AVTOVAZ Group* Operating Highlights for 2004
Vehicle unit sales by JSC AVTOVAZ 2004 2003 Change 000’s units 000’s units % Domestic market 630 626 + 0.6 Export market 92 92 Total 722 718 + 0.6
Assembly kit unit sales 301 203 + 48
RR million RR million Net sales 160,536 130,772 + 23 Operating income 9,496 5,941 + 60
Consolidated Statement of Operations** Year ended 31 December 2004 2003 Change RR million RR million % Net sales 160,536 130,772 + 23 Cost of sales (133,687) (110,120) + 21 Gross profit 26,849 20,652 + 30 Interest expenses (3,451) (3,416) + 1 Other expenses, net (18,823) (14,285) + 32 Net income for the year 4,575 2,951 + 55
Consolidated Balance Sheet** At 31 December 2004 2003 Change RR million RR million % Cash and cash equivalents 11,966 6,871 + 74 Other current assets 42,048 37,364 + 12 Non-current assets 111,845 107,829 + 4 Total liabilities 82,369 72,562 + 13 Minority interest 1,616 1,290 + 25 Total shareholders’ equity 81,874 78,212 + 5
AVTOVAZ | 2004 JSC AVTOVAZ’s share price and dividend development *** For the year ended 31 December 2004, RR 2003, RR Change, % Share price Ordinary share Closing (weighted average) 775.95 774.7 + 0.16 Annual high (weighted average) 896.33 906.42 - 1.11 Annual low (weighted average) 622.32 582.06 + 6.92 Preference share Closing (weighted average) 773.94 471.88 + 64.01 Annual high (weighted average) 823.30 525.68 + 56.62 Annual low (weighted average) 474.91 339.77 + 39.77 Dividends per ordinary share 23 6.0 + 383.33 per preference share 23 95.0 - 75.79
* The AVTOVAZ Group mentioned hereinafter is the parent company (JSC AVTOVAZ or the “Company”) and all of its subsidiaries and associated companies. The references “we”, “us”, “AVTOVAZ”, the Company etc., may be applied to both the AVTOVAZ Group and JSC AVTOVAZ depending on the context.
** Financial information was extracted from Consolidated IFRS Financial Statements of the AVTOVAZ Group.
*** Share price information shown here and below represents weighted average prices of shares of JSC AVTOVAZ at the Moscow Inter-bank Currency Exchange (MICEX). Contents
Address of the Chairman of the Board of Directors of JSC AVTOVAZ I 4 Message of the President – General Director of JSC AVTOVAZ I 8 Five-year financial review of the AVTOVAZ Group I 12 Board of Directors, Board of Management, Management structure I 22 1 Corporate Governance 3 Financial Report Mission and strategic tasks I 30 Management’s discussion and analysis of Code of corporate conduct I 31 financial condition and results of operations I 80 Share capital I 33 The Company’s risks I 84 Subsidiaries and associated companies I 37 4 Financial Statements 2 Business Review Auditors’ report I 88 Production I 40 Consolidated Financial Statements I 89 Logistic support I 44 Environmental protection I 47 Quality I 50 Sales I 53 Customer service I 59 Research and development I 61 Employee and social protection I 72 Address of the Chairman of the Board of Directors
Increasing competitiveness is the imperative of our time
In 2004 the 22 millionth vehicle rolled off the AVTOVAZ assembly line. This is equivalent to the all-Russia park of passenger vehicles and indicates the vital role of JSC AVTOVAZ in making our country an automotive empire. At present Russia holds 12th place worldwide in production of passenger vehicles and the part played by JSC AVTOVAZ is crucial. Over 2004 AVTOVAZ's share in production of passenger vehicles within Russia amounted to 62 %, this taken together with automotive kits supplied to assembly lines of other Russian plants increases our participation in Russian automotive industry to over 82 %. 2004 was a successful year as indicated by our operating highlights all of which exceeded those of 2003, and confirmed the leading position of JSC AVTOVAZ within the Russian automotive industry.
However, we should realize that the strong operational results of 2004 high are the accumulated result of the development strategy we have been implementing over a period of years. During this period new factors and trends developed within the global and Russian automotive industries that represent serious risks and threats to AVTOVAZ's market position. Consequently we must critically re-examine our priorities.
World market factors Striving to cut costs, American and European developing markets and consumers with manufacturers move their facilities on to average income. The South Korean group of The Russian automotive market is set within countries with low labour costs. Following this companies Hyundai developed a competitive a world market gripped by severe competitive trend China displays a vigorous growth in strategy based on a dual principle – struggle for survival. In 2004 manufacturers production of vehicles (according to 2004 “affordable quality” (good quality vehicles at around the world produced 60 million results it holds the 4th place after the USA, affordable prices) and expanding into passenger vehicles, whereas overall Japan and Germany). To date Chinese developing markets. According to 2004 production capacity was 20 million units automotive manufacturers develop ambitious results Hyundai is the leader in sales of more. This excess manufacturing capacity plans for promoting their goods on world foreign-made vehicles on the Russian drives the increasing struggle to win cus- markets, such as the USA, Europe and market. Pursuing a similar strategy, Renault tomers. Many famous automotive companies Russia. This requires close consideration. launches its Renault Logan model to the are suffering losses under pressure from Searching for new market niches Russian market by means of JV Avtoframos. competitors. international companies refocus on
AVTOVAZ | 2004 4 Russian market factors
Increasing pressure from globalization is distorting the Russian economy. The raw material sector is becoming more and more a servant of the world economy, and as a result the competitive position of large Russian manufacturing companies is declining. The lack of efficient mechanisms for state investment in the economy results in surplus income from raw material exports being accumulated in state foreign exchange reserves. This leads to the strengthening of the rouble exchange rate, which in turn has a negative impact on the competitiveness of Russian manufacturers. The global growth in prices for metal and energy, together with the process of Russian prices drawing ever closer to world level, results in an increase in our domestic production costs by comparison to our foreign competitors. Furthermore, as a result of the increase in availability of credit sales, expensive vehicles have become more available to average Russian customers. Each third vehicle sold on the domestic market in 2004 cost over USD 15,000. As a consequence, the competitive price advantage of JSC AVTOVAZ’s vehicles has decreased significantly. Accordingly, JSC AVTOVAZ is faced with the unavoidable necessity of improving its competitive position. Today, simply relying on a development strategy mainly based upon competitive price advantage is insufficient. It is necessary to search for additional Vladimir V. Kadannikov competitive advantages. Chairman of the Board of Directors, Below are some key priorities for addressing JSC AVTOVAZ this issue.
5 Address of the Chairman of the Board of Directors
Closer to our customers Towards world techniques and methods of work organizing, standards of quality and such causes of losses as loose In 2005 JSC AVTOVAZ is planning to discipline, irresponsibility and low employee complete the restructuring of its service-sales At present a common practice for the morale. Neither AVTOVAZ itself, nor our network to a one-level supply system Russian automotive industry is operating a suppliers are an exception here. Over the last designed to improve efficiency of sales and certified system of quality management of few years restructuring AVTOVAZ's meet European service quality requirements. standard ISO 9001:2000. The next step is management system we have significantly Our service-sales network is to become implementing ISO/TU 16949, which becomes improved the economic analysis behind closer to its customers and not lag behind especially important for supply chain managerial decisions on reduction of costs. It our competitors’. Our price strategy is to be management. Only 15 % of our suppliers are is necessary to continue managing resources supported by the competitive advantage of in compliance with world quality standards. and costs of the Company and its supply integrated and high-quality services delivered We will be able to compete on foreign chain, to intensify the economic monitoring of to customers once they have bought our markets and the domestic market (which in processes and to compare our key vehicles. This will be accompanied by a wide effect has become an international one) only performance indicators with our competitors’. range of payment (credit) terms on purchase, if we live up to world quality requirements. It and prompt and high-quality after sales is necessary to increase the efficiency of More innovation service. AVTOVAZ’s audit of its suppliers’ work and to A major element of our strategy continues to eliminate bureaucracy in improving quality. Security, environmental and consumer be cultivating customers’ loyalty. In this area Quality management systems must not be a requirements for passenger vehicles are suppliers of foreign-made vehicles to the “paper tiger”, but bring results that will satisfy constantly being updated. JSC AVTOVAZ is Russian market now offer a trade-in service our customers. We are about to reach a increasing its investments in research and (the customer’s old vehicle is taken in higher level of quality by implementing a new development to comply with updated exchange for a new vehicle, with a system of assembling Kalina model vehicles. requirements. In 2004 investments in R&D, corresponding discount in the price), which is For us all, suppliers and manufacturers, the pre-production and start-up work grew by rather popular in world practice. We need to most important “auditor” of quality is our final 23 % and amounted to RR 2.14 billion. As a determine an appropriate response. customer. result, we made a significant stride forward in Our knowledge of local conditions and designing the Kalina model, applying new market in each Russian region should be Continuing to cut costs techniques of welding, painting, assembling used to the maximum. A leading position in and increase output and organizing production process. sales techniques and after-sale service Another important achievement of the year should become one of our Company’s Every company has potential areas of cost 2004 was the implementation of an in-house strategic goals. reduction, such as excessive processes that designed 1.6-litre engine for the LADA 110 do not bring added value, outdated family. The engine complies with Euro 3
AVTOVAZ | 2004 6 environmental requirements and can In the course of this transformation, oil as a corresponding state policy, within the potentially meet Euro 4. This enables us to fuel resource, is likely to cease to play this framework of which JSC AVTOVAZ would be maintain the volume of export sales on the role by the end of the first third of the century, willing to solve automotive issues. most exacting market, Western Europe. if not earlier. That is why it is imperative that Development of these innovational projects, In order to reach the level of Euro 4 for a automobile transport should move on to as well as fulfilment of Kalina project, proves reasonable price, let alone higher standards, alternative low-carbon fuels, natural gas and that engineering at AVTOVAZ is still alive and the focus of development should be its derivatives, in the short term, and to competitive on the world scale. Given this transferred from the engine itself to the fuel it hydrogen in the long term. high level of uncertainty in the automotive consumes. Further enhancing of Our engineers are in process of work on market JSC AVTOVAZ’s management, environmental characteristics of vehicles on developing engines and fuel systems for market researchers and engineers must seek the basis of traditional oil engine fuels does alternative fuels. The VAZ-2110 dual out and identify market trends in the long not appear promising in the economic sense. modification project is in progress, whereby distance, feel the pulse of the market and This is all the more so given the steep upturn the electronic engine control system is develop strategies to anticipate develop- of prices for oil and oil products which reflects designed to provide a simpler transfer of ments. the growing tension between higher demand, engine from gas fuel to petrol and vice versa. mainly from automotive fleet (95 % of the While operating on gas, the engine is Enhancing competitiveness of the global oil consumption), and the limited ability compliant with Euro 3 and Euro 4 emission Company must become a concern of of the world oil industry to meet this demand. norms. Moreover, expenses for fuel and each employee, from top managers to The global automotive industry receives other running costs are significantly reduced, workers. corresponding signals from markets. while engine endurance is improved and its Beginning with 2003 demand for full-size noise level decreased. off-road vehicles has been falling at a Our Antel 2 pilot vehicle is based on a growing rate. The market is turning its face to number of new technologies and operates on energy conserving vehicles. Engineers all hydrogen and hydric mixtures. This around the world are searching for the ways experimental work assisted us in developing to develop energy conserving and a concept for multi-staged transition to environmentally safe vehicles. hydrogen fuel with interim steps of using On the whole, the global automotive industry hydrocarbon fuels mixed with synthesis has entered a new innovational cycle, a gases and hydrogen. A transition to determinant of which is a XXI century energy hydrogen will be possible as soon as a revolution that is likely to bring about a drastic hydrogen infrastructure emerges and a change in the structure of the energy base of legislative base is founded. Obviously, this the world economy, including transport. primarily depends on adopting a
7 Message of the President – General Director of JSC AVTOVAZ
Towards sustainable development through continuous improving of management
In 2004 AVTOVAZ achieved an historical Financial management and better co-operation with foreign investors record when it became the first Russian corporate governance on the international financial market. automotive manufacturer which In 2004 the AK&M–PACO credit rating produced for the market during the year over Cost management. In 2004 a new system consortium advanced JSC AVTOVAZ one million vehicles: 772,000 finished cars of accounting for inventories has been national credit rating to A, outlook stable, (including 93,000 units for export deliveries) implemented into production departments indicating that JSC AVTOVAZ is a borrower and 301,000 automotive kits. and warehouses. The system uses modern of high reliability. electronic strain-gauge weighing machines to In order further to improve cash flows for A key event of the year was the launch into minimize losses, to decrease labour input JSC AVTOVAZ’s investing activity, the production of the LADA Kalina family. The full and to increase the efficiency of the Company is intensifying its work in the capacity of these new production facilities manufacturing process. Variances between following directions: which comply with world technological actual and planned costs are monitored and • purchases of imported equipment using standards is 220,000 vehicles per year. This new ways of measuring and analysing vari- credit resources of western banks with the can claim to be the first breakthrough in the ances are being developed. corporate security of JSC AVTOVAZ; and Russian automotive industry since the In order to reduce costs the Company’s • leasing schemes as a funding instrument construction of AVTOVAZ. management focused on accelerating for both investing and current activity. In 2004 all aspects of performance improved working capital turnover. As a result, the in comparison with the previous year. Total operating cycle was reduced by 16 days. The Company’s capitalization. In 2004, sales of vehicles, automotive kits and other The most significant aspect of this was a despite unfavourable conditions on the products increased by 17 % and amounted decrease in funds tied up in inventories. Russian equity market JSC AVTOVAZ’s to RR 126 billion. Net revenue rose by 20 % Inventory turnover period was reduced from shares were quoted higher and continued to and totalled RR 5.6 billion. 59 days to 48 days; inventories of vehicles at strengthen their position. warehouses fell from 20,000 to 15,000 units. Operational results of recent years show that Quality of corporate governance. In the JSC AVTOVAZ has founded an efficient Investment management. One of the reporting year greater attention was attached management system complying with the major components of JSC AVTOVAZ’s to compliance with JSC AVTOVAZ’s market requirements. This system contains investment programme focused on model corporate code of conduct, and in particular, all key elements of modern systems for entity range renewal, and this attracted over 75 % the observance of shareholders’ right to managing, from process management to of total capital investment in 2004. Our information. This brought positive results, corporate governance. The ongoing primary funding sources included AVTOVAZ's such as noted by Standard & Poor’s rating improving of JSC AVTOVAZ’s management own proceeds and long-term borrowings. agency in its report “Russian Transparency system is our priority. In 2004 the company’s financing portfolio and Disclosure Survey 2004” published in was enlarged by credit linked notes (CLN), October 2004. In accordance with the report, which were placed for a total of USD AVTOVAZ is one of the leading Russian 150 million in September 2004. The companies based on the improvement in securities issue was another step towards aggregate operational results.
AVTOVAZ | 2004 8 Management of relationship with customers
Closer to our customers. We are changing over to one-level system of vehicle deliveries by concluding direct agreements with dealers and eliminating the chain of distributors. This process will to be finished by late 2005. Our dealership network has continued to expand over numerous regions of the Russian Federation. Our goal is to establish up-to-date dealer centres in all towns with population above 100,000 inhabitants.
Expanding catchment area. JSC AVTOVAZ’s service and distribution network covers all regions of Russia. Each region is provided with a plan of developing the LADA sales and service network according to the size of a regional market. The system of LADA export sales is also developing. In 2004 AVTOVAZ exported 150,000 vehicles and automotive kits. Our exports cover 26 foreign countries (44 % of deliveries) and 9 CIS countries. In order to further enlarge export deliveries a marketing plan for foreign automotive markets for 2005 was prepared and accepted.
Vitaly A. Vilchik Higher quality of services. President – General We have established a superior style of Director of JSC AVTOVAZ service based on guidelines outlined in “Requirements for service and distribution network companies”, which regulate a wide range of operating features of entities, as well as their general processes and technologies.
9 Message of the President – General Director of JSC AVTOVAZ
Avtosfera information portal is designed to Passive and active security. To comply In the future mathematical simulation provide real time information concerning the with stricter European safety requirements technologies will provide high quality status of the Company’s warranty and concerning side-impact and frontal collision production of vehicles through the after-warranty work for all its customers in all new models LADA Kalina and Priora have a configuration of equipment by means of Russian regions. There is also a system for bulkhead with a reinforced framework. Due to electronic documentation. We currently utilise identifying products and sending them back the same reason bodies of LADA 110 and integrated solutions that combine the latest to suppliers for tracing defective automotive LADA Niva vehicles were reinforced in a tools of computer-aided design (CAD), components in vehicles still under warranty. number of ways. As a result, these models computer-aided manufacturing (CAM), In the course of a recent certification audit of retained their right to be exported. Airbags computer-aided engineering (CAE) and quality management UTAK auditors noted and other new systems of passive and active preparation of data management (PDM). In that JSC AVTOVAZ’s sales and distribution safety are being implemented over the whole this way AVTOVAZ is entering a new stage of network had improved in the area of range of vehicles. development. monitoring its relationship with customers. Environmental safety. LADA 2107 vehicles Quality management. JSC AVTOVAZ Diversification of services. In the near are now produced with 1.5 l engines and regularly works on improvement of the quality future a key factor for enhancing sales will be comply with Euro 2 emission norms. A major of its products. This process is based upon a the further development of auto-loans. achievement of 2004 was the start of quality management system which complies Almost all companies of AVTOVAZ's service production of the LADA 110 with a 1.6 l with ISO 9001:2000. and distribution network currently operate engine complying with Euro 3 environmental An important part of this process is the programmes for credit financing of partner requirements capable of subsequent upgrade development of information systems that banks. Share of vehicles sold on credit in our to Euro 4. The new engine is characterized support quality improvement. Products are total sales volume in Russia varies between by better dynamics, greater power and identified and monitored. A specialized 25 % and 30 % and in some regions reaches increased reliability. system informs working brigades of defects 50 %. In 2005 these indicators will continue in the components they have manufactured, to be increased. Consumer properties. Alongside the whether detected during tests, pre-sale renewal of our model range we are preparation or warranty period. A system for Development and quality developing new modifications of vehicle identifying components and sending them management interiors and improvements to the back to suppliers operates for tracing convenience of the passenger compartment. reclaimed automotive components in The Kalina project has become a major The interface between man and machine has under-warranty vehicles. driver of the Company’s technical been improved. Wider use of anticorrosive Measures targeted at quality improvement development. While developing this model, technologies and materials provides and taken in 2004 have brought positive AVTOVAZ obtained more than 90 patents increased resistance to penetrating corrosion results. In comparison with 2003 the number and its specialists designed more than 2,400 over a period of up to six years. of non-compliances and expenses for their unique automotive components. For correcting decreased by 12 % and 16 %, manufacturing vehicles of Kalina family new Reducing development time for new respectively. technologies were adopted, “just in time” models. In the process of developing the A next step in the development of our quality component supplies to assembly line and LADA Kalina family we completed the management system is the preparation and “zero defects” assembling process. The transition to mathematical simulation-based implementation of quality standard ISO/TS working team involved in the project is now in designing and pre-production preparation. As 16949. A preliminary audit for compliance a position to apply their experience in a result, the new model was taken from with ISO/TS 16949 is to be performed in late re-engineering management systems in the concept to the assembly line in less than four 2005, and the certification is due for late production process. This idea is already years, which is more in line with global 2006. being realized in relation to the LADA Priora practice. Mathematical simulation model, which is to replace Lada 110 range of technologies also helped to reduce time and vehicles by 2008. scope of testing.
