50 0 2009 2010 2011 2012 2013 Russian brands 62 89 111 114 108 Foreign brands assembled in Russia 12 17 22 21 15 New imports TOTAL 858 800 600 400 651 23% 24% 422 935 40% 36% 30% 31% 26% 20% 310 10% 200 0 0 ›› UAZ retail sales fell by 13.3% from 29.1 k vehicles to 25.3 k vehicles; UAZ’s market share in the SUV segment was 2.7% at the end of 2013. The slowdown was due to a decrease in sales of the old UAZ model range, whereas Patriot sales were virtually flat. 0 2009 2010 2011 2012 2013 Russian brands 43 68 89 84 77 Foreign brands assembled in Russia 71 129 228 349 417 New imports 196 225 334 425 441 TOTAL 310 422 651 858 935 Total 23% Market share of SUVs in PC market 24% 26% 31% 36% Source: AEB, Association of European Businesses. 3.4% in 2012 to 3.5% in 2013; this growth was mainly driven by sales of the SsangYong Actyon, following its recent restyling in this fast-growing market segment. ›› Ford Sollers JV’s SUV production in Russia started in Q4 of 2012 with the assembly of the Explorer and Kuga in Elabuga. The joint venture started CKD production of the Explorer in Elabuga in April 2013 and of the Kuga in October. In 2013, Ford SUV sales grew significantly by 172% from 6.3 k units to 17.0 k units; in 2013, 100% of the 17.0 k SUVs sold were produced in Russia (whereas in 2012 only 36% of Ford SUVs were assembled locally). ›› Year-on-year, the Company increased its retail sales of SsangYong SUVs by 12.6%, moving SsangYong’s share of the SUV market from 30 34 51 55 53 104 141 183 190 176 ›› The undertaking of joint loan programmes between automakers and banks along with the operations of several captive banks. Source: AEB, Association of European Businesses. 14 Avtostat estimates. 15 Sollers estimates. 16 Ministry of Industry and Trade estimates. 17 NBKI (National Bureau of Credit Histories) estimates. SOLLERS // Annual Report 2013 Sales of SUVs in the Russian Federation by Origin, thousand units19 ›› In recent years, the SUV segment has been the fastest-growing segment in the Russian automotive market, outpacing the overall growth rate of passenger car (PC) sales (+9% versus -6% in 2013). 141 KEY LONG-TERM GROWTH FACTORS ›› There is considerable potential for the Russian automobile market penetration rate to grow; currently, the number of cars per 1,000 inhabitants in Russia is 266, whereas in developed countries this indicator exceeds 500.14 SOLLERS’ Position in the Russian Automotive Market in 201318 18 SOLLERS’ Group sales here include retail domestic sales of SsangYong, UAZ, Ford and ISUZU. www.sollers-auto.com 19 The numbers are different to those published in the 2012 SOLLERS Annual Report due to a retrospective correction (later during the year 2013) of the origin of several car models, which had actually been assembled locally. 23 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION MOVING AHEAD // 24 Market Overview and SOLLERS’ Product Portfolio (continued) UAZ Patriot Explorer The legendary American off-roader first appeared on the Russian market in March 2012, when Ford Sollers JV started assembling the SUV in Elabuga. In 2013, the Explorer was one of the top 20 best-selling vehicles in USA, the biggest SUV and pick-up market in the world, and its prospects look very promising in the Russian market, especially taking into account the fast-growing share of SUVs in Russia. In 2013, Explorer retail sales surpassed the 2012 level by 145%, reaching 5.0 k SUVs. A powerful and reliable SUV with a true off-road character – second to none on the Russian market in terms of performance. In August 2013, SOLLERS revamped the original model, equipping the UAZ Patriot with the latest features such as a Hyundai-Dymos transmission with electronic control, windscreen heating, front seat heaters and individual heating modules for back seats. Together with the restyling which took place in 2012, when the Patriot was equipped with a new diesel engine and improved air conditioning, a soft-touch control panel, a hands-free entertainment system and new interior, this additional revamp in 2013 has created a new member of the Patriot family. In January 2013, Ford Sollers JV launched a new top-of-the-range version – the Explorer Sport. This car is finished with the original exterior elements, which not only make the SUV stand out in urban traffic, but also provide an unforgettable experience of driving a real off-roader. In addition the Explorer Sport is equipped with a powerful engine of 355 hp and a range of innovative technologies including Terrain Management System. In 2013, the Explorer was acknowledged the best in class model in the Annual Russian “Car of the year 2013” Awards. In 2013, the model was exported to over a dozen countries, primarily Kazakhstan, Belarus and Ukraine. SsangYong Actyon Kuga In March 2013, the new Kuga first appeared in Russian dealerships. Powerful, superior and more stylish, both inside and out, Ford Sollers JV launched the Kuga, the smartest of Ford’s SUVs. The car was an instant success on the Russian market. In 2013, retail sales of the Ford Kuga tripled compared to 2012, totalling 12 k units. The SsangYong Actyon is the first crossover to be designed with an integrated body and four-wheel drive. The model was first launched in Russia in 2011 and it now occupies a secure place in the Russian market for compact urban crossovers. Its share of crossovers, the fastest-growing subsegment of the SUV market, is 3%. In 2013, retail sales of the Actyon reached 20.1 k units, an increase of 26% Y-on-Y. The new Ford Kuga has excellent stowage capacity and boasts the very latest on-demand technology. An Intelligent All-Wheel Drive system adapts instantly to the terrain and driving conditions. Active City Stop automatically brakes at low speed to prevent collisions and the Ford SYNC allows hands-free control of music, phone calls and much more. The Ford Kuga is the first SUV model with an innovative hands-free tailgate. Packed with innovative features, the Kuga takes SUV styling and technology to a whole new level. In 2013, the model had a major internal and external makeover. The restyled version of the model is equipped with LED headlights and rearlights, seat ventilation, automatic tyre pressure checks, a soft-touch interior finish and the latest entertainment and navigation systems. SsangYong added a choice of four new colours and a special “Red Line” version with a red leather interior. In February 2013, the Ford Kuga won the 2012 Euro NCAP best-inclass safety award, coming top in the SUV segment. SOLLERS // Annual Report 2013 www.sollers-auto.com 25 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION MOVING AHEAD // 26 Market Overview and SOLLERS’ Product Portfolio (continued) COMMERCIAL VEHICLES (LCV & MPV, EXCL. CDV) C AND D SEGMENTS ›› Since the 2008 economic crisis, the Russian passenger car market has been growing steadily, but in 2013 it went into decline for the first time in the post-crisis recovery period. C and D segments were affected more strongly by the market deterioration than others. Nonetheless, the C segment is the second largest segment of the Russian PC market (behind the SUV segment) and also one of the most competitive; in 2013, this segment accounted for 22% of passenger car sales (27% in 2012); the D segment fell from 5th place in 2012 to 7th place in 2013 in terms of unit volumes in the PC market, but it maintained its 2012 market share of 3%. ›› For the first time since 2009 sales of foreign imported brands nearly equalled sales of foreign brands assembled in Russia, with sales of the latter falling by 22% vs. 2012 and holding a 46% share of the total C + D segment. ›› In 2013, retail sales of Ford cars in the C segment decreased by 27% against 2012. However, the Ford Focus is the number one C segment car in Russia across all brands with a 12% market share in this segment. In 2012 it was ranked 3rd behind Chevrolet and Lada. ›› Ford’s D segment sales in 2013 put the brand into the top five most popular models in this class. In 2013, the Ford Mondeo’s market share in this segment was 9.3%. Sales of C and D Segment Passenger Cars in the Russian Federation by Origin, thousand units ›› In 2013, SOLLERS and its joint ventures were active in the commercial vehicle segment through UAZ, ISUZU and Ford brands; sales of these three brands in the Russian LCV & MPV market amounted to 35.4 k units, accounting for a 24% share of the Russian LCV & MPV market in 2013. 1,000 794 800 600 847 654 623 507 400 200 ›› The ISUZU model range in the LCV & MPV segment is represented by NLR and NMR chassis. In 2013 sales of light commercial vehicles under this brand increased by 22% from 175 units to 213 units. 0 2009 2010 2011 2012 2013 Russian brands 107 138 147 133 60 Foreign brands assembled in Russia 170 253 367 388 297 New imports 229 232 280 325 297 TOTAL 507 623 794 847 654 Source: AEB, Association of European Businesses. Ford Focus SOLLERS // Annual Report 2013 ›› UAZ commercial vehicles held second place in the Russian LCV & MPV market, with a market share of around 15%. ›› Ford Transit remains the absolute sales leader among foreign brands in Russia. In the same period, sales of locally assembled Ford Transit and Tourneo Custom vehicles increased by almost 17% (from 11.0 k units to 12.8 k units) despite unfavourable market conditions. Ford Sollers JV’s total share of the LCV & MPV market reached 9% in 2013 (7% in 2012). Tourneo Custom The Ford Focus is one of the most technologically advanced cars in its class on the road today. It is equipped with an array of state-ofthe-art systems and features, all designed to make every journey safer, easier, more efficient and more exhilarating. The Tourneo Custom has obtained a maximum 5-star safety rating from Euro NCAP. Two of its innovative technologies, Lane Keeping Alert and Ford SYNC with Emergency Assistance, also received Euro NCAP Advanced awards for technology. For example, the innovative Active City Stop helps to avoid collisions in slow-moving traffic or at speeds under 30 km/h. If the system detects the car in front has unexpectedly stopped, it automatically brakes. Active City Stop recently won a Euro NCAP Advanced Reward for safety. When parking, Active Park Assist automatically steers the car into the tightest of spaces, completely hands-free. The luxurious interior has innovative flexible rear seats, with over 30 different configurations. There are cutting-edge features such as the Ford SYNC voice control and MP3/phone connectivity system. And the vehicle’s aerodynamic design, economical engine and fuel‑saving technologies, such as Auto-Start-Stop, make it one of the most efficient vehicles available. In 2013, Ford Sollers JV launched a new version of the Ford Focus – Ambiente Plus, which has fewer, but the most popular, extra features. Ambiente Plus represents the best value for money in the Ford Focus range. In Russia assembly of the Tourneo Custom started in June 2013 at the Elabuga production site. www.sollers-auto.com 27 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION Market Overview and SOLLERS’ Product Portfolio (continued) ›› Sales in the Russian truck market declined by 11% versus 2012. ›› The HDT class contributed significantly to overall market performance, having suffered the most from the downturn, with sales in 2009 dropping by 74%. At present, the market is slowly recovering. This is a direct consequence of the growth in sectors, such as construction and public utilities, that rely heavily on HDT vehicles. In 2013, the decline in the HDT segment was in line with the overall truck market: -12% versus 2012. Moving Ahead Towards Leadership Positions Our Strategy TRUCKS ›› This section covers the market for trucks with a gross weight of over 3.5 tonnes; the market is divided into three payload classes: light-duty trucks (LDT) with a payload of 2 to 5 tonnes, mediumduty trucks (MDT) with a payload of 5 to 15 tonnes, and heavy-duty trucks (HDT) with a payload of over 15 tonnes. MOVING AHEAD // ›› The MDT segment is the smallest truck segment and was the only segment to show a recovery in 2013: +24% versus 2012. ›› SOLLERS is represented in the truck segment by ISUZU, a Japanese brand and global leader in the LDT segment. In 2013, ISUZU also moved into the MDT segment with its new model range – ELF 9.5 and FORWARD vehicles. ›› In 2012, SOLLERS – along with its Japanese joint venture partners – decided to relaunch the ISUZU project and move production to the Ulyanovsk site. As a result of this move, and the temporary halt in production, sales of ISUZU in the LDT segment were quite moderate, resulting in a market share of 2% by the end of 2012. In 2013, ISUZU sales in the LDT segment more than doubled, from 485 units to 1,015 units, and its market share increased to 6%. The Company’s long-term strategic priority is to achieve and maintain a strong leadership position in the manufacturing and distribution of passenger cars and light commercial vehicles in Russia. ›› The LDT segment suffered the most from the unfavourable market conditions; at the end of 2013 sales had fallen by 19%. Isuzu ELF 9.5 In April 2013, the SOLLERS-ISUZU JV started production of the ELF 9.5 chassis with a payload of 6.6 tonnes, the highest payload in the N-series model range. The new ISUZU ELF 9.5 is equipped with a Euro 4 engine, an innovative braking system and a larger fuel tank; it also offers an improved and easy-to-maintain interior. Like all ISUZU trucks it brings the benefits of advanced engineering to every aspect of vehicle design. From superb safety and convenience to unsurpassed power and durability, these top-performing trucks are equipped with the most sought after features to meet the challenge of tough jobs and cost-effective operations. SOLLERS // Annual Report 2013 In the last five years the Company has concentrated on areas with considerable growth potential that will be realised when market conditions improve. Today SOLLERS remains focused on the fastest-growing market segments, launching new products and increasing the level of localisation. In the uncertain macroeconomic environment, we believe that striking a reasonable balance between improving internal efficiency and increasing our market positions considerably benefits the market capitalisation of the Company. www.sollers-auto.com 28 29 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION Our Strategy Sustainable Growth Through Partnerships (continued) SOLLERS’ strategy is aimed at generating shareholder value by growing organically in its consolidated businesses and accelerating its joint venture activities by investing in new, promising products and localisation. Strategic objective Key criteria Sustainable growth through partnerships ›› Increase capacity utilisation in the joint ventures with global OEMs ›› Develop partnerships with global suppliers of automotive components ›› Improve efficiency through economy of scale, localisation and investment sharing Development of the most attractive market segments ›› Launch new products in the fastest-growing segments ›› Regularly modernise the current model ranges ›› Maintain leading positions in the large, saturated market segments Increase the level of locally-produced parts and components to 60% Implement modern product and manufacturing technologies to maintain the highest quality ›› Develop a supplier cluster with global manufacturers of automotive components ›› Launch a Ford Sollers JV engine factory by December 2015 ›› Contribute to the development of a supplier cluster in the Far East of Russia ›› Modernise UAZ capacities to improve product quality and increase manufacturing efficiency ›› Develop products with a focus on the UAZ Patriot series SOLLERS developed four 50:50 partnerships with international OEMs and set up a financial joint venture for leasing services. Today, the SOLLERS’ business comprises a number of well-structured joint ventures and two independently managed businesses. We believe that the key growth driver of the SOLLERS’ business lies in our partnerships with global OEMs; and the main criteria to achieve this are: ›› Increase capacity utilisation in the joint ventures with global OEMs ›› Develop partnerships with global manufacturers of automotive components ›› Improve efficiency through economy of scale, localisation and investment sharing SOLLERS // Annual Report 2013 Objectives 2013 Results 2013 Plans 2014 ›› Increase capacity utilisation by launching new products in the joint ventures ›› Create investment synergies through industrial cooperation MAZDA SOLLERS JV AND SOLLERS-BUSSAN JV ›› Transferred production of SsangYong vehicles to MAZDA SOLLERS JV at the Far East production site ›› Launched assembly of the new Mazda6 ›› Launched assembly of the Toyota LC Prado ›› Increased capacity utilisation at the Far East production site to almost 70% ›› Increase production capacity utilisation further by launching new products in the SUV segment ›› Open the second Ford Sollers JV factory in the Republic of Tatarstan ›› Implement cost optimisation programmes at production facilities in the Ford Sollers JV to increase economic efficiency ›› Facelift current Ford Sollers JV model range FORD SOLLERS JV ›› Launched the new Kuga and Explorer Sport ›› Launched the Tourneo Custom ›› Increased capacity utilisation at Elabuga production site to almost 40% Development of the Most Attractive Market Segments The SUV segment is the fastest-growing segment in the Russian automotive market, with a growth rate of +9% Y-on-Y. It is forecast to grow steadily over the medium term, with an average market share of 40-50%. SOLLERS has a strong track record of producing 4x4 vehicles and has obtained considerable experience specifically in the Russian market. We plan to invest further to increase our activity in the SUV segment. Our key priorities for the Russian market are: ›› Launch new products in the fastestgrowing segments ›› Regularly modernise and facelift the current model ranges ›› Maintain leading positions in the large, saturated market segments ›› Ensure our operations comply with the highest standards of Sustainable development and environmentally responsible production 30 MOVING AHEAD // environmental and industrial safety ›› Respect the environment through the considerate use of natural resources ›› Develop employee competences in the best interests of the Company and maintain a positive social environment in the communities where we operate www.sollers-auto.com Objectives 2013 Results 2013 Plans 2014-2015 ›› Increase sales and market share in the SUV segment ›› Launch new products in the SUV segment ›› Maintain leading positions in the C segment market ›› Modernise and facelift current model ranges ›› Together, SOLLERS’ and Ford Sollers JV’s retail sales in the Russian market for new SUVs grew 24% Y-on-Y ›› SOLLERS’ and Ford Sollers JV’s total market share in the SUV segment reached 8.0% (versus 7.1% in 2012) ›› Ford Sollers JV launched the new Kuga, a modern urban crossover, a new topof-the-range version of the Explorer and mid-sized 4x4 SUV Ford Edge ›› The Ford Focus is the number one car in the Russian C segment with almost 12% market share ›› Facelift of the SsangYong: new lighting, electronic equipment and interior ›› Modernisation of the Patriot: new Hyundai-Dymos transmission with electronic control ›› Further development of Ford’s brand perception as a large SUV producer ›› Launch of the B segment urban crossover, the Ford EcoSport, which in the medium term is expected to become the highest volume model at the Tatarstan production sites ›› Start production of the new Ford Transit at the Elabuga production site ›› Modernise current model ranges 31 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION Our Strategy Implement Modern Product and Manufacturing Technologies to Maintain the Highest Quality (continued) Increase the Level of Locally-produced Parts and Components to 60% The Industrial Assembly regime (Regulation 166) allows manufacturers who are compliant with its conditions to be exempt from import duty on components. In 2005 the original Regulation 166 was issued requiring a minimum capacity of 30 k units p.a. to be installed and a minimum localisation level of 30%. The term of the agreement was limited to seven years. In 2010 the Government amended and extended Regulation 166 to 2020 to facilitate further development of local car production and the component industry. The new requirements are applicable to large-scale investment projects with a minimum capacity of 300 k units p.a. and a target localisation level of 60%. New requirements for the local production of engines and stamping were also added. Ford Sollers JV is one of four large players in the Russian automotive market to have signed the new Regulation 166 agreements with the Government. Other SOLLERS’ businesses are also compliant with Regulation 166. Our key priorities for localisation are: ›› Develop a supplier cluster through partnerships with global suppliers of automotive components ›› Launch Ford Sollers JV engine factory by December 2015 ›› Contribute to the development of a supplier cluster in the Far East of Russia SOLLERS // Annual Report 2013 32 MOVING AHEAD // Objectives 2013 Results 2013 Plans 2014-2016 ›› Insrease localisation level at Ford Sollers JV in Elabuga ›› Increase component supplier base for Ford Sollers JV in Tatarstan ›› Determine the scope of localisation for Ford engines ›› Initiate automotive cluster in the Far East of Russia ›› Ford Sollers JV started building the engine plant in Elabuga, Tatarstan with an investment of approximately $274 million ›› Ford Sollers JV announced the creation of an R&D centre in Russia ›› Ford Sollers JV increased its local component supplier base to over 50 companies in Russia ›› In April 2013 the Ford Sollers JV started CKD production of the Explorer in Elabuga and in October switched to CKD production of the Kuga ›› The establishment of a Far East automotive cluster by 2015 was included by the authorities in the Region’s development plan in March 2013 ›› Ford Sollers JV will gradually increase the level of localisation to reach the target of 60% in 2016 ›› Construction of an engine plant with a minimum capacity of 105 k engines p.a. ›› In 2014 switch to CKD kit assembly of Isuzu trucks at the Uliaynovsk production site ›› In 2014 SOLLERSISUZU JV will start sourcing large component parts from local suppliers, which should increase the localisation level by 5% Most of SOLLERS’ plants are modern and have been built to international standards. We are committed to bringing all our production sites up to these standards. SOLLERS’ main priorities for the development of its consolidated production facilities and products are: ›› Modernise UAZ assets to improve product quality and increase manufacturing efficiency ›› Develop products with a focus on the UAZ Patriot series Objectives 2013 Results 2013 Plans 2014-2015 ›› Further improvement of the UAZ Patriot model range to meet changing customer preferences ›› Increase internal efficiency of UAZ and ZMZ manufacturing ›› Modernised the Patriot, mainly through the new Hyundai-Dymos transmission with electronic control ›› Optimised UAZ production schedule and headcount according to market demand ›› Developed industrial park at ZMZ engine plant. By the end of 2013 ZMZ industrial park had six occupants ›› UAZ Patriot facelift including new lighting, interior and exterior changes, upgrade of on-board equipment, additional options ›› Acquisition of new painting equipment and transfer to the cataphoresis method ›› Increase corrosion resistance of the UAZ Patriot ›› Optimisation of moulding, stock logistics and assembly operations ›› Investment in stamping facilities for the UAZ Patriot, UAZ Cargo and UAZ Pickup Sustainable Development and Environmentally Responsible Production Sustainable development is important to the future prosperity of the Company and the elimination of possible risks, as well as to the welfare of society in general. It is our policy to improve continuously our environmental performance, employee motivation and relations with local communities. Our aims to achieve this: ›› Ensure our operations comply with the highest standards of environmental and industrial safety ›› Respect the environment through the considerate use of natural resources ›› Develop employee competences in the best interests of the Company and maintain a positive social environment in the communities where we operate www.sollers-auto.com Objectives 2013 Results 2013 Plans 2014 ›› Environmental monitoring ›› Controls for compliance with environmental regulations ›› Minimisation of environmental footprint ›› Reconstruction of environmental protection equipment resulted in considerable reduction in pollution ›› UAZ was awarded «GLOBAL ECO BRRANDAWARD» as an «ECO REGIONALBRAND» ›› UAZ won a top-100 Organizations award: Environmental Protection and Management ›› Ford Sollers JV introduced a Global Safety Operating System which aligns internal Company standards with global Ford requirements ›› Further repair of environmental protection equipment ›› Research into an appropriate method for the thermal disposal of combustible waste ›› Introduction of Performance Management System at SOLLERS’ consolidated business divisions ›› Continue with internship programme at Ford Sollers JV 33 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 34 MOVING AHEAD // Moving Ahead with a Sustainable Business Model Our Business Model Product Development Manufacturing ›› Ensure strong brands remain in the product portfolio ›› Select/ develop marketable products, staying up to date with customer preferences ›› Modify products tailored to customer needs ›› Carry out rigorous quality control ›› Ensure all production sites meet international standards ›› Maintain focus on internal efficiency and continuous localisation ›› Introduce investment sharing where possible ›› Long-term partnerships with international OEMs ›› Well-known brands ›› Focus on core value chain elements in large-scale investments ›› Investment sharing SOLLERS is moving ahead with its partners to develop the best products for the Russian market. From day one, the Company has successfully implemented a partnershipfocused strategy to generate synergies by combining key competencies into a single, multifaceted business, enabling the Company to offer great products and services to its customers. Our international partners, with their global operating base, reinforce our strong market position and enable us to choose the most promising models to customise according to the needs of Russian customers. Strong and well-known brands help to gain substantial market share in the largest market segments. Ford Sollers JV, working under a running royalty arrangement, can select any model from the Ford global model range if the product has proven market demand and meets the required cost-efficiency level. For example, Ford Sollers JV started production of the Ford Explorer, which before 2012, when it was launched in the Russian joint venture, was produced only for the US market. In 2013, Explorer sales grew by 145% and Ford Sollers JV launched CKDassembly production. The joint venture has announced the expansion of its SUV model range to include the subcompact crossover vehicle Ford EcoSport, which is currently only produced for the Brazilian and Indian markets. SOLLERS // Annual Report 2013 As of the end of 2013, SOLLERS’ overall capacity (directly owned or through joint ventures) exceeded 550 k units per year, making SOLLERS the second-largest automaker in Russia. Three state-of-the-art plants, established by the partners of Ford Sollers JV, are dedicated to different platforms and market segments. The equipment and technological process comply with Ford requirements and are aligned with the One Ford concept. Ford Sollers JV is accelerating its manufacturing and localisation level in the Russian market through its commitment to build its first engine plant in Tatarstan by December 2015. SOLLERS has made large-scale investments in the production site based in the Far East of Russia. The capacity and infrastructure are now shared between two industrial partnerships, which helps to improve the efficiency of SsangYong’s assembly operations and create localisation opportunities. The current capacity of the Far East plant is 100 k units per year which provides economies of scale and will facilitate investment sharing between the partners when the plant is equipped for CKD assembly. SOLLERS’ plants produce components and engines which are sold to the Group’s subsidiaries as well as to external clients. Taking into account the localisation commitments of the four largest market players and the requirement to increase the level of local content, the Group’s component business is forecast to grow steadily. Meeting Customer Expectations ›› Provide financing services ›› Carry out efficient product promotion and marketing activities Sales After-sales Service ›› Develop independent dealership network ›› Establish and attain the best service standards at the dealerships ›› Monitor financial and operating activity at the dealerships ›› Perform wholesale financing ›› Develop independent service network ›› Establish and attain excellent automotive service standards ›› Improve warranty guarantees in line with changes in production ›› Track record of successful and competitive market launches in Russia ›› Large distribution and after-sales network with strong growth potential In-depth market knowledge, a wide range of models and the provision of financial services all contribute to the growth in SOLLERS’ customer base. SOLLERS Group is uniquely placed to launch new models across five brands, with different origins and in various market segments. SOLLERS’ independent distribution and service network encompasses 129 UAZ dealers and 137 SsangYong dealers. The Ford Sollers JV distribution and service network covers 70 Russian cities and comprises 130 dealers. SsangYong is a good example of successful market promotion and increased brand loyalty. In 2005, when SsangYong was first launched in the Russian market, brand loyalty was very low and customers had no idea of the brand’s origin and reputation. 2013 was a record breaking year for the SsangYong brand in Russia with over 34 k vehicles sold. The brand was one of the top 20 most popular car brands in Russia, according to the Association of European Businesses. SOLLERS provides leasing financing through its joint venture with Sovkombank – SOLLERS-FINANCE JV. In 2013, the value of its leasing portfolio increased to RUB 2,226 million (+19% Y-on-Y). With a unique range of products for nearly all transportation purposes, SOLLERS is present across a broad spectrum of market segments and price classes. This helps improve the Company’s flexibility in diverse market conditions. www.sollers-auto.com The Company’s distribution network stretches from Kaliningrad in the westernmost part of European Russia to Vladivostok in Russia’s Far East – a distance of almost 10,300 km. All dealers and service centres are obliged to meet strict requirements developed by the sales headquarters to ensure delivery of the very best products and services to customers. 