AVTOVAZ | 2004 10 Procurement and supply groundwork for further pre-production employees engaged across the logistic chain, chain management preparation and tests on pilot vehicles, at which will result in fixed cost savings of 2.5 % which point components may be approved per year. Stricter requirements for suppliers. Basic for production. requirements for suppliers are as follows: In 2005 before a Supply Contract can be • Reducing time for development and signed with AVTOVAZ, it is necessary to Strategic development assimilation of products; undergo procedures of Production Part management • Constant quality improvement; Approval Process (PPAP). • Co-operation in cost management; In 2004 JSC AVTOVAZ continued to develop • Innovative approach to development of new Enhancing modularity of assembling. In its strategic management system intended to products. the production of the LADA Kalina we used secure a stable position for the Company in Certain aspects of these requirements large subassemblies. Alongside with the market conditions of growing competition become more demanding each year. We traditional supplies of such subassemblies as and a rapidly changing economic choose the best suppliers on the basis of climate control, steering assembly and seats environment. The Company’s strategic tenders, which comprise the results of to the main assembly line, a dash panel management system is intended to integrate technological audits and quality audits. This module is also delivered assembled. The and harmonize all current and developing has also brought positive results, e.g. in 2004 module is pulled together in the Final management systems. Further development the number of defects in supplied Assembly division next to the main assembly is intended to optimize the process of making components decreased by two times. line. and carrying out managerial decisions. Contracts with suppliers for 2005 contain We have determined the main principles of new requirements targeted at achieving world Improving logistics of supplies. JSC AVTOVAZ’s strategic management standards including: We are developing our use of up-to-date system. These principles regulate forming • A quality management system certified for information technologies. Just-in-time and implementing our strategy and transfer of compliance with ISO 9001:2000 with deliveries are based on an information goals and targets from the strategic plan to subsequent upgrade to ISO/TS 16949 by system that monitors components along the current production plans. To this effect JSC 1 October 2005. delivery route. A developing system of AVTOVAZ’s budget for 2005 was formed in • Obligatory certification of supplied goods for managing multi-level supplies of components accordance with chosen strategic guidelines compliance with international safety allows for uniting several minor shipments to of the Company for the medium future. requirements and Directives of the United a single major delivery. A developed Nations Economic Commission for Europe. information system for automated scheduling We have achieved much, but there is still • The final goal is the implementation of zero of just-in-time components supplies is more to be done. We will continue to defects with stringent control over all inputs. integrated with the supplies monitoring improve our management system, For each component we will develop a system. increasing our managers’ ability to balanced number of alternative suppliers. We In 2004 five suppliers provided uninterrupted implement the Company’s strategy on a will determine our strategic partners and build just-in-time deliveries. Our efforts brought in timely basis. In this way we intend to long-term relationships with them. the following positive results: the timing cycle ensure the Company’s efficient operation for components shipment and unloading in response to changing environment and Cooperation with suppliers in decreased by 2.5 times and the period for the perpetual new challenges of the development and design. Most major storing stocks in warehouses reduced by 4 market. suppliers conclude with JSC AVTOVAZ days. For LADA Kalina vehicles the period for contracts for scientific and technological storing stocks in warehouses according to cooperation. Mutual work with suppliers on planned norms will be 0.75 days. In 2005 this developing components starts on the earliest system will be extended to all component stage, i.e. with making a project concept. suppliers. The complete realization of this Solutions at the R&D stage lay the just-in-time supply programme will enable the reduction of labour costs and the number of
11 Five-year financial review of the AVTOVAZ Group
During five consecutive years the Group has made successful efforts to improve its financial position by achieving substantial gross profit margins, making considerable investments in development and production of new models of vehicles and restructuring of taxes.
This financial review is intended to give an During 2000-2002 the Russian economy has insight into the Group’s financial performance developed in conditions of hyperinflation. over the last five years. Beginning with 1 January 1999 cumulative inflation was more than 100 %, although the
Yuri B. Stepanov First Vice-President, First Deputy General Director, JSC AVTOVAZ
AVTOVAZ | 2004 12 rate reduced steadily over this period. In All figures in 2000-2002 financial statements Consumer Price Index published by the 2003 conditions of hyperinflation in the are expressed in terms of the measuring unit Russian State Committee on Statistics as Russian Federation ceased. current at 31 December 2002. follows:
The following analysis has been drawn from IFRS financial statements for the past five the consolidated IFRS financial statements. years have been restated using conversion 2000 2001 2002 factors derived from the Russian Federation 1.37 1.15 1.00
13 Financial review
Consolidated IFRS Balance Sheets at 31 December (In millions of Russian Roubles) 2004 2003 2002 2001 2000 ASSETS Current assets: Cash and cash equivalents 11,966 6,871 2,751 4,569 3,792 Trade receivables, net 7,548 6,970 8,247 9,116 9,390 Financial assets 3,624 4,255 1,154 - - Other current assets 10,134 7,079 5,508 6,837 6,986 Inventories 20,742 19,060 18,484 14,661 14,459 Total current assets 54,014 44,235 36,144 35,183 34,627 Long-term assets: Property, plant and equipment 103,158 101,454 98,557 96,023 98,440 Financial assets 2,251 675 466 305 1,538 Investments in associates 1,898 866 754 478 - Development costs 2,818 1,699 714 - - Other assets 1,720 3,135 2,345 1,851 1 ,496 Total long-term assets 111,845 107,829 102,836 98,657 101,474 Total assets 165,859 152,064 138,980 133,840 136,101
LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Trade payables current 18,494 17,495 17,444 16,628 18,591 Other payables and accrued expenses 6,541 5,743 7,525 7,160 5,613 Taxes payable-current other than income tax 4,064 4,289 2,822 3,859 7,782 Provisions 1,208 1,732 4,760 4,367 5,823 Short-term debt 16,249 11,852 9,296 4,947 5,599 Advances from customers 8,207 5,635 1,061 4,230 4,807 Total current liabilities 54,763 46,746 42,908 41,191 48,215 Long-term liabilities: Long-term debt 12,298 10,587 4,005 3,292 8,213 Long-term taxes payable 4,299 4,405 4,491 5,483 12,149 Deferred tax liability 11,009 10,824 10,762 7,711 14,405 Total long-term liabilities 27,606 25,816 19,258 16,486 34,767 Total liabilities 82,369 72,562 62,166 57,677 82,982
Equity: Share capital 28,890 28,890 28,890 30,193 30,211 Currency translation adjustment 1,338 1,289 1,119 961 822 Retained earnings 51,646 48,033 45,218 32,725 13,254 Total shareholders' equity 81,874 78,212 75,227 63,879 44,287
Minority interest* 1,616 1,290 1,587 12,284 8,832
Total equity 83,490 79,502 76,814 76,163 53,119
Total liabilities and shareholders' equity 165,859 152,064 138,980 133,840 136,101
* Changes in accounting policy The Group has early adopted IAS 27R “Consolidated Financial statements and accounting for investments in subsidiaries” and accordingly changed the policy for accounting for minority interest. In prior years minority interest was presented separately from liabilities and equity. From 1 January 2002 minority interest is presented in a consolidated balance sheet within equity, separately from the parent shareholders’ equity. The Group also changed its policy with respect to the method of calculating minority interest. The Group no longer attributes minority interest relating to cross shareholdings.
AVTOVAZ | 2004 14 Consolidated IFRS Statements of income for the years ended 31 December (In millions of Russian Roubles) 2000- 2004* 2004 2003 2002 2001 2000
Net sales 654,435 160,536 130,772 119,432 129,905 113,790 Cost of sales (543,729) (133,687) (110,120) (99, 331) (105,391) (95,200)
Gross profit 110,706 26,849 20,652 20,101 24,514 18,590
Selling, general and administrative expenses (65,567) (16,107) (12,804) (11,993) (10,119) (14,544) Research and development expenses (7,212) (703) (628) (1,425) (2,873) (1,583) Other operating expenses (9,664) (1,036) (2,146) (935) (3,272) (2,275) Other operating income 1,433 493 867 (157) 230 -
Operating income (loss) 29,696 9,496 5,941 5,591 8,480 188
Interest expense (17,926) (3,451) (3,416) (3,077) (3,635) (4,347) Foreign exchange (loss) gain (1,698) 680 (617) (1,266) (83) (412) Monetary gain 19,190 - - 4,187 6 ,421 8,582 Gains on extinguishment and forgiveness of tax debts and other borrowings 23,762 - 325 601 9,786 13,050 Income from associates and joint ventures 1,058 701 333 24 - -
Profit (loss) before taxation 54,082 7,426 2 ,566 6,060 20,969 17,061
Income tax expense (21,818) (2,851) 385 (4,932) (1,913) (12,507)
Net profit (loss) 32,264 4,575 2 951 1,128 19,056 4,554
Minority interest 4,181 330 (83) 4 3,138 792
Net income (loss) attributable to shareholders of AVTOVAZ Group 28,083 4,245 3,034 1,124 15,918 3,762
Weighted average number of ordinary shares outstanding during the year (000's) 14,819 14,445 14,445 14,980 15,101 15,123
Earnings per share (in RR) 1,895 294 210 75 1,054 249
* - this column represents cumulative numbers for the period from 2000 to 2004 inclusive.
15 Financial review
Consolidated IAS Statements of Cash Flows for the years ended 31 December (In millions of Russian Roubles) 2000-2004* 2004 2003 2002 2001 2000 Cash flows from operating activities:
Operating cash flows before working capital changes 71,542 17,427 12,746 12,300 17,847 11,222
Cash provided from operations 58,409 15,493 12 748 6,142 14,769 9,257
Income taxes paid (11,904) (2,650) (1,671) (2,531) (4,341) (711) Interest paid (10,232) (2,084) (3,660) (1,050) (1,563) (1,875)
Net cash provided from operating activities 36,273 10,759 7,417 2,561 8,865 6,671
Cash flows from investing activities:
Net cash used in investing activities (41,074) (10,496) (9,730) (7,852) (6,693) (6,303)
Cash flows from financing activities:
Net cash (used in) provided from financing activities 13,035 4,850 6,446 3,627 (1,197) (691)
Effect of inflation on cash (953) - - (234) (307) (412) Effect of exchange rate changes 287 (18) (13) 80 109 129
Net (decrease) increase in cash and cash equivalents 7,568 5,095 4,120 (1,818) 777 (606) Cash and cash equivalents at the beginning of the period 4,398 6,871 2,751 4,569 3,792 4,398
Cash and cash equivalents at the end of the period 11,966 11,966 6,871 2,751 4,569 3,792
* - this column represents cumulative numbers for the period from 2000 to 2004 inclusive
During the past five years AVTOVAZ has generated substantial operating net cash flow from operations of RR 36,273 million. This, together with restructuring of tax and debt obligations, has enabled the Group to reduce its net current liability position from RR 13,588 million in 2000 to RR 749 million in 2004.
In 2000 - 2001 AVTOVAZ was unable to raise significant external finance and consequently had to utilise the majority of these net operating cash flows to invest in property, plant and equipment. The situation began to change in 2002 when the Group received RR 3,627 million from financing activities, in 2003 RR 6,446 million, including loans from Deutsche bank and Alfa bank, and in 2004 RR 4,850 million, including bonds issued by Vneshtorgbank and credit linked notes placed by Raiffeisen Bank.
AVTOVAZ | 2004 16 Production mix Capacity utilisation
AVTOVAZ recognises the need to improve quality of its vehicles The Company has managed to maintain consistently high levels of in anticipation of the Russian Federation’s entering into the World capacity utilisation over past five years despite challenging macro Trade Organisation and consequent increase in competition from economic factors, among which were high inflation and rising energy western automotive companies. AVTOVAZ is continuously and raw materials costs. working to improve on quality and consumer features of its products. Maintaining high utilisation enables the Company to maximise economies of scale, and keep its vehicles affordable. During the period under review AVTOVAZ changed its product mix, removing the majority of its older rear-wheel drive models from main In 2002 utilisation fell because of a temporary excess of sales of production lines. AVTOVAZ launched the new VAZ-2110 family in imported second hand vehicles. Otherwise utilisation has been kept at 1997 and reached full production capacity for this range in 2001. near maximum levels. Additionally, AVTOVAZ has upgraded its VAZ-2109 family. In November 2004 AVTOVAZ began production of the new LADA KALINA model. AVTOVAZ is planning to reach full production capacity for the VAZ-1118 family in 2008.
Starting in September 2002, the joint venture of AVTOVAZ and GM successfully launched the Chevrolet-Niva model. In 2004 joint venture produced 58 thousand vehicles which generated revenues of RR 13,463 million and a net income of RR 1,378 million.
Further, in order to meet the strict requirements of European quality and toxic emissions standards e.g. Euro 3, AVTOVAZ has been both upgrading its own production equipment and ensuring that purchased components are produced in compliance with these standards.
change in production mix, ‘000 units capacity utilisation, %
17 Financial review
Sales price Operating performance
The graph shows clearly how price rises have been kept below the Over the past five years, AVTOVAZ has recorded substantial rate of inflation and in line with people’s ability to pay. gross profit margins - 17 % on average. In 2000 the Group achieved sufficient gross profit, but it was unable to gain the During the period under review the sales mix has steadily changed corresponding operating income because of a considerable amount of towards more modern vehicles. This did not lead to additional doubtful debts written-off. Between 2001 and 2004, as a result of both increases in sales price due to cost saving initiatives. strictening control over timely payment of receivables and maintaining the gross profit level, the Group achieved substantial gross profit margins of RR 9,496 million in 2004, which is up on 2003 by 59.8 %.
Management recognises the constant need to reduce costs to be competitive on the market and, apart from the measures discussed above, has taken the following steps:
• During 1999 and 2000 AVTOVAZ replaced the majority of foreign suppliers with Russian products. The share of cost of imported components at AVTOVAZ has decreased from 20-25 % to 3-5 %;
• The purchasing system was re-organised. AVTOVAZ monitored purchase costs more closely and negotiated better quality and prices for materials and components;
• AVTOVAZ transferred production of some components to third-party suppliers. This was done primarily to free up premises for installation of new equipment and production of components for new models. This policy has also resulted in a decrease in storage costs and an improvement in inventory turnover; and
• During 2001-2004, JSC AVTOVAZ reorganised its budgeting system by establishing budgets for separate divisions and monitoring performance according to set budgets.
As a result of the above management actions AVTOVAZ has improved results from break even at an operational level in 2000 to substantial operating income in 2001, 2002, 2003 and 2004.
increase in sales price vs infiation and gdp, % analysis of performance, rr bn
AVTOVAZ | 2004 18 Non-operating performance Taxation
Upon privatisation the Group inherited significant debt denominated in The chart shows a decrease in the effective tax burden over the past foreign currencies. Following the overall decline of the Russian five years: from 15 % in 2000 to 6 % in 2004. This is in large part due economy the Group was not able to extinguish this debt in 1993-1998, to favourable changes in tax legislation starting from 1999. resulting in significant foreign exchange losses and interest expenses. However, since 1998 the Group has been carrying out extinguishment However, the tax burden is still significant, and consists of payroll and restructuring of this debt, which was completed by the end of 2003. taxes, property tax, income tax.
The general economic difficulties during 1993-1998 caused the Group Starting from 1998, JSC AVTOVAZ has made timely payments of to accumulate significant tax penalties, fines and punitive interest. its current and restructured taxes. However, starting from the end of 1998 AVTOVAZ management was successful in applying favourable changes in tax legislation and obtaining forgiveness and restructuring of tax liabilities from the Russian government.
These deferrals of tax and debt payments resulted in real economic benefits to AVTOVAZ as reflected in the graph opposite.
The effect of the decline in the purchasing power of the rouble creates a monetary gain or loss. By holding net monetary liabilities (mainly amounts owed to suppliers and the government) AVTOVAZ gained purchasing power. Due to continuous reduction in AVTOVAZ’s net monetary liability position and the reduction in the rate of inflation, the monetary gain also fell steadily over the period 2000-2002.
non-operating income/(expenses), rr m tax burden vs sales, rr m
19 Financial review
Liquidity
Over the past five years AVTOVAZ has experienced difficulties with As the graph opposite demonstrates, there has been a reduction of liquidity. The graph opposite shows that AVTOVAZ's working capital debtors’ days from 32 in 2000 to 17 in 2004. The majority of domestic has improved during the last period but needs to be improved further to sales in 2001-2004 were made on a prepayment basis. However, the achieve positive levels. above measures were not sufficient to finance current operations of AVTOVAZ. As a result, AVTOVAZ had to delay payment to suppliers in By reorganising its sales network AVTOVAZ has significantly improved order to obtain additional financing. The gap between supplier terms collections from customers. This was achieved by locating sales units and debtors’ terms shown below has been the primary source of closer to their markets. finance for AVTOVAZ in 2000-2004.
AVTOVAZ has improved its net current liability position over the period Management have recognised these liquidity problems and has sought by: alternative sources of funds to finance the Group’s operations. In 2003 AVTOVAZ managed to obtain medium term financing from Deutsche • Continued strong gross margins on vehicle sales; bank amounting to USD 240 million and RR 2,275 million loans from Sberbank and Alfa bank. In 2003 the Company issued RR 1,000 million • Reduction in operating costs; short-term bonds and repaid them in 2004. On 18 February 2004, the Company completed the issue of RR 3 • Restructuring of certain current (and long-term) obligations; billion Rouble-denominated documentary coupon bearer bonds of Series 02. The bonds are issued at par value and mature in 4.5 years. • Improvements in cash collections through the restructuring of the In September 2004 an agreement on issuing credit linked notes (CLN) sales and distribution system. of JSC AVTOVAZ was signed. The issue amounted to USD 150 million and was organised by Raiffeisen Zentralbank Oesterreich AG, Austria. However, the need to prepare for the launch of the new Kalina model in 2004 placed heavy demands on the Group’s liquidity position.
working capital, rr m creditors days vs dabtors days
AVTOVAZ | 2004 20 Investing in the future
Management continue to invest in the business to remain competitive.
On average, the Group has spent 1.5 % of revenue on R&D and 6.0 % of revenue on capital expenditures, in line will spending patterns of major international automotive manufacturers. These levels of investment expenditures have allowed the Group to:
• Successfully launch the LADA 110 range;
• Continue working on new products, primarily on LADA PRIORA; and
• Launch the LADA KALINA model.
investment expenditures, rr m
21 Board of Directors as at 31.12.2004
V. V. Kadannikov V. A. Vilchik Y. B. Stepanov Chairman of the Board of Directors, President – General Director, First Vice-President, First Deputy General Director, JSC AVTOVAZ JSC AVTOVAZ JSC AVTOVAZ
N. M. Karagin N. V. Lyachenkov V. P. Yatsenko Chairman of the workers’ union, Member of the Board of Directors, Vice-President, OAO “Foreign Trade Bank” JSC AVTOVAZ JSC AVTOVAZ
AVTOVAZ | 2004 22 A. A. Melnikov S. A. Sychev N. N. Kosov Chairman of work council, Vice-Governor, Chairman of Government, First Deputy Chairman, JSC AVTOVAZ Samara Region Vnesheconombank
Y. S. Zektser A. A. Gavrikov R. L. Sheinin General Director, ОАО “All- Director, General Director, ZAO “Central Branch of Russia Automobile Alliance” Department of Corporate Clients Relations, Automobile Finance Corporation” OOO “Aton”
23 2 Management as at 31.12.2004
V. A. Vilchik Y. B. Stepanov M. V. Moskalev President – General Director, First Vice-President, First Deputy General Vice-President, Strategy and Corporate JSC AVTOVAZ, Director, JSC AVTOVAZ Governance, JSC AVTOVAZ Chairman of the Board of Management
V. P. Peresypkinsky P. N. Skrinsky V. N. Kuchai Vice-President, Human Resources, Vice-President, Production, Vice-President, Marketing, Sales and Cars JSC AVTOVAZ JSC AVTOVAZ Technical Services, JSC AVTOVAZ
AVTOVAZ | 2004 24 V. A. Davydov G. I. Kazakova K. P. Yeroslayev Vice-President, R&D, Finance Director – Head of Treasury, Director, Large Press Shop, JSC AVTOVAZ JSC AVTOVAZ JSC AVTOVAZ
V. K. Kotenev V. I. Ovcharenko V. G. Shendyapin Director, Sub-Assembly, Director, Foundry, Director, Final Assembly Division, JSC AVTOVAZ JSC AVTOVAZ JSC AVTOVAZ
25 Management Structure as at 31.12.2004
Management structure of JSC AVTOVAZ As at 31 December 2004
AVTOVAZ | 2004 26 27 1 Corporate Governance
Our mission and strategic I 30 Share capital I 33 Subsidiaries and associated I 37 tasks companies
We produce quality vehicles for Russian As at 31 December 2004, the statutory value As at 31 December 2004 JSC AVTOVAZ people at prices they can afford, bring stable of the Company’s share capital is equal to owned shares in 229 entities where the profits to our shareholders, increase the RR 16,062 million. It is divided among Company exercised corporate management prosperity of our employees and enhance the 32,124,964 shares of equal nominal value, and control. value of our business for the good of our and consists of: country. • 27,194,624 ordinary shares; and Code of corporate I 31 • 4,930,340 Type A preference shares. The nominal value of each of these shares is conduct RR 500.
In accordance with a survey conducted by Standard & Poor’s rating agency JSC AVTOVAZ became one of the leaders due to overall improvement factors - the Company’s grade increased from 12 % in 2003 to 31 % in 2004.
AVTOVAZ | 2004 28 29 1 Corporate Governance
Our mission and strategic tasks 1.1
In the current conditions of intense competition in the automotive market and higher standards of conducting business AVTOVAZ is seeking long-term success and a stable position, and must therefore exercise foresight and flexibility. Following this principle, AVTOVAZ endeavours to react promptly to external conditions and trends that may require revision of its strategy. In view of this, the Board of Directors of JSC AVTOVAZ has updated its mission, values and strategic objectives.
Our mission and strategic tasks I 1.1
Mikhail V. Moskalev Vice-President, Strategy and Corporate governance, JSC AVTOVAZ MISSION OF THE VALUES OF THE COMPANY COMPANY
We produce quality vehicles for Russian • personnel of the Company people at prices they can afford, bring stable • loyalty of consumers profits to our shareholders, increase the • powerful trade mark prosperity of our employees and enhance the • high scientific and technical potential value of our business for the good of our • solid business reputation country. • social responsibility STRATEGIC TASKS
Leadership Efficiency Flexibility
Consolidate JSC AVTOVAZ’s position as the Efficiently manage resources and costs Implement leading-edge flexible technologies market leader in the Russian automotive Continuously improve quality in production of vehicles industry Develop corporate culture targeted at Promptly respond to challenges of the market Actively integrate the Company into the glob- obtaining results Provide consumers with vehicles that comply al automotive industry with international environmental safety Obtain leading-edge qualifications for our requirements employees
AVTOVAZ | 2004 30 Code of Corporate Conduct I 1.2
The Board of Directors approved a Code of Corporate Conduct of JSC AVTOVAZ on 30 January 2003. This Code was developed based on recommendations put forth by the Federal Commission of the Securities Market of the Russian Federation. Best practices of major Russian companies and suggestions by shareholders of JSC AVTOVAZ were also taken into account in drafting this document.
31 1 Corporate Governance
Code of Corporate Conduct 1.2
In 2004 the Company continued to abide by principles of corporate conduct accepted in business circles and stated in the Code of Corporate Conduct of JSC AVTOVAZ.
JSC AVTOVAZ’s efforts in this area were These include the principle of providing free During 2004 the Board of Directors focused positively noted by Standard & Poor’s rating and easy access to information of the on ensuring executive decisions were taken agency in its report published in October Company’s activities, the neutrality principle in the best interests of JSC AVTOVAZ. The 2004 named “Russian Transparency and which prevents preferential approach to process of convening, preparing and holding Disclosure Survey 2004: Positive Trend certain groups of information users at the meetings of the Board of the Directors was Continues Despite Political Obstacles”. expense of others, and a principle of compliant with requirements of legislation, the ensuring shareholders’ rights to be regularly Charter and JSC AVTOVAZ’s main principles and timely informed of the Company’s of corporate conduct. In accordance with this study JSC AVTOVAZ activities with information adequate for them To properly exercise the functions of the became one of the leaders due to overall to make reasonable and justifiable decisions Company’s Board of Directors, the improvement factors - the Company’s grade as to their shareholdings. In addition, we met committees under the Board of Directors increased from 12 % in 2003 to 31 % in the requirement regarding protection of gave preliminary consideration to most 2004. information constituting a commercial or an significant issues within the remit of the In 2004 for maintaining and supporting the official secret; and proper control was Board of Directors as well as prepared current level of information transparency exercised over the use of insider information. recommendations for taking decisions on while abiding the principles of corporate In 2004 the Company was in compliance with such issues. governance the Company’s information all statutory information-disclosure policy was in compliance with major requirements, in particular, the Company principles of ensuring shareholders’ rights to published financial reports, disclosed receive information of the Company’s information on significant facts and provided activities. relevant information in news bulletins of press agencies and in the corporate internet site of JSC AVTOVAZ.
AVTOVAZ | 2004 32 Share Capital I 1.3
As at 31 December 2004, the statutory value of the Company’s share capital is equal to RR 16,062 million. It is divided among 32,124,964 shares of equal nominal value, and consists of: • 27,194,624 ordinary shares; and • 4,930,340 Type A preference shares. The nominal value of each of these shares is RR 500.
SHARE ISSUES INFORMATION
№ Issue and year of issue Number of state registration Quantity and category of shares Status of issue 1. First issue - 1993 42-1п-0164 5,354,161 cancelled preference Type A as a result 6,424,993 of conversion preference Type B 9,637,489 ordinary 2. Second issue - 1993 МФ 42-1-0283 10,708,321 cancelled as a result ordinary of conversion 3. Second issue - 1998 2-02-00002-А 4,930,340 preference Type A placed 4. Third issue - 1998 1-03-00002-А 27,194,624 ordinary placed 5. Fourth issue - 1999 1-04-00002-А 32,124,965 deemed non-existent, ordinary for the cancelled restructuring of the debt to the budget 6. Fifth issue - 2000 1-05-00002-А 32,124,965 deemed non-existent, ordinary for the cancelled restructuring of the debt to the budget 7. Sixth issue - 2001 1-06-00002-А 32,124,965 deemed non-existent, ordinary for the cancelled restructuring of the debt to the budget
33 1 Corporate Governance
Share Capital 1.3
BONDS ISSUES INFORMATION
№ Issue and year of issue Number of state registration Quantity and category of bonds Status of issue 1. First issue - 1993 МФ-42-2-0213 42,755 certified bearer bonds redeemed 2. Second issue - 2002 4-01-00002-А 1,000,000 certified bearer bonds redeemed 3. Third issue - 2003 4-02-00002-А 3,000,000 certified bearer bonds placed
In 2004 the total number of shareholders decreased from 174,674 to 163,779 as a result of an increase in the number of shares owned by legal entities. In 2004 the share of individuals in the Company’s share capital fell from 17.84 % to 15.88 % and the share of federal property dropped from 2.05 % to 1.47 %.
Composition of share TRANSACTIONS capital of JSC AVTOVAZ (in accordance with the shareholders’ register WITH SHARES of the Company at 31 December 2004) Despite adverse situation on the Russian stock market in 2004 the shares of JSC AVTOVAZ demonstrated progressive movement in quotations and continued to strengthen their position.
The price of ordinary share of JSC AVTOVAZ in 2004 increased by 0.69 % and closed at RR 776.1 per share. The market price of preference shares grew by 63.8 % (the price of the last market transaction in 2004 amounted to RR 778.1 per share), while index 10 of the MICEX exchange rose by 0.71 %.
AVTOVAZ | 2004 34 In the first quarter of 2005 prices of the In 2004 each day brought in on average 294 The same factor for preference shares of shares of JSC AVTOVAZ continued to grow. and 194 transactions with JSC AVTOVAZ’s JSC AVTOVAZ decreased by 0.20 % to By 1 April ordinary shares of JSC AVTOVAZ ordinary and preference shares, respectively, 0.47 %. appreciated by 8.19 %, the price amounted which in terms of volume amounts to 16,491 Another liquidity factor is diurnal volume to RR 830 per share. Prices of preference ordinary shares and 14,467 preference capacity of shares. The higher this factor is, shares increased to RR 863.94 per share shares. the higher level of liquidity is achieved. (+11.3 %), while index 10 of the MICEX Besides the continuing rise in trading By the close of 2004 diurnal volume capacity exchange rose by 5.18 %. volumes of shares of JSC AVTOVAZ the year of ordinary shares of JSC AVTOVAZ In 2004, the total trading volume of shares of of 2004 was marked by improved liquidity, amounted to RR 13,262 thousand with an JSC AVTOVAZ at the RTS and MICEX which is one of major characteristics of increase of RR 4,721 thousand (55.2 %) on exchanges was 4,251,000 ordinary shares shares. 2003. and 3,694,000 preference shares. In 2004, The increase in liquidity is indicated by the Diurnal volume capacity of preference shares similar to the previous year, above 97 % of fall in a relative spread. of JSC AVTOVAZ increased by RR the trading was effected at the MICEX In 2004 a relative spread of ordinary shares 6,479 thousand (202.3 %) on 2003 up to RR exchange. decreased by 0.10 % to 0.36 %. 9,681 thousand.
Change in price per share of JSC AVTOVAZ in 2004 at MICEX, RR
35 1 Corporate Governance
Subsidiaries and Associated Companies 1.4
Trading volume of shares Trading volume of shares Change in dividends payable, of JSC AVTOVAZ in 2004, of JSC AVTOVAZ at MICEX RR million thousands of shares exchange, thousands of shares
Change in price per GDR of JSC AVTOVAZ in 2004, EUR
АВТОВАЗ | 2004 36 GLOBAL REPORT ON ACCRUAL DEPOSITARY AND PAYMENT RECEIPTS OF DIVIDENDS
The year of 2004 was marked by significant quotation fluctuations of the Company’s global depositary receipts (GDR). As a result, prices of the GDRs of JSC AVTOVAZ went down by The Annual General Shareholders’ Meeting 4.41 % (from EUR 20.4 to Euro 19.5) at the Frankfurt stock exchange and remained unchanged held on 29 May 2004 took a decision to pay (EUR 20) at the Berlin stock exchange. dividends of RR 631.6 million for the year 2003. In the first quarter of 2005 prices of the GDRs of JSC AVTOVAZ increased up to EUR 22 by 12.82 % at the Frankfurt stock exchange and by 10 % at the Berlin stock exchange. The General Shareholders’ Meeting ratified the motion to allocate RR 738.8 million generated in the 2004 financial year, for payment of dividends on all shares in the Company.
Subsidiaries and associated companies I 1.4
As at 31 December 2004 JSC AVTOVAZ • 111 entities in which JSC AVTOVAZ owns AVTOVAZ’s subsidiaries and associated owned shares in 229 entities where the over 50 % of capital; companies. Each year JSC AVTOVAZ Company exercised corporate management • 24 associated companies (between 20 % receives income in the form of dividends per and control. These include: and 50 % of capital); shares (interests) owned by JSC AVTOVAZ. - 54 foreign entities (of which 41 entities are • 19 entities where JSC AVTOVAZ has a According to the financial results of 2003 located in the CIS, the Baltic region holding (less than 20 % of capital). subsidiaries and associated companies of and Georgia), including: JSC AVTOVAZ contributed RR 60.5 million of • 31 subsidiaries of JSC AVTOVAZ. A major part of subsidiaries (64 %) is dividends to it in 2004. - 175 entities located in the Russian presented by companies of service and sales Federation, including: network. • 21 entities where JSC AVTOVAZ has a In 2004 we started working at improving 100 % holding; efficiency of corporate governance of JSC
37 2 Business review
Production I 40 Quality I 50 Research and development I 61
In 2004 we produced 718,000 LADA vehicles, We are responsible for our vehicles In 2004, progress in technical development which is by 18,000 units greater than in 2003. throughout production and provision of guaranteed further improvements in vehicle Number of vehicles produced for export sales technical services by our corporate network. quality and strengthening of the Company’s increased by 1,500 units and totalled competitive position and brand image. 93,000 units.
Logistic support I 44 Sales I 53 Social and personnel policy I 72
Over recent years the Company raised its In 2004 AVTOVAZ began implementing a The Company considers it necessary to requirements as regards quality of materials new policy targeted at establishing an take care of welfare, health and morals of its and components supplied for assembly. identical brand for its vehicles. employees and their family members.
Environmental protection I 47 Customer service I 59
AVTOVAZ operates an environmental The Company’s sales and customer management system with a focus on easing service network is a dynamic structure the burden on the environment. encompassing 471 entities.
AVTOVAZ | 2004 38 39 2 Business review
Production 2.1
Production I 2.1
In 2004 we produced 718,000 LADA Pavel N. Skrinsky vehicles, which is by 18,000 units Vice-President, Production, JSC AVTOVAZ greater than in 2003. Number of vehicles produced for export sales increased by 1,500 units and totaled 93,000 units.
Of the total number of vehicles produced 518 thousand units were equipped with electronic engine control system (EECS) (2003: 478 thousand units); 305 thousand units were in compliance with Euro-2 (2003: 170 thousand units); and 14 thousand units were in compliance with Euro-3 toxic emissions norms (2003: 15 thousand units).
AVTOVAZ | 2004 40 VEHICLE PRODUCTION AT JSC AVTOVAZ, UNITS
INDICATORS 2000 2001 2002 2003 2004 VEHICLES PRODUCED LADA 2105, 2107 262,227 231,508 201,187 208,477 207,426 LADA SAMARA 207,821 227,466 208,497 220,400 239,871 LADA 110 161,913 225,679 217,453 222,094 239,516 LADA NIVA AND OTHER 73,549 82,654 75,901 48,918 31,172 TOTAL 705,510 767,307 703,038 699,889 717,985 INCLUDING VEHICLES FOR EXPORT 98,809 85,525 96 ,707 91,576 92,986
The average hourly rate of assembly at the main lines was 164 vehicles per hour in 2004. We produced 247 thousand complete assembly kits.
STRUCTURE OF AUTOMOTIVE ASSEMBLY KITS PRODUCTION, UNITS
INDICATORS 2000 2001 2002 2003 2004 NUMBER OF COMPLETE AUTOMOTIVE ASSEMBLY KITS PRODUCED 108,257 171,767 185,714 203,395 301,308 INCLUDING COMPLETE LADA AUTOMOTIVE ASSEMBLY KITS 36,565 55,696 100,639 97,565 146,660 INCLUDING COMPLETE AUTOMOTIVE ASSEMBLY KITS OF OTHER BRANDS 71,692 116,071 84,619 80,595 100,688 INCLUDING AUTOMOTIVE ASSEMBLY KITS FOR THE PRODUCTION OF CHEVROLET NIVA OFF-ROAD VEHICLE – – 456 25,235 53,960
Production output of spare parts increased by 25.4 % and amounted to RR 3,410 million.
41 2 Business review
Production 2.1
PRODUCTION CAPACITY UTILIZATION PRODUCTION OF VEHICLES AND AUTOMOTIVE KITS AT JSC AVTOVAZ, UNITS The annual vehicle production capacity was 725 thousand vehicles in 2004. The rate of utilisation of vehicle production capacity was 99 %, by 2.3 % in excess of the previous year’s level (2002: 96.7 %). Thus, in 2003 for the first time in its history JSC AVTOVAZ produced above 1 million units of vehicles, including assembly kits.
LADA KALINA
In accordance with the programme of model range upgrade, in November 2004 AVTOVAZ began production of the new LADA KALINA model. Ministry of Industry and Energy of the Russian Federation referred to the launch of new domestic vehicle LADA KALINA as one of the most significant 2004 events in automotive industry.
DEVELOPMENT OF PRODUCTION TECHNOLOGIES
Many new technologies that have been used as part of the LADA KALINA project will result in quality improvements for other new cars. These techniques will be rolled out to other projects. New technologies include: • Welding of hot dipped galvanized steel used in building bodies of LADA KALINA cars. A new approach to the technology of welding and to the equipment used.
For welding bodies of sedan model of LADA KALINA range of vehicles new workshops for welding body space frames and suspended units were established in buildings 01/3 and 01/2 of Final Assembly Division.
AVTOVAZ | 2004 42 New technical solutions for welding:
• Arranging circulation according to principle “a single line for a single model”;
• Applying computer generated simulation of welding workshop operations;
• Upgrading technology of “finishing” bodies, which should ensure a new quality level for joining suspended units (doors, hood, trunk) to a body; and
• New robotic complex of the body welding line, ensuring high quality welding and car body geometry parameters.
Using robots allows us to: • Simulate working processes on line Stricter requirements for body exterior (lashes (ROBCAD); and interfaces), higher exactitude norms for • Manipulate large body units (floor, front, • Simulate production process (SIMPLE++) doors, hoods and trunks (durable shape side plates, doors) by a new generation for determining throughput capacity of the retention after flanging) and new technology robots with lifting capacity of overall welding complex and storage for suspending them onto a body. 150/200/300 kg; capacity of stackers.
43 2 Business review
Logistic support 2.2
For mecting these requirements we introduced:
- High-frequency drying operations on glue after flanging of all suspended units;
- New line on “skids” equipped with manipulators for precise embedding of suspended units into body apertures;
- Designing, manufacturing, finishing and testing of geometric mounting of welding lines on the basis of mathematical models of body components.
• New painting line and new paints/polishes and sealing mastic resins for enhancing body corrosion resistance.
• New assembly line for the manufacture of the LADA KALINA cars is based upon two transportation systems – floor and suspended. 2.2 In the area immediately adjacent to the Logistic support I assembly line there is a shop for assembling large car modules (dashboards, doors, Over recent years the Company raised its suspension towers) and completing requirements as regards quality of materials mechanical units. Upon assembly, all units and components supplied for assembly. and modules are checked for quality, eliminating the potential for installation of These requirements include: defective units. - Certification of the current system of quality management for compliance with ISO 9001:2000 requirements; - Imposition of penalties for spoilage or reprocessing of supplied materials or components; - Compensation of losses caused by failure of defective units and systems encountered during their use and other.
AVTOVAZ | 2004 44 LEVEL OF DEFECTS QUANTITY OF DEFECTS IN IN INPUTS, % UNDER-WARRANTY VEHICLES, ‘000
AVTOVAZ's high requirements regarding We enhance the quality of vehicles together quality of components have made suppliers with international component suppliers, who change their current manufacturing established in Russia joint ventures for technologies to comply with international manufacture of components. JSC AVTOVAZ standards. willingly works with these suppliers. These companies are constantly expanding their range of products.
The Volga industrial area has favourable conditions for the development of automotive component industry. For example, a number of international suppliers operating in this region, such as VALE-95, PHR, FDO Automotive Components, have achieved impressive results, proved by a growing volume of supplies to JSC AVTOVAZ.
45 2 Business review
Logistic support 2.2
To date, approximately 20 companies with foreign capital supply JSC AVTOVAZ, as well as other automotive plants, e.g., the Russian department of Ford.
VOLUME OF SUPPLIES BY COM- PANIES WITH FOREIGN CAPITAL, RR MILLION
Prices for raw materials and components For individual line items of LADA Kalina increased by 15.1 %, including: vehicles the warehouse storage period - For components – by 8.2 %; according to planned norms will be 0.75 - For metals and materials – by 21.8 %. days. In 2005 “just-in-time” deliveries will be spread over all component suppliers To improve organizational structure and according to the terms of new contracts. develop integrated plant logistics, Once fully implemented, the “just-in-time” we worked on separating storage facilities supply programme will allow to reduce labour into an independent unit to be subsequently costs and the number of employees in the integrated into the logistics system of logistics chain, which will result in contingent JSC AVTOVAZ. and fixed cost savings of 2.5 % per year. For pilot projects and “just-in-time” supplies We are developing an information system for we allocated separate departments for monitoring inventories throughout the supply working with suppliers located in the chain from a single supplier to the main Key indicators of our purchasing activity in immediate proximity of JSC AVTOVAZ. assembly line. 2004: In 2004, five suppliers provided uninterrupted As part of developing cooperation with - Monthly purchases were equal to RR 7.13 “just-in-time” deliveries. This had the following companies of the Samara region in 2004, the billion or USD 210 million; positive results: timing cycle for components number of suppliers amounted to 328 entities - We dealt with 736 suppliers; shipment and unloading speeded up 2.5 (45 % of the total number of suppliers). - Over 33.2 thousand individual line items of times and the warehouse storage period was materials and components. reduced by 4 days.