35 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 36 MOVING AHEAD // Business Projects and Key Assets UAZ Holding FACTSHEET ›› Leading Russian producer of 4x4 vehicles and their spare parts ›› ZMZ, as a part of UAZ Holding, is one of the largest Russian producers of petrol and diesel engines and aluminium castings ›› Manufacturing capacity up to 100 k vehicles and 300 k engines per year ›› Over 4.6 mln vehicles have been produced since 194120 and over 14 million ZMZ engines since 195821 ›› Average number of personnel as of the end of 2013 was over 18,00022 people UAZ PATRIOT SERIES LAUNCH TIMELINE23 UAZ Patriot 2005 2006 ›› OCTOBER UAZ and its subsidiaries successfully passed a re-certification audit and confirmed their quality management compliance with the ISO: 9001: 2008 international standard ZMZ passed a re-certification audit and confirmed its quality management compliance with the ISO/TS 16 949: 2009 international automotive standard ZMZ and its subsidiaries started large-scale production and sales of aluminium transmission cases for KAMAZ (Tatarstan) trucks under a localisation project in partnership with ZF-KAMA (Germany). Now ZMZ casts six modifications of aluminium transmission cases and provides subsequent machining for two of them ›› DECEMBER UAZ produced a limited series of the UAZ Patriot Arctic. This version, equipped with an Eberspecher HYDRONIC coolant heater and special winter options, combines exceptional off-road capability with comfort in low temperatures UAZ Pickup UAZ Cargo 4X4 LCV Prices start from RUB 580 k 4X4 SUV Prices start from RUB 480 k 2013 ACHIEVEMENTS ›› JANUARY ZMZ started large-scale production and sales of Euro 4 engines with various modifications ›› APRIL UAZ was the winner in the 100 Best Russian Organizations for Ecology and Environmental Management The UAZ Patriot won a prestigious Runet award, coming top in ‘The best national car’ nomination ZMZ engine plant celebrated its 55th Anniversary ›› JUNE Ferrum (Russian producer of metal parts for shipbuilding) moved into the ZMZ industrial park, becoming the sixth member alongside Daido Metal Rus, Trelleborg, LEONI, Flaig+Hommel and SOLLERS- Special Vehicles ›› AUGUST UAZ started production of the modernised UAZ Patriot equipped with Hyundai-Dymos transmission ›› SEPTEMBER UAZ launched the UAZ Patriot’s new Trophy series and the UAZ Pickup with attractive design options and improved off-road capability 2007 4X4 Pickup Prices start from RUB 590 k 2008 2009 2010 2011 2012 2013 AT THE END OF 2014, PRODUCTION OF THE NEXT UAZ SUV GENERATION – PATRIOT 2015 WILL BE LAUNCHED UAZ WHOLESALES, thousand units 2013 2012 62.9 70.3 Hunter 7.7 10.2 Patriot 20.0 21.9 Old LCV, MPV model range 30.4 33.2 4.8 5.0 UAZ New LCV model range Company source. UAZ wholesales represent the Company’s sales to dealers and direct corporate sales, including export. 20 The year UAZ was established. 21 The year ZMZ was established. SOLLERS // Annual Report 2013 Multimedia system with navigation New instruments panel Updated headlights Selection of options for driver and passenger comfort New exterior New 18” wheels 22 Includes UAZ OJSC, ZMZ OJSC and all their subsidiaries. 23 The graph shows retail prices as of 1Q2014. www.sollers-auto.com 37 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 38 MOVING AHEAD // Business Projects and Key Assets (continued) SsangYong FACTSHEET ›› SOLLERS has been the exclusive producer and distributor of SsangYong vehicles in Russia since 2005 ›› In 2009 SOLLERS launched the first automobile plant in the Far East of Russia for the production of SsangYong vehicles 2013 ACHIEVEMENTS ›› SEPTEMBER For the third consecutive time SsangYong’s Russian distributor was awarded the best SsangYong distributor globally, based on sales, dealer/service network growth and brand marketing ›› OCTOBER SsangYong started selling the SsangYong Actyon 2014 with a restyled exterior and interior. The model is assembled at MAZDA SOLLERS JV in Vladivostok SsangYong launched the SsangYong Actyon Sports 2014 in Russia. The pickup is known globally as the perfect vehicle for outdoor life Launched the Actyon luxury ‘Red Line’ version. The top-of-therange version of this well-known crossover is equipped with a number of premium class options and an outstanding interior ›› In 2013 SsangYong production was transferred to MAZDA SOLLERS JV to benefit from economies of scale and investment sharing ›› The distribution of SsangYong vehicles in Russia remains under SOLLERS’ control ›› NOVEMBER SsangYong starts selling the brand new 4x4 minivan SsangYong Stavic, one of the biggest passenger cars with off-road capabilities in Russia SSANGYONG MODEL RANGE LAUNCH TIMELINE24 SsangYong Rexton SsangYong Kyron SsangYong Actyon Sports SsangYong Actyon SsangYong Stavic SUV Prices start from RUB 1,249 k SUV Prices start from RUB 749 k Pickup Prices start from RUB 939 k SUV Prices start from RUB 729 k Minivan Prices start from RUB 1,079 k 2005 2006 2007 2008 2009 2010 SSANGYONG WHOLESALES, thousand units 2013 2012 35.2 32.7 Rexton 0.7 1.7 Kyron 11.9 11.5 NEW Actyon (incl. Actyon Sports) 22.3 19.5 0.3 - SSANGYONG Stavic Company source. SsangYong wholesales represent the Company’s sales to dealers and direct corporate sales. 24 The graph shows retail prices as of 1Q2014. SOLLERS // Annual Report 2013 www.sollers-auto.com 2011 2012 2013 39 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 40 MOVING AHEAD // Business Projects and Key Assets (continued) Industrial Cooperation MAZDA SOLLERS JV SOLLERS created two joint ventures in the Russian Far East in partnership with Japanese OEMs to benefit from accelerated economies of scale and investment sharing. Both joint venture agreements are focused on production only and do not cover distribution rights. The distribution of the vehicles is controlled by the corresponding brand partner. The joint ventures are structured to remain profitable through cost plus agreements. The total production capacity of the two joint ventures is 100 k units p.a. FACTSHEET ›› MAZDA SOLLERS JV is a 50:50 joint venture with Mazda located in Vladivostok ›› The joint venture agreement covers production of Mazda and SsangYong vehicles in Russia ›› Distribution is not covered by the joint venture agreement ›› SOLLERS remains the exclusive distributor of SsangYong vehicles in Russia ›› Current model range: Mazda CX-5, Mazda6, SsangYong SUVs ›› Average number of personnel as of the end of 2013 was 67725 people ›› Total investment from launch till 2020 – RUB 10 billion ›› The joint venture uses project financing provided on a nonrecourse basis at a subsidised interest rate amounting to RUB 6 billion ›› Revenue in 2013 was RUB 39,068 million ›› Investment sharing will improve the efficiency of Mazda and SsangYong SKD and CKD assembly operations at the Far East production site SOLLERS-BUSSAN JV FACTSHEET ›› SOLLERS-BUSSAN JV is a 50:50 joint venture with Mitsui located in Vladivostok ›› The joint venture agreement covers the production of the Toyota LC Prado in Russia ›› Distribution is not covered by the joint venture agreement ›› Current model range: Toyota Land Cruiser Prado ›› Average number of personnel as of the end of 2013 was 22826 people ›› Initial investment of RUB 1 billion ›› The joint venture uses project financing provided by VEB on a nonrecourse basis at a subsidised interest rate ›› Revenue in 2013 was RUB 10,232 million ›› The Group benefits from industrial cooperation with the global automotive leader and Toyota’s production experience 2013 ACHIEVEMENTS ›› JANUARY SsangYong SUV production transferred to MAZDA SOLLERS JV in Vladivostok ›› FEBRUARY Large-scale production of the Toyota LC Prado at SOLLERSBUSSAN JV in Vladivostok ›› APRIL Launched production of the new SKYACTIV Mazda6 at MAZDA SOLLERS JV in Vladivostok ›› AUGUST Launched production of the SsangYong Actyon 2014 with a restyled exterior and interior at MAZDA SOLLERS JV in Vladivostok ›› SEPTEMBER Launched the restyled version of the Toyota LC Prado at SOLLERSBUSSAN JV in Vladivostok MAZDA SOLLERS JV AND SOLLERS-BUSSAN JV MODEL RANGE LAUNCH TIMELINE 2007 2008 2009 2010 Mazda CX-5 Toyota LC Prado The first Mazda crossover with SKYACTIV technology Classic frame based SUV equipped with Toyota’s leading off-road systems 2011 2012 2013 SsangYong production transferred to MAZDA SOLLERS JV MAZDA SOLLERS JV AND SOLLERS-BUSSAN JV PRODUCTION VOLUMES , thousand units SsangYong Vehicles MAZDA SOLLERS JV Mazda CX-5 Mazda6 SsangYong SUVs SOLLERS-BUSSAN JV Toyota LC Prado 2013 2012 58.2 3.4 19.8 3.4 6.4 - 32.0 - 7.9 - 7.9 - 25 Includes factory workers, specialists and managers. 26 Includes factory workers, specialists and managers SOLLERS // Annual Report 2013 www.sollers-auto.com New Mazda sedan with SKYACTIV-body, one of the lightest models in the class Mazda6 41 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 42 MOVING AHEAD // Business Projects and Key Assets (continued) Ford Sollers JV FACTSHEET ›› 50:50 joint venture formed in October 2011 between Ford Motor Company and SOLLERS OJSC ›› Ford Sollers JV is responsible for the exclusive production, import and distribution of all Ford brand products, including vehicles, parts and accessories in Russia ›› The company operates three vehicle assembly plants in Russia with a total capacity of over 350 k units per year ›› Ford Sollers JV is accelerating its plan to grow in the Russian market by building its first engine plant in Tatarstan by December 2015 ›› Average number of personnel as of the end of 2013 was over 5,60027 people ›› Total project investment is $1.6 billion. In 2013, the joint venture’s investment cash flow was $350 million ›› Revenue in 2013 was RUB 82,362 million ›› In two years, Ford Sollers JV has moved from building two car models, Focus and Mondeo, to producing a wide range of Ford vehicles FORD SOLLERS JV MODEL RANGE LAUNCH TIMELINE28 2013 ACHIEVEMENTS ›› APRIL The first CKD-assembled Explorer was produced at the Ford Sollers JV Elabuga plant in the Republic of Tatarstan ›› MAY Ford Sollers JV announced its plans to build a $274 million (RUB 10 billion) engine plant in Elabuga (Tatarstan), with the first engines to be built in 2015 ›› JUNE Ford Sollers JV Vsevolozhsk plant started production of the special 20th anniversary series of the Ford Mondeo Over one million Russian customers have chosen Ford vehicles in the past decade ›› JULY Ford won the prestigious JATO CO2 award in Russia ›› SEPTEMBER Ford Sollers JV received a special award “For success in the development of the Russian market.” The award was announced at the “Best Commercial Vehicle of the Year in Russia” awards ceremony in Moscow, which took place during the COMTRANS 2013 commercial vehicle show Ford Sollers JV announced the creation of an R&D centre in Russia ›› OCTOBER Ford Sollers JV announced the start of CKD assembly of the Ford Kuga at its plant in Elabuga in the Republic of Tatarstan ›› DECEMBER Sales of the SUV line tripled in 2013 and Ford Focus became the number 1 C segment car in Russia across all models Ford Focus III Ford Transit Ford Explorer Ford S-Max Ford Turneo Custom Ford Edge Ford Ecosport C-class Prices start from RUB 594 k Ambiente Plus version launched in February 2013 LCV Prices start from RUB 1,107 k 4X4 SUV Prices start from RUB 1,649 k CKD assembly started in April 2013 Minivan Prices start from RUB 1,122 k MPV Prices start from RUB 1,501 k 4X4 SUV Prices start from RUB 1,699 k To be launched in 1Q2014 B segment crossover To be launched in 2H2014 2011 2012 2013 C-class crossover Prices start from RUB 989 k CKD assembly started in October 2013 Ford Kuga FORD SOLLERS JV WHOLESALES, thousand units 2013 2012 104.6 134.3 62.6 93.8 Mondeo 6.6 14.4 Transit 14.6 12.7 Kuga 13.1 5.1 Explorer 5.2 2.0 Other models 2.5 6.3 FORD SOLLERS JV Focus Company source. Ford Sollers JV wholesales represent the Company’s sales to dealers and direct corporate sales. 27 Includes three plants and corporate headquarters in Moscow. SOLLERS // Annual Report 2013 28 The graph shows retail prices as of 1Q2014. ON TRACK WITH LOCALISATION PLANS Ford Sollers JV is highly committed to Russia and regards it as one of the most promising automotive markets in Europe: in 2013 the company started building the engine plant in Elabuga, Tatarstan, and announced the creation of an R&D centre in Russia which will adapt Ford vehicles for Russia and create special local versions of LCVs. R&D will be based in three locations: Moscow, Tatarstan and the Leningradskiy region. The company is investing considerably in the development of its supplier base in the regions where it operates. In St. Petersburg a supplier cluster has already been created and in Tatarstan the JV is actively developing its supplier base and already sourcing components from more than 50 companies in Russia. Ford Sollers JV is fully on track with its localisation plans and aims to hit the target of 60% in 2016. www.sollers-auto.com 2014 LCV To be launched in 2H2014 ELABUGA ENGINE PLANT MAIN INPUTS: ›› Investment: $274 mln ›› SOP: December 2015 ›› Capacity: 105-200 k engines p. a. ›› Staff: over 500 employees ENGINE TO BE ASSEMBLED FORD 1.6-LITRE DURATEC ENGINE: ›› Fuel: Gasoline ›› Displacement: 1.6 litre ›› Output: 85 HP, 105 HP and 125 HP New Ford Transit 43 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 44 MOVING AHEAD // Business Projects and Key Assets (continued) SOLLERS-ISUZU JV SOLLERS-FINANCE JV FACTSHEET ›› The first Russian-Japanese joint venture for the production and distribution of ISUZU vehicles was launched in July 2007 ›› In 2012 SOLLERS-ISUZU was restructured into a joint venture, with SOLLERS retaining 50% of share capital. The assembly line was relocated to the Ulyanovsk production site (UAZ) ›› SOLLERS-ISUZU JV is responsible for the production, import and distribution of ISUZU trucks and their parts in Russia ›› The locally assembled model range includes ISUZU N-series light commercial vehicles and light duty trucks. The joint venture has a capacity of 5 k trucks per annum ›› Average number of personnel as of the end of 2013 was over 16029 people ›› Revenue in 2013 was RUB 1,987 million SOLLERS-ISUZU JV MODEL RANGE LAUNCH TIMELINE30 2013 ACHIEVEMENTS ›› APRIL SOLLERS-ISUZU JV started production of the NQR90 chassis with a payload up to 6.6 tonnes. This model has the highest payload in the ISUZU model range, assembled in Russia SOLLERS-ISUZU JV started selling two F-series trucks: FORWARD 12.0 (FSR90) and FORWARD 18.0 (FRV34), the first ISUZU models in the medium duty trucks (MDT) segment for Russian customers ›› MAY SOLLERS-ISUZU JV announced the successful certification of the ISUZU ELF 3.5 chassis (NMR85H). The chassis is a modification of the well-known ELF 5.2, but with the maximum gross weight reduced to a maximum of 3.5 tonnes ›› DECEMBER In 2013, SOLLERS-ISUZU JV increased its retail sales in Russia to 1,295 trucks and commercial vehicles (75% up Y-on-Y) FACTSHEET ›› Financial company specialising in leasing services ›› Founded by SOLLERS in 2008 ›› In December 2010, it was restructured into a 50:50 joint venture between Sovkombank and SOLLERS ›› Value of leasing portfolio as of 31 December 2013 increased by 19% Y-on-Y to RUB 2,226 million ›› Cost of vehicles purchased in 2013 increased by 6% Y-on-Y to RUB 2,939 million (incl. VAT) ›› SOLLERS-FINANCE JV’s IFRS revenue for the year ended 31 December, 2013 totalled RUB 599 million (up 38% Y-on-Y) SOLLERS-FINANCE JV 2013 Leasing Portfolio by Brand 12% 11% 34% ISUZU ELF 3.5S ISUZU ELF 3.5 – ELF 5.2 ISUZU ELF 7.5 ISUZU ELF 9.5 ISUZU FORWARD 12.0-18.0 LCV chassis Certified name: NLR85A Payload: 1.5 tonnes Prices start from RUB 1,107 k LCV & LDT chassis Certified name: NMR85H Payload: 3.0 tonnes Prices start from RUB 1,239 k LDT chassis Certified name: NPR75L Payload: 4.7 tonnes Prices start from RUB 1,650 k LDT chassis Certified name: NQR90L Payload: up to 6.6 tonnes Prices start from RUB 1,910 k MDT chassis Certified name: FSR90SL and FRV34UL Payload: up to 12.5 tonnes Prices start from RUB 2,450 k 2007 2008 2009 2010 SOLLERS-ISUZU JV WHOLESALES, thousand units 2013 2012 1,640 727 N-series 1,592 718 F-series 48 - C-series - 9 SOLLERS-ISUZU JV Company source. SOLLERS-ISUZU JV wholesales represent the Company’s sales to dealers and direct corporate sales. 29 Includes production site in Ulyanovsk and SOLLERS-ISUZU JV headquarters in Moscow. SOLLERS // Annual Report 2013 2011 2012 2013 ON TRACK WITH LOCALISATION PLANS In the second quarter of 2014, SOLLERS-ISUZU JV plans to start CKD assembly of N-series trucks. Also in the second half of 2014 SOLLERS-ISUZU JV plans to start the local assembly of F-series medium duty trucks. The 2014 production plan includes the assembly of 2,340 N-series chassis and 204 F-series chassis. In 2014, the joint venture will increase the local content of the assembled trucks by increasing the number of locally-produced large parts, such as fuel tanks, leaf springs, shock absorbers and propeller shafts. These actions will help to partly reduce logistics costs and decrease the exposure to foreign exchange. The estimated increase of the localisation level is +5%. 30 The graph shows retail prices as of 1Q2014. www.sollers-auto.com Ford ISUZU Special vehicles MAZ 10% 2% 4% KAMAZ Fiat Hyundai 9% 5% 5% 9% MAN HINO Other 45 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE Transparent We are committed to disclosing relevant financial and operational information and our future development plans CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION MOVING AHEAD // Ethical We believe in the fundamental principle of protecting the legal rights and interests of all our stakeholders SOLLERS is focused on improving its corporate governance standards, upholding the rights and legal interests of its stakeholders, providing transparent information and adopting ethical practices SOLLERS // Annual Report 2013 46 Corporate Governance www.sollers-auto.com 47 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION What does Corporate Governance Mean to SOLLERS? 48 MOVING AHEAD // Annual General Shareholders Meeting Board of Directors (BoD) The Annual General Shareholders meeting is the supreme managing body of SOLLERS OJSC. The Board of Directors is responsible for the strategic management and overall control of SOLLERS. The procedures regarding the Annual General Shareholders Meeting are set out in the Regulations relating to the Annual General Shareholders Meeting. The main role of the BoD is to uphold the rights of SOLLERS’ shareholders, develop corporate strategy and determine longterm objectives, monitor the implementation of this strategy and coordinate internal control and risk management functions. The procedures and functions of SOLLERS’ Board of Directors are set out in the Regulations relating to the Board of Directors. › For more info, please see DAVID J. HERMAN CHAIRMAN OF BOARD OF DIRECTORS Good corporate governance is integral to our overall business approach. It enables us to make informed and considered decisions to ensure that we set and execute a sound corporate strategy for the long term on behalf of our shareholders. At the heart of our governance framework sits our Board – a balanced team of qualified individuals who, together, bring an excellent mix of skills, knowledge and experience to our business. The Board is supported by Board Committees, chaired by independent Directors, who advise and challenge our management team and the strategic direction of the business. At SOLLERS, we are committed to improving our governance and aspire to follow best practice standards. › For more info, please see PAGE 50. Board of Directors’ Committees Management The Company has formed a number of committees to support the Board of Directors in exercising control over different lines of operations. Although the Committees report directly to the BoD they also have functional reporting lines to Company’s management to ensure the provision of timely information about business operations for decision-making purposes. Management carries out the day-to-day governance of the Company’s operations and its subsidiaries/ affiliates. Corporate Governance Framework ANNUAL GENERAL SHAREHOLDERS MEETING Direct reporting lines Functional reporting lines CHAIRMAN OF BOARD OF DIRECTORS BOARD OF DIRECTORS’S COMMITTEES Board of Directors Audit Committee Strategy Committee CHIEF EXECUTIVE OFFICER Remuneration Committee Management Nomination and Corporate Governance Committee The procedures and roles of the SOLLERS’ Board of Committees are set out in the Regulations relating to each Committee. Management is responsible for implementing strategy, business plans, investment programmes and creating a roadmap to achieve operating objectives. It also has operational control over the financial position of the Company, prepares improvement proposals for the main business lines and reports to the BoD. Management operates in compliance with the Company’s Charter and internal acts. › For more info, please see SOLLERS // Annual Report 2013 PAGE 59. www.sollers-auto.com PAGE 55. › For more info, please see PAGE 60. 49 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION Protecting our Long-term Success 2 The Profiles of SOLLERS’ Directors RICHARD BROYD INDEPENDENT DIRECTOR Independent: Yes Board Committees: Strategy Committee (Chairman) Year appointed to the Board: 2007 Key skills and experience: Corporate Development and Finance, Principal Investing and Philanthropy. Our Board structure follows corporate governance best practice, with a majority of five Independent Directors out of a total of nine. Other current appointments: Director of Waypoint Capital, Northill Asset Management and Euromedic, a diagnostic imaging company in Budapest. He is Chairman of Reach-to-Teach, a charity providing children’s primary education in rural India and an Advisory Board member of the Legatum Center for Development and Entrepreneurship, MIT. Independent Directors 1 2 Background: Prior to his current appointments, Richard was Chief Executive of a private investment fund in Brussels. He held a number of positions in the Montedison Group, Milan, including Managing Director of SIR SpA, a specialty chemical company, and Director of Corporate Development and Strategy, and Controller. He has also been a partner of The Monitor Group, co-founder and managing director of Monitor Clipper Partners, a private equity fund, and has worked for the United Nations in Japan. Education and awards: Richard holds a PhD from Cornell University. 4 3 4 5 SEPPO REMES INDEPENDENT DIRECTOR Independent: Yes Board Committees: Audit Committee (Chairman) Year appointed to the Board: 2004 Key skills and experience: Wide experience gained mainly in the energy sector. Other current appointments: Chairman of the Board at EOS Russia (an investment company focusing on the Russian power sector), and board member of several major companies, including JSC Russian Grids, SIBUR Holding and Rusnano. 1 DAVID J. HERMAN CHAIRMAN OF BOARD OF DIRECTORS (SINCE 2007) Independent: Yes Board Committees: Nomination and Corporate Governance Committee (Chairman), Strategy Committee, Audit Committee Year appointed to the Board: 2004 Key skills and experience: Over 30 years of international experience in the automotive industry. A qualified lawyer. Other current appointments: Member of the US-Russia Council and the American Chamber of Commerce (Russia), and an independent director of Magnitogorsk Iron and Steel Works, Strategic Initiatives and New Health Sciences. Background: David worked at General Motors for 29 years, including 10 years as Vice President. In addition to establishing GM-AVTOVAZ, the largest Russian automobile joint venture, he was chairman of the board of Adam Opel AG, CEO of SAAB Automobile, and represented General Motors in a number of countries. Education and awards: David is a graduate of New York University, holds a Master’s degree from Harvard Graduate School and a Juris Doctor degree from Harvard Law School. He has been awarded the German Bundesverdienstkreuz and the Belgian Order of Leopold. SOLLERS // Annual Report 2013 50 MOVING AHEAD // Background: As a board member of RAO UES Seppo took part in the fundamental reform of Russia‘s electric power sector and created one of Russia’s first corporate audit committees. Prior to this, he was vice president for Russian Affairs of Neste-Fortum, an OMX-listed global energy company. He was also the founder of the European Business Club (now the Association of European Businesses). Education and awards: Seppo Remes is a graduate of Oulu University and holds a Licentiate Degree from the Turku School of Economics and Business Administration in Finland. Seppo has twice been named Best Independent Director of the Year by the Investor Protection Association, Russia (2006, 2008) and Director of the Year 2012 by the Independent Directors Association. He is the Honorary Doctor at Plekhanov Russian Academy of Economics and also the Honorary Doctor of Turku School of Economics, Finland. www.sollers-auto.com 3 PATRICK T. GALLAGHER INDEPENDENT DIRECTOR Independent: Yes Board Committees: Remuneration Committee (Chairman), Audit Committee, Strategy Committee Year appointed to the Board: 2008 Key skills and experience: International business career mainly in the telecoms sector. Other current appointments: Chairman of Harmonic Inc (NASDAQ: HLIT) a US-based global provider of high performance video solutions and a director of Ciena Corporation, a NYSE-listed global supplier of Telecommunications and related equipment. Background: From 2008 to 2012, Patrick was Chairman of Ubiquisys Ltd in the UK and, from 2008 to 2009, Chairman of Macro 4 plc, a FTSE-listed global software company. Prior to this, he was Vice Chairman of Golden Telecom Inc., in Moscow. Patrick was Executive Vice Chairman and served as Chief Executive Officer of FLAG Telecom Group and, for 17 years, held various senior management positions at BT Group. Education and awards: Graduate of Warwick University in Economics and Industry. 5 ALEXANDER IKONNIKOV INDEPENDENT DIRECTOR Independent: Yes Board Committees: Remuneration Committee, Nomination and Corporate Governance Committee Year appointed to the Board: 2011 Key skills and experience: Over 10 years’ experience serving on the boards of leading Russian companies in the telecommunications, financial services and brewing industries. Other current appointments: Chairman of the Board of the Independent Directors Association, an Independent Director at Swedish investment fund East Capital Explorer Plc, and a Member of the Supervisory Board of the National Settlement Depository. Background: Prior to holding his current position, Alexander was CEO of the Russian Investor Protection Association. Alexander also served as an independent director of North-West Telecom OJSC and Baltika OJSC. Education and awards: Alexander is a graduate of the Gubkin Russian State University of Oil and Gas. He holds a PhD in Economics and is a Chartered Director of the Institute of Directors (IoD) in the UK. In 2010, the Yale School of Management recognised him as a “rising star of corporate governance”. 51 MOVING AHEAD BUSINESS & STRATEGY CORPORATE SOCIAL RESPONSIBILITY CORPORATE GOVERNANCE SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 52 MOVING AHEAD // 53 The Profiles of SOLLERS’ Directors (continued) Executive Directors 6 8 7 NIKOLAY SOBOLEV FIRST DEPUTY CEO (SINCE 2009) AND CFO (SINCE 2005) OF SOLLERS Independent: No Board Committees: Strategy Committee, Remuneration Committee Year appointed to the Board: 2005 Key skills and experience: Financier and economist, with experience in the automotive and machine tool industries. Other current appointments: Since 2012 a Board member of Russian Railways. 7 9 Background: Between 2002-2005 Nikolay was the Director for Financial and Economic Affairs of UAZ OJSC and in 2002-2011 he was a Member of the Board of Directors of UAZ OJSC. From 1997 to 2002, he served as the First Deputy Director General and Vice President of Yuzhuralmash Holding JSC and a Member of the Board of Directors of Yuzhuralmash OJSC. 8 ZOYA KAIKA DEPUTY CEO (SINCE 2013) AND DIRECTOR OF PUBLIC AND GOVERNMENT RELATIONS (SINCE 2003) OF SOLLERS 9 VICTOR KHVESENYA DIRECTOR OF LEGAL AFFAIRS (SINCE 2009) OF SOLLERS, SECRETARY OF THE BOARD OF DIRECTORS Independent: No Board Committees: Nomination and Corporate Governance Committee Year appointed to the Board: 2010 Key skills and experience: International legal experience. Independent: No Board Committees: n/a Year appointed to the Board: 2013 Key skills and experience: Journalism and economic analysis. Other current appointments: Board member of UAZ OJSC. Background: Zoya was a member of the board of directors of ZMZ OJSC from 2010 to 2013. Prior to joining the Company as an analyst, she was Deputy Editor of the economics section of Vedomosti, one of Russia‘s leading business publications. Education and awards: Zoya holds a Journalism degree from Lomonosov Moscow State University. Background: Between 2005 and 2009 Victor was VicePresident of Legal Affairs in AMEDIA Group. From 1995 to 2005, he served as Senior Attorney in the Moscow office of the international law firm of White & Case. Education and awards: Victor graduated from the Law Faculty of Belarusian State University (Minsk) in 1984 and earned a Master’s degree from the Case Western Reserve University School of Law (Cleveland, USA) in 1993. Education and awards: Nikolay graduated from Lomonosov Moscow State University and the Russian Presidential Academy of National Economy and Public Administration. He holds a PhD in Economics from Lomonosov Moscow State University and an MBA from Kingston University Business School (UK). 