AVTOVAZ | 2004 46 Environmental protection I 2.3
ENVIRONMENTAL PROTECTION POLICY OF JSC AVTOVAZ
Management of JSC AVTOVAZ 5. Not approve any project for AVTOVAZ operates an environmental undertakes to: construction, enhancement or technical management system with a focus on easing upgrading without state environmental the burden on the environment. 1. Treat environmental issues as an approval. integral part of the business management In 2004 the Company’s priority goals in the system. 6. Regularly upgrade qualification of area of environmental protection were: JSC AVTOVAZ’s personnel in the area • compliance with environmental legislation; 2. Ensure compliance with Russian of environmental protection. • satisfying the norms for landfill, waste environmental legislation and standards, water disposal and pollutant emissions; international environmental standards 7. Detect and consistently reduce • broader recycling of production waste; and consumers’ requirements. environmental risks of emergency • environmental protection measures; and situations. • staff training in international standard 3. Consistently develop our own system ISO 14001. of environmental standards to expand 8. Create the conditions for public and raise the requirements of demonstration of our environmental We achieved positive results in each of the environmental legislation. responsibility to any stakeholder. above areas.
4. Continue with progress made on 9. Include environmental management Average annual value of environmental solving ecological problems, improve our requirements while working with facilities of JSC AVTOVAZ for 2004 amounted environmental management system and subsidiaries, suppliers of metals and to RR 7,618 million, including those designed continuously reduce the impact on the components and firms engaged in sales, for: environment. after-sale service and repair of VAZ vehicles. • protection and sustainable utilization of water resources in the amount of RR 6,500 million;
47 2 Business review
Environmental protection 2.3
• protection of the atmosphere in the amount • completed construction of an area for purification technology and quality of of RR 1,029 million; temporary storage of spent lime slurry, to production water. Ammonium nitrogen ratio • protection of soil in the amount of RR prevent topsoil and ground water pollution; in production water was reduced 6.1 times 89 million. (2003: 5.54 mg/l; 2004: 0.90 mg/l), ratio of Expenditures for overhaul of main Foundry, Production Recycling, suspended substance 1.18 times environmental facilities increased by RR Sub-Assembly built temporary storage of (2003: 8.7 mg/l; 2004: 7.37 mg/l), oil products 9 million on 2003 and totalled RR 29 million used mercury lamps; 1.9 times (2003: 5.6 mg/l; 2004: 2.94 mg/l). in 2004. Laboratory Research Division, in cooperation JSC AVTOVAZ’s current expenses on with Environmental Protection Department environmental protection increased by RR and Project Department, brought JSC 85 million on 2003 to a total of RR 759 million AVTOVAZ’s classes of hazardous production ENVIRONMENTAL in 2004, including those allocated to: waste into compliance with Federal Wastes PROTECTION • protection and sustainable utilization of Classification Catalogue; OF THE ATMOSPHERE water resources in the amount of RR Project Department developed projects on 499 million; norms for waste generation and waste • We made a source inventory of freon air • protection of atmosphere in the amount disposal limits for different divisions. pollution and passed the results on to the of RR 78 million; Project Department to adjust the design of • protection of soil against production and the maximum permissible emissions. consumption waste in the amount of RR 181 million; and ENVIRONMENTAL • Black varnish paint was brought out of • recultivation of land in the amount of RR PROTECTION OF painting process on Lak-3 and -4 lines in 1 million. WATER RESERVOIRS Final Assembly. This cut air pollutant The related expenses increased on 2003 due emissions by 34.7 tons per annum. to transportation expenses for waste disposal We continued construction of the second and electricity cost. containment pond. For this purpose between • We initiated transferring transport to JSC AVTOVAZ performed its environmental 2002 and 2004 we allocated RR 51 million environmentally safer fuels, reducing air activity in accordance with licenses, annual of the planned RR 104 million, i.e., we pollutant emissions by 9.0 tons per annum. norms, limits for emission, pollutants performed 49 % of total work volume. The discharge and waste disposal. Measures construction is to be finished in 2006 (the • To prepare for ISO 14001 certification of already taken in regard to sustainable second containment pond will eliminate the JSC AVTOVAZ environmental management reduction of JSC AVTOVAZ’s impact on the risk of flooding the Company buildings’ system we arranged for personnel training environment cover all spheres of cellars during heavy rains, speed up waste in environmental safety of production. environmental protection, including: water purification, and thereby improve the quality of waste waters released into • During the year, 9,625 employees, including Kuibyshev dam reservoir). 1,495 office employees and specialists and ENVIRONMENTAL State Scientific Centre of the Russian 8,130 workers underwent training. For the PROTECTION OF SOIL Federation Federal State Unitary Enterprise whole period of training, 15,725 employees “NII VODGEO” issued a positive expert in total underwent training in the JSC Power Supply Division opinion on “Safety declaration of water intake AVTOVAZ Training Centre. • put into operation an area for preparing facilities of JSC AVTOVAZ from a surface cinder and sand mixture to prevent topsoil source”. • Divisions arrange environmental protection and ground water pollution; We have done much to improve waste water and safety training in accordance with the
AVTOVAZ | 2004 48 JSC AVTOVAZ Training Memorandum. • We issued order "On enhancing On average, 90 % of JSC AVTOVAZ’s documentation flow in environmental employees completed training. protection in accordance with ISO 14001 requirements"; The Company’s achievements in the area of environmental protection won recognition at • We started developing the “Ecology” the EcoMir 2004 national ecological awards. automated management system; JSC AVTOVAZ came third in the “Environmental Policy” category. • In accordance with ISO 14001 requirements The national ecological award EcoMir is a we worked out draft Guidance for public award for outstanding achievements in environmental protection and seven draft environmental protection and safety, as well Company standards: as any other ecological activity targeted at a sustainable development of Russia in the - Monitoring of environmental requirements in 21st century. The award was established by legal and regulatory documents; the Russian Academy for Natural Sciences in cooperation with multi-region public Fund of - Identification and assessment of ecological Charitable Initiatives to promote public aspects; awareness of sustainable development, for each person to realise his own important role - Planning in the environmental management in conservation of the environment. system;
- Internal audit of the environmental ma agement system; PREPARING FOR CERTIFICATION OF - Analysis of environmental management ENVIRONMENTAL system functioning;
MANAGEMENT - Amending and anticipating actions in the SYSTEM environmental management system; and
In 2004, in the context of preparing for - Work procedures for maintaining relations ISO-14001 certification of the environmental with concerned parties. management system, we performed the following activities: • We made proposals on changes in the structure of JSC AVTOVAZ environmental • Analysis of work in 2003 and 2004 under department; and the JSC AVTOVAZ Environmental Management Programme up to 2010; • We signed a contract with a German firm, RWTUV, for an audit of the environmental • Environmental Protection Department management system. issued a Memorandum on environmental protection and safety training of the Company’s personnel;
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Quality 2.4
Alexander V. Vasilchuk Director, Quality, 2.4 JSC AVTOVAZ Quality I
10 rules of the JSC AVTOVAZ Corporate Quality System:
1. We are responsible for our vehicles 4. When impossible to carry out your work throughout production and provision of with the required quality, take your own technical services by our corporate network. decision to stop working. Follow the “three 2. Our supplier shares responsibility for DON’Ts” principle: DON’T accept defects, components we use in production. Otherwise DON’T create them and DON’T pass we do not deal with this supplier. them on. 3. Each employee is always expected to: 5. Continuous training, workplace keep their workplace organised and tidy; communication and competition, visual aids. comply with technology and manufacturing 6. Best control is self-control. Employees who policy as well as personal conduct standards; understand their role in the overall context of and maintain manufacturing discipline and the Company’s goals are key to ensure the self-discipline. quality of products.
AVTOVAZ | 2004 50 7. If defects are identified they should be QUALITY accordance with the recommendations corrected at origin. Quality is achieved from UTAC, an independent certifying through processes, not quality assurance MANAGEMENT organisation (France); of finished goods. SYSTEM • We continue implementing the plant’s 8. Every year, each workplace should have quality information systems that provide five improvements. JSC AVTOVAZ persistently works on information support to the quality 9. The Company’s employees should be improving the quality and reliability of improvement process; consistently proactive in correcting the first vehicles. This process is based on the • Improving methods of statistical control ten defects. quality management system of JSC over production processes; 10. Achieve consistent improvements in each AVTOVAZ (QMS), developed in compliance • Enhancing JSC AVTOVAZ’s organisation new model of vehicles. with international quality standard ISO structure on a process-based approach; 9001:2000. The QMS spans all divisions of • Implementing a system of identification and the main plant throughout the life cycle of the monitoring of automotive assembly units Measures for enhancing quality produce vehicle, as well as our suppliers and dealers. and components; certain results. During 2004, 268 measures All divisions of the Company are currently • mplementing the surface optical digitization were taken, among them 191 brought in certified for compliance with these norms. complex for reverse re-engineering and positive results, others are being operated computer modelling of automotive body and monitored. We implemented over 250 We continue to develop the QMS components, die-stamping and check design-engineering improvements. in the following areas: fittings for both finished models and models Between 2003 and 2004, warranty • Improvements are being made to corporate in development. vehicles’ defects decreased by 11 %. business processes of JSC AVTOVAZ in
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Quality 2.4
Together with high-priority targets and full For further enhancement of the quality example, selectively assure quality on a adoption of ISO 9001:2000, JSC AVTOVAZ JSC AVTOVAZ focuses on the following major supplier’s territory; continued to improve processes by areas: • Ensuring transparency and reducing implementing ISO 16949, which sets stricter • Cultivating our relationship with suppliers pre-production time by implementing requirements on organizing the management based on implementing procedures for the corporate pre-production information system system oriented at meeting customers’ approval of vehicle components production (IS PP). demands. (PPAP - Production Part Approval Process); • High requirements for suppliers and their Also, in 2005 we will install the Andon quality activity targeted at zero defect quality management system on the LADA KALINA assurance of inputs; assembly line, ensuring defect-free car 2005 QUALITY • Optimizing the number of alternative assembly. TARGETS suppliers, determining strategic partners and Ongoing quality enhancing is a strategic building long-term relationships with them; objective of JSC AVTOVAZ and the Company 2005 is a key year for improving quality, in • Finding other ways of cooperation with will invest, develop and improve this field of its particular, quality of automotive components. suppliers of unsuitable components, for activity.
AVTOVAZ | 2004 52 Sales I 2.5
REBRANDING
In 2004 AVTOVAZ began implementing a new policy targeted at establishing an identical brand for its vehicles. As market competition intensifies, the Company needs a unique, powerful brand, which would integrate all families of our vehicles into an organic whole in the consumer’s mind. LADA brand implicates much more than just a design of automotive parts and systems. Theoretically, this trade name is to establish identical emotional characteristics for all families of vehicles in the consumers’ mind and to demonstrate the producer’s confidence in its creative and technical resources, as well as an optimistic future for potential consumers.
Clearly, the rebranding process will take some time. But we are currently introducing changes to certification and accompanying service documentation for vehicles taking into consideration basic elements of the corporate style and registered trade marks. We have developed a unified system of ornamenting LADA vehicles. The current standards of the Company are being changed.
Between 2003 and 2004 we developed recommendations on using elements of JSC AVTOVAZ’s corporate style. The Company has introduced this style on its production site and in its service and sales network.
Vladimir N. Kuchai Vice-President, Marketing, Sales and Cars Technical Services, JSC AVTOVAZ
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Sales 2.5
DOMESTIC Combined with LADA vehicles assembled at Further growth of the population’s real SALES OAO Izh-Avto and ZAO RosLada, sales income, availability of consumer loan totalled at 690 thousand units. During 2004, services and, consequently, a partial shift in In 2004 the passenger car market in Russia the Company’s share of the market was demand from second-hand to new foreign counted 1.502 million vehicles, up on the 41.7 %. brand cars were the distinguishing features of previous year by 4.8 %. 2004. During the year, sales of new foreign During the year, sales of LADA vehicles In 2004, the total share of LADA vehicles on cars reached 406 thousand (including amounted to about 626 thousand units - the market (including assembled at RosLada Chevrolet Niva vehicles). 2.6 % more than in 2003. and Izh-Avto) was 45.9 %.
NEW FOREIGN CARS SALES NEW FOREIGN CARS SALES IN RUSSIA DURING 2003, % IN RUSSIA DURING 2004, %
AVTOVAZ | 2004 54 SEGMENT 2000 2001 2002 2003 2004 Movement 2003, % 2004, %
2004 / 2003, % 1. 1. NEW RUSSIAN-PRODUCED VEHICLES 864 922 886 867 866 -0,2 60,5 57,6 LADA VEHICLES, INCLUDING 638 729 690 680 690 1,4 47,4 45,9 ASSEMBLED AT IZH-AVTO AND ROSLADA (INCLUDING LADA MODELs ASSEMBLED 590 659 590 610 626 2,6 42,6 41,7 AT JSC AVTOVAZ) OTHER DOMESTIC VEHICLES 226 193 196 187 176 -5,9 13,0 11,7 2. NEW FOREIGN VEHICLES 46 79 111 216 406 87,7 15,1 27,1 3. SECOND-HAND FOREIGN VEHICLES 224 360 420 350 230 -34,3 24,4 15,3
TOTAL 1 134 1 361 1 417 1 433 1 502 4,8 100,0 100,0
The second-hand foreign vehicle segment is cars – (manufactured by JSC AVTOVAZ, The majority of Class “E” cars are the Volga giving ground. In 2004, this segment OAO Izh-Avto and OAO RosLADA) account model produced by GAZ (68 % of Class E accounted for 15.3 % of the market, as for most of these vehicles. segment in 2004); the remainder being opposed to 24.4 % in 2003. foreign-made cars. Oka cars produced by SeAZ and ZMA The other domestic auto producers’ share comprise over 85 % of new Class A vehicles. Prior to 2003, Class SUV included mainly decreased somewhat. In 2004, they account- To date, Class B has been represented only LADA NIVA vehicles manufactured by JSC ed for 11.7 % of the market, against 13.0 % by foreign manufactured vehicles. As OAO AVTOVAZ and UAZ cars produced by JSC in 2003. Moskvich stopped to manufacture Class D UAZ. During 2004, the Chevrolet NIVA model cars, they are now represented only by produced by JV ZAO GM – AVTOVAZ made The Class C vehicles comprise the main bulk foreign-made vehicles and small numbers up 35 % of the SUV segment. MPVs are of new vehicles sold in Russia - around 68 % produced by JSC AVTOVAZ. represented by LADA vehicles and of the total vehicle market in 2004. LADA foreign-made cars.
SALE OF NEW PASSENGER SALE OF NEW PASSENGER VEHICLES IN RUSSIA BY CLASS, VEHICLES IN RUSSIA BY CLASS, 2003, % 2004, %
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Sales 2.5
SUVs saw the biggest growth (due to the Chevrolet NIVA’s manufactured by JV ZAO GM – AVTOVAZ) of 3.0 %. Class “C” segment also grew (essentially, due to the Ford Focus, Hyundai Accent, Kia Rio vehicles made in Russia), by 2.6 %.
VOLUME OF SALES OF NEW VOLUME OF SALES OF NEW FOREIGN BRAND CARS BY FOREIGN BRAND CARS BY AUTHORISED DEALERS AUTHORISED DEALERS IN RUSSIA BY CLASS IN RUSSIA BY CLASS IN 2003, % IN 2004, %
EXPORT SALES
93,090 LADA vehicles were exported during Switzeland (56 %) and Austria (21 %). • shipments to assembly plants in Ukraine: 2004. Export sales increased by 1.5 % on In Eastern Europe sales increased in 58,910 vehicles (LADA 2104, LADA 2105, 2003. LADA vehicles were exported to Macedonia (120 %), Bulgaria (65 %) and LADA 2106, LADA 2107, LADA SAMARA 26 foreign countries and nine CIS countries. Lithuania (60 %). CIS countries with higher hatchback and sedan, LADA NIVA); Exports to foreign and CIS countries account sales were Ukraine (48 %), Azerbaijan (25 %) for 44 % and 56 %, respectively. and Moldavia (18 %). • shipments to the assembly plant in A total of 63,750 assembly kits were Kazakhstan: 3,160 vehicles (three-door 2004 saw a growth of sales in Western delivered to foreign assembly plants during LADA NIVA); European countries such as Sweden (69 %), 2004, as follows:
AVTOVAZ | 2004 56 CAR EXPORT STRUCTURE BY MODELS, %
• shipments to the assembly plant in Egypt: 1,680 vehicles (LADA 2107, LADA 110).
Our foreign service/sales network is based on the principle of an exclusive distributor in each country.
Export deliveries of vehicles and automotive kits between 2000 and 2004, %
REGION 2000 2001 2002 2003 2004 VEHICLES EUROPE 42.4 48.3 28.7 33.7 40.9 MIDDLE EAST 14.1 9.2 4.1 5.4 8.6 SOUTH AMERICA 4.0 2.3 22.6 13.0 2.1 CIS 38.4 37.9 44.1 46.7 47.3 AFRICA 1.0 2.3 0.5 1.1 1.1 TOTAL 100.0 100.0 100.0 100.0 100.0 AUTOMOTIVE KITS SOUTH AMERICA 0.0 28.9 1.3 0.9 0.0 CIS 71.4 71.1 92.0 91.1 97.4 AFRICA 28.6 0.0 6.7 8.0 2.6 TOTAL 100.0 100.0 100.0 100.0 100.0 TOTAL. THOUSAND UNITS 103 97 114 113 157
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Sales 2.5
DELIVERIES OF ASSEMBLY KITS
One of JSC AVTOVAZ’s main priorities is to 248 thousand automotive kits and power Kherson Automotive Assembly Plant, which deliver automotive kits and power packs to packs to external assembly plants in Russia stopped assembling LADA vehicles. external assembly plants in Russia and and abroad. Yet JSC AVTOVAZ maintains production abroad. It allows to maintain the output which volumes and deliveries of automotive kits would meet the demand for LADA vehicles While planning deliveries of automotive kits by their redistribution among stable and at the same time to discharge facilities for 2005, we took into account results of the fast-developing companies of its assembly for manufacturing new ranges of cars. While previous year, our marketing experts’ network. making decisions on organizing external forecasts for situations on different markets assembly, we consider a number of and the necessity of maximum utilization of economic and social indicators in regions our own assembly lines. and prepare a flexible schedule of deliveries of automotive components, thanks to which Plans for 2005 allow for some reduction in we are able to timely redistribute delivery production volume of vehicles made with volumes among partners depending on the AVTOVAZ's automotive kits at Izhevsk business climate. By the close of 2004, Automotive Plant and ZAO RosLada. In addi- AVTOVAZ had produced and delivered over tion, we ceased delivering automotive kits to
AVTOVAZ | 2004 58 Customer service I 2.6
The Company’s sales and customer In 2004 we continued bringing the The requirements were approved for three service network is a structure Company’s sales and customer service categories of dealers. Depending upon target encompassing 471 entities: network into conformity with our corporate retail sales (2,400, 1,200 or 600 vehicles per requirements. When renewing dealership annum), they regulate the floor space of the • 63 distributors; agreements, JSC AVTOVAZ considers the salesroom, premises for customers, repair • 147 direct dealers; and possibility of aligning companies with the and maintenance facilities, hard-surface • 261 regional dealers. Requirements for companies of AVTOVAZ's vehicle storage area, the list of equipment, sales and customer service network. These types of services, etc. requirements set up the main characteristics Steps taken in 2004 increased vehicle of buildings for car sales, service centres, deliveries to the regions significantly, bringing premises for customers, types of services, products closer to customers. The vehicle the list of basic equipment and information inventory level at the regional distribution support. centres declined from 19,000 vehicles at the beginning of 2004 to 14,500 vehicles at year-end.