6 VADIM SHVETSOV CEO OF SOLLERS, CEO OF UAZ OJSC Independent: No Board Committees: Strategy Committee, Nomination and Corporate Governance Committee Year appointed to the Board: 2002 Key skills and experience: Extensive operational and sales experience in the automotive sector. Other current appointments: Chairman of the boards of directors of UAZ OJSC, ZMZ OJSC and Ford Sollers Holding. Member of the board of directors of Russian Automobile Producers Association, the largest automotive sector association in Russia. Director Background: Vadim Shvetsov has held operational management roles in the Company and its subsidiaries since 2002. From 1993 to 2002, he held a number of positions at Severstal Group, from commercial manager to First deputy CEO. As Head of sales he established Severstal’s system of in-bound and foreign sales. For four consecutive years to 2000, Vadim was a member of the town council in Cherepovets. Education and awards: Vadim is a graduate of the Moscow Institute of Steel and Alloys, specialising in Electric Drives and Automation of Industrial Installations and Technological Complexes. In 2001, he received an MBA from Northumbria University Business School (UK). He has been awarded the Order for Service to the Motherland (2nd degree) and the Automotive Industry Order of Honour. SOLLERS // Annual Report 2013 Board Composition 2013: Independent Directors Percentage Interest that Directors Hold in the Share Capital as of 31 December 2013 Number of direct voting rights Number of indirect voting rights % of voting rights - - - David J. Herman Richard Broyd - - - Patrick T. Gallagher - - - Seppo Remes - - - Alexander Ikonnikov 44% Independen Executive D 56% - - - Vadim Shvetsov 15,980 18,433,919 53.85% Nikolay Sobolev 99,383 - 0.29% - - Independent Directors - - Executive Directors Viktor Khvesenya - Zoya Kaika - Source: SOLLERS OJSC List of Affiliates as of 31 December 2013. www.sollers-auto.com 44% 56% As of 31 December 2013 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 54 MOVING AHEAD // Board of Directors’ Meetings Board Committee Reports The Board met 11 times in 2013 and the majority of agenda items discussed were corporate governance matters. In line with best practice corporate governance, the Company has formed a number of Board committees to support the Board of Directors in exercising control over different business activities. Meetings and Attendance Matters Discussed and Approved Audit Committee The Audit Committee was established in 2005. Its mission is to support the Board of Directors in exercising control over the Company’s business activities. The Audit Committee reports to the Company’s Board of Directors. During the year under review the Board of Directors held 11 meetings. The Board’s attendance for each meeting is set out in the table below. One new member was appointed to the Board at the AGM on 16 May 2013 (Zoya Kaika) and one member (Evegeny Yasin) retired from the Board on the same date. Nearly a half of the Board meetings in the year were attended in person. A variety of topics was discussed at the Board meetings during the year. Over 50% of the number of topics discussed related to corporate governance matters, which demonstrate the Board’s commitment to keeping corporate governance high on its agenda. Board Meeting Attendance in 201331 Number of Topics Approved at Board Meetings in 2013 Director 1 2 3 4 5 6 7 8 9 10 Number of meetings David J. Herman Richard Broyd Patrick T. Gallagher Seppo Remes Alexander Ikonnikov Vadim Shvetsov Nikolay Sobolev Viktor Khvesenya Zoya Kaika32 Evgeny Yasin33 11/11 10/11 11/11 11/11 11/11 11/11 11/11 11/11 2/3 3/8 Number of Board Meetings Held in Person and in Absentia in 2013 60 52 50 40 38 38 Number of items put to the vote Number of items passed unanimously 30 20 10 0 Total number of items discussed Breakdown of Topics Considered at Board Meetings in 2013, % 10% 10% 45% 55% Meetings held in person Mettings held in absentia 52% 11% SOLLERS // Annual Report 2013 Approval of Transactions Strategy and Main Business Members of the Audit Committee must be independent and also have relevant professional financial qualifications in order to ensure the committee operates in the most effective manner. All members fulfil these criteria. Details about the status of each members’ independence and qualifications can be found in the Board profiles on page 50. THE ROLE OF THE AUDIT COMMITTEE The Audit Committee’s main areas of activities include control over the following: ›› completeness and fairness of financial statements, and the process of their preparation and presentation ›› operation of internal control, internal audit and risk management systems ›› compliance with current Russian legislation and the Company’s internal regulations. Financials 17% 31 The figures presented in the table indicate the number of meetings in which a Board member actually participated/ the number of meetings in which a Board member could participate. Corporate Governance The Audit Committee consists of the Chairman and three members who are nonexecutive directors of the Company. As of 31 December 2013, the Audit Committee included the following members of the Board of Directors: ›› Seppo Remes (Committee Chairman, independent director) ›› Patrick T. Gallagher (independent director) ›› David J. Herman (independent director, Chairman of the Board of Directors) The Audit Committee’s exclusive functions include: ›› evaluating candidates for Company auditors and presenting their conclusions to the Board of Directors ›› assessing the auditors’ opinion ›› evaluating the efficiency of current internal control and risk management procedures, and making recommendations for improving them. AUDIT COMMITTEE MEETINGS The Audit Committee meets regularly to ensure the prompt monitoring of the Company’s internal control and audit systems and risk management procedures, and to summarise the interim and annual results of the Company’s business operations. Meetings are attended by Committee members, who are invited to make presentations, and also by other stakeholders, as and when required (for example, the heads of corporate reporting, internal audit and control, risk management, and representatives of external auditor). 32 New member of the Board of Directors who was elected during the AGM held on May 16, 2013. 33 Member of the Board of Directors who served on it before the AGM held on May 16, 2013. www.sollers-auto.com SEPPO REMES CHAIRMAN OF AUDIT COMMITTEE KEY AUDIT COMMITTEE ACTIVITIES IN 2013 The following documents were approved at the Audit Committee meetings in 2013: ›› Consolidated Financial Statements of SOLLERS Group for 2012 ›› Consolidated Financial Statements for H1 2013 ›› approval of PricewaterhouseCoopers Audit, as the external auditor of SOLLERS Group’s Financial Statements for 2013 ›› the reports on internal audit findings and internal audit plan for 2014. In 2013, the Audit Committee also implemented the risk matrix and influenced the development of major risk management activities. Other “In 2013 we successfully implemented our risk management matrix and developed our risk management activities.” › For more information about our internal control, risk management processes and our principal risks, please see PAGE 62. 55 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 56 MOVING AHEAD // Board Committee Reports (continued) Strategy Committee Remuneration Committee The Strategy Committee was established in 2005. Its task is to present recommendations on the development of the Company’s strategy and to determine its priority development areas. The Strategy Committee reports to the Company’s Board of Directors. STRATEGY COMMITTEE MEETINGS The Strategy Committee includes the Chairman and at least three Members of the Company’s Board of Directors. During 2013 and as of 31 December 2013, the Committee included the following Members of the Board of Directors: ›› Richard Broyd (Committee Chairman, independent director) ›› Patrick T. Gallagher (independent director) ›› David J. Herman (independent director, Chairman of the Board of Directors) ›› Vadim Shvetsov (CEO) ›› Nikolay Sobolev (First Deputy CEO, CFO). The Strategy Committee presents its opinions to the Board of Directors on documents submitted by management regarding the Company’s development strategy. At the Board of Directors’ request, or on its own initiative, the Strategy Committee prepares oral or written recommendations on specific topics within its competence, and issues reports on its work for consideration by the Board of Directors. The Strategy Committee meets on a regular basis, at least twice per year. Committee meetings are attended by the Company’s First Deputy CEO or CEO. KEY STRATEGY COMMITTEE ACTIVITIES IN 2013 THE ROLE OF THE STRATEGY COMMITTEE The Strategy Committee’s main areas of activities include: ›› reviewing the goals, development concepts, and strategic plans developed by top management, as well as coordinating strategic plans in accordance with the Company’s performance and prospects and communicating these to the Company’s units ›› preparing recommendations for the Board of Directors concerning investment decisions, including: –– acquiring capital of other companies, analysis of investment projects and review of their compliance with the development strategy (at the project acceptance stage) –– analysis of top-level organisational projects and assessment of their compliance with the development strategy (at the project development stage) ›› preparing recommendations for the Board of Directors regarding potential restructuring, including the utilisation of non-core assets. SOLLERS business is growing organically, adapting to changing macro- and microeconomic factors. The Strategy Committee played a significant role in defining the Company’s development strategy, focusing in particular on the changing market structure and deterioration of the macroeconomic environment. “In 2013 we focused in particular on monitoring changing consumer demand and the challenging macroeconomic environment.” RICHARD BROYD CHAIRMAN OF STRATEGY COMMITTEE The Remuneration Committee was first established in 2005. Among the Committee’s responsibilities is the establishment of fair compensation packages for the Company’s governing bodies. The Remuneration Committee reports to the Company’s Board of Directors. REMUNERATION COMMITTEE MEETINGS The Remuneration Committee includes the Chairman and at least three members of the Company’s Board of Directors. During 2013 and as of 31 December 2013, the Committee included the following members of the Board of Directors: ›› Patrick T. Gallagher (Committee Chairman, independent director) ›› David J. Herman (independent director, Chairman of the Board of Directors) ›› Alexander Ikonnikov (independent director) ›› Nikolay Sobolev (First Deputy CEO, CFO). Based on the results of the Committee’s work, the Board of Directors made recommendations to the Annual General Shareholders Meeting regarding the amount of remuneration and compensation for members of the Company’s Board of Directors. THE ROLE OF THE REMUNERATION COMMITTEE The Remuneration Committee’s main areas of activity are: ›› defining criteria for selecting candidates for the Company’s Board of Directors and top management, and the preliminary evaluation of candidates ›› developing proposals for determining essential contract terms with members of the Company’s Board of Directors and top management, including principles and criteria for determining their remuneration ›› assessing the performance of the Company’s management on a regular basis. KEY REMUNERATION COMMITTEE ACTIVITIES IN 2013 “We put our remuneration proposals to the vote at the AGM, based on a detailed assessment of the work carried out by the Board of Directors and its Committees during the year.” PATRICK T. GALLAGHER CHAIRMAN OF REMUNERATION COMMITTEE › Details of the remuneration for members of the Board and its Committees which were approved at the AGM can be found on PAGE 59. › For more information about strategy, please see PAGE 29. SOLLERS // Annual Report 2013 The Remuneration Committee meets as required. www.sollers-auto.com 57 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 58 MOVING AHEAD // Board Committee Reports (continued) Nomination and Corporate Governance Committee The Nomination and Corporate Governance Committee was established in 2012. The main purposes of the Nomination and Corporate Governance Committee are to develop and enhance the corporate governance of the Company, to carry out preliminary reviews of matters regarding the corporate governance and corporate culture of the Company and to make recommendations to the Board of Directors on such matters. The Nomination and Corporate Governance Committee reports to the Company’s Board of Directors. The Nomination and Corporate Governance Committee includes the Chairman and at least three members of the Company’s Board of Directors. During 2013 and as of 31 December 2013, the Committee included the following members of the Board of Directors: ›› David J. Herman (Committee Chairman, Chairman of the Board of Directors, independent director) ›› Alexander Ikonnikov (independent director) ›› Vadim Shvetsov (CEO) ›› Victor Khvesenya (director of Legal Affairs). THE ROLE OF THE NOMINATION AND CORPORATE GOVERNANCE COMMITTEE The Nomination and Corporate Governance Committee’s main areas of activity are to: ›› develop general recommendations regarding the desired composition and size of the Board of Directors ›› conduct an evaluation of candidates proposed for election to the Board of Directors and provide the Board of Directors with recommendations regarding such candidates ›› review and develop the Company’s standard for director independence and recommend to the Board of Directors any modifications to that standard ›› monitor emerging corporate governance trends, evaluate corporate governance policies and Company programmes and recommend to the Board of Directors any actions as the Committee may consider appropriate ›› consider policies relating to the preparation, convocation and holding of general meetings of shareholders and meetings of the Board of SOLLERS // Annual Report 2013 Directors ›› make recommendations to the Board of Directors with respect to the approval of and amendments to the Company’s internal corporate rules and policies relating to insider information and the Company’s confidential information, as well as regarding the procedure relating to the use of information about the Company’s operations, securities and transactions which is not in the public domain ›› handle any other matters relating to corporate governance as may be requested by the Board of Directors or deemed necessary or desirable by the Committee. NOMINATION AND CORPORATE GOVERNANCE COMMITTEE MEETINGS The Nomination and Corporate Governance Committee meets as required. The Nomination and Corporate Governance Committee presents its opinions and recommendations to the Board of Directors on the Company’s corporate governance and corporate culture. At the Board of Directors’ request or on its own initiative, the Committee prepares oral or written recommendations on specific issues within its competence, and issues reports on its work for consideration by the Board of Directors. KEY NOMINATION AND CORPORATE GOVERNANCE COMMITTEE ACTIVITIES IN 2013 In 2013, the Committee initiated and contributed to the development of a new Corporate Code of Governance, which was finally approved at the AGM held on 16 May 2013. The Corporate Code of Governance was established in compliance with the terms of the Corporate Code of Conduct, recommended by the Act issued by the Federal Committee for Security Markets on 4 April 2002 # 421 ‘Recommendations for application of Corporate Code of Conduct’ and the UK Corporate Governance Code, revised version as of September 2012. The amendments to the Corporate Code of Governance primarily involve the definition of independent directors. Annual General Meetings KEY AMENDMENTS TO THE CORPORATE CODE OF GOVERNANCE: DEFINITION OF INDEPENDENT DIRECTOR “In 2013 we developed a new Corporate Code of Governance, reinforcing the importance of corporate governance within our corporate culture.” DAVID J. HERMAN CHAIRMAN OF NOMINATION AND CORPORATE GOVERNANCE COMMITTEE SOLLERS is committed to ensuring that the Board of Directors includes at least three independent members of the Board of Directors, each of whom meets the following requirements: ›› within the last five years, he/she has not been a direct or indirect employee of the Company or of the companies controlled by the Company ›› he/she does not have, or within the last three years has not had, any relevant business relationships with the Company, directly or indirectly ›› he/she does not receive any additional remuneration from the Company, other than the remuneration for performing his/her duties as a Board of Director member, and does not participate in any of the Company’s stock options and retirement plans ›› he/she is not a close relative of any advisor, any Board of Director member or the Company's Chairperson ›› he/she, together with other members of the Board of Directors of the Company, does not hold management positions in other companies and has no other relevant relationships with other members of the Board of Directors through participation in other companies or bodies ›› he/she is not a major shareholder (please note that if a candidate is nominated by or voted for by a major shareholder to hold a position on the Board of Directors, this candidate is not deemed to be a representative of the major shareholder) ›› he/she has not been a member of the Board of Directors of the Company for more than nine years since his/her first election In its decision to appoint an independent director, the Board of Director takes into consideration the above requirements to ensure that there are no circumstances which may affect the independence of the member of the Board of Director when performing his/her functions. The definition of an independent director provided by the Code is used exclusively for the purpose of applying the provisions of this Code and does not cancel or alter any statutorily prescribed definition of an independent director established by the applicable laws of the Russian Federation. The Annual General Meeting (AGM) is held at least two months after, and no later than six months after, the financial year end. The SOLLERS OJSC’s next AGM will be held on 30 May 2014. The information regarding the AGM procedure and Shareholders materials can be found on the Company’s website. The Company’s 2012 AGM took place on 16 May 2013. The SOLLERS OJSC shareholders approved the financial statements for the year ended 31 December 2012 as well as the Annual Report for 2012. On the back of strong financial performance in 2012 the shareholders took the decision to pay out a dividend of RUB 52.52 per share, making a total declared dividend of around RUB 1.8 billion. Dividends were paid 60 days from the day that the decision was taken. The shareholders elected the nine following members to make up the SOLLERS OJSC Board of Directors: David Herman, Vadim Shvetsov, Richard Broyd, Patrick Gallagher, Seppo Remes, Nikolay Sobolev, Viktor Khvesenya, Zoya Kaika and Alexander Ikonnikov. The Company’s statutory auditor for the second term running was elected: ACG Business Krug Ltd. The meeting also approved the new version of the SOLLERS OJSC Charter, the Corporate Code of Governance and Statute of the Board of Directors. The AGM established remuneration for each member of the Board of Directors for the period during which they performed their duties: ›› EUR 130 000 for the Chairman of the Board of Directors ›› EUR 120 000 for Chairmen of the Committees ›› EUR 110 000 for each other member of the Board of Directors. All resolutions were passed by a majority vote. www.sollers-auto.com 59 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION Managing Exclusively for the Benefit of our Shareholders 5 The Profiles of SOLLERS’ Managers 1 2 3 5 6 ALEXANDER KORNEYCHUK GENERAL DIRECTOR OF MAZDA SOLLERS MANUFACTURING RUS LLC (SINCE 2012) AND SOLLERS-BUSSAN LLC (SINCE 2011) Background: In 2011 Alexander was appointed General Director of SOLLERSBUSSAN LLC. In 2012 this position was combined with the role of General Director of MAZDA SOLLERS Manufacturing Rus LLC. In 2009, he became General Director of SOLLERS-Far East. From 2005 to 2009, he was Executive Director of SOLLERS-Naberezhnye Chelny (formerly, OAO ZMA). From 2002 to 2005, he was Director of Strategic Development Projects at SOLLERS. In 2000-2001, he was Acquisition Manager at Ford Motor Company. ALEXEI VOLODIN MANAGING DIRECTOR OF SSANGYONG DISTRIBUTION (SINCE 2009) Background: Prior to his current role, Alexei worked in the Sales, Marketing & Aftersales operations of General Motors Europe, starting at Chevrolet BDM Russia in 2005 and ending up as European Fleet & Remarketing Manager in Russelsheim (Germany). Education and awards: Alexei is a graduate of the Moscow Legal Institute. 9 7 8 9 ANDREY MATYUSHIN GENERAL DIRECTOR OF ZMZ OJSC (SINCE 2012) Background: Alongside his current role Andrey was appointed head of RosALit Foundry LLC (a ZMZ subsidiary) in February 2012. Andrey began his career at ZMZ OJSC in 1997 as a technologist and for the past five years has headed its technical department. Education and awards: Andrey is a graduate of Nizhny Novgorod State Technical University and where he is currently studying for an MBA. 10 11 12 11 › For a full biography of Managers numbered 1–4, please see the Board of Directors’ section on SOLLERS // Annual Report 2013 PAGE 52 6 OLGA TYRYSHKINA DIRECTOR OF RISK MANAGEMENT AND INTERNAL AUDIT OF SOLLERS (SINCE 2010) Background: Olga was Chief Accountant of SOLLERS from 2004. From 1993, she worked as Deputy Chief Accountant at ZAO Raspadskaya. Education and awards: Olga graduated in Economics from Kuzbass State Technical University. Education and awards: Alexander is a graduate of the Moscow Aviation Institute. 7 4 60 MOVING AHEAD // TARAS ROSTOPIROV HUMAN RESOURCES DIRECTOR OF SOLLERS (SINCE OCTOBER 2013) 8 ANTON KARPOV GENERAL DIRECTOR OF THE UAZ DISTRIBUTION CENTRE (SINCE 2010) Background: From 2005, he was Head of the UAZ Sales Department. From 2003, he was Head of the Marketing Department at UAZ OJSC (Ulyanovsk). Education and awards: Anton holds a degree in Journalism from the Moscow State Social University, and completed his postgraduate studies at the Higher School of Economics with a degree in Economics and Management of the Domestic Economy. 10 VERONIKA ANTONOVA STRATEGIC MARKETING DIRECTOR OF SOLLERS (SINCE MAY 2013) Background: Prior to joining SOLLERS in 2012, Veronika held a managerial position at KPMG Strategy Group. She has over 12 years of professional experience in marketing and consulting in Europe and in Russia in B2B and B2C markets. Education and awards: Veronika graduated from the Lomonosov Moscow State University, Faculty of Economics and received a Master’s Degree at Lomonosov Moscow State University Business School. In 2008, Veronika received her MBA from SDA Bocconi in Italy. 12 EVGENY SUDARKIN INFORMATION TECHNOLOGY DIRECTOR (SINCE 2011), GENERAL DIRECTOR OF PROF-IT GROUP LLC (SINCE APRIL 2013) Background: Taras joined SOLLERS Group as a Dealer Network Development Director in 2010. In 2012, he was appointed General Director of FRONTLINE Company (an education subsidiary of SOLLERS Group). He started his career in the automotive sector in 2001 at Rolf Import LLC, where he served nine years. Background: Evgeny joined SOLLERS Group as a project manager at UAZ OJSC in 2007. In 2009, he was appointed Head of UAZ IT department and from 2010 he also became Head of ZMZ IT department. Evgeny started his career in 2005 at Kristal LLC as a senior engineer and was involved in several automation projects. Education and awards: Taras graduated from the Kiev Military Aviation Engineering Academy and Moscow State Lenin Pedagogical University with a major in Educational Research. Taras served in the Military Air Force as a training specialist at the Yuri A. Gagarin State Scientific Research and Testing Cosmonaut Training Center. Education and awards: Evgeny graduated from Uliyanovsk State Technical University majoring in Applied Information Science in Economics and Finance and Credit. He also has an MBA from International Institute of Management LINK. www.sollers-auto.com 61 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION Balanced Approach to Risk Management Risk Management and Principal Risks One of the most important elements of SOLLERS’ corporate governance is its risk management system that enables the Company’s management to identify current strategic, operational, regulatory and financial risks in a timely manner. 62 MOVING AHEAD // MARKET RISKS Description Risk management In the last couple of years we have observed a significant change in the preference of Russian consumers, who are now demanding vehicles from the SUV segment at the expense of the C segment. The Company faces very tough competition, which includes leading global manufacturers, who are focusing their activity on the Russian SUV segment. Competition is particularly intense from those companies that have higher production capacities and sales volumes than SOLLERS. Sales of SUVs from some major brands can account for nearly 70% of their total sales in Russia. The successful localisation of competitors, together with their economies of scale, can result in the emergence of new models in the low-end price range. This change in customer preferences and the increased competition in the SUV segment could influence the Company’s profitability. The Company aims to mitigate these risks through the following actions: ›› SOLLERS Group continuously monitors trends in the Russian car market and changes its model mix and pricing scheme accordingly ›› Ford Sollers JV started production of several Ford SUVs between 2012 and 2013 and plans to increase the number of SUV models in its portfolio in 2014 ›› Ongoing modernisation and facelifts of the current SUV model range (SsangYong and UAZ) in the low-end price range is carried out in order to support the Company’s sales and market share ›› To support sales in the declining C segment, Ford Sollers JV has introduced the most affordable versions of the Focus to compete with the top-of-the range cars in the B+ segment. COUNTRY AND REGIONAL RISKS Our approach to risk management MARKET RISKS The risk management system plays an important role in safeguarding the Company’s value creation as it improves the Company’s ability to manage risks by identifying potentially negative factors, which could affect the achievement of the Company's goals. Risk management is integrated into the decision-making processes for all investment, strategic and automation projects. P63 COUNTRY AND REGIONAL RISKS LEGISLATION RISKS P63 P63 KEY RISK AREAS PROCUREMENT RISKS P64 Description Risk management SOLLERS’ business activities are mainly concentrated in the Russian Federation. Deterioration in the Russian economic environment could result in a decrease of disposable income and a slow down of GDP growth. This could have a negative impact on SOLLERS’ revenues and lead to a lack of liquidity. The Company continually monitors the macroeconomic and geopolitical situation and, accordingly, diversifies its activity in different Russian regions and increases its UAZ export sales (up 37% Y-on-Y). The Company uses wholesales bank financing to eliminate the risk of late payment of receivables from dealers should any liquidity constraints arise. SOLLERS engages with federal authorities to negotiate the interests of automotive manufacturers through sector associations and has also initiated the development of support programmes for the Russian automotive sector. FINANCIAL RISKS P64 LEGISLATION RISKS Risk identification and mitigation The Company adopts a balanced approach to risk management with a focus on mitigating risks in order to minimise their implications and/or likelihood of materialising. In-depth analyses of operational and transaction risks are performed regularly, as well as of market risks and risks inherent in pricing, financial reporting and taxation. SOLLERS // Annual Report 2013 Following a recent review made by senior management, the most significant risks areas and risk factors for the Company are set out below. The risks are grouped into five categories: market risks, legislation risks, procurement risks, financial risks and country and regional risks. Description Risk management The introduction of new environmental regulations for CO2 emissions, Euro 4, and the further tightening of standards to Euro 5 impacts the Company’s business, as engine manufacturing is one of its key brand strengths. The introduction of a recycling fee for imported vehicles and its expansion to include locally-assembled vehicles could considerably impact the profitability of the business. SOLLERS Group continuously monitors all environmental regulations and ensures that all new products comply with current environmental standards. The UAZ model range already complies with the Euro 4 standard and ZMZ engines are planned to be upgraded to the Euro 5 standard by 2016. As such, the likelihood of our products failing to comply with environmental regulation is low. SOLLERS Group continuously monitors tax and tariff legislation. Sector associations negotiate with federal authorities on behalf of local producers. To maintain its current level of profitability the Company is focused on continuous improvement of its operational efficiency and product mix. In 2014, the federal authorities introduced subsidies to support Russian producers and to incentivise R&D activities. We consider that the net impact of changes in legislation will be minimal. www.sollers-auto.com 63 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 64 MOVING AHEAD // Risk Management and Principal Risks (continued) Risk Management and Internal Audit Directorate PROCUREMENT RISKS Description Risk management The failure to receive components according to agreed delivery terms, a sharp increase in prices of materials and components, and any deterioration in the quality of components could lead to production stoppages and a loss of customer loyalty. SOLLERS continually works with its supplier base and is improving its procurement competences. Ongoing quality management improvement enables the Company to control the timely supply and quality of components. Long-term relations with global OEMs and joint ventures with international OEMs facilitate the secure supply of assembly kits and fair pricing policies through mutually beneficial contracts. Given our mitigating actions, in our opinion, the likelihood of these risks materialising is quite low. FINANCIAL RISKS Description Risk management An influential financial risk, and currently the most significant for the Russian automotive industry, is foreign exchange risk. Leading Russian banks have forecast a depreciation in the rouble against the USD to around 36.0034 roubles to the USD by the end of 2014, which represents a 9% devaluation in the rouble compared to the end of 2013. The Company has a considerable share of materials and components denominated in USD and EUR. The level of purchases in foreign currency varies from one business to another and also depends on the level of localisation of each model. Given the fact that around 80% of the Russian automotive market is denominated in foreign currencies35 all industry players will increase prices to compensate for the long-term weakening of the national currency. It will not change the level of competition, as all players will be subject to the same negative impact. However, it will result in a change in consumer purchasing patterns as, typically, consumers tend to defer large purchases until prices start to stabilise again. In the short term the market is forecast to respond with normal elasticity to changes in the exchange rate and any decline in consumer spending. A long-term, continuous depreciation of the rouble could negatively impact the profitability of the Company. The Company does not typically hedge foreign currencies as the nature of its business enables the Group to eliminate possible negative effects by changing related rouble-denominated retail prices. As at 31 December 2013 SOLLERS had no debt facilities denominated in foreign currency. The Company strengthens its internal efficiency through ongoing cost-cutting initiatives and by focusing on localisation activities. By increasing the local content of the vehicle cost, we can reduce our exposure to foreign exchange risk and, as a result, improve the competitiveness of the vehicles. SOLLERS aims to increase the level of localisation up to 60% in the medium term. Our Risk Management and Internal Audit Directorate facilitates the achievement of SOLLERS Group’s goals and objectives. It provides shareholders and management with systematic, consistent, independent, substantiated advice and guarantees in relation to risk management, internal audit processes and taxation. It reports directly to the CEO or First Deputy CEO and also has a functional reporting line into the Board of Directors’ Audit Committee. The Directorate has a clear set of objectives: ›› Building a risk management system and supporting its effectiveness at a corporate and operational level within SOLLERS Group ›› Providing Management with methodological assistance and advice regarding risk management and internal audit issues ›› Monitoring SOLLERS Group companies’ compliance with tax laws and working closely with competent third parties, including regulatory/government bodies, on relevant matters ›› Developing programmes, organising and conducting risk-based audits in the following areas: –– assessing the reliability and effectiveness of monitoring tools applied in key business processes –– monitoring compliance with applicable laws and internal regulations –– assisting the Company’s Management to develop corrective measures and risk management activities, based on the results of audits, and following these up once implemented –– submitting reports to the Audit Committee and Management on the risks identified within SOLLERS Group and on risk management activities, as well as on the results of audits that have been conducted. 34 Forecast consensus as of 11 March, 2014. 35 SOLLERS’ estimates: 80% of the cost of car sales, for companies active in the Russian market, is denominated in foreign currencies. These companies include local manufacturers who source components from abroad and importers. SOLLERS // Annual Report 2013 www.sollers-auto.com Organisational Structure of the Risk Management and Internal Audit Directorate BOARD OF DIRECTORS’ AUDIT COMMITTEE CHIEF EXECUTIVE OFFICER RISK MANAGEMENT AND INTERNAL AUDIT DIRECTORATE RISK MANAGEMENT DEPARTMENT Direct reporting lines INTERNAL AUDIT DEPARTMENT TAX DEPARTMENT Functional reporting lines 65 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING Safe Sustainable We are committed to increasing our operational safety record throughout our business As we grow we must do so sustainably – nurturing our people and developing a robust culture for the long term ADDITIONAL INFORMATION MOVING AHEAD // Corporate Social Responsibility We take CSR topics into account when embarking on a new project or making important operational decisions – they are an integral part of our strategic planning SOLLERS // Annual Report 2013 66 www.sollers-auto.com 67 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 69 68 MOVING AHEAD // Responsible Business Principles in All Our Operations Corporate Social Responsibility SOLLERS’ responsible business policy is an integral part of its overall strategic planning. CSR topics are considered at all levels of corporate governance: at a shareholder level, through to the Board of Directors and senior management. This means that the Group’s social and environmental impact in its areas of operation is taken into account when making important operational and economic decisions. All companies, in which Sollers OJSC owns a controlling stake, follow the same principles of responsible business in their operations. The Group CSR policy is implemented and monitored in the following consolidated businesses: UAZ Holding (including the production of ZMZ engines and components), its headquarters (including the distribution divisions for UAZ and SsangYong cars), and other subsidiaries. SOLLERS partnerships, Ford Sollers JV, SOLLERS-ISUZU JV, SOLLERS-BUSSAN JV, MAZDA SOLLERS JV, and SOLLERS-FINANCE JV, implement their own sustainable development strategies, which are not covered in this section of the Annual Report. CORPORATE RESPONSIBILITY PRINCIPLES 1. Increasing the Company’s shareholder value 2. Contributing to growth through long-term mutually beneficial partnerships 3. Continuing development SOCIAL INVOLVEMENT P69 4. Improving the quality of our products and services 5. Improving employees’ competences P70 P71 6. Contributing to the social and economic development in the regions where we operate The strategy to increase SOLLERS’ shareholder value is based on improving its market capitalisation as well as increasing its dividend payout. In 2013 market capitalisation increased by 23%, while the MICEX index remained at the same level. PROPOSED DIVIDEND Historically the Company makes dividend payments of between 30–40% of the consolidated net profit for the respective period. The final decision on dividend payments and their amount is made at the Shareholders General Meeting. The Board of Directors will propose to pay dividends to shareholders if positive financial results have been achieved in the reporting period and if the Net debt / EBITDA ratio does not exceed 1.5. At the Board of Directors meeting held on 7 April 2014 it was decided to recommend to the Shareholders General Meeting to pay dividends of RUB 52.52 per share (in line with the previous dividend payment), which makes a total declared dividend amount of RUB 1.8 billion. SOLLERS Group’s Key Corporate Responsibility Principles ECONOMIC EFFICIENCY 1. Increasing the Company’s Shareholder Value ENVIRONMENTAL AND OCCUPATIONAL SAFETY P73 P74 P75 7. Increasing operating safety and monitoring across our business processes P75 8. Reducing our impact on the environment P76 This recommendation represents an increase in the payout ratio to 50%, which demonstrates the Board of Directors’ confidence in the stability of the Group’s financial position, and is also based on the strong free cash flow generated in 2013. The maintenance of dividend payments in an environment of financial market volatility and continued economic and geopolitical uncertainty underpins SOLLERS’ commitment to create value for its shareholders. MARKET CAPITALISATION MICEX INDEX as of 08.01.2013 1,514.8 695.0 23,818 as of 30.12.2013 1,504.1 854.3 29,277 www.sollers-auto.com Y-on-Y Growth 23% * Number of ordinary shares outstanding: 34,270,159 › You can find more information about the Company’s share price in the Market Share Price and GDR section on PAGE 80. FINANCIAL RATIONALE FOR MAKING THE DECISION TO PAY DIVIDENDS ›› Strong free cash flow in 2013: up 20% Y-on-Y to RUB 6,923 million ›› Stable financial position with a record low Net Debt/ EBITDA ratio of 0.6 as of 31 December 2013 (versus 1.0 as of 31 December 2012) ›› Positive financial result: Net profit for the year of RUB 3,625 million › You can find more information about our financial performance in the Financial Reporting section on PAGE 83. DIVIDEND PAYMENT HISTORY Record date Dividend per share (RUB) Declared dividend (mln RUB) Dividend yield (as of record date) Payout ratio SOLLERS // Annual Report 2013 Market Capitalisation* (RUB mln) SVAV share price (RUB) 2003 9M 2004 2004 2005 2006 2007 1H 2008 2012 P2013 09.01.04 28.10.04 21.04.05 21.04.06 01.04.07 11.04.08 05.09.08 08.04.13 11.06.14 17.00 10.00 11.00 14.00 19.70 29.18 16.00 52.52 52.52 375 298 328 480 675 1,000 548 1,800 1,800 n/a n/a n/a 2% 2% 2% 2% 7% n/a 0.4 n/a 0.2 0.3 0.4 0.4 n/a 0.3 0.5 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 70 MOVING AHEAD // Corporate Social Responsibility (continued) 2. Contributing to Growth Through Long-term Mutually Beneficial Partnerships 3. Continuing Development SOLLERS Group’s sustainable development strategy aims to develop long-term partnerships based on its unique corporate culture. Strategic relationships are built on mutual trust, a creative approach to solving common tasks, and by striving to attain the highest quality standards in all areas of operation. SOLLERS was founded to meet the needs and expectations of private Russian car owners, as well as to create the best transport solutions for businesses. The Company continues to operate with this purpose by constantly taking on board new trends in the automotive market and using this information to update products for its customers. Within its framework of global cooperation, SOLLERS aims to maximise value for its shareholders and business partners through its unique combination of core competencies: ›› a deep understanding of trends in the Russian automotive market ›› efficient logistics ›› a strong infrastructure and ›› a high level of expertise in automobile manufacturing. The ability to remain flexible is another important feature of our market strategy, making it possible to take on board changing customer preferences. Competitive advantage is achieved through a unique combination of product lines and brands, across a wide range of segments and price bands, shaped to the needs and tastes of the majority of customers. HISTORY OF SOLLERS’ PARTNERSHIP PROJECTS 2000–2005 ›› acquisition of UAZ and ZMZ ›› restructuring of UAZ and ZMZ 2005 ›› IPO ›› acquisition of ZMA ›› strategic partnership with SsangYong for SUV production established 2006–2007 ›› strategic partnership with ISUZU for truck production ›› strategic partnership with FIAT for production of passenger cars and LCVs 2008 ›› launch of SOLLERS-Elabuga plant for production of LCVs ›› JV with ISUZU established ›› launch of SOLLERS-ISUZU plant for truck production 2009–2011 ›› launch of Far East plant (Vladivostok) for SsangYong production ›› JV with Sovkombank established for development of leasing services ›› new major strategic partnership with Ford: 50:50 Ford Sollers JV launched on 1 October 2011 ›› exit from strategic partnership with FIAT 2012–2013 ›› JV with Mazda for production of cars in Vladivostok launched on 6 September 2012 ›› JV with Mitsui for production of Toyota LC Prado in Vladivostok launched on 18 February 2013 NEW PROJECTS: AN OPTIMAL PARTNERSHIP STRATEGY WITH A 50:50 STRUCTURE In 2011, SOLLERS established a joint venture with the Ford Motor Company, with production assets located in Vsevolozhsk (in the Leningrad Region), and in Naberezhnye Chelny and Elabuga (in the Republic of Tatarstan). The Ford Sollers JV manufactures and distributes Ford branded vehicles exclusively in Russia. By the end of 2011, the Group established a joint venture with the Japanese company Mitsui&Co., Ltd in Vladivostok, where Toyota LC Prado cars were first launched in February 2013. In the second half of 2012, SOLLERS set up a joint venture with Mazda Motor Corporation in Vladivostok and, in the same year, started production of Mazda CX5 SUVs, with the range extended to include the new Mazda6 notchback in 2013. In 2012, SOLLERS Group sold a 16% stake in SOLLERS-ISUZU JV and moved to a 50:50 joint venture ownership structure. In 2013, this structure was used for all of SOLLERS’ joint ventures. › You can find more information about the Group’s projects in the Business Projects and Key Assets section on PAGE 36. SOLLERS // Annual Report 2013 This is a fast-moving market which requires our employees to improve their skills and acquire new knowledge and to stay focused on progressing projects with innovative solutions. Our CSR policy principle of sustainable development, which is evident across all areas of operation, fundamentally underpins our approach to stay true to our original purpose. GLOBAL STRATEGY SOLLERS’ strategy aims to generate shareholder value by growing organically in its consolidated businesses and accelerating its joint venture activities by investing in new, promising products and localisation. STRATEGIC OBJECTIVE Sustainable growth through partnerships Development of the most attractive market segments Increase the level of locally-produced parts and components to 60% Implement modern product and manufacturing technologies to maintain the highest quality › You can find more information about the Group’s strategic objectives in the Strategy section on Sustainable development and environmentally responsible production PAGE 29. INVESTMENT IN THE KEY ELEMENTS OF THE VALUE CHAIN WIDE DEALERSHIP NETWORK As of the end of 2013, the production capacity of SOLLERS Group (including joint ventures) was over 550 k cars, making SOLLERS the second largest manufacturer in the Russian market. SOLLERS’ dealership network comprises 129 UAZ and 137 SsangYong centres; the Ford Sollers JV dealership network covers over 70 cities in Russia and consists of 130 dealerships. ISUZU trucks dealers are present in all federal districts and many of them are authorised to install and update ISUZU chassis superstructures upon request. The ISUZU dealership network has 46 centres. Large scale investments in the Far East production site will allow the Company to localise production of SsangYong SUVs effectively and improve profitability by increasing production volumes (up to 100 k vehicles per year) through industrial joint ventures with Japanese automakers. SOLLERS Group is developing its industrial park for the production of automotive components at the Zavolzhsky Engine Plant (ZMZ) site. This industrial park concept uses Russian and foreign automotive component manufacturers to support the localisation of automotive manufacturing in Russia and enables the Company to satisfy both the internal needs of the Group and to meet the increased demand for components from Russian automakers. › You can find more information about our value creation in the Business Model section on PAGE 34. www.sollers-auto.com Geographically, the dealership and service network covers the territory from Kaliningrad to Vladivostok. All dealership and service centres meet the strict requirements of the brand distributor in order to maintain the traditionally high quality of products and services. 71 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 72 MOVING AHEAD // Corporate Social Responsibility (continued) CORPORATE CULTURE KPI SYSTEM SOLLERS Group uses an incentive system built in alignment with the Group’s general strategy and objectives. The set of metrics used reflects the specific characteristics of the business and aims both to promote the Group’s financial health and to meet customer needs through the provision of new, high quality products and services. One of the most important metrics in the incentive system for top management of distribution divisions is NPS – Net Promoter Score. This is a customer loyalty metric based on a direct question: How likely are you to recommend our company/product/service to your friends and colleagues? NPS = % of promoters - % of detractors SOLLERS Group is planning to introduce a Performance Management System for employees at its headquarters and vehicle distribution businesses in 2014-2015. The Performance Management System is a system for tracking business objectives for employees focused on target setting and performance. Net Profit, FCF, Market Capitalisation NPS, Market share, Revenue, EBITDA, Operating cash flow Production perfomance / effiency Defectivity ratios, Industrial safety ratios Individual KPIs for workers, specialists, managers and bonus plans for sales personnel The Performance Management System is intended to improve the Company’s efficiency by enhancing: ›› The quality of management ›› Employee commitment. Key advantages of the Performance Management System: ›› Target setting based on transparency, joint discussion of the desired outcome and criteria for achieving it ›› A set of competencies and their quality assessment method approved and accepted by all employees ›› Maintaining achieved performance levels ›› Accurate planning: –– Understanding of team goals by all team members; competition; timely risk detection –– Performance analysis of business units and its employees –– Building a strong employee database –– Ability to understand the Company’s expectations more easily –– Ability to plan employee development. MEDIUM-TERM MOTIVATION SOLLERS Group’s top management ANNUAL AND INTERIM MOTIVATION Top management of distribution divisions ANNUAL, INTERIM AND QUARTERLY MOTIVATION Top management of production divisions SHORT-TERM MOTIVATION Workers, specialists, managers, sales personnel Our most important task in relation to our employees is to create an environment that helps them to work at their best and achieve high results. To ensure we are providing the right environment we are developing our corporate culture in six main areas. OUR CORPORATE CULTURE: MAIN DEVELOPMENT AREAS Creating decent working conditions Providing health care Providing support in difficult circumstances Each company within the Group develops and implements its own programme of social benefits for its employees, taking into account its local business needs. In-house canteens and medical centres, various corporate events and compensation and incentive systems are covered by collective employment agreements — these are used to ensure that employees are motivated to work to their full potential whilst promoting a good work-life balance and enabling them to feel secure about their future in the knowledge that they will be supported if faced with difficult circumstances. SOLLERS Group goes beyond legislative occupational safety requirements: it provides employees with an opportunity to take health treatments at a reduced price and has significantly expanded the range of available medical services under the Voluntary Healthcare Insurance programmes. The Group’s large enterprises have in-house healthcare centres, where qualified medical staff can give immediate professional medical assistance. Developing employees and their careers Organising large corporate events and charitable programmes All SOLLERS’ companies place great importance on programmes for young people. UAZ OJSC and ZMZ OJSC have a special “Youth” programme for employees under 35, which aims to develop the creative and intellectual potential of young employees, promote healthy lifestyles and alternative leisure activities, and improve their professional capability. The Company also provides for its longserving veterans. Pensioners are covered by the “Care” programme, under which former employees can obtain a lump-sum financial assistance in critical circumstances, in-home medical services for bedridden patients, and housing repairs. In 2013, the total amount of social expenditure increased to RUB 70 million (compared to RUB 36 million in 2012). This increase reflects the higher expenditure made by UAZ Holding in its key social programmes. 4. Improving the Quality of Our Products and Services We are constantly looking for ways of applying innovation to improve our products and services. A key recent development is the introduction at UAZ of a new painting technology, which improves body corrosion resistance eight-fold. This is important owing to the various climatic conditions to which our vehicles are exposed. The new method has several advantages: the paint penetration is far superior, reaching hidden and inaccessible cavities, including component edges. SOLLERS // Annual Report 2013 Recognising employees’ achievements www.sollers-auto.com To achieve this a new EISENMANN production line was installed at the plant and all equipment was designed in line with the latest environmental requirements and with the possibility of further upgrading. The modernisation of this technological process allows the company to improve significantly the reliability of its manufactured cars and to offer customers warranties of three years or 100 thousand kilometres for vehicles in the Patriot series. 73 MOVING AHEAD BUSINESS & STRATEGY CORPORATE SOCIAL RESPONSIBILITY CORPORATE GOVERNANCE SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 74 MOVING AHEAD // Corporate Social Responsibility (continued) 5. Improving Employee Competences The training of SOLLERS Group’s employees is based on a single competency model, which allows us to develop the skills and knowledge of employees necessary for the successful fulfilment of their official duties. In addition to compulsory training, employees have the opportunity to develop personal competences, completing short-term courses. In the main, employees in the production companies and at the headquarters are trained either by leading training companies, which have offices in the regions where the Company operates or at special corporate training centres, controlled by the Group, which provide a consistent training quality and tailor-made educational programmes. In 2013, training for managers at our headquarters was focused on the development of skills in financial management, professional competencies and changes in the applicable laws of the Russian Federation. Number of Employees Receiving Training, thousand people In 2013, the Group continued to implement programmes in lean manufacturing, occupational health and safety, quality management, and professional development of senior management at UAZ Holding. A Training Centre for mechanical engineers working on assembly lines was opened. In 2013, the ZMZ engine production facility launched a range of innovative training programmes: from technological innovation and foreign language learning, to training in IT and managing investment projects. This line of activities should create a step change in thinking at a senior management level. 100% 21.1 20.0 10.0 We continued to develop our employee succession pool project (scheduled for three years), which involves over 80 professionals. 19.7 14.5 13.5 19.3 64% 70% 5.0 80% 40% 20% 0 31% 24% 25% 69% 76% 75% 2011 2012 2013 0 2011 2012 Despite the contribution of the Far Eastern production facilities to MAZDA SOLLERS JV, the plant kept its tradition of supporting regional initiatives and raising awareness of youth in automotive manufacturing. Each Friday the plant opens its doors to children and teenagers and gives them tours around the plant. High school pupils from Ulyanovsk and the region visit the plant to see how cars are manufactured. 2013 Number of employees receiving training Male Average headcount as of 31 December Female Employees receiving training, percentage of total headcount Particular attention is paid to improving safety at the production facilities of the Group. In 2013, a whole range of measures to modernise the workplace were implemented at our production sites. In particular, outdated equipment was modernised, the factory temperature controlling systems were improved, and workplaces were certified according to relevant working conditions. In order to improve working conditions, the Work-related Accident Prevention Programme was developed. Full-time and Distance Learning Compulsory and Optional Courses 100% 25 80% 20 80% 17% 10% 60% 40% 35% Number of Accidents 42% 39% 60% 96% 83% 90% 20% 40% 20% 0 2012 22% 20% 42% 36% 42% 2013 2011 2012 2013 Since its establishment, the SOLLERS Group has been focusing on three charity programme areas: healthcare projects, development programmes for educational centres, and youth sports teams. Optional Distance Compulsory professional (recertification) This programme involves regular occupational safety and health and environmental protection inspections, the monitoring of compliance with requirements, and disciplinary measures for people in charge. Factories train new employees in occupational safety and health and environmental protection and provide regulatory safety procedure certification for its personnel. Over three years, the programme has led to a two-fold reduction in the number of accidents, and the frequency coefficient (number of accidents per 1,000 employees) decreased by 37%. 25 1.9 20 13 12 1.2 15 10 10 5 5 0 Full-time 0.9 0 2011 Compulsory (occupational and industrial safety) SOLLERS // Annual Report 2013 In 2013, total charitable donations increased to RUB 111 million which is 2.6 times higher than in the previous year. The Company increased its contributions to educational, healthcare and child welfare facilities in the regions where it operates. During the year, the Group also supported charities in Moscow, where SOLLERS’ headquarters is located. Accidents Frequency Coefficient per 1,000 Employees 23 15 23% 0 2011 CHARITY 7. Increasing Operating Safety and Monitoring across Our Business Processes 100% 4% The tours are free, and there is also the opportunity of meeting with our recruitment and adaptation department, where visitors can talk about practical training and employment at the plant. 60% 13.5 74% UAZ, which is one of the main industrial enterprises in the city of Ulyanovsk and the Ulyanovsk Region, takes an active part in the social and economic development of its local community and implements a relevant social policy to support and develop the region. Following an established tradition, the enterprise supports the following Ulyanovsk Region Government’s social initiatives: schools sponsorship, Children’s Protection Day, Mother’s Day, Disabled People’s Day, and activities to help victims of natural disasters. In recent years UAZ OJSC has funded more than 20 sports grounds and children’s sports facilities. Gender Ratio of Personnel Trained 25.0 15.0 6. Contributing to the Social and Economic Development in the Regions of Operation www.sollers-auto.com 2012 2013 2011 2012 2013 75 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 76 MOVING AHEAD // Corporate Social Responsibility (continued) 8. Reducing Our Impact on the Environment In order to reduce the volume of solid waste, the Company introduced a system to rationalise the use of raw materials and supplies. The system monitors the supply of components in costeffective packaging, which allows costs associated with solid waste disposal to be reduced. Air Emissions, tonnes 1,400 1,208 1,200 Water Emissions, tonnes 600 1,216 1,004 1,000 800 2011 2012 Solid Waste Disposal, tonnes 7,000 50,000 6,470 5,716 5,000 5,073 30,000 3,000 20,000 2012 2013 40,461 35,815 25,353 10,000 1,000 0 0 2011 2012 2013 2011 2012 Energy Consumption, Gcal Electric Power Consumption, MW*h 600,000 320,000 310,000 300,000 290,000 280,000 270,000 260,000 250,000 240,000 500,000 503,831 486,526 399,504 400,000 300,000 200,000 100,000 0 2011 SOLLERS // Annual Report 2013 40,000 4,000 2,000 UAZ OJSC was the winner of the GLOBAL ECO BRANDAWARD Prize in the ECO REGIONALBRAND category. 2011 2013 Water Consumption, thousand cubic metres 6,000 UAZ OJSC was the winner in the 100 Best Russian Organizations for Ecology and Environmental Management. 390 0 0 AWARDS 408 100 200 In order to reduce air pollutant emissions and discharges of pollutants into water, in 2013 the manufacturing units of the Company installed new dust- and gas-trapping units, and commissioned a thermal waste treatment unit and a sludge dewatering unit at its wastewater treatment facilities. The stormwater drainage system was updated and water discharge outlets were joined to the wastewater treatment facility. In 2013, the running of the biological treatment units at the ZMZ Engine Plant was transferred to municipal authorities. This will optimise the wastewater treatment cost, as well as reduce the cost of maintaining treatment facilities. 400 200 400 A strict adherence to these principles has enabled us to improve our performance against all major indicators for resource consumption and environmental pollution. 552 500 300 600 SOLLERS’ environmental policy aims to conserve energy and resources, reduce carbon emissions and manage solid waste efficiently. In 2013, SOLLERS’ major focus areas in environmental safety were: ›› energy conservation, sustainable use of natural resources, reduction of greenhouse gas emissions, efficient solid waste management ›› compliance of business operations with environmental standards ›› environmental footprint measurement and rapid response to any detected violations ›› environmental safety of employees and local communities in areas of manufacturing expansion ›› continuous reinforcement of an environmental culture among employees. Within the framework of its long-term technological re-tooling programme, UAZ Holding is increasing the use of high-tech material that does not generate waste. This allows a significant reduction in the volume of solid waste. www.sollers-auto.com 2012 2013 2013 310,638 293,036 268,357 2011 2012 2013 77 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING up 23% Dedicated Engaged Market capitalisation is up from RUB 23.8 bln to RUB 29.3 bln Y-on-Y We have a dedicated IR team, led by our First Deputy CEO, CFO, Nikolay Sobolev We run a variety of investor events and roadshows throughout the year We operate in the best interests of our shareholders. Our share price performed well in 2013 despite significant volatility in the financial markets SOLLERS // Annual Report 2013 ADDITIONAL INFORMATION MOVING AHEAD // 78 Shareholders’ Equity & Securities www.sollers-auto.com 79 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 80 MOVING AHEAD // Ensuring the Best for All Our Investors Shareholders’ Equity and Securities SOLLERS operates in the best interests of its shareholders. Our share price performed well in 2013 increasing in value compared to the previous year, despite significant volatility in the financial markets. Major Shareholders As of 31December 2013 the immediate parent company was Newdeal Investments Limited36. The Group’s ultimate controlling party is Vadim Shvetsov, who is the Company’s principal shareholder. Date VENUE EVENT 14 February - SOLLERS OJSC 4th Quarter Report, 2013 7 April - SOLLERS Full Year Financial Results, 2013 (Consolidated IFRS Financial Statements) May - SOLLERS Group Annual Report 2013 15 May - SOLLERS OJSC 1st Quarter Report, 2014 and SOLLERS OJSC Full Year Financial Results, 2013 30 May Moscow Annual General Shareholders Meeting and SOLLERS OJSC Annual Report 2013 V. Shevtsov 14 August - SOLLERS OJSC 2nd Quarter Report, 2014 Other shareholders 29 August - SOLLERS Half Year Financial Results, 2014 (Consolidated IFRS Financial Statements) Free-float 14 November - SOLLERS OJSC 3rd Quarter Report, 2014 Shareholder Structure37 34% 54% 12% Share Capital The Company’s subscribed share capital is RUB 428 million, divided into 34,270,159 ordinary shares at a value of RUB 12.50 each. The Company has the right to allocate an additional 47,804,033 ordinary shares at a value of RUB 12.50 each. These ordinary shares would carry voting rights in the same proportion as other ordinary shares. Investor Relations Calendar 2014 Market Share Price and GDR The Company’s shares are listed on the Moscow Exchange under the ticker SVAV. In addition to the disclosures required by the Regulator and the quarterly release of operating results, we take part in one-on-one meetings at investor conferences, organised by major investment banks in Russia and abroad. In 2013, we participated in nine investor conferences. For the latest upcoming events, please see the investor relations section of our website, which also includes other IR information, for example, equity analyst coverage and archived reports and results. http://www.sollers-auto.com/en/investors/ Share Price Performance 2013, RUB 1,000 900 800 700 600 500 400 300 200 100 1,800 1,700 1,600 1,500 1,400 1,300 0 01.02.2013 01.03.2013 01.04.2013 01.05.2013 01.06.2013 01.07.2013 01.08.2013 01.09.2013 01.10.2013 SVAV (Last Price) During the reporting period, SOLLERS share price increased by 23% whereas the MICEX index remained almost flat (between 8 January 2013 and 30 December 2013). In August 2005, SOLLERS established a sponsored Global Depositary Receipt (GDR) programme. The GDRs are unlisted and 1 DR equals 1 ordinary share. The custodian for the programme is Deutsche Bank, Moscow. 1,200 01.11.2013 01.12.2013 MICEX Index (Last Price) DR Ratio: 1:1 DR ISIN: US8342581050 CUSIP 834258105 DR Type: Reg S / Sponsored Investor Relations Department Our First Deputy CEO, CFO, Nikolay Sobolev, has overall responsibility for our IR activities. He is supported by a dedicated IR team, who can be contacted using the details below for any IR‑related queries: Elena Nishanova Head of Corporate Reporting and Investor Relations Department Anna Mikhaylova IR-manager 36 As of the publication date of this Annual report, but after 4 April 2014, the Cypriot entity, NEWDEAL INVESTMENTS LIMITED, the immediate parent company of the Group, transferred 53.79% of SOLLERS’ shares to the Russian entity, ERFIX LLC. Vadim Shvetsov, the Group’s beneficial owner and ultimate controlling shareholder, maintains a share of 54% of SOLLERS through ERFIX LLC 37 Free-float is estimated by MOEX as of 22 April 2014, source: http://moex.com/ SOLLERS // Annual Report 2013 www.sollers-auto.com 10 Testovskaya Street Moscow International Business Centre Northern Tower, Moscow City Moscow, 123317, Russia Tel.: +7 (495) 228 3045 Fax: +7 (495) 228 3044 Email: [email protected] Website: www.sollers-auto.com 81 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING up 20% down 56% Strong free cash flow in 2013: up 20% to RUB 6,923 mln Net debt was down from RUB 7,880 mln in 2012 to RUB 3,491 mln in 2013 ADDITIONAL INFORMATION MOVING AHEAD // We have demonstrated a stable operational and financial perfomance, despite the challenges posed by ongoing macroeconomic instability; this performance confirms the financial robustness of our strategy to build strong and long-term partnerships SOLLERS // Annual Report 2013 82 Financial Reporting www.sollers-auto.com 83 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION SOLLERS GROUP INTERNATIONAL FINANCIAL REPORTING STANDARDS CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR’S REPORT 31 DECEMBER 2013 SOLLERS // Annual Report 2013 MOVING AHEAD // 84 CONTENTS Independent Auditor’s Report............................................................................................................................................................................ 