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Customer service 2.6
Domestic vehicle sales in 2004 increased by the introduction of uniform selling prices for was sold by autoloan programmes of dealers 4 % on 2003. spare parts. with partner banks. In 2004, vehicle maintenance services One of the major tasks JSC AVTOVAZ faces We are working intensively on credit sales of provided by subsidiaries of the Company’s in 2005 is to align the companies of its sales our vehicles. In cooperation with ZAO sales and customer service network and customer service network with European Automobilny Bankirsky Dom, we have increased by 7.3 %. requirements and to adopt a one-tier delivery launched a car loan programme. In 2004, system. Companies with coordinated 16,000 vehicles were sold through this development plans for distribution centres programme. To date almost all companies of that are in full compliance with JSC JSC AVTOVAZ’s sales and customer service AVTOVAZ’s requirements will be offered network, together with partner banks, offer direct contracts for car deliveries in 2005. their own autoloan programmes. Many dealers organize space for several bank One-tier sales system applies to direct representatives directly in their showrooms, contracts for car deliveries concluded with so buyers can choose from among several retail dealers based on the size of the different loan programmes. In some regions regional market and product demand. credit sales account for up to 40 % or 50 % A one-tier sales system is designed to of total sales of LADA vehicles. improve sales efficiency by cutting out the additional link of wholesale dealers in the In 2004, credit sales of LADA vehicles dealership chain. totalled 170 thousand units. The volume of Along with restructuring the sales and credit sales in money terms exceeded USD customer service network, JSC AVTOVAZ is 750 million, i.e., each fourth LADA vehicle increasing domestic sales of original spare parts. In 2004, domestic spare parts sales (under repair, maintenance and warranty) exceeded RR 4 billion, a 23 % increase in VOLUME OF AUTOMOBILE MAINTENANCE SERVICES PROVIDED BY comparison with 2003. SUBSIDIARIES OF jSC AVTOVAZ SALES AND CUSTOMER SERVICE NETWORK BETWEEN 2000 AND 2004 (IN COMPARABLE PRICES AS OF 01.01.2005), RR THOUSAND In 2005 we plan to boost production of spare parts for the domestic market by RR 100 million. We will pay special attention to developing a regional network of warehouses for spare parts. We have already established 16 warehouses in Moscow, Stavropol, Nizhny Novgorod, Rostov, Saratov, Mineralnye Vody, Chelyabinsk, Naberezhnye Chelny, Voronezh, Krasnodar, Volgograd, Ekaterinburg, Ufa and Chekhov. In 2005 the number of warehouses will grow to 20. To prevent distribution of pirate products we will protect our original spare parts with patents. We are also planning to complete
AVTOVAZ | 2004 60 Research and development I 2.7
Research and development objectives in 2004
In 2004, progress in technical development guaranteed further improvements in vehicle quality and strengthening of the Company’s competitive position and brand image.
equipped with 1.45 litre engine and electronic safety requirements and support continuing engine control system. This configuration export sales of LADA NIVA model. satisfies Euro 2 toxic emission norms and enhances consumer aspects of the model in regard to cold start, etc. LADA SAMARA In early 2004 we introduced for LADA 2107
Victor A. Davydov and LADA 2105 models a modified scheme In line with the programme of technical Vice-President, of switching on rear fog lights and began upgrading of manufacture and LADA range Research and Development, installation of an additional stop light in changeover, in 2004 we stopped assembling JSC AVTOVAZ accordance with legislation requirements. LADA Samara vehicles on the main We have found an efficient way of ensuring assembly line and replaced them with side impact safety in LADA NIVA vehicles. upgraded LADA Samara 2 models. In Minor changes to the vehicle body and a September 2004 we began production of more pliable steering wheel on collision meet three-door LADA 113 Samara hatchbacks.
UPGRADING OF CURRENTLY MANUFACTURED MODELS
LADA 2107, 2105 and LADA NIVA ranges
In 2004, we finished upgrading body parts and steering wheels of LADA NIVA vehicle to make it comply with passive safety requirements. LADA NIVA vehicles are exported. In January 2004 we started production of LADA -2107-20 vehicles
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Research and development 2.7
To meet consumers’ needs, in February LADA 2120 and an agreement on technical support for 2004 AVTOVAZ started manufacturing on the development, adaptation and launch of a main assembly line of LADA 114 Samara This minivan developed at JSC AVTOVAZ new-generation electronic engine control and LADA 115 Samara vehicles in de-luxe has series-produced units and systems. Its system (EECS) based on M 7.9.7 controller. configuration comprising electric window all-metal integral body and unique spacious In September 2004 we started production raisers, isothermal (heat-absorbing) windows, cabin can comfortably hold seven people of vehicles equipped with a 1.6 l engine front seats electric heater and other fittings. and with folded rear seats the baggage and a new generation EECS based on compartment will be even more spacious. M 7.9.7 controller. In 2004, the main objective of 2120 project Parallel to adapting Bosch’ new controller, LADA 2110 was to lower vehicle cost by unitizing AVTOVAZ's specialists developed and components with current production. In 2004, we worked on expanding the vehicle’s offered for production the Yanvar 7.2 diversity in its body and interior. We controller – an equivalent to M 7.9.7 developed a modification with six seats, controller. providing easier access for back seat The new engine is environmentally safer, passengers. The second row comprises more powerful and reliable and possesses two single seats regulated similarly to the such consumer properties as a cold start, a front ones. The seats are maximally unitized cold run, zero defects of ignition unit, with 21213 seat series, and therefore the individual control over fuel-air ratio and cost of the seat set is lower than that of a ignition in each cylinder. This engine satisfies seven-seat set.
In 2004, to meet strict European safety requirements on side and frontal offset impact, JSC AVTOVAZ made a series of works on reinforcing the framework of LADA 110 body and updating its interior with all necessary tests. As a result, LADA 110 family of vehicles obtained European certification and homologation and upheld its right to sell its products on the Western market. The export variant of LADA 110 vehicle has a three-point safety belt for a passenger sitting in the middle of a back seat. We are working on improving passive safety by installing IMPLEMENTATION OF A Euro 3 environmental requirements with airbags and a system of load retention in the NEW 1.6 L ENGINE subsequent upgrade to Euro 4. baggage compartment. With a view to higher active safety and Range of vehicles equipped with comfort of vehicles we finished preproduction a new engine Eight-valve and 16-valve 1.6 l engines bear a of steering booster for the LADA 110 family In 2001 Bosch, a German company, and number of structural alterations that notably in 2004. JSC AVTOVAZ concluded a supply contract enhanced the main technical features of the
AVTOVAZ | 2004 62 LADA 110 family. The power plant allows LADA 21214 family of vehicles equipped with A SYSTEM OF TEST different nominal power, which is currently a new EECS based on M 7.9.7 controller. FACILITIES AND ROADS 59.5 kW and 65.5 kW for the eight-valve In the third quarter of 2004 we started engine and 16-valve engine, respectively. production of LADA 2110 family of vehicles A system of test facilities and roads located The new engine contains an improved equipped with a 1.6 l engine and new EECS 50 km away from the city allows reducing electronic system and emission reduction based on M 7.9.7 controller. The LADA 110 costs of expensive and long tests for system, updated buckets, crankshaft and family of vehicles obtained homologation from endurance and speed. The facilities are
designed for long-run and climate testing of cylinder barrel. Design of a bucket for UTAC (France) and thus proved their compli- vehicles. 16-valve engine prevents it from touching with ance with European standards. The main facility is a circular motorway of valves in any contingency situation. The new generation EECS allows us to 10 km in length and 12.5 m in width. It has In January 2004 we started production of significantly improve consumer properties of a three traffic lanes, each with a determined Samara 2 family of vehicles equipped with the vehicle (a cold start, a cold run, zero defects idle speed: 60 km/h on the first lane, new EECS based on M 7.9.7 controller. of ignition unit, individual control over fuel-air 120 km/h on the second and 180 km/h on In October 2004 we started production of ratio and ignition in each cylinder etc.). the third. Maximum speed on the motorway exceeds 250 km/h.
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Research and development 2.7
By setting a precise speed it is possible to PROJECTS CARRIED LADA PRIORA provide a structural load repetition day by OUT IN THE AREA day, year after year and thus identical test OF TECHNICAL In 2004, we continued preparing for the DEVELOPMENT launch onto the market of a new modification of vehicles with upgraded design and One of the strategic tasks of joint activity is improved quality, the LADA PRIORA family, enhancing the quality of vehicles and their intended to replace the LADA 110 range. consumer properties. Our model range is The modifications within the range include developed in line with modern trends in the sedan, hatchback and station wagon. global automotive industry that are focused The new LADA model is the most up-to-date on the requirements and specific features of among Russian vehicles and surpasses the Russian automotive market. many European counterparts in We at JSC AVTOVAZ are continuously aerodynamics. The car’s body was designed working on establishing relatively low and using mathematic simulation. conditions. Safety drive at high speed is stable prices for our products. This work is ensured by a solid barrier railings and led in different areas, such as cost reduction Soft and elegant lines of frontal and back one-level road without crossings. in production, supplies and sales and bumpers, hood and wings harmonize with The dynamometric road of the test ground is ensuring quality on the basis of modern the new original lamp-cluster and back lights. used for alpha and driving tests for methods of parallel engineering and quality An open rear wheel arch, a new form of a measuring speed, economic indicators and management system. face bar, trunk lid and lights give a lighter feel other parameters. In fact, this is the only site to the exterior. The baggage compartment for determining the potential impact of minor changes in vehicle design on drivability and for perfecting the whole functioning process of vehicle units and parts. In 2004, a start-up complex of a road repair point was launched on the test grounds. The complex has 16 technological equipment units and is designed for an annual test drive programme of 1,730 thousand kilometres. During 2004 design works at the start-up complex cost RR 1,735.5 thousand. At the test ground we tested not only AVTOVAZ vehicles, but also the vehicles of UAZ, Izh, GAZ and a number of foreign automotive firms, as well as products of tyre manufacturers. We also carried out endurance tests for vehicles and tests for suitability in Russian climate, alpha and driving tests for confirmation of declared features.
AVTOVAZ | 2004 64 remains similar in size to that of LADA 110 The dashboard has soft rounded lines. Even both external and in-house origin. vehicles. base configurations are equipped with Production facilities for this model are located electric power steering. Enhanced dashboard in existing and in reconstructed additional New lighting technology has a modern style visibility and controls ergonomics ensure areas. We plan to apply to this vehicle new and updated technical features compared to extra comfort for the driver and a safer drive. technologies used for the LADA KALINA LADA 110 vehicles. The dashboard contains a modified heater project. In 2004, based on issued Besides the new body shape, its frame has with upgraded features. Air streams are engineering documentation we determined been significantly updated. Due to a better distributed throughout the cabin. The volumes of preproduction preparation and the reinforced loading pattern the vehicle is in standard air-induction system has an air equipment set, gave technical design compliance with modern European safety cleaning filter. assignments on equipment with a long requirements in regard to side impact and Body parts exposed to corrosion are made of manufacturing (updating) cycle and approved frontal offset impact with dislodgement. zinc-galvanized metal. Taken together with the configuration. The capital costs budget The vehicle safety system also comprises other applied methods of corrosion protection was approved as required for design and safety belts with additional holding lock, and this provides car body resistance against purchasing of production machinery and driver and passenger airbags. In developing penetration corrosion for a period of six equipment. the new interior, designers and engineers years. endeavoured to create a modern and The body framework of PRIORA vehicle has comfortable cabin. been adapted for mounting power plants of
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Research and development 2.7
PROJECT 1121 OKA-2 JSC AVTOVAZ is currently working on a LADA ANTEL 3. The main difference Engineering departments of JSC AVTOVAZ between this modification and the previous have developed a design of PROJECT 1121 one (LADA ANTEL 2) is in a hydrogen vehicle, which meets modern levels of generator working on hydrocarbon fuel and automotive industry development and meets located within the car body. the Class A criteria under European We are currently developing a LADA classification. Broader wheel track and longer ANTEL 4 modification, which represents a vehicle base ensure additional robustness new generation of AVTOVAZ vehicles and improve running characteristics. running on fuel cells and combining more The model is to be equipped with a range of LADA ANTEL 1 and LADA ANTEL 2 advanced technical solutions. This model will power plants that contain dispensed fuel modifications have already been be a frame vehicle with a non-bearing car injection, satisfy updated environmental demonstrated at motor shows. In autumn body and all systems located on the frame. requirements and improve running 2004, the LADA ANTEL 2 was exhibited Such a design seems to be the most efficient characteristics of the vehicle. Four-cylinder among other AVTOVAZ vehicles at the for future production technology and engines produced by AVTOVAZ and International Motor Show in Paris. Specialists manufacture organization of these vehicles. Melitopol Motor Plant can be mounted on this praised its high technical standards of model. manufacturing. In 2004, the Company issued a full package of engineering documentation for the first series of sample vehicles, manufactured a prototype for testing and exhibition purposes, five full-scale prototypes and five car bodies.
LADA ANTEL
In late September 2004 the Board of Directors of JSC AVTOVAZ made a decision on financing the LADA ANTEL project (vehicle running on fuel elements) in 2005 and 2006.
AVTOVAZ | 2004 66 LADA SILUET
In 2004, we continued working on the design of a vehicle on a new Class C platform. The model is to be developed in the next five years. This new Class C project will meet all the current and anticipated legislative requirements applicable to European and Russian markets up to the year 2012. Design of the body will ensure compliance with the following perspective safety requirements:
• front collision (Rule R94 EEC UN) and • requirements of insurance companies in side impact (R95)1; respect to the cost of restoration repair • pedestrians safety requirements (Draft work after collision at a low speed; Directive 2003/0033, effective from 2005)2; • requirements of energy absorption to be • requirements of the EuroNCAP3 met by interior design parts during crash programme (anticipated adoption – 2012); tests.
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Research and development 2.7
Sports vehicles
LADA -21126-07 Super 2000 R vehicle
In 2004 we developed engineering documentation for the LADA - 21126-07 vehicle, equipped with a 2.0 l engine and four-wheel drive transmission in compliance with new technical requirements of the Federation Internationale de l’Automobile (FIA) Super 2000 Rally. The Company has manufactured a prototype, carried out aerodynamic tests and finished works on suspended body units and aerodynamic elements.
AVTOVAZ | 2004 68 We are currently working on manufacture of original units and parts of the vehicle. Assembly of the first sample model has started.
LADA -21106-37 Touring vehicle LADA -21123-06 vehicle (Group N)
In the reporting period we carried out We have developed engineering engineering works on finishing intake, documentation for the LADA - 21123-06 exhaust and fuel systems of C20XE 2.0 l coupe and manufactured 10 sample vehicles. engine of the LADA - 21106-37 vehicle with a We have tested two prototypes in motor rally view to 2004 circuit race. and curcuit races of 2004.
1 After having joined the Geneva Agreement, Russia has committed to test cars in accordance with the EEC UN Rules. Starting from 2003, for certification of new models front and side collision in accordance with Rules 94 and 95 have become mandatory.
2 Primary requirement of the standard is that a pedestrian, when hit by a car moving at 40 km per hour, must stay alive and not seriously injured.
3 The programme of testing passive protection systems of new cars – EuroNCAP (New Car Assessment Programme) - was launched in 1997. The programme has been designed jointly by the governments of Sweden, Germany, UK, the Netherlands and France, in conjunction with the European Commission and reputable motorists’ clubs from Europe. From inception to date, the EuroNCAP programme by many parameters remains the strictest programme for vehicle testing. For example, the speed of the front crash test with the 40 % lap (64 kph) for this test is 8 kph higher than the requirement set for car certification in Europe. Besides, this testing includes imitation of two side collisions – with a flat barrier and with a lamp post and collision with a pedestrian. The latter is performed to establish the level of danger that a car presents to the life of a pedestrian. For the purpose of determining the pressures applied to a human body at collision, special design crash test dummies are used which have multiple implanted sensors.
69 2 Business review
Research and development 2.7
LADA Revolution vehicle
In 2004, the LADA Revolution vehicle won top prizes and praise from professionals in automotive sports, journalists, motor show visitors and spectators of the Russian Championships on circuit races. • August 2002 – the first appearance of the sports two-seater roadster at the Moscow International Motor Show; • September 2003 – presentation of LADA Revolution race car at the Frankfurt International Motor Show; • December 2003 – winning nomination “The Best Russian Project” in competition organized by Klaxon magazine; • March 2004 – exhibiting the Russian sports prototype at the annual Geneva International Motor Show; • May 2004 – demonstration race in LADA Revolution class of vehicles at the opening of the LADA National Racing Series of the Russian Championship on circuit races in 2004 sports season; • July 2004 – an official start of LADA Revolution racing team at the Fourth Russian Championship on circuit races; and • August 2004 – presentation of LADA Revolution “acting” sports prototype at the 2004 Moscow International Motor Show.
TECHNICAL FEATURES of LADA Revolution vehicle: Weight ...... 670 kg Engine ...... Based on 21083 model Type of engine ...... In-line 4-cylinder with 4-strangler intake, mounted transversally Cubic capacity, sm3...... 1,600 Engine capacity, litres per minute/rpm ...... 165/7,400...7,600 Engine torque, Nm/rpm ...... 157/5,800...6,200 Transmission ...... 5-section cam with sequential gear shift Front suspension ...... Independent, double fishbone suspension Back suspension ...... Independent, multi-fishbone suspension Front brakes ...... Ventilated plates of 315 in diameter with 4-bucket support Back brakes ...... Ventilated plates of 315 in diameter with 4-bucket support Driving wheels ...... Rear Tyre size ...... 210/620 R17
AVTOVAZ | 2004 70 The LADA National Racing Series (the LADA • repeated champions in Russian car circuit NRS) has become the most popular racing races, autocross and winter track racing. series in Russia in 2004. Success of the LADA NRS project in 2004 is The LADA National Racing Series, supported by positive wide press coverage of sponsored by JSC AVTOVAZ, has become this event as one of the most significant in the most popular racing series in one Russian automotive sports. season. In 2004, the LADA NRS hosted to: 384 journalists from 150 mass media were • 134 sportsmen in 49 teams from Moscow, accredited for the contest, including St. Petersburg, Nizhny Novgorod, Samara, representatives of 127 print and electronic Togliatti, Ekaterinburg, Ulianovsk, Ryazan, mass media, camera crews of 30 federal and Kursk, Kurgan, Armavir, the Moscow region regional TV broadcasters. Printing run of (Mytischi, Khimki, Ramenskoye, Lyubertsy), press publications about the LADA NRS the Leningrad region (Vyborg), Kherson amounted to 79,764,704 copies, total TV (Ukraine) and Forli (Italy). time exceeded 59 hours. The racing project’s High professionalism of pilots made the 2004 high profile was also proven by Sport sports season spectacular and channel (VGTRK)’s official coverage watched intriguing. In the five classes of LADA NRS by 54 million people. Sport TV broadcast all participated: stages of the LADA NRS in 2004. In the • ex-pilot of Formula 1 and IRL, 2005 sports season automotive sports fans • racers taking part in Formula-3000 will be able to follow racing in the LADA (Formula -2), Revolution class. Besides Sport TV, the • young Russian pilots successfully LADA NRS got coverage on national TV participating in European Formula races, channels, such as First Channel, TVC, NTV, • an eight-times champion and two 7 TV, M1, DTV, RBC-TV, NTV+sport. seven-times champions in Russian carting contests,
71 2 Business review
Employee and social protection 2.8
Employee and social protection I 2.8 Social policy of JSC AVTOVAZ
Vladimir P. Peresypkinsky Vice-President, Human Resources, JSC AVTOVAZ
The Company considers it necessary to take care of welfare, health and morals of its employees and their family members.
The Company endeavours to provide each employee with conditions for maximum use of his or her creative potential, professional skills and talent.
The Company maintains favourable and safe working conditions, social guarantees that create employees’ confidence in the future.
The Company treats The Company does its best to provide for a non-hazardous production process environment with care and improved ecological properties of manufactured vehicles.
The Company is always ready to talk We talk openly to the media about the Company’s activities in an unbiased manner. We are ready to cooperate with state authorities of all levels to implement programmes targeted at enhancing welfare of the Russian people and developing the Russian automotive industry.
AVTOVAZ | 2004 72 HIRE AND mechanical-engineering technical school, Togliatti technical college, Professional DISMISSAL technical schools Nos. 47, 51, 45 etc. Annually, the above training institutions On average, in 2004 JSC AVTOVAZ prepare 1,600 technicians of 15 vocations in employed 116,808 employees. the sphere of car manufacturing, their training In 2004, the Company hired 9,900 people, period is 2.5–3 years. In the course of including: 9,170 as workers; and 730 as industrial training and practical training, managers, engineers and technicians. The students are selected for their subsequent newcomers included 261 graduates of higher employment in the Company. educational institutions, 1,363 graduates of Engineers and technicians for colleges and technical schools, JSC AVTOVAZ are trained in higher 176 graduates of secondary schools and education establishments of Togliatti, 1,132 former servicemen discharged from Samara, St Petersburg, etc. JSC AVTOVAZ the Russian Armed Forces. The average age continued to cooperate with Samara State of engineers and technicians is 42.2 years, of Aerospace University in the sphere of workers is 39.1 years (in 2003: 42.1 years contractual training of engineers in the and 39.7 years, respectively). 61.1 % of Machinery Building Faculty of the University, newly hired workers are under 25 years old. located in Togliatti. Experts of four specialist During 2004, 11,790 people left the areas were trained at the Company’s Company, the staff turnover factor was request. In 2004, the Company continued 8.3 %. The workforce reduced by 1.4 %. professional development of its personnel.
PERSONNEL STRUCTURE, % PERSONNEL TRAINING, NUMBER OF EMPLOYEES
3,860 employees were retrained and gained new skills, 23,502 employees improved their qualification, 14,709 employees were trained in the Training centre of JSC AVTOVAZ and PROFESSIONAL other training establishments. TRAINING In 2004, the Company continued professional development of its personnel. Training in the technical skills most required 46,679 employees, including 15,282 at JSC AVTOVAZ is provided to our managers, technicians and engineers were employees in the Company’s educational retrained and gained new skills or improved institutions, specifically in Togliatti their qualification.
73 2 Business review
Employee and social protection 2.8
SALARIES LABOUR AND Health care at JSC AVTOVAZ is characterized by a multi-level structure of AND WAGES HEALTH PROTECTION health maintenance satisfying the strictest up-to-date requirements. The first level of this In 2004, salaries and wages were indexed in In 2004, more than 65,000 tests of sanitary structure comprises 13 prevention line with the Company’s operating results and and physiological factors of the working departments including 70 medical stations, the changes in prices for consumer goods space in all the Company’s divisions were 21 workshop health-protection homes, and services. While the price index went up performed to ensure compliance with sanitary gynecologist’s and dentist’s consulting by 16.1 %, salaries increased by 25.2 %. requirements. Commissioning of the new rooms, all visited by 108,678 employees From 01.02.2004, tariff rates and tax rates up-to-date equipment and 100 % control over in 2004. were raised 5 % and on 01.07.2004 a further introduction of new materials into the 3.3 %. In December 2004 the average salary production process and of their utilisation (including of production workers) amounted significantly improved labour safety in the to RR 9,799. workspace. number of injuries per 100 employees, AVERAGE SALARY, RR As a result of the above activities we frequency ratio managed to: - improve working conditions for almost 3,000 employees; - lower the general level of industrial injuries; - reduce the average number of disability days per one injury; and - reduce mass injuries.
AVTOVAZ | 2004 74 The second level is presented by a health RECREATION, In 2004, in accordance with the workers’ diagnosis polyclinic and its branches which collective agreement, we carried out a rendered 40 kinds of specialized services in PHYSICAL FITNESS package of social programmes for the regard to 1,430 thousand visits in 2004. AND SPORT Company’s employees. ACTIVITIES The third level functions are performed by twenty-four-hour and day hospitals, where To ensure recreation, healthy lifestyles, Participation in social programmes of pension 2,191 operations were performed and physical treatment and sports activities of and housing accruals, medical insurance, 5,188 people were treated in 2004. Company employees and their families, in dispensary and polyclinic service, partial 2004, JSC AVTOVAZ operated 10 recreation compensation of catering and travel The health care system at JSC AVTOVAZ camps, four children’s health camps, one expenses, vouchers for treatment and rest, has both a comprehensive health diagnosis community centre, the Olymp sports complex, brings considerable extra benefits to our and a medical rehabilitation service based on the Volgar sports complex, the Torpedo employees. health-protection sanatoriums “Prilesje” and athletic field, the Sputnik sports complex, one “Alye Parusa”. In 2004, 6,763 employees ski complex and one water sports complex. were treated in recuperation sanatoriums and More than seven thousand children were 1,554 employees underwent treatment in involved in the sports activities in six sports health resorts of other Russian towns. schools and seven sports centres. On average, 200,000 to 220,000 people attended sports activities and performances arranged in social support facilities every month.
75 2 Business review
Employee and social protection 2.8
LOAN-SAVING PLAN HOUSING VOLUNTARY PROGRAMME MEDICAL The loan-saving plan offered to the Company’s employees made it possible to In 2004, living conditions of 1,061 families of INSURANCE PLAN purchase property, goods and services by the Company’s employees were improved. Voluntary medical insurance plans, which instalments, including with the use of Almost half of the employees (506 people) are primarily financed by the employees, consumer loans, such as housing, hospital used real-estate loans in the amount of received further impetus. In 2004, 29,715 treatment fund and urgent consumer needs. RR 139.4 million. The loans were given in employees were insured under all existing During 2004, the plan involved more than accordance with a special-purpose voluntary medical insurance plans. seven thousand employees and over agreement concluded by JSC AVTOVAZ 30 thousand people solved their everyday and the Federal Agency for Mortgage problems thanks to the plan. Lending. The living conditions of the NON-STATE As at the end of 2004, the plan involved Company’s employees were improved, first PENSION more than 55 thousand employees of the of all, at the expense of employees. Company. 729 employees most in need of housing aid FUND SCHEME received non-repayable housing grants in accordance with the Company’s Regulation. The Company’s non-state pension fund scheme is targeted at enhancing social protection of the Company’s employees after retirement. In 2004, employees of the Company signed 12,369 special individual pension contracts.
AVTOVAZ | 2004 76 PERSONNEL INVOLVEMENT IN categories of the Company’s neighbourhood: THE PENSION SCHEME, PEOPLE CHARITY PROGRAMME invalids, the elderly and children.
In 2004, charitable assistance was provided JSC AVTOVAZ took part in the charitable to more than 23,000 pensioners who are action “My Birthday”, giving support to 32 former employees of JSC AVTOVAZ; large babies born in Togliatti on 20 July, which is families, children of invalids belonging the date of the Company’s birthday. to I & II disability groups, including 16 parents of the babies are employed by nonworking pensioners belonging the Company. to I, II & III disability groups (6,182 people); 915 childless families of nonworking pensioners, 419 families of invalids belonging to I & II disability groups with young children; and 98 large families of the Company’s employees. Urgent assistance (financial and in-kind) was rendered to more than 12,000 people. 12,600 charitable meals were arranged.
At 1 January 2005 the Non-state Pension The annual charitable action “New Year and Fund of JSC AVTOVAZ involved 38,841 Christmas Present” was organized. This was people. directed at the most financially constrained
77 3 Financial report
Management’s discussion and Risk exposure I 84 analysis of financial condition and results of operations I 80
In 2004 the macro-economic development of • Production risks Russia remained favourable for the growth of • Country and regional risks the automotive market as personal income • Financial risks continued to grow in line with overall growth • Legal risks of GDP.
AVTOVAZ | 2004 78 79 3 Financial report
Management’s discussion and analysis 3.1
Management’s discussion and analysis of financial condition and results of operations I 3.1
Nikolai P. Khatuntsov Chief Accountant – Director of Accounting, OVERVIEW Taxes and Audit, JSC AVTOVAZ • ZAO GM-AVTOVAZ continued to develop Major factors affecting financial position further. In 2004 it sold 58 thousand vehicles and results of the Group in 2004: and generated revenues of RR 13,463 million (2003: RR 4,768 million) and • In 2004 the macro-economic development RR 1,378 million of net income (2003: RR of Russia remained favourable for the 611 million); The following management’s discussion growth of the automotive market as and analysis of financial condition and personal income continued to go up in line • On 18 February 2004, the Company results of operations (MD&A) should be with overall increase in GDP. The rise in completed the issue of RR 3 billion Rouble read in conjunction with the IFRS personal income and buying activity of denominated documentary coupon bearer consolidated financial statements customers, which continues to grow during bonds of Series 02. The bonds are issued at presented on pages 89 to 124 of this past years, influences sales of cars in par value and mature in 4.5 years. annual report. Russia favourably;
• In September 2004 an agreement on • JSC AVTOVAZ continued to develop new issuing credit linked notes (CLN) of JSC ranges of vehicles (LADA KALINA and AVTOVAZ was signed. The issue amounted LADA PRIORA) and modernization of the to USD 150 million. The issue was existing models. JSC AVTOVAZ launched organised by Raiffeisen Zentralbank the new model LADA KALINA in November Oesterreich AG, Austria. 2004. Related development costs of RR 1,119 million were capitalised;
AVTOVAZ | 2004 80 81 3 Financial report
Management’s discussion and analysis 3.1
SALES ADMINISTRATIVE RESEARCH AND VOLUME EXPENSES DEVELOPMENT EXPENSES In 2004 1,502 thousand vehicles were sold in In 2004 administrative expenses of the Group the Russian Federation compared to grew by 12.6 % to RR 9,768 million mainly During 2004 JSC AVTOVAZ continued to 1,433 thousand vehicles in 2003, which is an due to an increase in labour costs. invest significant funds in the development of increase of 4.8 %. The total number of new new products and upgrades of existing cars sold by JSC AVTOVAZ increased by products. Development costs of RR 1 %. The market share changed slightly from DISTRIBUTION 1,119 million relating mainly to the new 42.6 % in 2003 to 41.7 % in 2004. COSTS LADA KALINA and LADA PRIORA ranges of vehicles were capitalised in 2004. Export sales changed slightly from 92 thousand units in 2003 to 93.0 thousand Distribution costs of the Group increased units in 2004. In 2004 JSC AVTOVAZ has during 2004 by 54 % to RR 6,339 million. made significant efforts to upgrade export The Group has changed its distribution policy REVENUES models to satisfy the new European to take on the cost of railway tariffs of its In 2004 revenues of the Group amounted to standards in the area of quality and dealers to equalise selling prices in different RR 160,536 million with an increase of 23 % environmental safety, which became effective regions of the Russian Federation. This was compared to 2003, mainly due to higher from 1 October 2003. Management of the the main factor affecting the rise in these prices and structural improvements of model Company believes that an upgrade of the costs. range. LADA 110 range will allow the Group to retain its position on foreign markets in future. FINANCE GROSS COSTS PROFIT In 2004 finance costs decreased by 25 % to In 2004 AVTOVAZ Group gross profit RR 2,771 million. This was primarily due to a amounted to RR 26,849 million. Gross reduction in foreign exchange losses, which margin increased from 15.8 % in 2003 to was a result of an increase in liabilities 16.7 % in 2004, mainly due to an increase in denominated in US $ in line with a drop in the selling prices of vehicles. dollar exchange rate.
AVTOVAZ | 2004 82 OTHER MATTERS
Associate Dividends GM-AVTOVAZ The annual shareholders’ meeting in May The associate GM-AVTOVAZ was launched 2005 voted for the payment of dividends of in September 2002 and produced about 400 RR 23 per ordinary share (2003: RR 6) and Chevrolet Niva vehicles in 2002. In 2003 and RR 23 per preference share (2003: RR 95). 2004 the associate sold 25 thousand and Tax forgiveness 58 thousand vehicles respectively, which generated revenues of RR 4,768 million In accordance with the Russian Government and RR 13,463 million and a net income Resolution dated 28 April 2005 certain tax of RR 611 million and RR 1,378 million fines, penalties and interest previously respectively. accrued by JSC AVTOVAZ, have been forgiven. This forgiveness is contingent upon Substantial capital the Company’s compliance with a revised investments repayment schedule for the outstanding principal. Total capital expenditures were RR 8,963 million in 2004.
Rouble denominated bonds
On 28 June 2005, the Company completed the issue of RR 5,000 million Rouble denominated documentary coupon bearer bonds. The bonds are issued at par value and mature in 5 years. The rate of the first two coupons, which was determined at the auction, was 9.7 % per annum. The coupon rates of the third to tenth coupons are to be set by the issuer.
83 3 Financial report
Risk exposure 3.2
Risk exposure I 3.2 Production Country and risks regional risks
• Risk of failures in components supplies • Environmental risk; affect the Company’s activities. (including energy supply); • Political risk; Due to its standing, JSC AVTOVAZ is able to • Risk of low-quality components supply; • Demographic risk; influence the regional situation: in the event • Risk of physical interference (fires, natural • Social risk; of force-majeure it will undertake emergency disasters, accidents etc.). • Risk of changes in macroeconomic measures (for instance, accident situation. relief/clean-up activities); it also undertakes The Company’s management controls timely preventive measures, like production risks. For eliminating production Any drastic changes on the regional scale environmental activities, implementation of risks JSC AVTOVAZ is continuously working (environmental, political, demographic or HR policies and development of social on improvement of suppliers’ structure, social) are unlikely to take place. However, if infrastructure. quality, management and security systems. such changes do occur, they would definitely
AVTOVAZ | 2004 84 Financial Legal risks risks
• Credit risk; • Risk of changes in tax policies; • Investment risk; • Risk of changes in mechanisms of • Market risk; customs tariff regulation; • Liquidity risk. • Risk of changes in antimonopoly control. The Company’s management controls financial risks. To eliminate financial risks JSC AVTOVAZ cooperates with different financial institutions, constantly optimizes and improves methods of working with financial resources.
85 4 Financial statements
Auditors’ Consolidated financial report I 88 statements I 89
In accordance with consolidated financial statements, net profit amounted to RR 4,575 million: a 55 % increase compared to the prior year. Revenue of the Group grew by 23 % to RR 160,536 million.
AVTOVAZ | 2004 86 87 4 Financial statements
Auditors’ report on consolidated financial statements of AVTOVAZ Group
ZAO PricewaterhouseCoopers Audit Kosmodamianskaya Nab. 52, Bld. 5 115054 Moscow Russia Telephone +7 (095) 967 6000 Facsimile +7 (095) 967 6001
AUDITORS’ REPORT To the Shareholders of JSC "AVTOVAZ"
1 We have audited the accompanying consolidated balance sheet of JSC "AVTOVAZ" and its subsidiaries (the "Group") as of 31 December 2004 and the related consolidated statements of income, of cash flows and of changes in equity for the year then ended. These financial statements (as set out on pages 1 to 29) are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audit.
2 We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
3 In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2004, and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Moscow, Russian Federation 30 June 2005
The firm is an authorised licensee of the tradename and logo of PricewaterhouseCoopers.
AVTOVAZ | 2004 88 AVTOVAZ GROUP Consolidated Balance Sheet at 31 December 2004 (In millions of Russian Roubles) (Amounts translated into US dollars for convenience purposes, Note 2.2)
Supplementary information Unaudited RR million RR million US$ million 31 December 31 December 31 December 2004 2003 2004
ASSETS Current assets: Cash and cash equivalents (Note 9) 11,966 6,871 431 Trade receivables (Notes 8 and 10) 7,548 6 ,970 272 Financial assets (Note 11) 3,624 4,255 131 Other assets (Note 12) 10,134 7,079 365 Inventories (Note 13) 20,742 19,060 747 Total current assets 54,014 44,235 1,946
Non-current assets: Property, plant and equipment (Note 14) 103,158 101,454 3,718 Financial assets (Note 16) 2,251 675 81 Investments in associates (Note 17) 1,898 866 68 Development costs (Note 15) 2,818 1,699 102 Other assets (Note 18) 1,720 3,135 62 Total assets 165,859 152,064 5,977
LIABILITIES & EQUITY Current liabilities: Trade payables current (Note 8 and 19) 18,494 17,495 666 Other payables and accrued expenses (Note 20) 6,541 5,743 236 Taxes other than income tax (Note 23) 4,064 4,289 146 Provisions (Note 21) 1,208 1,732 44 Debt (Note 22) 16,249 11,852 586 Advances from customers 8,207 5,635 296 Total current liabilities 54,763 46,746 1,974
Non-current liabilities: Debt (Note 22) 12,298 10,587 443 Taxes other than income tax (Note 23) 4,299 4,405 155 Deferred tax liability (Note 34) 11,009 10,824 397 Total liabilities 82,369 72,562 2 ,69
Equity Share capital (Note 24) 28,890 28,890 1,041 Currency translation adjustment 1,338 1,289 48 Retained earnings 51,646 48,033 1,861
Equity holders’ of the Company 81,874 78,212 2,950 Minority interest 1,616 1,290 58 Total equity 83,490 79,502 3,008 Total liabilities and equity 165,859 152,064 5,977
V. Vilchik N. Khatuntsov President – General Director Chief Accountant 30 June 2005
The accompanying notes 1 to 39 are an integral part of the consolidated financial statements.
89 4 Financial statements
AVTOVAZ GROUP Consolidated Statement of Income for the year ended 31 December 2004 (In millions of Russian Roubles, except for earnings per share) (Amounts translated into US dollars for convenience purposes, Note 2.2)
Supplementary information RR million RR million US$ million Year ended 31 December Unaudited 2004 2003 2004
Sales (Note 25) 160,536 130,772 5,572 Cost of sales (Notes 26) (133,687) (110,120) (4,640)
Gross profit 26,849 20,652 932
Distribution costs (Note 27 and 33) (6,339) (4,128) (220) Administrative expenses (Notes 28 and 33) (9,768) (8,676) (339) Other operating expenses (Note 29 and 33) (1,036) (2,146) (36) Research and development expenses (Notes 30 and 33) (703) (628) (24) Other gains (Note 31) 493 867 17
Operating profit 9,496 5,941 330
Finance costs (Note 32) (2,771) (3,708) (96) Income from associates (Note 17) 701 333 24
Profit before taxation 7,426 2,566 258
Income tax (expense)/credit (Note 34) (2,851) 385 (99)
Net profit 4,575 2,951 159
Attributable to: Equity holders of the Company 4,245 3,034 147 Minority interest 330 (83) 12 4,575 2,951 159
Weighted average number of shares outstanding during the period (000’s) 14,445 14,445 14,445
Earnings per share (basic/diluted) (in RR and US $) (Note 35) 294 210 10
The accompanying notes 1 to 39 are an integral part of the consolidated financial statements.
AVTOVAZ | 2004 90 AVTOVAZ GROUP Consolidated Statement of Cash Flows for the year ended 31 December 2004 (In millions of Russian Roubles) (Amounts translated into US dollars for convenience purposes, Note 2.2)
Supplementary information (Note 2.2) RR million RR million US$ million Year ended 31 December Unaudited 2004 2003 2004
Cash flows from operating activities: Profit before taxation 7,426 2,566 258 Adjustments for: Depreciation (Note 26) 6,379 6,293 221 Provision for impairment of receivables (Note 28) (272) 110 (9) Provisions (Note 29) (265) 121 (9) Interest expense (Note 32) 3,451 3,416 120 Gains on forgiveness of tax debt and restructuring of other debt (Note 32) - (325) - Loss on disposal of property, plant and equipment (Note 29) 747 393 26 Income from associates (Note 17) (701) (333) (24) Loss on impairment of property, plant and equipment (Note 14) 415 117 14 Reversal of impairment loss on property, plant and equipment (Note 14) (303) (501) (11) Impairment loss on non-current financial assets (Note 29) 121 584 4 Negative goodwill (Note 7) - (458) - Loss on disposal of subsidiaries (Note 29) (203) 256 (7) Unrealised foreign exchange effect on non-operating balances 632 507 22 Operating cash flows before working capital changes 17 427 12 746 605 Increase in gross trade receivables (473) (519) (16) Increase in current financial and other assets (2,425) (4,238) (84) Increase in inventories (1,868) (525) (65) Increase/(decrease) in trade payables and other payables and accrued expenses 485 (1,342) 17 (Decrease)/increase in taxes payable other than income tax (224) 2,051 (8) Increase in advances from customers 2,571 4,575 89 Cash provided from operations 15,493 12 748 538 Income tax paid (2,650) (1,671) (92) Interest paid (2,084) (3,660) (72) Net cash provided from operating activities 10,759 7,417 374 Cash flows from investing activities: Purchase of property, plant and equipment (8,963) (9,210) (311) Proceeds from the sale of property, plant and equipment 38 225 1 Proceeds from the sale of subsidiaries 3 49 - Purchase of subsidiaries, associates and financial assets (33) (303) (1) Loans issued by bank (2,406) (423) (84) Loans repaid by bank 865 - 30 Business combination (Note 7) - (68) - Net cash used in investing activities: (10,496) (9,730) (365) Cash flows from financing activities: Proceeds from borrowings 16,083 19,570 558 Repayment of loans and long-term taxes payable (10,695) (12,905) (371) Dividends paid (538) (219) (19) Net cash provided from financing activities 4,850 6,446 168 Effect of exchange rate changes (18) (13) (1) Effect of translation --22 Net increase in cash and cash equivalents 5,095 4,120 198 Cash and cash equivalents at the beginning of the period 6,871 2,751 233 Cash and cash equivalents at the end of the period (Note 9) 11,966 6,871 431
The accompanying notes 1 to 39 are an integral part of the consolidated financial statements.