86 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position at 31 December 2013............................................................................................................................... 87 Consolidated Statement of Comprehensive Income for the year ended 31 December 2013.......................................................................................... 88 Consolidated Statement of Cash Flows for the year ended 31 December 2013............................................................................................................... 89 Consolidated Statement of Changes in Equity for the year ended 31 December 2013................................................................................................... 90 Notes to the Consolidated Financial Statements 1 The Sollers Group and its operations............................................................................................................................................................................. 91 2 Basis of preparation and significant accounting policies............................................................................................................................................ 92 3 Critical accounting estimates and judgements in applying accounting policies................................................................................................... 101 4 Adoption of new or revised standards and interpretations...................................................................................................................................... 102 5 New accounting pronouncements.............................................................................................................................................................................. 104 6 Balances and transactions with related parties........................................................................................................................................................ 105 7 Property, plant and equipment................................................................................................................................................................................... 106 8Goodwill........................................................................................................................................................................................................................ 107 9 Development costs....................................................................................................................................................................................................... 107 10 Other intangible assets................................................................................................................................................................................................ 108 11 Investments in joint ventures and associates............................................................................................................................................................ 108 12 Other non-current assets............................................................................................................................................................................................. 110 13Inventories.................................................................................................................................................................................................................... 110 14 Trade and other receivables......................................................................................................................................................................................... 110 15 Cash and cash equivalents........................................................................................................................................................................................... 111 16 Shareholders equity..................................................................................................................................................................................................... 112 17Borrowings................................................................................................................................................................................................................... 113 18 Advances received and other payables....................................................................................................................................................................... 113 19 Taxes payable................................................................................................................................................................................................................ 114 20 Warranty and other provisions..................................................................................................................................................................................... 114 21Sales............................................................................................................................................................................................................................... 114 22 Cost of sales.................................................................................................................................................................................................................. 115 23 Distribution costs......................................................................................................................................................................................................... 115 24 General and administrative expenses........................................................................................................................................................................ 115 25 Other operating income – net..................................................................................................................................................................................... 115 26 Finance costs, net........................................................................................................................................................................................................ 115 27 Income tax expense....................................................................................................................................................................................................... 116 28 Earning per share.......................................................................................................................................................................................................... 117 29 Segment information.................................................................................................................................................................................................... 117 30 Financial risk management.......................................................................................................................................................................................... 117 31 Contingencies, commitments and operating risks.................................................................................................................................................... 121 32 Principal subsidiaries.................................................................................................................................................................................................. 123 www.sollers-auto.com 85 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 86 MOVING AHEAD // ZAO PricewaterhouseCoopers Audit, White Square Office Center, 10 Butyrsky Val, Moscow, Russia, 125047 T:+7 (495) 967 6000, F: +7 (495) 967 6001, www.pwc.ru CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2013 (IN MILLIONS OF RUSSIAN ROUBLES) (AMOUNTS TRANSLATED INTO US DOLLARS FOR CONVENIENCE PURPOSES, NOTE 2) RR million Note INDEPENDENT AUDITOR’S REPORT To the Shareholders and Board of Directors of Open Joint Stock Company Sollers: We have audited the accompanying consolidated financial statements of Open Joint Stock Company Sollers and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2013 and the consolidated statements of comprehensive income, cash flows and changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2013, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 4 April 2014 Moscow, Russian Federation ASSETS Non-current assets Property, plant and equipment Goodwill Development costs Other intangible assets Deferred income tax assets Investments in associates and joint ventures Other financial assets Other non-current assets Total non-current assets Current assets Inventories Trade and other receivables Other current assets Cash and cash equivalents Total current assets TOTAL ASSETS LIABILITIES AND EQUITY EQUITY Share capital Share options Share premium Additional paid-in capital Retained earnings Equity attributable to the Company's owners Non-controlling interest Total equity LIABILITIES Non-current liabilities Long-term borrowings Deferred income tax liabilities Other long term liabilities Total non-current liabilities Current liabilities Trade accounts payable Advances received and other payables Taxes payable Warranty and other provisions Short-term borrowings Total current liabilities TOTAL LIABILITIES TOTAL LIABILITIES AND EQUITY At 31 December 2013 At 31 December 2012 At 31 December 2013 At 31 December 2012 7 8 9 10 27 11 12 13 14 15 16 16 16 16 16 32 17 27 18 19 20 17 9,451 1,484 361 167 196 14,947 20 515 27,141 11,539 1,484 393 182 276 14,492 20 677 29,063 289 45 11 5 6 456 1 16 829 380 49 13 6 9 477 1 22 957 4,526 6,894 40 6,020 17,480 44,621 4,503 9,816 231 2,560 17,110 46,173 138 211 1 184 534 1,363 148 323 8 84 563 1,520 530 4,538 1,438 9,187 15,693 5,083 20,776 530 50 4,480 1,438 6,340 12,838 7,042 19,880 16 139 44 280 479 155 634 17 2 148 47 209 423 232 655 5,716 514 2 6,232 3,742 854 31 4,627 175 16 191 123 28 1 152 10,115 1,362 1,376 965 3,795 17,613 23,845 44,621 10,454 2,865 1,045 604 6,698 21,666 26,293 46,173 309 42 42 29 116 538 729 1,363 344 94 34 20 221 713 865 1,520 Approved for issue and signed on behalf of the Board of Directors on 4 April 2014. General Director V.A. Shvetsov The accompanying notes on pages 91 to 123 are an integral part of these consolidated financial statements. SOLLERS // Annual Report 2013 Supplementary information US$ million (Note 2) www.sollers-auto.com Chief Financial Officer N.A. Sobolev 87 MOVING AHEAD BUSINESS & STRATEGY CORPORATE SOCIAL RESPONSIBILITY CORPORATE GOVERNANCE SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2013 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2013 (IN MILLIONS OF RUSSIAN ROUBLES) (AMOUNTS TRANSLATED INTO US DOLLARS FOR CONVENIENCE PURPOSES, NOTE 2) RR million Sales Cost of sales Gross profit Distribution costs General and administrative expenses Net result on formation of joint venture Other operating income, net Operating profit Finance costs, net Share of result of joint ventures and associates Profit before income tax Income tax expense Profit for the year Total comprehensive income for the year Profit is attributable to: Owners of the Company Non-controlling interest Profit for the year Total comprehensive income is attributable to: Owners of the Company Non-controlling interest Total comprehensive income for the year Weighted average number of shares outstanding during the period (in thousands of shares) – basic Weighted average number of shares outstanding during the period (thousands) – diluted Profit per share (in RR and US$) – basic Profit per share (in RR and US$) – diluted (IN MILLIONS OF RUSSIAN ROUBLES) (AMOUNTS TRANSLATED INTO US DOLLARS FOR CONVENIENCE PURPOSES, NOTE 2) Supplementary information US$ million (Note 2) RR million Year ended 31 December 2013 61,317 (49,878) 11,439 (2,554) (4,167) 523 5,241 (1,144) 574 4,671 (1,093) 3,578 3,578 Year ended 31 December 2012 65,549 (51,475) 14,074 (2,551) (5,205) 922 5 7,245 (810) 1,149 7,584 (1,703) 5,881 5,881 Year ended 31 December 2013 1,925 (1,566) 359 (80) (130) 16 165 (36) 18 147 (34) 113 113 Year ended 31 December 2012 2,108 (1,656) 452 (82) (167) 30 233 (26) 37 244 (55) 189 189 3,625 (47) 3,578 5,843 38 5,881 114 (1) 113 188 1 189 28 3,625 (47) 3,578 34,270 5,843 38 5,881 34,152 114 (1) 113 34,270 188 1 189 34,152 28 34,281 34,275 34,281 34,275 28 105.78 171.1 3.32 5.50 28 105.75 170.5 3.32 5.48 Note 21 22 23 24 11 25 26 11 27 32 88 MOVING AHEAD // Other than as presented above, the Group did not have in year 2013 any items to be recorded as other comprehensive income in the statement of comprehensive income (2012: no items). Note Cash flows from operating activities Profit before income tax Adjustments for: Depreciation Amortisation Share options Provision for impairment of receivables and write-offs Provision for inventories Other provision movements Loss on disposal of other non-current assets Amortisation of Government grants Development expenses write-off Net (gain)/losses on disposal of property, plant and equipment Loss on disposal of investments Net result on formation of joint venture Share of result of JV and associates Finance costs, net Operating cash flows before working capital changes (Increase)/decrease in inventories Decrease in trade and other receivables Decrease in other current assets (Decrease) in trade accounts payable, advances received and other payables Increase /(decrease) in taxes payable Cash provided from operations Income taxes paid Interest paid Net cash from operating activities Cash flows from investing activities: Purchase of property, plant and equipment Proceeds from the sale of property, plant and equipment and advances received Development costs Purchase of other non-current assets Investment in joint venture Dividends received from participation in joint venture Proceeds from sale of subsidiary net of cash disposed Net cash from /(used in) investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Dividends paid to the Group’s shareholders Change in non-controlling interest in subsidiaries Change in treasury shares Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 13 11 11 9 11 Supplementary information US$ million (Note 2) Year ended 31 December 2013 Year ended 31 December 2012 Year ended 31 December 2013 Year ended 31 December 2012 4,671 7,584 147 244 985 161 8 2 19 (153) (29) (563) 839 274 18 172 71 439 28 (16) 7 220 31 5 1 (5) (1) (18) 27 9 1 6 2 14 1 (1) 7 31 (574) 1,003 5,561 (91) 3,210 192 (499) (922) (1,149) 1,438 9,003 1,424 945 25 (584) 1 (18) 32 175 (3) 101 6 (16) (30) (37) 47 290 46 30 1 (19) 262 8,635 (1,220) (1,252) 6,163 (1,200) 9,613 (1,755) (1,424) 6,434 8 271 (38) (39) 194 (39) 309 (56) (46) 207 (1,162) 2,072 (917) 1,626 (36) 65 (30) 53 (88) (25) (100) 22 41 760 (86) (52) (951) 13 (320) (687) (3) (1) (3) 1 1 24 (3) (2) (30) (10) (22) 15,141 (15,943) (1,761) (900) (3,463) 3,460 2,560 6,020 6,995 (13,305) (16) 182 (6,144) (397) 2,957 2,560 475 (501) (55) (28) (109) 109 (9) 84 184 225 (428) (1) 6 (198) (13) 5 92 84 The accompanying notes on pages 91 to 123 are an integral part of these consolidated financial statements. The accompanying notes on pages 91 to 123 are an integral part of these consolidated financial statements. SOLLERS // Annual Report 2013 www.sollers-auto.com 89 CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) ADDITIONAL INFORMATION 90 (900) (1,790) 8 20,776 BUSINESS & STRATEGY Total equity 13,554 5,881 5,881 232 (80) 247 46 19,880 3,578 3,578 - MOVING AHEAD (1,138) 5,083 238 (1,790) 8 15,693 The Company and the Group’s principal activity is the manufacture and sale of vehicles, including automotive components, assembly kits and engines. The Group’s manufacturing facilities are primarily based in Ulyanovsk and the Nizhniy Novgorod region in the Russian Federation. 238 (1,790) 9,187 In 2011 the Group established the joint venture with Ford. Joint venture’s production assets are located in Vsevolozhsk in the St.Petersburg region, Naberezhnye Chelny and Elabuga in the Republic of Tatarstan. Ford-Sollers joint venture is exclusive manufacturer and distributor of Ford branded vehicles in Russia. By the end of 2011 the Group established the joint venture with Japanese Mitsui&Co., Ltd located in Vladivostok. Toyota vehicles production started in February 2013. During the second half 2012 the Group finalized the foundation of the joint venture with Mazda Motor Corporation in Vladivostok also for production of Mazda SUVs and passenger cars. Mazda-Sollers joint venture launched the production of Mazda SUVs in September 2012 and of passenger cars in April 2013. In August 2012 the Group disposed 16% stake in joint venture Sollers-Isuzu and recognised the remained investment as 50%-50% joint venture. The Sollers-Isuzu production of lights-duty trucks is located in Ulyanovsk.The Company was incorporated as an open joint stock company in the Russian Federation in March 2002 by OAO “Severstal” (the predecessor) by contributing its controlling interests in OAO “Ulyanovsky Avtomobilny Zavod” (OAO “UAZ”) and OAO “Zavolzhskiy Motor Works” (OAO “ZMZ”), which were acquired through purchases close to the end of 2000, in exchange for the Company’s share capital. The accompanying notes on pages 91 to 123 are an integral part of these consolidated financial statements. 1,438 58 4,538 (50) 530 32 16 6, 16 32 6, 16 32 11 530 - Additional paid-in-capital 1,438 1,438 Share premium 4,893 (312) (101) 4,480 Share options 77 (27) 50 Treasury shares (653) (80) 559 174 Share capital 530 Note SOLLERS // Annual Report 2013 These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2013 for Sollers OJSC, previously called OAO “Severstal-auto”, (the “Company”) and its subsidiaries (the “Group”). The Group adopted its new name “Sollers” in 2008. Since February 2013 the Group relocated SsangYong SUVs’ production from the Group’s subsidiary site to JV Mazda-Sollers’ production facilities. The Group continues exclusive distribution of the SsangYong SUVs. Balance at 1 January 2012 Profit for the year Total comprehensive income for 2012 Change of interest in subsidiary Disposal of subsidiary Treasury shares acquisition Treasury shares disposal Share options Balance at 31 December 2012 Profit for the year Total comprehensive income for 2013 Change of interest in subsidiary Purchase of non-controlling interest in subsidiary Dividends Share options Balance at 31 December 2013 (IN MILLIONS OF RUSSIAN ROUBLES) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013 Retained earnings 1,092 5,843 5,843 (595) 6,340 3,625 3,625 774 Total Attributable to equity holders Non- controlling of the Group interest 7,377 6,177 5,843 38 5,843 38 (595) 595 232 (80) 247 46 12,838 7,042 3,625 (47) 3,625 (47) 774 (774) 1. THE SOLLERS GROUP AND ITS OPERATIONS The immediate parent company is Newdeal Investments Limited. The ultimate controlling party of the Group is Vadim Shvetsov who is the principal shareholder of the Company. The Company’s shares are listed on MICEX-RTS. The registered office of the Company is Testovskaya street, 10, Moscow, Russian Federation. These consolidated financial statements were approved for issue by the General Director and Chief Financial Officer on 4 April 2014. Operating Environment of the Group The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to varying interpretations (Note 31). The political and economic turmoil witnessed in the region, including the developments in Ukraine have had and may continue to have a negative impact on the Russian economy, including weakening of the Rouble and making it harder to raise international funding. At present, there is an ongoing threat of sanctions against Russia and Russian officials the impact of which, if they were to be implemented, are at this stage difficult to determine. The financial markets are uncertain and volatile. In 2014 Rouble exchange rates deteriorated by more than 8% reaching the level of 48.8834 roubles/Euro on 4 April 2014. Given the substantial volume of imports, these events alongside with a decline in customer demand observed in the beginning of 2014 and forecasted to continue throughout 2014 resulted in certain operational cost reduction measures implemented by management in order to maintain short to mediumterm profitability. Management is confident that long-term business plans of the joint ventures are sustainable. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes, and other legal and fiscal impediments contribute to the challenges faced by entities currently operating in the Russian Federation. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. Management is unable to predict all developments which could have an impact on the Russian economy and consequently what effect, if any, they could have on the future financial position of the Group. Management believes it is taking all the necessary measures to support the sustainability and development of the Group’s business. www.sollers-auto.com 91 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) 92 2. Basis of preparation and significant accounting policies (continue) 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of preparation. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value and by the revaluation of available for sale securities. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated (refer to Note 4, Adoption of New or Revised Standards and Interpretations). These financial statements are prepared on a going concern basis. The Group companies maintain their accounting records in Russian Roubles (“RR”) and prepare their statutory financial statements in accordance with the Federal Law on Accounting of the Russian Federation. The consolidated financial statements are based on the statutory records, with adjustments and reclassifications recorded for the purpose of fair presentation in accordance with IFRS. 2.1. Presentation currency All amounts in these consolidated financial statements are presented in millions of Russian Roubles (“RR millions”), unless otherwise stated. 2.2. Supplementary information US Dollar (“US$”) amounts shown in the consolidated financial statements are translated from the Russian Rouble (“RR”) amounts as a matter of arithmetic computation only, at the official rate of the Central Bank of the Russian Federation at 31 December 2013 of RR 32.7292 = US$1 (31 December 2012: RR 30.3727 = US$1). The profit or loss statement and cash flow statement have been translated at the average exchange rates during the years ended 31 December 2013 of RR 31.8478 = US$1 (2012: RR 31.0930 = US$1). The US$ amounts are presented solely for the convenience of the reader, and should not be construed as a representation that RR amounts have been or could have been converted to the US$ at this rate, nor that the US$ amounts present fairly the financial position and results of operations and cash flows of the Group. 2.3. Consolidated financial statements Subsidiaries are those investees, including structured entities, that the Group controls because the Group (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor’s returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even when it holds less than majority of voting power in an investee. In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other investors, such as those that relate to fundamental changes of investee’s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are deconsolidated from the date on which control ceases. The acquisition method of accounting is used to account for the acquisition of subsidiaries other than those acquired from parties under common control. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest’s proportionate share of net assets of the acquiree. Non-controlling interests that are not present ownership interests are measured at fair value. Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of noncontrolling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount (“negative goodwill”) is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed and reviews appropriateness of their measurement. The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs related to the acquisition and incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt as part of the business combination are deducted from the carrying amount of the debt and all other transaction costs associated with the acquisition are expensed. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies. 2.5. Purchases and sales of non-controlling interests The Group applies the economic entity model to account for transactions with owners of non-controlling interest. Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recorded as a capital transaction directly in equity. The Group recognises the difference between sales consideration and the carrying amount of non-controlling interest sold as a capital transaction in the statement of changes in equity. 2.6. Purchases of subsidiaries from parties under common control Purchases of subsidiaries from parties under common control are accounted for using the pooling of interest method. Under this method the consolidated financial statements of the combined entity are presented as if the businesses had been combined from the beginning of the earliest period presented or, if later, the date when the combining entities were first brought under common control. The assets and liabilities of the subsidiary transferred under common control are at the predecessor entity’s carrying amounts. The predecessor entity is considered to be the highest reporting entity in which the subsidiary’s IFRS financial information was consolidated. Related goodwill inherent in the predecessor entity’s original acquisitions is also recorded in these consolidated financial statements. Any difference between the carrying amount of net assets, including the predecessor entity’s goodwill, and the consideration for the acquisition is accounted for in these consolidated financial statements as an adjustment to other reserves within equity. 2.7. Associates and joint ventures Associates are entities over which the Group has significant influence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. Dividends received from associates reduce the carrying value of the investment in associates. Other post-acquisition changes in the Group’s share of net assets of an associate are recognised as follows: (i) the Group’s share of profits or losses of associates is recorded in the consolidated profit or loss for the year as share of result of associates, (ii) the Group’s share of other comprehensive income is recognised in other comprehensive income and presented separately, (iii); all other changes in the Group’s share of the carrying value of net assets of associates are recognised in profit or loss within the share of result of associates. However, when the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables; the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Joint ventures are those joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. When a joint venture is created through loss of control of a subsidiary, the initial carrying amount is recognised at fair value. Subsequently, they are accounted for using the equity method of accounting. The share of joint ventures’ results is recognised in the consolidated financial statements from the date that joint control commences until the date at which it ceases. Unrealised gains on transactions between the Group, its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. 2.8. Disposals of subsidiaries, associates or joint ventures When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are recycled to profit or loss. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. 2.9. Financial instruments – key measurement terms Depending on their classification financial instruments are carried at fair value or amortised cost as described below. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. For assets and liabilities with offsetting market risks, the Group may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position as appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Company. Non-controlling interest forms a separate component of the Group’s equity. SOLLERS // Annual Report 2013 www.sollers-auto.com 93 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) 94 2. Basis of preparation and significant accounting policies (continue) 2. Basis of preparation and significant accounting policies (continue) 2.9. Financial instruments – key measurement terms (continue) 2.10. Classification of financial assets (continue) Valuation techniques such as discounted cash flows models or models based on recent arm’s length transactions or consideration of financial data of the investees are used to fair value certain financial instruments for which external market pricing information is not available. Valuation techniques may require assumptions not supported by observable market data. Disclosures are made in these consolidated financial statements if changing any such assumptions to a reasonably possible alternative would result in significantly different profit or loss, sales, total assets or total liabilities. All other financial assets are included in the available-for-sale category, which includes investment securities which the Group intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related consolidated balance sheet items. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate (refer to income and expense recognition policy). 