91 4 Financial statements
AVTOVAZ GROUP Consolidated Statement of Changes in Equity for the year ended 31 December 2004 (In millions of Russian Roubles) (Amounts translated into US dollars for convenience purposes, Note 2.2)
Attributable Treasury to equity shares Currency holders Share (Notes 7.1 translation Retained of the Minority Total In RR million capital and 24) adjustment earnings Company interest equity
Balances as of 31 December 2002 (as restated) 64,251 (35,361) 1,119 45,218 75,227 1,587 76,814 Currency translation adjustment - - 170 - 170 - 170 Dividends - - - (219) (219) - (219) Purchase of additional shares in subsidiary - - - - - (526) (526) Purchase of subsidiaries - - - - - 312 312 Profit for the year - - - 3,034 3,034 (83) 2,951
Balances as of 31 December 2003 64,251 (35,361) 1,289 48,033 78,212 1,290 79,502
Currency translation adjustment - - 49 - 49 - 49 Dividends - - - (632) (632) - (632) Purchase of subsidiaries - - - (17) (17) Sale of subsidiaries 13 13 Profit for the year - - - 4,245 4,245 330 4,575
Balances as of 31 December 2004 64,251 (35,361) 1,338 51,646 81,874 1,616 83,490
Supplementary information Прибыль (Note 2.2) Собственные в отношении акции, изъятые Поправка Нераспре- держателей (Unaudited) Акционерный из обращения на валютный деленная акций Доля Всего In US$ million капитал (Прим. 7.1 и 24) курс прибыль Общества меньшинства капитал
Balances as of 31 December 2004 2,315 (1,274) 48 1,861 2,950 58 3,008
The statutory accounting reports of JSC AVTOVAZ (the “Company”) are the basis for profit distribution and other appropriations. Russian legislation identifies the basis of distribution as the net profit. For 2004, the current net statutory profit for the Company as reported in its statutory reporting forms was RR 5,600 (the year ended 31 December 2003: RR 4,655). However, this legislation and other statutory laws and regulations dealing with the distribution rights are open to legal interpretation and accordingly management believes at present it would not be appropriate to disclose an amount for the distributable reserves in these consolidated financial statements.
The accompanying notes 1 to 39 are an integral part of the consolidated financial statements.
AVTOVAZ | 2004 92 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
1. JSC AVTOVAZ and subsidiaries
JSC AVTOVAZ and its subsidiaries’ (the “Group”) principal activities include the manufacture and sale of passenger automobiles. The Group’s manufacturing facilities are primarily based in the Samara Oblast of Russia. The Group has a sales and service network spanning the Commonwealth of Independent States and some other countries. The parent company, JSC AVTOVAZ (“the Company” or JSC AVTOVAZ), was incorporated as an open joint stock company in the Russian Federation on 5 January 1993. At 31 December 2004 the Group employed 159,953 employees (31 December 2003: 161,228). JSC AVTOVAZ is registered at Yuzhnoye Shosse, 36, Togliatti, 445633, Russian Federation.
These consolidated financial statements have been approved for issue by the President-General Director on 30 June 2005
2. Basis of presentation of the consolidated financial statements
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). JSC AVTOVAZ and its subsidiaries resident in the Russian Federation, which account for approximately 94% of assets and liabilities of the Group, maintain their accounting records in Russian Roubles (“RR”) and prepare their statutory financial statements in accordance with the Regulations on Accounting and Reporting of the Russian Federation. These consolidated financial statements are based on the statutory records, with adjust- ments and reclassifications recorded for compliance with IFRS. Similarly, adjustments to conform with IFRS, where necessary, are recorded in the financial statements of companies not resident in the Russian Federation.
The consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. Trade receivables, non-current receivables, other current assets, trade and other current payables are shown at fair value through profit or loss. The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5.
2.1 Accounting for the effect of inflation
Prior to 1 January 2003 the adjustments and reclassifications made to the statutory records for the purpose of IFRS presentation included the restatement of balances and transactions for changes in the general purchasing power of the RR in accordance with IAS 29 (“Financial Reporting in Hyperinflationary Economies”). IAS 29 requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date. As the characteristics of the economic environment of the Russian Federation indicate that hyperinflation has ceased, effective from 1 January 2003 the Group no longer applies the provisions of IAS 29. Accordingly, the amounts expressed in the measuring unit current at 31 December 2002 are treated as the basis for the carrying amounts in these financial statements.
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AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles) 2.2 Supplementary information
U.S. dollar (“US$”) amounts shown in the accompanying consolidated balance sheet are translated from RR as a matter of arithmetical computation only, at the official rate of the Central Bank of the Russian Federation at 31 December 2004 of RR 27.7487 = US$1 (31 December 2003: RR 29.4545 = US$1). The consolidated statement of income and the consolidated statement of cash flows have been translated at the average exchange rates during the year (2004: 28.81 = US$1). The difference was recognized in equity. The US$ amounts are presented solely for the convenience of the reader as supplementary information, and should not be construed as a representation that RR amounts have been, could have been, or would be converted to US$ at this rate, nor that the US$ amounts present fairly the financial position and results of operations and cash flows of the Group in accordance with IFRS.
3. Summary of significant accounting policies
3.1 Early adoption of standards
In 2003 the Group early adopted the IFRS below, which are relevant to its operations.
IAS 1 (revised 2003) “Presentation of Financial Statements” IAS 2 (revised 2003) “Inventories” IAS 8 (revised 2003) “Accounting Policies, Changes in Accounting Estimates and Errors” IAS 10 (revised 2003) “Events after the Balance Sheet Date” IAS 16 (revised 2003) “Property, Plant and Equipment” IAS 17 (revised 2003) “Leases” IAS 21 (revised 2003) “The Effects of Changes in Foreign Exchange Rates” IAS 24 (revised 2003) “Related Party Disclosures” IAS 27 (revised 2003) “Consolidated and Separate Financial Statements” IAS 28 (revised 2003) “Investments in Associates” IAS 31 (revised 2003) “ Interests in Joint Ventures” IAS 32 (revised 2003) “Financial Instruments: Disclosure and Presentation” IAS 33 (revised 2003) “Earnings per Share” IAS 39 (revised 2003) “Financial Instruments: Recognition and Measurement” IFRS 2 (issued 2004) “Share-based Payments” IFRS 3 (issued 2004) “Business Combinations” IFRS 5 (issued 2004) “Non-current Assets Held for Sale and Discontinued Operations” IAS 36 (revised 2004) “Impairment of Assets” IAS 38 (revised 2004) “Intangible Assets”.
AVTOVAZ | 2004 94 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles) 3.2 New accounting standards and IFRIC interpretations
Certain new accounting standards and IFRIC interpretations have been published that are mandatory for accounting periods beginning on or after 1 January 2006. The Group’s assessment of the impact of these new standards and interpretations is set out below.
(a) IFRS 6, Exploration for and Evaluation of Mineral Resources The Group does not have any exploration and evaluation assets. This standard will not affect the Group’s financial statements.
(b) IFRIC 2, Members’ Shares in Co-operative Entities and Similar Instruments This interpretation will not affect the Group’s financial statements.
(c) IFRIC 3, Emission Rights The Group does not participate in an emission rights scheme. This interpretation will not affect the Group’s financial statements.
(d) IFRIC 4, Determining whether an Asset Contains a Lease IFRIC 4 is applicable to annual periods beginning on or after 1 January 2006. The Group has not elected to adopt IFRIC 4 early. It will apply IFRIC 4 in its 2006 financial statements and the IFRIC 4 transition provisions. The Group will therefore apply IFRIC 4 on the basis of facts and circumstances that existed at 1 January 2005. Implementation of IFRIC 4 is not expected to change the accounting for any of the Group’s current arrangements.
(e) IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds The Group does not have interests in decommissioning, restoration and environmental rehabilitation funds. This interpretation will not affect the Group’s financial statements.
3.3 Group reporting
Subsidiary undertakings Subsidiary undertakings are those entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. All intercompany transactions, balances and unrealised gains on transactions between the Group’s companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group.
Minority interest at the balance sheet date includes the minority shareholders’ portion of the fair values of the identifiable assets and liabilities of subsidiaries at the acquisition date, and the minority’s portion of movements in those subsidiaries’ equity since the date of acquisition. Minority interest is presented in the consolidated balance sheet within equity, separately from the equity attributable to equity holders of the Company. The Group no longer attributes minority interest relating to cross shareholdings (Note 7.1).
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group.
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AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisitions date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of net assets of the subsidiary acquired, the difference is recognised directly in the consolidated statement of income.
Associated undertakings Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20 % and 50 % of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. Unrealised gains on transactions between the Group and its associated undertakings are eliminated to the extent of the Group’s interest in the associated undertakings; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Equity accounting is discontinued when the carrying amount of the investment in an associated undertaking reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associated undertaking.
3.4 Investments
Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. Realised and unrealised gains and losses arising from changes in the fair value of these financial assets are included in the consolidated statement of income in the period in which they arise.
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of trading. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets.
Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Purchases and sales of investments are recognised on trade-date – the date on which the Group commits to purchase or sell the assets. Investments are initially recognised at fair value plus transactions costs for all financial assets not carried at fair value through profit or loss.
AVTOVAZ | 2004 96 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest method. Realised and unrealised gains and losses arising from changes in the fair value of the “Financial assets at fair value through profit or loss” category are included in the consolidated statement of income in the period in which they arise. Unrealised gains and losses arising from changes in the fair value of non-monetary securities classified as available-for-sale are recognised in equity. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments are included in the consolidated statement of income as gains and losses from investment securities.
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same and discounted cash flow analysis refined to reflect the issuer’s specific circumstances.
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the consolidated statement of income. Impairment losses recognised in the consolidated statement of income on equity instruments are not reversed through the consolidated statement of income. The Group holds no trading investments.
3.5 Revenue recognition
Revenues on sales of automobiles, spare parts and miscellaneous production are recognised when goods are dispatched to customers as this is normally the date that the risks and rewards of ownership are transferred to the customers.
Sales are shown net of value added tax (VAT) and discounts, and after eliminating sales within the Group.
3.6 Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the market rate of interest for similar borrowers, less provision for impairment and includes value added taxes. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. The amount of the provision is recognised in the statement of income.
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AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles) 3.7 Value added tax
Value added taxes related to sales is payable to tax authorities upon collection of receivables from customers. Input VAT is reclaimable against sales VAT upon payment for purchases. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases which have not been settled at the balance sheet date (VAT deferred) is recognised in the balance sheet on a gross basis and disclosed separately from the actual VAT payable/receivable. VAT deferred is classified as a current assets or liability. Where provision has been made against debtors deemed to be uncollectible bad debt expense is recorded for the gross amount of the debtor, including VAT. The related VAT deferred liability is maintained until the debtor is written off for tax purposes.
3.8 Inventories
Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on the weighted average basis. The costs of finished goods and work in progress comprises material, direct labour and the appropriate indirect manufacturing costs (based on normal operating capacity). Obsolete and slow-moving inventories are written down, taking into account their expected use, to their future realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.
3.9 Cash and cash equivalents
Cash comprises cash on hand, demand deposits and bank promissory notes. Cash equivalents comprise short-term investments which are readily converted to cash, are not subject to significant risk of changes in value and with original maturities of three months or less.
3.10 Property, plant and equipment
Property, plant and equipment are recorded at purchase or construction cost. Property, plant and equipment purchased before 31 December 2002 were recorded at purchase or construction cost restated to the equivalent purchasing power of the RR as at 31 December 2002. At each reporting date management assess whether there is any indication of impairment of property, plant and equipment. If any such indication exists, the management estimates the recoverable amount, which is determined as the higher of an asset’s net selling price and its value in use. The carrying amount is reduced to the recoverable amount and the difference is recognised as an expense (impairment loss) in the consolidated statement of income. 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 assets recoverable amount.
Depreciation is calculated on the restated amounts of property, plant and equipment on a straight line basis. The depreciation periods, which approximate to the expected useful economic lives of the respective assets, are as follows: Number of years Buildings 40 to 50 Foundry equipment 25 Plant, machinery and equipment 10 to 20 Other 5 to 10
AVTOVAZ | 2004 98 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred. Major renewals and improvements are capitalised and the assets replaced are retired. Gains and losses arising from the retirement or disposal of property, plant and equipment are included in the consolidated statement of income as incurred. Assets under construction owned by the Group are not depreciated.
3.11 Intangible assets
Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. When the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised exceeds the cost of the business combination, the Group: (a) reassess the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and (b) recognise immediately in profit or loss any excess remaining after that reassessment. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Goodwill impairment is not reversed. Research and development costs Research expenditure is recognised as an expense as incurred. Costs incurred for development projects related to a new range of vehicles are recognised as intangible assets if, and only if, it is probable that the future economic benefits that are attributable to the asset will flow to the Group and the cost of the asset can be measured reliably. Development costs with a finite useful life that have been capitalised are amortised from the commencement of the commercial production of the new vehicles on a straight-line basis over the period of their expected benefits, not exceeding three years.
3.12 Impairment of assets
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
3.13 Deferred income taxes
Deferred tax assets and liabilities are calculated in respect of temporary differences using the balance sheet liability method for financial reporting and accounting for deferred income taxes. Deferred income taxes are provided for all temporary differences arising between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have
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AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles) been enacted or substantively enacted at the balance sheet date. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
3.14 Borrowings and restructured taxes
Borrowings are recognised initially at cost which is the fair value of the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of income over the period of the borrowings using the effective using the effective interest method. All borrowing costs are expensed in the period in which they are incurred. Interest expense, which is currently due, is recorded within other payables, whilst other interest that accrues is included within the restructured liabilities. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Restructured taxes are recognised initially at their fair value (which is determined using the prevailing market rate of interest for a similar instrument). In subsequent periods, restructured taxes are stated at amortised cost.
3.15 Foreign currency transactions and translation
Exchange restrictions and controls exist relating to converting the RR into other currencies. The RR is not a freely convertible in most countries outside of the Russian Federation. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Russian Roubles, which is the Company’s functional and presentation currency. U.S. dollar amounts have been provided as supplementary information only. Monetary assets and liabilities, which are denominated in foreign currencies at 31 December 2004, are translated into the functional currency at the exchange rate prevailing at that date. Foreign currency transactions are accounted for at the exchange rate prevailing at the date of the transaction. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currency are recognised in the consolidated statement of income.
Functional and presentation currency Foreign subsidiary balance sheets and statements of income have been translated into RR at the exchange rate ruling at 31 December 2004 and average exchange rates for the year then ended, respectively. Differences arising from translation of foreign subsidiaries’ balances are included in shareholders’ equity as currency translation adjustments.
3.16 Product warranty costs The Group recognises the estimated liability to repair or replace products sold still under warranty at the balance sheet date. This provision is cal- culated based on past history of the level of warranty repairs and replacements.
AVTOVAZ | 2004 100 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles) 3.17 Employee benefits
Social costs The Group incurs costs on social activities, principally within the City of Togliatti. These costs include the provision of health services and kindergartens. These amounts represent an implicit cost of employing principally production workers and, accordingly, have been charged to the Group’s IFRS consolidated statement of income.
Pension costs The Group’s obligatory contributions to the Pension Fund of the Russian Federation are expensed as incurred.
3.18 Interest expense and interest income
Interest income and expenses are recognised on the accrual basis, as earned or incurred. Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cashflow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised either as cash is collected or on a cost-recovery basis as conditions warrant.
3.19 Earnings/(loss) per share
Preference shares are considered to be participating shares, as their dividend may not be less than that given with respect to ordinary shares. An earnings per share is determined by dividing the net income attributable to ordinary and preference shareholders by the weighted average number of participating shares outstanding during the reporting period. Losses are allocated to preference shares in this calculation.
3.20 3.20 Use of promissory notes
Promissory notes are debt securities. The Group makes extensive use of both third party promissory notes and Group originated promissory notes in its operations. Bank promissory notes received are included in the balance sheet within cash and cash equivalents. Promissory notes issued by the Group, are included within trade payables until they are settled for cash.
3.21 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statement of income on a straight-line basis over the period of the lease.
3.22 Shareholders’ equity
Treasury shares Treasury shares are stated at nominal value, restated to the equivalent purchasing power of the RR as at 31 December 2002. Any difference between cost and nominal value on the purchase of treasury shares is recorded direct to retained earnings. Any gains or losses arising on the dis- posal of treasury shares are recorded direct to the consolidated statement of changes in equity.
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AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
Dividends Dividends are recognised as a liability and deducted from equity at the balance sheet date only if they are declared for payment before or on the balance sheet date. Dividends are disclosed in the Notes to the consolidated financial statements when they are proposed or declared for payment after the balance sheet date but before the consolidated financial statements are authorised for issue.
3.23 Provisions
Provisions are recognised when the Group has present legal or constructive obligations as a result of past events, it is probable that a significant outflow of resources will be required to settle the obligations, and a reliable estimate of the amount of the obligation can be made.
3.24 Comparatives
The Group has made some reclassifications of the comparatives in the accompanying consolidated financial statements for a fairer presentation, in particular: - advances paid to suppliers of property, plant and equipment of RR 1,757 have been reclassified from Property, plant and equipment to Other non-current assets; - non-current accounts receivable of RR 862 have been reclassified from current to non-current assets.
4. Financial risk management
The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest risk and price risk), credit risk, liquidity risk and cash flow interest-rate risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.
(a) Market risk The Group’s manufacturing operation is in the Russian Federation with limited imports of raw materials and components. The Group has limited international operations (see Note 25) and is exposed to foreign exchange risk arising from exposures primarily with respect to the U.S. dollar and the EURO. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign oper- ations. Foreign exchange risk arises when future commercial transactions, recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. Risk management is carried out by the Company’s treasury department, which identifies, evaluates and man- ages foreign exchange risks in close co-operation with the Group’s operating units by analysing the net position in each foreign currency. The Group is not exposed to equity securities price risk. The Group has not entered into any hedging arrangements in respect of its foreign currency exposure.
(b) Credit risk The Group has no significant concentrations of credit risk. It has policies in place to ensure that wholesale sales of products are made to cus- tomers with an appropriate credit history. The Group has policies that limit the amount of credit exposure to any financial institution.
(c) Liquidity risk The Group manages its liquidity risk by maintaining sufficient cash and marketable securities and available funding through an adequate amount of committed credit facilities.
AVTOVAZ | 2004 102 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
(г) Cash flow and fair value interest rate risk The Group’s interest-rate risk arises from borrowings. The majority of interest rates on debt are fixed. Existing interest rates can be changed subject to agreement by the third parties. Assets are generally non-interest bearing; the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has not entered into any hedging arrangements in respect of its interest rate exposures.
5. Critical accounting estimates and judgements
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the relat- ed actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the current circumstances.