2.10. Classification of financial assets The Group classifies its financial assets into the following measurement categories: (a) loans and receivables; (b) available-for-sale financial assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit and loss. Financial assets at fair value through profit and loss have two subcategories: (i) assets designated as such upon initial recognition, and (ii) those classified as held for trading. Certain derivative instruments embedded in other financial instruments are treated as separate derivative instruments when their risks and characteristics are not closely related to those of the host contract. Other financial assets at fair value through profit and loss are financial assets designated irrevocably, at initial recognition, into this category. Management designates financial assets into this category only if (a) such classification eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or (b) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information on that basis is regularly provided to and reviewed by the Group’s key management personnel. Recognition and measurement of this category of financial assets is consistent with the accounting policy for trading investments. Trading investments are financial assets which are either acquired for generating a profit from short-term fluctuations in price or trader’s margin, or are securities included in a portfolio in which a pattern of short-term trading exists. The Group classifies securities into trading investments if it has an intention to sell them within a short period after purchase, i.e. within 12 months The Group may choose to reclassify a non-derivative trading financial asset out of the fair value through profit and loss category if the asset is no longer held for the purpose of selling it in the near term. Financial assets other than loans and receivables are permitted to be reclassified out of the fair value through profit and loss category only in rare circumstances arising from a single event that is unusual and highly unlikely to reoccur in the near term. Financial assets that would meet the definition of loans and receivables may be reclassified if the Group has the intention and ability to hold these financial assets for the foreseeable future or until maturity. Loans and receivables are unquoted non-derivative financial assets with fixed or determinable payments other than those that the Group intends to sell in the near term. Held-to-maturity assets include quoted non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has both the intention and ability to hold to maturity. Management determines the classification of investment securities held to maturity at their initial recognition and reassesses the appropriateness of that classification at each reporting date. SOLLERS // Annual Report 2013 2.11. Classification of financial liabilities Financial liabilities have the following measurement categories: (a) held for trading which also includes financial derivatives and (b) other financial liabilities. Liabilities held for trading are carried at fair value with changes in value recognised in profit or loss for the year in the period in which they arise. Other financial liabilities are carried at amortised cost. 2.12. Initial recognition of financial instruments Trading investments, derivatives and other financial instruments at fair value through profit and loss are initially recorded at fair value. All other financial assets and liabilities are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date that the Group commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. The Group uses discounted cash flow valuation techniques to determine the fair value of options and bonds that are not traded in an active market. Differences may arise between the fair value at initial recognition which is considered to be the transaction price and the amount determined at initial recognition using the valuation technique. Any such differences are amortised on a straight line basis over the term of the options and bonds. 2.13. Derecognition of financial assets The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. 2.14. Valuation of investments Available-for-sale investments. The Group classifies investments as available for sale at the time of purchase. Available-for-sale investments are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method and recognised in profit and loss. Dividends on available-for-sale equity instruments are recognised in profit and loss when the Group’s right to receive payment is established and inflow of benefits is probable. All other elements of changes in the fair value are recognised in other comprehensive income until the investment is derecognised or impaired at which time the cumulative gain or loss is reclassified from other comprehensive income to finance income in profit or loss for the year. Impairment losses are recognised in profit and loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit and loss – is reclassified from other comprehensive income to finance costs in profit or loss for the year. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit and loss, the impairment loss is reversed through current period’s profit and loss. Held-to-maturity investments. Held-to-maturity investments are carried at amortised cost using the effective interest method, net of a provision for incurred impairment losses. Trading investments. Trading investments are carried at fair value. Interest earned on trading investments calculated using the effective interest method is presented in the consolidated profit or loss as finance income. Dividends are included in dividend income within other operating income when the Group’s right to receive the dividend payment is established and inflow of benefits is probable. All other elements of the changes in the fair value and gains or losses on derecognition are recorded in profit and loss as gains less losses from trading investments in the period in which they arise. Embedded derivatives. Foreign currency forwards embedded into sales-purchase contracts are separated from the host contracts and accounted for separately unless the contract is denominated in the functional currency of any substantial party to the contract or in a currency that is commonly used in the economic environment in which the transaction takes place, such as in US Dollars and Euros for contracts within the Russian Federation. www.sollers-auto.com 95 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) 96 2. Basis of preparation and significant accounting policies (continue) 2. Basis of preparation and significant accounting policies (continue) 2.15. Property, plant and equipment Property, plant and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble at 31 December 2003 for assets acquired prior to 1 January 2003, less accumulated depreciation and provision for impairment, where required. Cost includes borrowing costs incurred on specific or general funds borrowed to finance construction of qualifying assets. 2.19. Share based compensation Until May, 16, 2013 the Group operated equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each reporting date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the consolidated profit or loss for the year, and with a corresponding adjustment to equity over the remaining vesting period. Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing or renewing major parts or components of property, plant and equipment items are capitalised and the replaced part is retired. At each reporting date, management assess whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the consolidated profit or loss for the year. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit and loss. 2.16. Depreciation Land is not depreciated. Depreciation on other items of property, plant and equipment is calculated using the straight-line method to allocate their cost amounts to their residual values over their estimated useful lives: Buildings Plant and machinery Equipment and motor vehicles Useful lives in years 35 to 45 15 to 25 5 to 12 The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. 2.17. Operating leases Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to profit and loss on a straight-line basis over the lease term. The lease term is the noncancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option. Leases embedded in other agreements are separated if (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets and (b) the arrangement conveys a right to use the asset. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. 2.18. Finance lease receivables Where the Group is a lessor in a lease which transfers substantially all the risks and rewards incidental to ownership to the lessee, the assets leased out are presented as a finance lease receivable and carried at the present value of the future lease payments. Finance lease receivables are initially recognised at the date from which the lessee is entitled to exercise its right to use the leased asset, using a discount rate determined at inception (the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease). The difference between the gross receivable and the present value represents unearned finance income. This income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. Incremental costs directly attributable to negotiating and arranging the lease are included in the initial measurement of the finance lease receivable and reduce the amount of income recognised over the lease term. Finance income from leases is recorded within other operating income in profit or loss for the year. Impairment losses are recognised in profit and loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of finance lease receivables. Impairment losses are recognised through an allowance account to write down the receivables’ net carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the interest rates implicit in the finance leases. The estimated future cash flows reflect the cash flows that may result from obtaining and selling the assets subject to the lease. SOLLERS // Annual Report 2013 The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. 2.20. Goodwill Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for impairment at least annually and whenever there are indications that goodwill may be impaired. Goodwill is allocated to the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the business combination. Such units or groups of units represent the lowest level at which the Group monitors goodwill and are not larger than an operating segment. Gains or losses on disposal of an operation within a cash generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the operation disposed of, generally measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit which is retained. 2.21. Other intangible assets The Group’s intangible assets other than goodwill have definite useful lives and primarily include capitalised computer software, patents, trademarks, licences and clips. Acquired computer software licenses, patents and trademarks are capitalised on the basis of the costs incurred to acquire and bring them to use. Development costs that are directly associated with identifiable and unique software controlled by the Group are recorded as intangible assets if the inflow of incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs of the software development team and an appropriate portion of relevant overheads. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Intangible assets are amortised using the straight-line method over their useful lives: Trademarks Production licences Computer software licences Useful lives in years 3 to 10 5 to 10 3 to 5 If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less costs to sell. 2.22. Inventories Inventories are recorded at the lower of cost and net realisable value. The cost of inventory is determined on the weighted average basis. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses. Inventories at the reporting date include expected sales returns subsequent to the period end, where the related sales, profit margin and receivables balance are reversed. Inventories are initially recognised when the Group has control of the inventory, expects it to provide future economic benefits and the cost of the inventory can be measured reliably. For components imported from outside of the Russian Federation, this is typically at the point of delivery to the Group’s warehouse and accepted by the Group. 2.23. Income taxes Income taxes have been provided for in the consolidated financial statements in accordance with Russian legislation enacted or substantively enacted by the balance sheet date. The income tax charge comprises current tax and deferred tax and is recognised in profit or loss for the year, except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different periods, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxes other than on income are recorded within operating expenses. www.sollers-auto.com 97 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 2. Basis of preparation and significant accounting policies (continue) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) 98 2. Basis of preparation and significant accounting policies (continue) 2.23. Income taxes (continue) Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill which is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the reporting date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. The Group controls reversal of temporary differences relating to taxes chargeable on dividends from subsidiaries or on gains at their disposal. The Group does not recognise deferred tax liabilities on such temporary differences except to the extent that management expects the temporary differences to reverse in the foreseeable future. The Group’s uncertain tax positions are reassessed by management at every reporting date. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the reporting date and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the reporting date. 2.24. Trade and other receivables Trade and other receivables are carried at amortised cost using the effective interest method. 2.25. Impairment of financial assets carried at amortised cost Impairment losses are recognised in profit and loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence exists that impairment has incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The primary factors that the Group considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: ›› any portion or instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; ›› the counterparty experiences a significant financial difficulty as evidenced by its financial information that the Group obtains; ›› the counterparty considers bankruptcy or a financial reorganisation; ›› there is adverse change in the payment status of the counterparty as a result of changes in the national or local economic conditions that impact the counterparty; or ›› the value of collateral, if any, significantly decreases as a result of deteriorating market conditions. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the counterparty, impairment is measured using the original effective interest rate before the modification of terms. Impairment losses are always recognised through an allowance account to write down the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit and loss. Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in the profit or loss for the year. SOLLERS // Annual Report 2013 2.26. Prepayments Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as noncurrent upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other prepayments are written off to profit and loss when the goods or services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in profit and loss. 2.27. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at amortised cost using the effective interest method. Restricted balances are excluded from cash and cash equivalents for the purposes of the consolidated cash flow statement. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date are included in other non-current assets. 2.28. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in equity. 2.29. Treasury shares Where the Company or its subsidiaries purchase the Company’s equity instruments, the consideration paid, including any directly attributable incremental costs, net of income taxes, is deducted from equity attributable to the Company’s equity holders until the equity instruments are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, and are included in equity attributable to the Company’s equity holders. 2.30. Dividends Dividends are recorded as a liability and deducted from equity in the period in which they are declared and approved. Any dividends declared after the reporting date and before the consolidated financial statements are authorised for issue are disclosed in the subsequent events note. 2.31. Value added tax Output value added tax related to sales is payable to tax authorities on the earlier of (a) collection of the receivables from customers or (b) delivery of the goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognised in the balance sheet on a gross basis and disclosed separately as an asset and liability. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT. 2.32. Borrowings Borrowings are carried at amortised cost using the effective interest method. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed. 2.33. Government grants and subsidies Grants from the Government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to the purchase of property, plant and equipment are included in noncurrent liabilities as deferred income and are credited to the consolidated profit or loss for the year on a straight line basis over the expected lives of the related assets. Government grants and subsidies relating to costs are deferred and recognised in the consolidated profit or loss over the period necessary to match them with the costs that they are intended to compensate. 2.34. Trade and other payables Trade and other payables are accrued when the counterparty performed its obligations under the contract and are carried at amortised cost using the effective interest method. www.sollers-auto.com 99 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 2. Basis of preparation and significant accounting policies (continue) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) 100 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUE) 2.39. Employee benefits (continue) 2.35. Provisions for liabilities and charges Provisions for liabilities and charges are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The Group recognises the estimated liability to repair or replace products sold still under warranty at the end of each reporting period. This provision is calculated based on past history of the level of repairs and replacements and recognised in costs of sale. 2.36. Foreign currency translation The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates. The Group’s functional currency and the Group’s presentation currency is the national currency of the Russian Federation, Russian Roubles. Monetary assets and liabilities are translated into each entity’s functional currency at the official exchange rate of the Central Bank of the Russian Federation (“CBRF”) at the respective reporting dates. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange rates of the CBRF are recognised in profit and loss. Translation at year-end rates does not apply to non-monetary items that are measured at historical cost. Non-monetary items measured at fair value in a foreign currency, including equity investments, are translated using the exchange rates at the date when the fair value was determined. Effects of exchange rate changes on non-monetary items measured at fair value in a foreign currency are recorded as part of the fair value gain or loss. Labour expenses include state pension contributions of RR 1,795 for the year ended 31 December 2013 (2012: RR 1,670). In addition, labour expenses include payments under share based compensation of RR 8 (2012: RR 18). 2.40. Earnings per share Basic earnings per share are calculated by dividing the profit or loss attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during period. If applicable, diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of dilutive potential ordinary shares under the share based compensation programme. For the share options used in the share based compensation programme a calculation is done to determine the number of shares that would have been issued at the reporting date if this date was the vesting date. 2.41. Offsetting Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. 2.42. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Group’s chief operating decision maker. Segments whose revenue, result or assets are ten percent or more of all the segments are reported separately where they do not have similar economic characteristics. 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES At 31 December 2013, the principal rate of exchange used for translating foreign currency balances was US$ 1 = RR 32.7292, Euro 1 = RR 44.9699 (2012: US$ 1 = RR 30.3727, Euro 1 = RR 40.2286). The principal average rate of exchange used for translating income and expenses was US$ 1 = RR 31.8478 (2012: US$ 1 = RR 31.0930). 2.37. Revenue recognition Revenues from sales of vehicles, engines and automotive components are recognised at the point of transfer of the major of risks and rewards of ownership of the goods, normally when the goods are shipped. If the Group agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point. The group generally retains physical possession of the vehicle ownership document (“PTS’) until cash is collected from the dealer, however, it considers that substantially all risks and rewards are transferred upon shipment. An estimate is made for vehicles that are returned to the Group subsequent to the period end where a dealer is not able to settle receivables owed to the Group. In such instances, the related sales revenue, profit margin and trade receivable balances are reversed during the period and the vehicles are included as inventories as at the period end date. Sales of services are recognised in the accounting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales are shown net of VAT, excise, discounts and other bonuses to dealers. Revenues are measured at the fair value of the consideration received or receivable. When the fair value of goods received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the goods or service given up. Interest income is recognised on a timeproportion basis using the effective interest method. The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: 3.1. Remaining useful life of property, plant and equipment Management has assessed the remaining useful life of property, plant and equipment in accordance with the current technical conditions of assets and estimated period when these assets will bring economic benefit to the Group. The estimation of the useful lives of items of property, plant and equipment is a matter of judgment based on the experience with similar assets. The future economic benefits embodied in the assets are consumed principally through use. However, other factors, such as technical or commercial obsolescence and wear and tear, often result in the diminution of the economic benefits embodied in the assets. Management assesses the remaining useful lives in accordance with the current technical conditions of the assets and estimated period during which the assets are expected to earn benefits for the Group. The following primary factors are considered: (a) expected usage of the assets; (b) expected physical wear and tear, which depends on operational factors and maintenance programme; and (c) technical or commercial obsolescence arising from changes in market conditions. 3.2. Impairment of assets (including goodwill) Management have used judgement when evaluating any indicators of potential impairment of the Group’s non-current assets (including property, plant and equipment, intangibles and goodwill), or, when testing for impairment as at 31 December 2013 as required. Management have determined that there are two cash-generating units (“CGU”) within the Group: OAO “UAZ” and OAO “ZMZ”. No indicators in respect of impairment of assets were identified in 2013 due to favourable Group’s financial position. 2.38. Research and development costs Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility, and costs can be measured reliably. Other development expenditures are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs with a finite useful life that have been capitalised are amortised from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit, on average over ten years. 2.39. Employee benefits Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits (such as health services and kindergarten services) are accrued in the year in which the associated services are rendered by the employees of the Group. SOLLERS // Annual Report 2013 During the year 2013 there was a slight slowdown of 6% in the Russian automotive market. The total market sales amounted to 2.8 mln. units. The slowdown was driven mostly by macroeconomic factors, such as an increase in interest rates together with negative changes in foreign currency exchange rates escalated at the end of the year. However, the Group has not experienced significant negative effect. The stocks remain under control and sustainable cash flows are maintained. The Group managed to improve its net debt position and maintain profitability level. Management considers the current market situation as expected and is able to plan and perform accordingly. Goodwill allocated to OAO “UAZ” and OAO “ZMZ” CGUs have been tested by management for impairment using value-in-use calculations. The calculations use business plans and cash flows projections developed and approved by the management. The discounting rate used for each CGU was estimated based on weighted average cost of capital, which is post-tax and reflects specific risks related to the CGU and time value of money. www.sollers-auto.com 101 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (CONTINUE) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) 102 4. Adoption of new or revised standards and interpretations (continue) 3.2. Impairment of assets (including goodwill) (continue) The cash flow projections cover an initial five-year period. Cash flows beyond five year period are extrapolated using basic assumptions such as potential sales volumes, EBITDA margin level and discounting rate specific for the particular CGU. Management determined budgeted EBITDA margin on the basis of the past performance of each CGU and its expectations for the market development. For the OAO “UAZ” these include continued stable demand for quality vehicles in the niche markets in which the units operate, and the CGU’s sales price advantage over its foreign competition in those markets. For the OAO “ZMZ” these include expansion of its position as a supplier to the Russian market, development further the production of spare parts and components and ability to upgrade its products in line with expected increases in regulations over emission levels. Cash flows beyond the five-year period are extrapolated using estimated growth rate of 3.0% for both CGUs (31 December 2012: 3.5% for both CGUs); these growth rates do not exceed the long-term average growth rate for the automotive business in which CGUs operate. The discount rate used of 15% for OAO “ZMZ” and 15% for OAO “UAZ” (31 December 2012: 14.8% and 14.9% respectively) are pre-tax and reflect specific risks related to the relevant CGU. The inherence of no impairment of OAO “UAZ” CGU is sensitive to the level of future revenues. With all other assumptions held constant, a reduction in revenues of 20% in each future period would result in a need to reduce the carrying value of goodwill by RR 219. The inherence of no impairment of OAO “ZMZ” CGU is sensitive to the level of future revenues. With all other assumptions held constant, a reduction in revenues of 10% in each future period would result in a need to reduce the carrying value of goodwill by RR 277 and other noncurrent assets in aggregate by RR 45. For each of the CGUs identified for impairment testing, management consider that there have not been any significant changes in any of the businesses during the year. For all CGUs, the recoverable amount in the valuation performed as at 31 December 2013 exceeded the carrying amount by a substantial margin and based on an analysis of events, the likelihood that the current recoverable amount would be lower that the carrying amount is remote. Management believes that any reasonably possible change in the key assumptions described above would not cause the carrying amount of goodwill related to OAO “UAZ” and OAO “ZMZ” to exceed their recoverable amounts. 3.3. Tax legislation and deferred income tax recognition Russian tax, currency and customs legislation is subject to varying interpretations. Related accounting treatment requires the use of estimates and judgements as further detailed in Note 31. Deferred tax assets represent income taxes recoverable through future deductions from taxable profits and are recorded on the balance sheet. Deferred income tax assets are recorded to the extent that realisation of the tax benefit is probable. In determining future taxable profits and the amount of tax benefits that are probable in the future, management makes judgements and applies estimation based on taxable profits earned in the past three years; the possibility of challenges to the deductibility of expenses; the time period available in order to utilise the losses and expectations of future taxable income that are believed to be reasonable under the circumstances. For details of the deferred tax assets recognised as at 31 December 2013, see Note 27. The balance includes RR 196 (2012: RR 276). Management expects the losses to be utilised in the next few years based on current profit forecasts. 4. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS The following new standards and interpretations became effective for the Group from 1 January 2013: IFRS 10 “Consolidated Financial Statements” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces all of the guidance on control and consolidation in IAS 27 “Consolidated and separate financial statements” and SIC-12 “Consolidation – special purpose entities”. IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. The Standard did not have any material impact on the Group’s consolidated financial statements. IFRS 12 “Disclosure of Interests in Other Entities” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements previously found in IAS 28 “Investments in associates”. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgements and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of non-controlling interests in group activities and cash flows, summarised financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. The Standard resulted in additional disclosures in these consolidated financial statements. Refer to Note 32. IFRS 13 “Fair Value Measurement” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) improved consistency and reduced complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. The Standard did not have any material impact on the Group’s consolidated financial statements. IAS 27 “Separate Financial Statements” (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013) was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The guidance on control and consolidated financial statements was replaced by IFRS 10 “Consolidated Financial Statements”. The amended standard did not have any material impact on the Group’s consolidated financial statements. IAS 28 “Investments in Associates and Joint Ventures” (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the Board’s project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. The amended standard did not have any material impact on the Group’s consolidated financial statements. Amended IAS 19 “Employee Benefits” (issued in June 2011, effective for periods beginning on or after 1 January 2013) makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. The Standard did not have any impact on the Group’s consolidated financial statements. “Disclosures – Offsetting Financial Assets and Financial Liabilities” – Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that enable users of an entity’s consolidated financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. The Standard didn’t result in additional disclosures in these consolidated financial statements. Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23 “Borrowing costs”, retrospectively by first-time adopters. IAS 1 was amended to clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that servicing equipment that is used for more than one period is classified as property, plant and equipment rather than inventory. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its requirements in line with IFRS 8. IAS 34 now requires disclosure of a measure of total assets and liabilities for an operating segment only if such information is regularly provided to chief operating decision maker and there has been a material change in those measures since the last annual consolidated financial statements. The amended standards did not have any material impact on the Group’s consolidated financial statements. IFRS 11 “Joint Arrangements” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces IAS 31 “Interests in Joint Ventures” and SIC-13 “Jointly Controlled Entities—Non-Monetary Contributions by Venturers”. Changes in the definitions have reduced the number of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. The Standard did not have any material impact on the Group’s consolidated financial statements. SOLLERS // Annual Report 2013 www.sollers-auto.com 103 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) 104 4. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS (CONTINUE) 5. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUE) “Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12” (issued in June 2012 and effective for annual periods beginning 1 January 2013). The amendments clarify the transition guidance in IFRS 10 “Consolidated Financial Statements”. Entities adopting IFRS 10 should assess control at the first day of the annual period in which IFRS 10 is adopted, and if the consolidation conclusion under IFRS 10 differs from IAS 27 and SIC 12, the immediately preceding comparative period (that is, year 2012) is restated, unless impracticable. The amendments also provide additional transition relief in IFRS 10, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities”, by limiting the requirement to provide adjusted comparative information only for the immediately preceding comparative period. Further, the amendments remove the requirement to present comparative information for disclosures related to unconsolidated structured entities for periods before IFRS 12 is first applied. The amended standards did not have any material impact on the Group’s consolidated financial statements other than application of the relief from disclosure of certain comparative information in the notes to the financial statements. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity’s investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary. The Group does not expect the amendment to have any impact on its financial statements. Other revised standards and interpretations: IFRIC 20 “Stripping Costs in the Production Phase of a Surface Mine”, considers when and how to account for the benefits arising from the stripping activity in mining industry. The interpretation did not have an impact on the Group’s consolidated financial statements. Amendments to IFRS 1 “First-time adoption of International Financial Reporting Standards – Government Loans”, which were issued in March 2012 and are effective for annual periods beginning 1 January 2013, give first-time adopters of IFRSs relief from full retrospective application of accounting requirements for loans from government at below market rates. The amendment is not relevant to the Group. 5. NEW ACCOUNTING PRONOUNCEMENTS Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2014 or later and which the Group has not early adopted. IFRS 9 “Financial Instruments: Classification and Measurement”. Key features of the standard issued in November 2009 and amended in October 2010, December 2011 and November 2013 are: ›› Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. ›› An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent payments of principal and interest only (that is, it has only “basic loan features”). All other debt instruments are to be measured at fair value through profit or loss. ›› All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. ›› Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. ›› Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging. The amendments made to IFRS 9 in November 2013 removed its mandatory effective date, thus making application of the standard voluntary. The Group does not intend to adopt the existing version of IFRS 9. Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and that some gross settlement systems may be considered equivalent to net settlement. The Group is considering the implications of the amendment and its impact on the Group. Amendments to IFRS 10, IFRS 12 and IAS 27 – Investment entities (issued on 31 October 2012 and effective for annual periods beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. SOLLERS // Annual Report 2013 IFRIC 21 – “Levies” (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clarifies the accounting for an obligation to pay a levy that is not income tax. The obligating event that gives rise to a liability is the event identified by the legislation that triggers the obligation to pay the levy. The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern assumption, does not create an obligation. The same recognition principles apply in interim and annual financial statements. The application of the interpretation to liabilities arising from emissions trading schemes is optional. The Group does not expect the amendment to have any impact on its financial statements. Amendments to IAS 36 – “Recoverable amount disclosures for non-financial assets” (issued in May 2013 and effective for annual periods beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). The amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or indefinite lived intangible assets but there has been no impairment. The Group is currently assessing the impact of the amendments on the disclosures in its financial statements. Amendments to IAS 39 – “Novation of Derivatives and Continuation of Hedge Accounting” (issued in June 2013 and effective for annual periods beginning 1 January 2014).The amendments will allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated (i.e parties have agreed to replace their original counterparty with a new one) to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met. The Group is currently assessing the impact of the amendments on the disclosures in its financial statements. Amendments to IAS 19 – “Defined benefit plans: Employee contributions” (issued in November 2013 and effective for annual periods beginning 1 July 2014). The amendment allows entities to recognise employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the employee contributions is independent of the number of years of service. The amendment is not expected to have any material impact on the Group’s financial statements. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group’s financial statements. 6. BALANCES AND TRANSACTIONS WITH RELATED PARTIES Related parties are defined in IAS 24, Related Party Disclosures. Parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Group’s immediate parent and ultimate controlling party are disclosed in Note 1. 6.1. Balances and transactions with related parties Balances with related parties of the Group as at 31 December 2013 and 31 December 2012 consist of the following: Balances Nature of relationship As at 31 December 2013 Accounts receivable Trade and other accounts payable As at 31 December 2012 Accounts receivable Loans issued Advances received Trade and other accounts payable www.sollers-auto.com Parent company Other related parties Associates and joint ventures Total - 2 539 5,708 539 5,710 - 203 - 157 961 553 157 203 961 553 105 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) ADDITIONAL INFORMATION 6. Balances and transactions with related parties (continue) 106 7. PROPERTY, PLANT AND EQUIPMENT (CONTINUE) 6.1. Balances and transactions with related parties (continue) Transactions with related parties of the Group for the years ended 31 December 2013 and 31 December 2012 consist of the following: As at 31 December 2013, bank borrowings are secured on land and buildings and plant and equipment. The value of these items of property, plant and equipment included above is RR 2,790 (31 December 2012: RR 2,845). See Note 17. Transactions Nature of relationship Year ended 31 December 2013 Sales of vehicles and components Sale of non-current assets and services Purchases Dividends paid Year ended 31 December 2012 Sales of vehicles and components Sale of non-current assets and services Purchases Capital transaction Parent company Other related parties Associates and joint ventures 920 931 342 - 207 2,975 18,872 - 207 3,906 19,214 920 247 - 210 195 488 - 210 195 488 247 Total 6.2. Key management compensation The compensation paid to the nine members of key management (year ended 31 December 2012: nine people) for their services in full or part time executive management positions is made up of a contractual salary and a performance bonus depending on operating results. Each director receives a fee for serving in that capacity and is reimbursed reasonable expenses in conjunction with their duties. No additional fees, compensation or allowances are paid. Total key management compensation included in expenses in the consolidated profit or loss for the year ended 31 December 2013 comprises: ›› short-term employee benefits amounting to RR 670 (2012: RR 613); and ›› expenses recognised under equity-settled, share based compensation amounting to RR 8 (2012: RR 16). 8. GOODWILL Goodwill arose first on the original purchase of the controlling stake in OAO “UAZ” and OAO “ZMZ” and then on the increase of the holding stake in OAO “UAZ” in 2003 and OAO “ZMZ” in 2004. OAO “UAZ” OAO “ZMZ” Total goodwill 31 December 2013 1,207 277 1,484 31 December 2012 1,207 277 1,484 Impairment tests for goodwill Management have tested goodwill for impairment at 31 December 2013. Goodwill is allocated to two of the Group’s CGUs: OAO “UAZ” and OAO “ZMZ”. See details of impairment testing in Note 3.2. 9. DEVELOPMENT COSTS During the year ended 31 December 2013 nil options were exercised (2012: 150,000 options at an exercise price US$ 3) by members of key management. Following an assessment of future economic benefits to the Group for each individual project, as at 31 December 2013, RR 3 of development costs were written off (31 December 2012: RR 7). Management do not consider that the write-off would be materially different in the event of applying reasonable changes to the underlying assumptions used in reaching this conclusion. On 16 May 2013 share option programme for the key management was ceased. All expenses related to share options were recognised immediately with the corresponding change in equity. The compensation for termination of the option programme amounted to RR 40 and recognised in labour costs of the reporting period. 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment and related accumulated depreciation consist of the following: SOLLERS // Annual Report 2013 The Group owns the land on which factories and buildings, comprising the principal manufacturing facilities of the Group, are situated. At 31 December 2013, the cost of the land amounted to RR 678 (2012: RR 689). As a result of the assessment performed by management, no impairment loss has been identified as at 31 December 2013 (31 December 2012: nil). For information on the share based compensation, refer Note 16. Cost Balance at 1 January 2012 Additions Disposals Transfers Balance at 31 December 2012 Additions Disposals Transfers Balance at 31 December 2013 Accumulated depreciation Balance at 1 January 2012 Depreciation expense for year Disposals Balance at 31 December 2012 Depreciation expense for year Disposals Balance at 31 December 2013 Net book value Balance at 31 December 2012 Balance at 31 December 2013 Construction in progress consists mainly of equipment. Upon completion, assets are transferred to plant and equipment. During the year ended 31 December 2013, the Group capitalised borrowing costs of RR 36 (2012: RR 80) as part of the cost of the qualifying assets (see Note 2.14). The annual capitalisation rate was 11.7% (2012: 10.0%). Land and buildings Plant and equipment Other Construction in progress Total 7,184 (772) 660 7,072 (1,650) 876 6,298 8,700 (331) 340 8,709 (422) 198 8,485 2,661 (242) 265 2,684 (239) 266 2,711 1,477 897 (19) (1,265) 1,090 1,725 (985) (1,340) 490 20,022 897 (1,364) 19,555 1,725 (3,296) 17,984 (1,972) (174) 77 (2,069) (172) 104 (2,137) (3,926) (422) 140 (4,208) (383) 116 (4,475) (1,597) (284) 142 (1,739) (384) 202 (1,921) - (7,495) (880) 359 (8,016) (939) 422 (8,533) 5,003 4,161 4,501 4,010 945 790 1,090 490 11,539 9,451 Cost Balance at the beginning of the year Additions Write-off Balance at the end of the year Accumulated amortisation Balance at the beginning of the year Amortisation charge Write-off Balance at the end of the year Net book value Balance at the end of the year 31 December 2013 31 December 2012 1,479 92 (3) 1,568 1,401 86 (8) 1,479 (1,086) (121) (1,207) (877) (210) 1 (1,086) 361 393 31 December 2013 26 51 3 65 2 7 96 111 361 31 December 2012 59 67 3 40 2 15 130 77 393 Breakdown of development costs Development of new off-road vehicle (UAZ Patriot) Development of Euro-4 engine for UAZ Development of new light commercial vehicle (UAZ-2360) Improvement of selected vehicle component parts Improvement of vehicles and engines to satisfy Euro-2 requirements Vehicles with ABS Improvement of vehicles and engines to satisfy Euro-4 requirements Other Total development costs www.sollers-auto.com 107 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) ADDITIONAL INFORMATION 108 11. Investments in joint ventures and associates (continue) 10. OTHER INTANGIBLE ASSETS The gain from the subsidiary disposal for RR 922 is recognised within operating income in the profit or loss for the year. Other intangible assets mainly comprise of exclusive licences, which were provided for a period of 4 to 10 years: After the recognition of 50%-50% joint venture the Group provided additional cash contribution to the joint venture for RR 136 and non-cash contribution in the form of debt forgiveness for RR 257. Cost Balance at the beginning of the year Additions Disposals Balance at the end of the year Accumulated amortisation Balance at the beginning of the year Amortisation charge Disposals Balance at the end of the year Net book value Balance at the end of the year 31 December 2013 31 December 2012 559 25 584 573 52 (66) 559 (377) (40) (417) (374) (64) 61 (377) 167 182 Investments in joint ventures and associates are presented by followings assets: 31 December 2013 12,438 961 887 213 414 34 14,947 31 December 2012 12,597 797 674 45 345 34 14,492 The table below summarises the movements in the carrying amount of the Group’s investment in joint ventures and associates. Carrying amount at 1 January Share of profit of joint venture and associates Unrealised profit from sales to joint venture Fair value of net assets of joint venture and associate acquired Cash contribution to joint ventures Non-cash contribution in joint venture Dividends received from joint venture 31 December 2013 14,492 574 (197) 100 (22) 14,947 31 December 2012 11,921 1,149 214 951 257 14,492 Sollers-Finance JV In November 2010, the Group established a joint venture with a bank for the development of leasing services and contributed О “Sollers-Finance”, a previously wholly owned subsidiary, to the joint venture. During the year ended 31 December 2013 the dividends of RR 22 were received from the Sollers-Finance JV. Sollers-Isuzu JV During 2013 the additional shares issue was performed by the joint venture. In December 2013 the Group paid its contribution amounted to RR 100. In May 2012 the Group entered to the agreement with intention of partial shares disposal in ZAO Sollers-Isuzu. On 30 August 2012 the deal was finalised and 16% stake of ZAO Sollers-Isuzu was sold to the other venturer for RR 257 and the Group’s share declined to 50%. The negative net assets of the subsidiary at the date of disposal amounted to RR 683, including non-controlling interest of RR 232. The Group recognised the retained investment as 50%-50% joint venture with fair value of RR 214. The portion of the gain related to the remeasurement of the retained non-controlling investment to fair value: Fair value of recognised share in joint venture The Group's retained share of negative carrying value of subsidiary The Gain on retained non-controlling investment, joint venture SOLLERS // Annual Report 2013 The Group has pledged it’s share in OOO “DC SanYong” as a collateral for working capital facility related to SsangYong business at Mazda-Sollers JV. Sollers-Bussan JV By the end of 2011 the Group established 50%-50% joint venture with Japanese Mitsui&Co., Ltd located in Vladivostok, where Toyota vehicles are produced. During 2012 additional RR 65 were contributed to the JV. Ford-Sollers JV In February 2011, the Group announced cancellation of the alliance with FIAT SPA and the signing of Memorandum of understanding to establish a new joint venture in Russia with Ford. In May 2011 Sollers and Ford signed an Agreement to establish a joint venture for exclusive production and distribution of Ford vehicles in the Russian Federation. 11. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES Ford-Sollers JV Mazda-Sollers JV Sollers-Isuzu JV Sollers-Bussan JV Sollers-Finance JV DaeWon-SeverstalAuto Elabuga Total Mazda-Sollers JV In August 2012 the Group paid its contribution to share capital of joint venture with Mazda Motor Co in amount of RR 750 and finalized the foundation of 50%-50% joint venture with Mazda Motor Corporation. The production of Mazda SUVs and passenger cars was launched in September 2012. 214 342 556 On 1 October 2011 the Group completed formation of 50%-50% Ford-Sollers JV and the commencement of the joint venture was announced. Ford Sollers JV will manufacture a range of Ford passenger cars and light commercial vehicles in the St. Petersburg region and in the Republic of Tatarstan. The project implies development of large-scale production facilities with a high level of localization as well as maintaining of R&D activities. At 31 December 2013 the Ford-Sollers JV has contractual capital expenditure commitments in respect of property, plant and equipment amounted to RR 12,490 (2012: RR 6,087 million) and operating lease commitments for RR 298 (2012: RR 322). The financing for the joint ventures Mazda-Sollers, Sollers-Bussan and Ford-Sollers have been agreed and obtained from Vnesheconombank (further “VEB”). The borrowings are secured by joint ventures’ property, plant and equipment. Additionally the Group together with the coinvestors Mazda Motor Co, Mitsui&Co and Ford, respectively, have pledged 100% interest in the joint ventures to the VEB. For Joint ventures’ contingencies refer to note 31. At 31 December 2013 and 2012, the Group held 50% interest in joint ventures Ford-Sollers, Mazda Sollers, Sollers-Isuzu, Sollers-Bussan and Sollers-Finance and also held 30% interest in OOO DaeWon-SeverstalAuto Elabuga. The summarised financial information of the Joint ventures and the associates, including full amounts of total assets, liabilities, revenues, operating and net profit/(loss), is as follows: Joint ventures: Total at 31 December 2013 Ford-Sollers JV Mazda-Sollers JV Sollers-Isuzu JV Sollers-Bussan JV Sollers-Finance JV Total at 31 December 2012 Ford-Sollers JV Mazda-Sollers JV Sollers-Isuzu JV Sollers-Bussan JV Sollers-Finance JV Associates: Total at 31 December 2013 Total at 31 December 2012 www.sollers-auto.com Total assets Total liabilities Revenue Operating profit/(loss) Profit/ (loss) 85,988 64,048 12,276 3,154 4,176 2,334 64,955 56,166 3,731 2,454 520 2,084 55,912 39,302 9,961 1,329 3,749 1,571 35,983 30,934 2,136 1,056 429 1,428 134,248 82,362 39,068 1,987 10,232 599 94,468 90,960 2,625 448 435 2,596 400 1,376 170 425 225 3,507 3,284 133 (16) (42) 148 1,148 (319) 722 227 336 182 2,298 1,983 95 134 (37) 123 105 120 18 27 (-) - (15) (16) (15) (12) 109 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) 111 110 14. TRADE AND OTHER RECEIVABLES (CONTINUE) 12. OTHER NON-CURRENT ASSETS Advances for construction in progress and equipment Other non-current assets Total other non-current assets The analysis by credit quality of trade receivables outstanding are as follows: 31 December 2013 449 66 515 31 December 2012 675 2 677 31 December 2013 1,655 (120) 1,535 398 398 2,657 (64) 2,593 4,526 31 December 2012 2,067 (111) 1,956 709 709 1,891 (53) 1,838 4,503 13. INVENTORIES Raw materials Less: provision Total raw materials Work in progress Less: provision Total work in progress Finished products Less: provision Total finished products Total At 31 December 2013 and 31 December 2012 there were no any pledged inventories. 14. TRADE AND OTHER RECEIVABLES Trade receivables Less: provision for impairment Total trade receivables Other receivables Less: provision for impairment Total other receivables Advances to suppliers, other than for equipment Less: provision for impairment Total advances to suppliers, other than for equipment Taxes prepayments VAT recoverable, net Other prepayments Total 31 December 2013 6,045 (39) 6,006 217 (13) 204 357 (3) 354 162 155 13 6,894 31 December 2012 8,608 (60) 8,548 706 (21) 685 432 (9) 423 75 68 17 9,816 At 31 December 2013, trade receivables arising from revenue contracts of RR 2,913 were pledged as a security for a working capital facility related to SsangYong business (at 31 December 2012: RR 5,021). Trade receivables are represented by currency as follows: Currency Russian Roubles US Dollars Total SOLLERS // Annual Report 2013 31 December 2013 6,003 3 6,006 31 December 2012 8,463 85 8,548 31 December 2013 31 December 2012 300 4,733 877 5,910 621 7,444 371 8,436 37 36 9 5 9 96 36 65 10 1 112 39 39 (39) 6,006 60 60 (60) 8,548 Current and not impaired – exposure to - Group 1 – large corporate clients - Group 2 – dealers - Group 3 – other clients Total current and not impaired Past due but not impaired - less than 30 days overdue - 30 to 90 days overdue - 90 to 180 days overdue - 180 to 360 days overdue - over 360 days overdue Total past due but not impaired Individually determined to be impaired (gross) - over 360 days overdue Total individually impaired Less impairment provision Total The Group retains the PTS (vehicle registration certificate representing the certificate of title of a vehicle) as a pledge when other documents are transferred to the dealer in conjunction with a sale. Management considers that this serves as collateral in relation for the trade receivables in Group 2 and Group 3. The fair value of the collateral for the past due but not impaired receivables as at 31 December 2013 was RR 96 (31 December 2012: RR 112) and the fair value of the collateral for the individually determined to be impaired receivables was RR 39 (31 December 2012: RR 60). Movements in the impairment provision for trade and other receivables are as follows: 31 December 2013 Provision for impairment at start of year Amounts written off during the year as uncollectible Provision for impairment during the year Provision for impairment at end of year 31 December 2012 Trade receivables 60 Other financial receivables 21 Advances to suppliers 9 Trade receivables 151 Other financial receivables 70 Advances to suppliers 3 (18) (3) 39 (8) 13 (6) 3 (71) (20) 60 (54) 5 21 6 9 15. CASH AND CASH EQUIVALENTS 31 December 2013 1,657 4,363 6,020 Cash on hand and balances with banks Cash deposits Total 31 December 2012 1,436 1,124 2,560 Cash and cash equivalents held by the Group earned the following interest rates per annum: As at 31 December 2013 Cash on hand and balances with banks Cash deposits Total As at 31 December 2012 Cash on hand and balances with banks Cash deposits Total www.sollers-auto.com <1% 1%-3% 3%-5% 5%-7% non-interest bearing Total 702 702 387 387 503 503 3,860 3,860 568 568 1,657 4,363 6,020 14 157 171 243 243 69 69 898 898 1,179 1,179 1,436 1,124 2,560 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) ADDITIONAL INFORMATION 112 15. CASH AND CASH EQUIVALENTS (CONTINUE) 16. SHAREHOLDERS EQUITY (CONTINUE) The following cash and cash equivalents held by the Group are denominated in foreign currencies: Share based compensation On 10 March 2009, the Group granted to members of key management and other employees options to acquire 855,000 of the Group’s ordinary shares at an exercise price of US$3 that represented the average market share price for the three months preceding the grant date. The market share price at the grant date was US$3. The vesting period for the options is one year for 285,000 options; two years for 285,000 options and three years for 285,000 options. These options are exercisable until 1 March 2013 subject to an employee meeting certain conditions, including remaining in employment in the Group up until the date of vesting. Currency US Dollars Euro Korean won Total 31 December 2013 78 5 83 31 December 2012 831 1 6 838 During the year ended 31 December 2012 248,000 options were exercised at an exercise price of US$ 3 by the members of key management and other employees. The carrying value of cash and cash equivalents as at 31 December 2013 and 31 December 2012 is approximately equal to their fair value. The Group holds cash and cash equivalents in the top-20 Russian banks. Credit ratings of the banks where accounts were held as at the year-end date are set out in the analysis below: Rating by Fitch - A-A - BBB+ - BBB - BBB- BВBВ+ - BB - B+ -B Rating by Moody’s - B2 Rating by S&P -B Other - Unrated - Cash on hand Total On 16 May 2013 share option programme was ceased. For further details please see Note 6.2. 31 December 2013 31 December 2012 5,326 59 513 16 - 59 100 7 2,138 23 16 24 90 183 13 - 2 1 6,020 4 6 2,560 16. SHAREHOLDERS EQUITY At 31 December 2013 At 31 December 2012 The Group’s long-term borrowings consisted of bank loans amounted to RUB 5,716 (31 December 2012: RUB 3,742). The Group’s long-term borrowings are denominated in Russian Roubles at 31 December 2013 and 31 December 2012. The carrying amounts of long-term borrowings approximates to their fair values as at 31 December 2013 and 31 December 2012. The Group’s short-term borrowings consisted of the following: Bank loans Bonds Interest payable Total short-term borrowings Share capital 530 530 Share premium 4,538 4,480 Additional paid-in capital 1,438 1,438 The total authorised number of ordinary shares is 82,074 thousand (31 December 2012: 82,074 thousand). The nominal value of all shares is 12.5 roubles per share. All issued ordinary shares are fully paid. Each ordinary share carries one vote. Share premium represents the excess of contributions received over the nominal value of shares issued. In accordance with Russian legislation, the Group distributes profits as dividends or transfers them to reserves (fund accounts) on the basis of financial statements prepared in accordance with Russian Accounting Rules. The statutory accounting reports of the Company are the basis for profit distribution and other appropriations. Russian legislation identifies the basis of distribution as the accumulated profit. For the year ended 31 December 2013, the net statutory profit for the Company reported in the published annual statutory reporting financial statements was RR 1,786 (2012: net loss RR 2,601) and the closing balance of the accumulated profit including the current reporting period net statutory profit was RR 2,399 (31 December 2012: RR 2,423). However, this legislation and other statutory laws and regulations are open to legal interpretation and accordingly management believes at present that it would not be appropriate to disclose an amount for the distributable reserves in these consolidated financial statements. By the date of approval of these consolidated financial statements, no dividends were proposed by the Board of Directors for the year ended 31 December 2013. In May 2013 the General Shareholders Meeting declared the dividends per results of the year ended 31 December 2012 totally amounted to RR 1,800, or 52.52 Roubles per ordinary share. No dividends were declared at the General Shareholders Meetings during the year ended 31 December 2012. 31 December 2012 3,320 3,185 193 6,698 The Group’s short-term borrowings are denominated in Russian Roubles at 31 December 2013 and 31 December 2012. The carrying amounts of short-term borrowings approximates to their fair values at 31 December 2013. At 31 December 2012 the fair value of short-term borrowings amounted to RR 6,737, comprising bonds RR 3,222 and bank loans and interests payable RR 3,513. Property, plant and equipment of RR 2,790 (31 December 2012: RR 2,845) are pledged as collateral for long-term and short-term borrowings. See Note 7. The short-term borrowings from Repurchase agreement for RR 250 are secured by 9.6% shares of the Group’s subsidiary OAO “UAZ”. 18. ADVANCES RECEIVED AND OTHER PAYABLES Dividends payable Liabilities for purchased property, plant and equipment Accrued liabilities and other creditors Total financial liabilities within other payables Advances received Accrued employee benefit costs Vacation accrual Bonus accrual Total advances received and other payables 31 December 2013 56 38 94 188 197 244 214 519 1,362 31 December 2012 17 34 237 288 1,290 300 266 721 2,865 There were no overdue payables as at 31 December 2013, including in respect of trade payables (31 December 2012: nil). The bonus accrual relates to performance based on productivity of employees at a subsidiary during the year ended 31 December 2013 of RR 519 (31 December 2012: RR 721). During the year ended 31 December 2013 the Group did not perform any transactions with treasury shares. During the year ended 31 December 2012, the Group disposed of 1,047 thousand of ordinary shares and acquired an additional 248 thousand shares. SOLLERS // Annual Report 2013 31 December 2013 3,730 65 3,795 Certain of the Group’s borrowings are subject to covenant requirements that the Group is required to comply with, or otherwise could result in an acceleration of the repayment period. See Note 31. The value of share capital issued and fully paid up consists of the following amounts: Number of outstanding ordinary shares (thousands) 34,270 34,270 17. BORROWINGS www.sollers-auto.com 113 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) ADDITIONAL INFORMATION 19. TAXES PAYABLE 23. DISTRIBUTION COSTS 31 December 2013 755 183 353 26 36 23 1,376 Value-added tax Payments to the State Pension Fund and other social taxes Income tax Property tax Personal income tax Other taxes Total 31 December 2012 557 156 210 20 15 87 1,045 The Group had no tax liabilities past due at 31 December 2013 or 31 December 2012. Transportation Advertising Labour costs Check and inspection performed by dealers Materials Commission fee Other Total During the year ended 31 December 2013 and 31 December 2012, the following movements in warranty and other provisions were recorded: Warranty 318 426 (213) 531 459 (358) 632 Tax and other claims 27 68 (22) 73 261 (1) 333 Total 345 494 (235) 604 720 (359) 965 The Group provides a one-year warranty on most UAZ vehicles, except a three-year warranty on the UAZ Patriot; one and two-year warranty on ZMZ engines; and a three-year warranty period on sport utility vehicles. The Group undertakes to repair or replace items that fail to perform satisfactorily. A provision has also been recognised for SsangYong vehicles based on expected costs to be incurred that are not covered by warranties provided by the supplier. All of the above provisions have been classified as current liabilities as the Group does not have an unconditional right to defer settlement beyond one year. Labour costs Services provided by third parties Depreciation and amortisation Rent Taxes other than income Business travel Fire brigade and security costs Repairs and maintenance Transportation Materials Insurance Training costs Movement in the provision for impairment of receivables Other Total Year ended 31 December 2013 51,704 5,595 1,845 1,145 1,028 61,317 Year ended 31 December 2012 55,071 5,841 1,684 1,788 1,165 65,549 22. COST OF SALES Materials and components Labour costs Other production costs Depreciation and amortisation Change in finished goods and work in progress Total Year ended 31 December 2012 1,415 470 337 113 106 35 75 2,551 Year ended 31 December 2013 2,776 317 157 120 203 150 136 130 17 38 19 30 3 71 4,167 Year ended 31 December 2012 3,058 497 192 228 193 155 144 130 73 72 46 19 172 226 5,205 Year ended 31 December 2013 (557) (7) 111 70 93 (29) (204) (523) Year ended 31 December 2012 220 (197) 43 36 60 7 (16) (158) (5) Year ended 31 December 2013 1,039 (18) 159 1,180 (36) 1,144 Year ended 31 December 2012 1,574 (369) (315) 890 (80) 810 25. OTHER OPERATING INCOME – NET 21. SALES Vehicles Automotive components Engines Services Other sales Total Year ended 31 December 2013 1,284 488 401 63 44 174 100 2,554 24. GENERAL AND ADMINISTRATIVE EXPENSES 20. WARRANTY AND OTHER PROVISIONS Balance at 1 January 2012 Additional provision Utilised in the year Balance at 31 December 2012 Additional provision Utilised in the year Balance at 31 December 2013 114 Net (income)/losses on disposals of property, plant, equipment and investments Accounts payables written-off Charitable donations Social expenses Loss on disposal of materials Research and development expenses Government grant amortisation Other Total 26. FINANCE COSTS, NET Year ended 31 December 2013 41,438 5,485 2,401 998 (444) 49,878 Year ended 31 December 2012 40,877 5,501 2,200 884 2,013 51,475 Interest expense, net Government subsidy of interest expenses Foreign exchange losses/(gain), net Total finance costs, net Less capitalised finance costs Total finance costs, net The Group’s capitalised borrowing costs of RR 36 mainly arising on financing attributable to the construction of property, plant and equipment (2012: RR 80). Interests paid during 2013 and 2012 to State banks were partly compensated under Government Decrees #640 dated 1 August 2011 and #357 dated 6 June 2005. The compensation was recognised within finance costs of the consolidated profit or loss of the reporting periods to match it with the costs that they are intended to compensate. SOLLERS // Annual Report 2013 www.sollers-auto.com 115 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) ADDITIONAL INFORMATION 116 27. INCOME TAX EXPENSE (CONTINUE) 27. INCOME TAX EXPENSE The Group has not recorded a deferred tax liability in respect of temporary differences associated with investments in subsidiaries and joint ventures as the Group is able to control the timing of the reversal of these temporary differences and does not intend for them to reverse in the foreseeable future. Un-remitted earnings from subsidiaries and joint ventures were RR 15,882 at 31 December 2013 (31 December 2012: RR 13,776), mostly being subject to tax rate on dividends of 0%. The income tax expense recorded in the consolidated statement of comprehensive income for the year comprises the following: Year ended 31 December 2013 1,358 (265) 1,093 Current income tax expense Deferred tax charge Income tax expense Year ended 31 December 2012 1,681 22 1,703 28. EARNING PER SHARE Basic earning per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year, excluding treasury shares. The income tax rate applicable to the majority of the Group’s income is 20% (2012: 20%). A reconciliation between the expected and the actual taxation charge is provided below: Profit before income tax Theoretical tax charge at statutory rate (2013: 20%; 2012: 20%) Theoretical tax charge/(benefit) at different statutory rate (2013: 16%; 2012: 16%) Tax effect of items which are not deductible or assessable for taxation purposes: - Non-deductible expenses/(income) at 20% - Non-deductible expenses at 16% Income tax expense Year ended 31 December 2013 4,671 925 9 Year ended 31 December 2012 7,584 1,480 36 158 1 1,093 50 137 1,703 Differences between IFRS and statutory taxation regulations in Russia give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 20% (31 December 2012: 20%) The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded on the balance sheet. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on the medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management’s expectations that are believed to be reasonable under the circumstances. In the context of the Group’s current structure, tax losses and current tax assets of the different companies may not be set off against current tax liabilities and taxable profits of other companies and, accordingly, taxes may accrue even where there is a net consolidated tax loss. Deferred tax assets may be realised in different periods than the deferred tax liabilities may be settled. Management believes that there will be sufficient taxable profits available at the time the temporary differences reverse to utilise the deferred tax assets. See Note 3.3. The recognised tax losses carried forward generally expire in the period to 2023, being ten years after the end of the fiscal period when the losses were generated. Tax effects of deductible temporary differences: Losses carried forward Accounts payable and provisions Taxes payable Inventories Total Tax effects of taxable temporary differences: Property, plant and equipment Accounts receivable Equity investments Total Recognised deferred tax asset, net Recognised deferred tax liability, net Total net deferred tax assets/(liabilities) 1 January 2012 Movement in the year ended 31 December 2012 31 December 2012 Movement in the year ended 31 December 2013 31 December 2013 1,243 262 159 1,099 2,763 (1,182) (38) (85) (21) (1,326) 61 224 74 1,078 1,437 60 106 (74) (347) (255) 121 330 731 1,182 (1,027) (1,332) (738) (3,097) 874 (1,208) (334) 57 287 738 1,082 (598) 354 (244) (970) (1,045) (2,015) 276 (854) (578) 114 401 515 (80) 340 260 (856) (644) (1,500) 196 (514) (318) Basic earnings per share (in RR per share) Diluted earnings per share (in RR per share) Profit attributable to equity holders of the Company Basic weighted average number of shares outstanding (thousands) – Adjustment for share options (thousands) Diluted weighted average number of shares outstanding (thousands) Year ended 31 December 2013 105.78 105.75 3,625 34,270 11 34,281 Year ended 31 December 2012 171.1 170.5 5,843 34,152 123 34,275 29. SEGMENT INFORMATION IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group which are regularly reviewed by the ‘chief operating decision maker’ in order to allocate resources to segments and to assess their performance. The Group’s operating segments are reported based on the financial information provided to the Group’s Chief Executive Officer and that are used to make strategic decisions. Since 2011 the Group restructured its automotive and engine segments after OAO UAZ has become the major customer of OAO ZMZ. The sales of engine segment became immaterial in terms of segment reporting and are no longer disclosed separately. As at 31 December 2013 the Group activities are considered as one reporting segment: vehicles. The Group’s production facilities are wholly located within the Russian Federation, and almost all sales are domestic. The Chief Executive Officer reviews financial information prepared on the basis of Russian accounting standards adjusted to meet the requirements of internal reporting. Such financial information differs in certain aspects from International Financial Reporting Standards, including in relation to inventory provisions; receivables provisions and other adjustments. Performance is evaluated on the basis of operating profit or loss. Accordingly, foreign currency gains/ losses, interest income/ expenses and income tax charges are excluded. No balance sheet information is regularly reviewed and accordingly no information on assets or liabilities is included as part of the segment information presented. Revenues from external customers are presented in Note 21. Management considers that across the range of vehicles and models produced, these are considered as similar products. During the year ended 31 December 2013 and 31 December 2012 the Group did not have transactions with a single external customer that amounted to 10% or more of the Group’s revenues. 30. FINANCIAL RISK MANAGEMENT 30.1. Financial risk factors The risk management function within the Group is carried out in respect of financial risks (market, currency, price, interest rate, credit and liquidity), operational risks and legal risks. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks. (a) Market risk During the year ended 31 December 2013 movement of RR 5 (31 December 2012: RR 222) was due to disposal of subsidiaries. The Group takes on exposure to market risks. Market risks arise from open positions in (a) foreign currencies, (b) interest bearing assets and liabilities and (c) equity investments, all of which are exposed to general and specific market movements. Management sets limits on the value of risk that may be accepted, which is monitored on a daily basis. However, the use of this approach does not prevent losses outside of these limits in the event of more significant market movements. SOLLERS // Annual Report 2013 www.sollers-auto.com 117 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) ADDITIONAL INFORMATION 30. FINANCIAL RISK MANAGEMENT (CONTINUE) 30. Financial risk management (continue) 30.1. Financial risk factors (continue) 30.1. Financial risk factors (continue) (i) Currency risk The Group is exposed to currency risk from changes in the exchange rate of following currencies: Euro and US Dollars. The risks arise on purchase agreements for delivery of major production components denominated in foreign currencies. Management believes that the nature of its business enables the Group to offset currency risk by changing related Rouble denominated retail prices. 31 December 2013 Fixed interest rates Total The Group did not expose to currency risk arising on open loan positions denominated in Euros and US Dollars. The positions are monitored monthly. The table below summarises the Group’s exposure to foreign currency exchange rate risk at 31 December 2013: Monetary financial assets US Dollars Euros Total foreign currencies Russian Roubles Total Cash and cash equivalents 78 5 83 5,937 6,020 Accounts receivable 3 3 6,167 6,170 Monetary financial liabilities Accounts payable (874) (116) (990) (9,313) (10,303) Bonds and borrowings (9,511) (9,511) Net balance sheet position (793) (111) (904) (6,720) (7,624) Monetary financial assets Cash and cash equivalents 831 1 6 838 1,722 2,560 Accounts receivable 85 85 8,711 8,796 Monetary financial liabilities Accounts payable (6,389) (191) (61) (6,641) (4,101) (10,742) Bonds and borrowings (10,440) (10,440) Net balance sheet position (5,473) (190) (55) (5,718) (4,108) (9,826) The above analysis includes only monetary assets and liabilities. The Group does not hold any currency derivatives. Investments in equities and non-monetary assets are not considered to give rise to any material currency risk. From 3 to 12 months More than 1 year More than 5 years Total 130 130 3,600 3,600 5,716 5,716 - 9,446 9,446 Demand and less than 3 month From 3 to 12 months More than 1 year More than 5 years Total 800 800 5,135 570 5,705 3,742 3,742 - 9,677 570 10,247 At 31 December 2013, if interest rates at that date had been 200 basis points lower (31 December 2012: 200 basis points lower) with all other variables held constant, the interest expense for the year would have been RR 196 lower (2012: RR 270 lower). If interest rates at that date had been 100 basis points higher (31 December 2012: 100 basis points higher) with all over variables held constant, the interest expense for the year would have been RR 98 higher (31 December 2012: RR 135 higher). In % p.a. Assets Cash and cash equivalents Liabilities Borrowings 2013 2012 0%-7.4% 0%-6.4% 8.6%-12% 7.5%-12.5%, CB RF refinancing rate + 4% (b) Credit risk The Group takes on exposure to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure to credit risk arises as a result of the Group’s sales of products on credit terms and other transactions with counterparties giving rise to financial assets. The Group’s maximum exposure to credit risk by class of assets is as follows: Management monitors exchange rates and market forecasts on foreign exchange rates regularly as well as prepares budgets for long-term, medium-term and short-term periods. The following table presents sensitivities of profit and loss and equity to reasonably possible changes in exchange rates applied at the reporting date relative to the Group’s functional currency, with all other variables held constant: Impact on profit and loss and on equity of: US Dollar strengthening by 10% (10% for 2012) US Dollar weakening by 10% (10% for 2012) Euro strengthening by 10% (10% for 2012) Euro weakening by 10% (10% for 2012) Korean Won strengthening by 10% (10% for 2012) Korean Won weakening by 10% (10% for 2012) 31 December 2012 Fixed interest rates EURIBOR based interest rates CB RF refinancing rate based Total Demand and less than 3 month The Group monitors interest rates for its financial instruments. The table below summarises interest rates based on reports reviewed by key management personnel: The table below summarises the Group’s exposure to foreign currency exchange rate risk at 31 December 2012: US Dollars Euros Korean Won Total foreign currencies Russian Roubles Total 118 2013 2012 (79) 79 (11) 11 - (547) 547 (19) 19 (5) 5 Cash and cash equivalents Accounts receivable, including long-term accounts receivable Other receivables Other financial assets Total on-balance sheet exposure Financial guarantees, Note 31 Total maximum exposure to credit risk 31 December 2013 6,020 6,072 68 30 12,190 5,404 17,594 31 December 2012 2,560 8,548 203 45 11,356 11,356 All of the financial assets of the Group, except for RR 20 (31 December 2012: RR 20) in shares, categorised as available for sale, are loans and receivables. The process of management of credit risk includes assessment of credit reliability of the counterparties and reviewing payments received. All the receivables from the Group’s dealers are secured through the Group retaining the PTS of vehicles dispatched until payment has been made. The exposure was calculated only for monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity of the Group. Management reviews the ageing analysis of outstanding trade receivables and follows up on past due balances. Management therefore considers it appropriate to provide ageing and other information about credit risk as disclosed in Note 14. (ii) Price risk The credit quality of each new customer is analysed before the Group enters into contractual agreements. The credit quality of customers is assessed taking into account their financial position and past experience. The Group is not exposed to equity securities price risk because it does not hold a material portfolio of equity securities. (iii) Interest rate risk Although the collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the provisions already recorded. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The table below summarises the Group’s exposure to interest rate risks. The table below presents the Group’s financial liabilities at their carrying amounts, categorised by the earlier of contractual interest repricing or maturity dates. The Group’s cash and cash equivalents are held with over 17 banks (31 December 2012: 18 banks) thus there is no significant exposure of the Group to a concentration of credit risk. Management monitor Moody’s, Fitch and S&P ratings of the banks used to manage the level of credit risk that the Group is exposed to. Management considers that the credit risk associated with these banks is negligible. SOLLERS // Annual Report 2013 www.sollers-auto.com 119 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) ADDITIONAL INFORMATION 120 30. Financial risk management (continue) 30.1. Financial risk factors (continue) 30. FINANCIAL RISK MANAGEMENT (CONTINUE) Credit risks concentration The Group did not have any derivative financial instruments issued/held during the year ended 31 December 2013 or the year ended 31 December 2012. 30.1. Financial risk factors (continue) No single debtor of the Group accounts for more than 2.1% (31 December 2012: 4.1%) of the trade accounts receivable of the Group. However, the majority of the Group’s trade receivables represent dealers who sell the Group’s vehicles to consumers, and therefore are exposed in similar ways to reductions in the demand from consumers for new vehicle sales, and their ability to obtain access to credit in the financial markets in order to finance their businesses. As the Group maintains the PTS registration certificates to each vehicle and has insurance arrangements in place covering the vehicles held by the dealers, this mitigates the potential exposure of the Group in the event that a number of dealers are impacted in similar ways and are not able to repay amounts owed. Management does not consider any requirement to enter into hedging arrangements in relation to the credit risks to which the Group is exposed. In the year ended 31 December 2013 SsangYong distributor issued a financial guarantee for working capital facility at its joint venture operations related to SsangYong business in amount of RR 5,404 (Note 31). 30.2. Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. (c) Liquidity risk Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. The ratio is calculated as net debt divided by a sum of total equity and net debt. The Group considers total capital under management at 31 December 2013 to be RR 24,267 (31 December 2012: RR 27,760). Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Group manages liquidity risk with the objective of ensuring that funds will be available at all times for all cash flow obligations as they become due by preparing long-term, medium-term and short-term budgets, continuously monitoring forecast and actual cash flows. The gearing ratios at 31 December 2013 and 31 December 2012 were as follows: The Group monitors the range of financial ratios (net debt/EBITDA, EBIT/Interest expense) in order to ensure that the Group maintains sufficient liquidity in order to meet its obligations as they fall due. Management review the targeted ratios in order to ensure that targets are in line with the market and take actions to ensure that the Group is able to maintain sufficient liquid resources to ensure that the Group continues to meet its liabilities as they fall due. Management monitors compliance with covenant requirements on a monthly basis, or more frequently as appropriate. A schedule of covenant requirements that the Group is subject to is maintained by the Head of Treasury, and management are proactive to obtain revised agreements or waivers to the extent that requirements would otherwise not be achieved. Management considers the targeted ratios sustainable for the foreseeable future. Management believes that the Group has access to additional credit facilities if required. The analysis below represents management expectations of repayment schedule of monetary assets and liabilities of the Group as of 31 December 2013 and 31 December 2012. The table below is based on the earliest possible repayment dates and on nominal cash flows including future interest payments. Foreign currency cash flows are translated using spot exchange rates as of 31 December 2013 and 31 December 2012. 31 December 2013 Total monetary financial assets Cash and cash equivalents Trade receivables Other receivables Other financial assets Total monetary financial liabilities Loans and bonds Trade payables Other payables Future interest payments Net monetary financial assets / (liabilities) at 31 December 2013 31 December 2012 Total monetary financial assets Cash and cash equivalents Trade receivables Other receivables Other financial assets Total monetary financial liabilities Loans and bonds Trade payables Other payables Future interest payments Net monetary financial liabilities at 31 December 2012 SOLLERS // Annual Report 2013 Demand and less than 3 month From 3 to 12 months More than 1 year More than 5 years Total 12,127 6,020 6,009 68 30 (10,423) (195) (10,040) (188) (237) (3,675) (3,600) (75) (642) 63 63 (5,716) (5,716) (322) - 12,190 6,020 6,072 68 30 (19,814) (9,511) (10,115) (188) (1,201) 1,467 (4,317) (5,975) - (8,825) 11,356 2,560 8,548 45 203 (11,706) (993) (10,425) (288) (270) (620) (5,731) (5,705) (26) (536) (6,267) (3,745) (3,742) (3) (357) (4,102) - 11,356 2,560 8,548 45 203 (21,182) (10,440) (10,454) (288) (1,163) (10,989) Long-term borrowings Short-term borrowings Less: cash and cash equivalents Net debt Equity Total net debt and equity Gearing ratio 31 December 2013 5,716 3,795 (6,020) 3,491 20,776 24,267 14% 31 December 2012 3,742 6,698 (2,560) 7,880 19,880 27,760 28% Management constantly monitor profitability ratios, market share price and debt/capitalisation ratio. The level of dividends is also monitored by the Board of Directors of the Group. Fair value of financial instruments Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety. The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. The fair value of long-term and short-term borrowings is disclosed in Note 17. The carrying value of other financial instruments approximates to their fair value. Level three measurements were applied. 31. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS Legal proceedings. From time to time and in the normal course of business, claims against the Group may be received. On the basis both of its own estimates and external and internal professional advice, management is of the opinion that no material losses will be incurred in respect of claims. Tax legislation. Russian tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities. www.sollers-auto.com 121 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2013 (in millions of Russian Roubles – RR) 122 31. Contingencies, commitments and operating risks (continue) The Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. The Supreme Arbitration Court issued guidance to lower courts on reviewing tax cases providing a systemic roadmap for anti-avoidance claims, and it is possible that this will significantly increase the level and frequency of tax authority’s scrutiny. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Different interpretations and applications of the Russian Tax Code are possible. For example, in relation to Russian taxpayers where outstanding loans are controlled by a foreign company owning directly or indirectly more than 20% of the charter capital of the Russian entity, thin capitalisation limits could be applied to the respective loan interest under certain circumstances even where loans are with other subsidiaries or Russian banks for the purpose of financing Russian business activities. As Russian tax legislation does not provide definitive guidance in certain areas, other tax matters including assessment of tax bases could also have different interpretations. Nonetheless management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax, currency legislation and customs positions will be sustained. 32. PRINCIPAL SUBSIDIARIES The principal subsidiaries consolidated within the Group and the degree of control exercised by the Group are as follows: Entity OOO “DC SanYong” OOO “Torgoviy dom Sollers” OAO “Zavolzhskiy Motor Works” (further “ZMZ”) OAO “Ulyanovsky Avtomobilny Zavod” (further “UAZ”) OOO “Sollers-Dal’niy Vostok” OOO DC UAZ Activity Auto trading Auto components trading Manufacture and sale of engines for passenger automobiles, trucks and buses Manufacture and sale of passenger automobiles, light trucks and minibuses Vehicle production Auto trading 31 December 2013 31 December 2012 % of effective interest (total share capital) 100 100 % of effective interest (total share capital) 100 100 68 64 79 100 100 66 100 100 The table presents the Group’s effective interest in total share capital comprising of ordinary shares and preference shares. Amended Russian transfer pricing legislation took effect from 1 January 2012. The new transfer pricing rules appear to be more technically elaborate and, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD). The new legislation provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controlled transactions (transactions with related parties and some types of transactions with unrelated parties), provided that the transaction price is not arm’s length. Management has implemented internal controls to be in compliance with the new transfer pricing legislation and do not anticipate any tax exposures will arise in practice. Russian transfer pricing legislation is also applicable to all the Joint ventures in which the Group participates. Management of respective companies has also implemented internal controls to be in compliance with the new transfer pricing regulations and do not anticipate any tax exposures will arise in practice. The impact of any such exposure cannot be reliably estimated but may have a material effect on the joint ventures’ financial results. During the year ended 31 December 2013, as part of an internal Group reorganisation, the Group’s effective interest in OAO “Zavolzhskiy Motor Works” was increased in comparison with prior year although the Group retained a majority effective interest and there were no changes in voting rights. As a result of this reorganisation, an amount of RR 774 is recognised in the Statement of Changes in Equity. During the year ended 31 December 2012, as part of an internal Group reorganisation, the Group’s effective interest in OAO “Zavolzhskiy Motor Works” was reduced although the Group retained a majority effective interest and there were no changes in voting rights. As a result of this reorganisation, an amount of RR 595 is recognised in the Statement of Changes in Equity. At 31 December 2013 and 2012 the Group has two subsidiaries with non-controlling interests that are material: 31 December 2013 Capital commitments. Company’s commitments totalled RR 1,694 at 31 December 2013 (31 December 2012: RR 185) including contractual obligations to purchase, construct or develop property, plant and equipment. Guarantees. Guarantees are irrevocable assurance that the Group will make payments in the event that another party cannot meet its obligations. SsangYong distributor has issued a financial guarantee for working capital facility at its joint venture operations related to SsangYong business in amount of RR 5,404. ZMZ UAZ Total Carrying amount 3,320 1,763 5,083 31 December 2012 The non-controlling interest’s share 32% 21% The table below summarises the movements in the carrying amount of the non-controlling interest in the Group’s subsidiaries: Covenants. For certain borrowing agreements, the Group is subject to covenant requirements. Breaches of these requirements could give a lender the right to accelerate the repayment period of the borrowings and demand immediate repayment. Management have validated that the Group was in full compliance with all covenants attached to contracts entered into, including borrowing agreements with lenders, as at 31 December 2013 (31 December 2012: no exceptions). As at the date of approval of these consolidated financial statements, management considers that the Group is in full compliance with all covenant requirements. Environmental matters. Environmental regulation in the Russian Federation is evolving and the enforcement posture of Government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current climate under existing legislation, management believes that there are no significant liabilities for environmental damage. ZMZ 2,889 (242) 983 3,630 (60) (250) 3,320 Carrying amount at 1 January 2012 Non-controlling interest in current year result Dilution factor effect Carrying amount at 31 December 2012 Non-controlling interest in current year result Dilution factor effect Decrease of non-controlling interest due purchase by the Group Carrying amount at 31 December 2013 UAZ 3,527 273 (388) 3,412 13 (524) (1,138) 1,763 In November 2013 the Group bought-out 13% of UAZ shares from the State for RR 900. The Group’s result amounted to RR 238 was recognised in equity. The summarised financial information of the Group’s subsidiaries with significant non-controlling interest, including full amounts of total assets, liabilities, revenues and profit/(loss), is as follows: Total at 31 December 2013 ZMZ UAZ Total at 31 December 2012 ZMZ UAZ SOLLERS // Annual Report 2013 The non-controlling interest’s share 36% 34% Carrying amount 3,630 3,412 7,042 www.sollers-auto.com Total assets Total liabilities Revenue Profit/ (loss) Net cash flows 11,908 23,483 (1,564) (14,892) 6,583 28,304 (176) 38 (170) 1,477 12,381 24,299 (2,303) (14,198) 7,508 31,530 (889) 807 308 (109) 123 MOVING AHEAD BUSINESS & STRATEGY CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY SHAREHOLDERS’ EQUITY & SECURITIES FINANCIAL REPORTING ADDITIONAL INFORMATION Glossary Corporate Information and Key Contacts AEB Association of European Businesses LDT Light duty truck Cataphoresis painting process A process based on electro-chemical technology MDT Medium duty truck C segment Medium cars (according to European Commission Classification) MPV Multi-purpose vehicle CDV Car-derived van OEM (original equipment manufacturer) In this report, automotive manufacturer CKD (Completely Knocked Down) Fully disassembled unit that is required to be assembled by the producer locally (See also SKD) Payload Carrying capacity of a vehicle, usually measured by weight Crossover See CUV CV Commercial vehicle with a gross weight of up to 6 tonnes CUV Crossover utility vehicle. A vehicle built on a car platform with features of a sport utility vehicle (SUV) and a passenger cars (PC) D segment Large cars (according to European Commission Classification) F+S F segment luxury cars and S segment sports coupes (according to European Commission Classification) GVW Gross vehicle weight HDT Heavy duty truck LCV Light commercial vehicle SOLLERS // Annual Report 2013 MOVING AHEAD // PC Passenger car Retail sales Sales of independent dealers to customers (also see wholesales) SKD (Semi Knocked Down) Partially disassembled unit that is required to be assembled by the producer locally (See CKD) SUV Sport utility vehicle SYNC Factory-installed, integrated in-vehicle communications and entertainment system that allows users to make hands-free telephone calls, control music and perform other functions with the use of voice commands Registered Office: SOLLERS OJSC 10 Testovskaya Street Moscow International Business Centre Northern Tower, Moscow City Moscow, 123317, Russia Tel.: +7 (495) 228 3045 Fax: +7 (495) 228 3044 Website: www.sollers-auto.com Investor Relations Contact: Head of Corporate Reporting and Investor Relations Department Elena Nishanova [email protected] Tel: +7 (495) 228 30 45 Fax: +7 (495) 228 30 44 (please add: “Attn: Investor Relations”) Media Contact: Head of Public Relations Department Elena Tarasenko [email protected] Tel: +7 (495) 228 30 45 Fax: +7 (495) 228 30 44 (please mark: “Attn: Public Relations”) UAZ Ulyanovsky Avtomobilny Zavod (Ulyanovsk Automobile Plant) Wholesales Sales of SOLLERS’ distributors to independent dealers (also see retail sales) www.sollers-auto.com 124 125 Annual Report 2013 The use of the FSC logo indicates that this Report was printed on paper that comes from responsibly managed forests