5.1 Operating environment of the Group
Whilst there have been improvements in the economic trends in the country, the Russian Federation continues to display certain characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible in most countries outside the Russian Federation, restrictive currency controls, and relatively high inflation. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations, the changes, which can occur frequently.
The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary meas- ures undertaken by the Government, together with tax, legal, regulatory, and political developments.
5.2 Taxes
The Group is subject to taxes. Significant judgement is required in determining the provision for taxes. There are many transactions and calcula- tions for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcomes of these matters is different from the amounts that were initially recorded, such differences will impact the amount of income tax and deferred tax provision in the period in which such determination is made. Were the actual final outcome (on the judgement areas) to differ by 10% from management’s estimates, the Group would need to: - increase in provision for taxes by RR 18, if unfavourable; or - decrease in provision for taxes by RR 18, if favourable.
5.3 Remaining useful life of property, plant and equipment
Management assesses 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.
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AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
If the estimated remaining useful life of buildings had been 20% higher or lower than management estimates, then the carrying value of buildings would be RR 5,892 higher or RR 8,837 lower accordingly. If the estimated remaining useful life of plant and equipment had been 20% higher or lower than management estimates, then the carrying value of plant and equipment would be RR 11,930 higher or RR 17,896 lower accordingly.
5.4 5.4 Capitalisation of development costs
The Group capitalises development costs in accordance with the accounting policy stated in Note 3.11. Judgement is required to assess the probability that future economic benefits that are attributable to these assets will flow to the Group. If management assumptions at 31 December 2004 of the degree of certainty attached to the flow of future economic benefits are not fulfilled, all the development costs which do not meet recognition criteria would have to be written off reducing the equity at 31 December 2004 by up to RR 2,818.
5.5 Product warranty costs
The Group made a provision for warranties at the year end based on past experience of the level of repairs and returns. Were the actual outcome to exceed by 10% management’s estimates, the Group would need to increase provision for warranties by RR 121.
5.6 Fair values
In assessing the fair value of non-traded financial instruments the Group uses a variety of methods including estimated discounted value of future cash flows, and makes assumptions that are based on market conditions existing at each balance sheet date.
At 31 December 2004 and 2003, the fair value of certain financial liabilities was estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments with the same remaining maturity, and is disclosed in the relevant notes to these consolidated financial statements.
6. Segment reporting
The Group operates as one business segment – automobiles manufacturing – as its operations are subject to similar risks and returns. No geographical segments are identified as reportable segments.
AVTOVAZ | 2004 104 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
7. Principal subsidiaries, business combinations
The principal subsidiaries of the Group and the degree of control exercised by the Group are as follows:
Entity Country of Incorporation Activity 31 December 2004 31 December 2003 % share % share
OAO DAAZ Russia Car components 100 100 OAO SAAZ Russia Car components 100 100 OAO AvtoVAZtrans Russia Transport 100 100 OAO TEVIS Russia Utilities 100 100 OAO SeAZ Russia Car assembly 100 100 OAO Elektroset Russia Power supply 100 100 OAO AvtoVAZstroi Russia Construction 100 100 Lada International Ltd. Cyprus Car distribution 99.9 99.9 ZAO CB Avtomobilny Bankirsky Dom Russia Bank services 58.4 58.4 OAO AVVA Russia Investments 86 86 Delta Motor Group Oy Finland Car distribution 100 100 ZAO CO AFC Russia Financial 60 60 ZAO IFC Russia Financial 51 51 OOO Eleks-Polyus Russia СCar distribution 51 51 ZAO TH Ukravtovaz Украина Car distribution 76 76 ОАО Piter-Lada Russia Car distribution 52.4 52.4 ОАО «Avtocenter- Togliatti-VAZ» Russia Maintenance 51 51 124 Technical Service Centres Russia Car service centres 50.1-100 50.1-100
All of the above subsidiaries have been consolidated. The principal associated companies and degree of ownership by the Group are as follows:
Entity Country of Incorporation Activity 31 December 2004 31 December 2003 % share % share
ZAO GM-AVTOVAZ Russia Vehicle production 41.6 47.6 National Trade Bank Russia Bank services 19.9 19.9 ZAO VAZinterService Russia Carcomponents 32.4 64.8
On 12 March 2003 the Group purchased an additional number of ordinary shares of Delta Motor Group Oy. The share of the Group in this entity’s capital increased to 100% from 69.83%. No goodwill arose on earlier purchases of ordinary shares of Delta Motor Group Oy. Delta Motor Group Oy contributed revenues of RR 11,732 and net profit of RR 73 to the Group for the year ended 31 December 2004 (RR 9,465 and RR 25, respectively, for the year ended 31 December 2003).
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AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
Details of net assets acquired and excess of the acquired share in the net fair value of identifiable assets and liabilities are as follows:
Purchase consideration - Cash paid 68 Total purchase consideration 68 Fair value of net assets acquired (526) Negative goodwill (458)
The negative goodwill is attributable to the fact that the dissentient shareholder of Delta Motor Group Oy decided to cease its participation in the group and accepted the bargain price of RR 68.
7.1 Cross shareholding:
At 31 December 2004 OAO AVVA, an 86% owned subsidiary of JSC AVTOVAZ, owned 38% of the ordinary shares of JSC AVTOVAZ. ZAO “Central Branch of Automobile Financial Corporation” (ZAO CB AFC), a 60% owned subsidiary, in turn owns 24% of the ordinary shares of JSC AVTOVAZ. Furthermore, ZAO IFC, a 51% owned subsidiary of JSC AVTOVAZ, owns 2% of the ordinary shares of JSC AVTOVAZ. As a result approximately 64% of the ordinary voting share capital of JSC AVTOVAZ is held by entities within the Group. The shares of JSC AVTOVAZ that are owned by subsidiaries are recognised as treasury shares in these consolidated financial statements. In accordance with Russian legislation JSC AVTOVAZ’s shares owned by its subsidiaries have the right to vote at shareholders’ meetings and participate in dividend distribution. Consequently, the ultimate controlling party of the Group is JSC AVTOVAZ (the parent company) itself.
7.2 Minority interest:
The minority interest in equity presented in the consolidated balance sheet does not include the holdings of OAO AVVA, ZAO CB AFC and ZAO IFC in JSC AVTOVAZ’s share capital. The effective interest in JSC AVTOVAZ’s ordinary capital, held by minority shareholders of these entities, amounts to 16% and their effective interest in JSC AVTOVAZ’s share capital amounts to 14%.
AVTOVAZ | 2004 106 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
8. Balances and transactions with related parties
8.1 Balances with related parties:
Consolidated balance sheet caption Relationship 31 December 2004 31 December 2003 Trade receivables - gross Associates 997 1 611 Provision for impairment of receivables Associates (4) (7) Trade payables current Associates 596 686 Cash held in bank Associates 593 125 Short-term bank promissory notes Associates 727 78 Other accounts payable Deposits by Key Management in the subsidiary bank 290 185 Current financial assets Loans to Key Management in the subsidiary bank - 15 Minority interest Minority interest in the subsidiary bank attributable to Key Management 25% 25%
8.2 Transactions with related parties:
Consolidated statement Relationship Year ended Year ended of income caption 31 December 2004 31 December 2003 Sales Associates 8,035 5,944 Finance costs Interest payable on deposits by associate bank 10 - Finance costs Interest payable to Key Management on deposits in the subsidiary bank 20 5 Other gains Interest receivable on loans to Key Management by the subsidiary bank - 2
Sales include sales of car kits to ZAO GM-AVTOVAZ and other sales. During the year ended 31 December 2004, the Group made purchases, mainly of car components, from associates of RR 8,121 (2003: 5,609) inclusive of VAT of 18% (2003: 20%). During the year ended 31 December 2004 dividends of RR 4 (2003: nil) were paid by the subsidiary bank to Key Management, who collectively held 25% shares in this bank at 31 December 2004 (2003: 25%).
8.3 Directors’ and Key Management’s compensation:
Compensation of the Board of Directors and the Management Board is disclosed in Note 38.
107 4 Financial statements
AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
9. Cash and cash equivalents
Cash and cash equivalents comprise the following: 31 December 2004 31 December 2003 RR denominated cash on hand and balances with banks 3,395 2,990 Foreign currency denominated balances with banks 1,975 990 RR denominated short-term bank promissory notes and deposits 5,936 2,670 Euro denominated letters of credit 660 221 11,966 6,871 Foreign currency denominated balances with banks consist of the following: Currency 31 December 2004 31 December 2003 Euro 1,386 372 US$ 561 608 Other currencies 28 10 Total currency denominated balances with banks 1,975 990
Cash deposits of RR 408 held by the Group at 31 December 2004 bear interest of 6% per annum (2003: RR 99 bear interest of 1.5% per annum). Cash and cash equivalents of RR 11,558 (2003: RR 6,772) held by the Group are not interest bearing.
10. Trade receivables
31 December 2004 31 December 2003 Trade receivables – gross Rouble denominated 6,268 4,848 Foreign currency denominated 1,621 2,487 7,889 7,335 Less Provision for impairment of receivables Rouble denominated (297) (285) Foreign currency denominated (44) (80) (341) (365) Trade receivables – net Rouble denominated 5,971 4,563 Foreign currency denominated 1,577 2,407 7,548 6,970
Net trade receivables denominated in foreign currencies consist of the following: Currency 31 December 2004 31 December 2003 Euro 1,141 968 US$ 233 1,201 Other currencies 203 238 Total net trade receivables denominated in foreign currencies 1,577 2,407
As at 31 December 2004 the fair value of trade receivables was RR 1,577 (31 December 2003: RR 2,407).
AVTOVAZ | 2004 108 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
11. Financial assets – current
31 December 2004 31 December 2003 RR loans and receivables, net of provision 2,633 2,101 Promissory notes of third parties 586 1,727 Bank promissory notes (with original maturities of more than 3 months) 308 76 Balances with Central Bank of Russian Federation 97 351 3,264 4,255
Financial assets include RR 1,414 (31 December 2003: RR 1,847) of commercial loans given by ZAO CB Avtomobilny Bankirsky Dom to its cus- tomers for a period less than 12 months after the balance sheet date. As at 31 December 2004 the fair value of these assets was RR 3,264 (31 December 2003: RR 4,255).
12. Other assets – current
Other current assets consist of the following: 31 December 2004 31 December 2003 Value-added tax 5,406 4,268 Prepaid expenses, advances and other receivables 3,511 1,671 Advances to sub-contractors by the subsidiary-real estate developer 1,217 1,140 10,134 7,079
13. Inventories
Inventories consist of the following: 31 December 2004 31 December 2003 Raw materials 9,366 9,600 Work in progress 4,337 3,518 Finished products 7,039 5,942 20,742 19,060
Inventories are recorded net of obsolescence provision of RR 385 at 31 December 2004 (31 December 2003: RR 551). A decrease in the provi- sion is predominantly due to a disposal of inventory previously provided for. The cost of inventories recognised as expense and included in cost of sales amounted to RR 101,972 (2003: RR 82,679).
109 4 Financial statements
AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
14. Property, plant and equipment
Property, plant and equipment and related accumulated depreciation and impairment consist of the following:
Buildings Plant and Other Assets under Total equipment средства construction Cost Balance at 31 December 2002 74,543 109,875 11,454 15,035 210,907 Additions - - - 11 000 11,000 Disposals (584) (1,726) (556) (296) (3,162) Transfers 1,029 7 860 387 (9,276) - Balance at 31 December 2003 74,988 116,009 11,285 16,463 218,745 Additions - - - 10 584 10,584 Disposals (1,089) (3,657) (471) (629) (5,846) Transfers 3,354 6,354 1,476 (11,184) -
Balance at 31 December 2004 77,253 118,706 12,290 15,234 223,483
Accumulated depreciation and impairment Balance at 31 December 2002 (32 254) (66 236) (9 846) (4 551) (112 887) Depreciation charge (1 736) (4 334) (223) - (6 293) Disposals 136 1 015 354 - 1 505 Impairment loss recognized - - (117) - (117) Reversal of impairment loss - - - 501 501 Balance at 31 December 2003 (33 854) (69 555) (9 832) (4 050) (117 291) Depreciation charge (1 755) (4 374) (250) - (6 379) Disposals 256 2 374 375 452 3 457 Impairment loss recognized - (3) (412) - (415) Reversal of impairment loss - - - 303 303
Balance at 31 December 2004 (35 353) (71 558) (10 119) (3 295) (120 325)
Net Book Value Остаток на 31 декабря 2002 г. 42 289 43 639 1 608 10 484 98 020 Остаток на 31 декабря 2003 г. 41 134 46 454 1 453 12 413 101 454 Остаток на 31 декабря 2004 г. 41 900 47 148 2 171 11 939 103 158
Assets Under Construction (“AUC”) include the cost of property, plant and equipment which have yet to be put into production. The balance of accumulated depreciation of AUC represents an impairment provision against construction projects started but not expected to be completed as well as a provision against the construction of properties to be used by the local community.
A decrease of the impairment provision against AUC relates to buildings previously taken out of use which are now being converted to production. A respective gain of RR 303 was recorded in the consolidated statement of income for the year ended 31 December 2004 (2003: RR 501). An increase of the impairment provision of RR 415 in the year ended 31 December 2004 predominantly related to the assets of the Company’s sub- sidiaries and additions of properties used by the local community (see below).
AVTOVAZ | 2004 110 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
The assets transferred to the Company upon privatisation do not include the land on which the Company’s factory and buildings, comprising the Group’s principal manufacturing facilities, are situated. Until 11 December 2001 the land on which the Group’s manufacturing facilities are situated was provided to JSC AVTOVAZ by local authorities for unlimited use. As a result of changes in existing legislation, on 11 December 2001 rental agreements were made with local authorities in relation to this land for the period of 49 years. Lease payments for land related to Group’s produc- tion facilities can be changed subject to agreement by the parties. The future aggregate minimum lease payments under non-cancellable operating leases of land are disclosed in note 37.1.
Included in Property, plant and equipment and AUC are properties used by the local community (such as rest houses, kindergartens, sports and medical facilities) at a gross carrying value of RR 3,840 and RR 4,106 as of 31 December 2004 and 31 December 2003, respectively. These prop- erties are fully provided for.
At 31 December 2004 and 31 December 2003, the gross carrying value of fully depreciated property, plant and equipment was RR 45,601 and RR 47,856, respectively.
15. Development costs
Year ended Year ended 31 December 2004 31 December 2004 Opening net book amount 1,699 714 Additions 1,119 985 Closing net book amount 2,818 1,699
31 December 2004 31 December 2003 Cost 2,818 1,699 Accumulated amortisation and impairment - - Net book amount 2,818 1,699
Development costs relating to a new range of vehicles amounting to RR 1,119 (2003: RR 985) were capitalised in 2004.
16. Financial assets – non-current
31 December 2004 31 December 2003 Loans and receivables of ZAO CB Avtomobilny Bankirsky Dom 2,056 473 Other financial assets 195 202 2,251 675
Loans and receivables of ZAO CB Avtomobilny Bankirsky Dom at 31 December 2004 bear average interest of 19% p.a. (2003: 17%).
111 4 Financial statements
AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
17. Investments in associates 31 December 2004 31 December 2003 Beginning of the year 866 754 Additions 350 - Share of income 701 333 Disposals (19) (221) End of the year 1,898 866
The Group’s ownership in ZAO GM-AVTOVAZ decreased from 47.6% to 41.6% during 2004, because of additional share issue by ZAO GM-AVTOVAZ in favour of General Motors, which contributed RR 1,076 in cash. ZAO GM-AVTOVAZ is an associate which began production in September 2002. The shareholders are JSC AVTOVAZ (41.6%), General Motors (41.6%) and EBRD (16.8%). During 2004 the associate produced 58 thousand vehicles (2003: 25 thousand vehicles) and generated revenues of RR 13,463 and a net profit of RR 1,378 of which the Group’s share was RR 635. Investments in associates comprise of the following: 31 December 2004 31 December 2003 ZAO GM-AVTOVAZ 1,365 730 Other 533 136 Total 1,898 866
The following aggregated amounts represent the assets and liabilities, and sales and financial results of associates, which have been consolidated using the equity method: 31 December 2004 31 December 2003 Assets: Non-current assets 8,265 6,536 Current assets 15,887 5,746 Liabilities: Long-term liabilities 1,186 358 Short-term liabilities 12,036 5,24 Net assets 10,930 6,675 Income 24,679 7,152 Expenses (23,729) (6,465) Profit after income tax 950 687
There are no contingent liabilities relating to the Group’s interests in the associates, and no contingent liabilities of the associates themselves.
18. Other assets – non-currentv
31 December 2004 31 December 2003 Advances for property, plant and equipment 698 1,757 Non-current receivables 451 737 Software 131 119 Other 440 19 1,720 3,135
AVTOVAZ | 2004 112 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
19. Trade payables current
31 December 2004 31 December 2003 Trade payables 17,898 16,809 Payables to associated undertakings 596 686 18,494 17,495
Trade payables include RR 700 (31 December 2003: RR 611) of customers’ current and settlement accounts and short-term deposits in ZAO CB Avtomobilny Bankirsky Dom.
20. Other payables and accrued expenses
Other payables and accrued expenses include the following: 31 December 2004 31 December 2003 Salaries payable and vacation accrual 2,779 1,875 Advances received by the subsidiary real estate developer 1,131 945 Insurance provisions 449 71 Accrued interest 269 300 Payable to customs authorities 194 332 Dividends payable 107 40 Settlements of claims 35 414 Income tax liability 33 18 Other 1,544 1,748 6,541 5,743
21. Provisions
During 2004 the following movements of provisions took place: 2004 2003 Balance at 31 December 1,732 1,549 Utilised (1,418) (1,278) Released (234) - Additional provisions 1,128 1,461 Balance at 31 December 1,208 1,732
All provisions are made up for not more than 1 year.
113 4 Financial statements
AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
The Group undertakes to repair vehicles or replace certain components that fail to perform satisfactorily during two years after sale or until a mileage of 35,000 kilometres is reached. A provision of RR 1,208 (31 December 2003: RR 1,498) is made at the year end based on past experience of the level of repair and returns.
22. Debt
Short-term debt by currency of loan consists of the following: Currency Effective interest rate 31 December 2004 31 December 2003 RR 14% 11,672 11,805 US$ 12% 4,169 29 Euro 11% 297 18 CHF 8% 111 -
Total loans from financial institutions 16 249 11 852
Short-term debt by currency of loan consists of the following: Currency Effective interest rate 31 December 2004 31 December 2003 US$ 7% 6,721 7,069 RR 13% 4,841 2,986 CHF 7% 443 487 Euro 6% 293 45
Total loans from financial institutions 12 298 10 587
Short-term and long-term debt comprises loans at fixed interest rates. 31 December 2004 31 December 2003 1 to 2 years 7,729 2,748 2 to 3 years 756 7,227 3 to 4 years 3,184 158 4 to 5 years 216 58 Over 5 years 413 396 12,298 10,587
As at 31 December 2004, the fair value of these liabilities was estimated to be RR 12,698 using current market interest rates ranging between 10% and 12%. As at 31 December 2003, the fair value of these liabilities was estimated to be RR 10,982 using current market interest rates ranging between 17% and 18%.
During 2004 the Company issued RR 3,000 Rouble denominated documentary coupon bearer bonds maturing in 2008. These bonds carry 9 half yearly coupons. The rate of the first coupon, which was determined at the auction, was 11.78% per annum, the second coupon’s rate is 11.28%, the rate of the third coupon is 10.78%. The rates of other coupons are determined by the issuer.
AVTOVAZ | 2004 114 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
During 2003 management restructured and subsequently extinguished liabilities denominated in US$ and in Euro amounting to RR 5,852 (includ- ing liabilities to the Ministry of Finance restructured as of 31 December 2002) to Vnesheconombank and the Ministry of Finance of the Russian Federation.
As at 31 December 2004 and 31 December 2003 loans for RR 13,233 and RR 7,832, respectively, are guaranteed by collateral of inventories and equipment.
Included in long-term debt are rouble denominated interest-free bearer promissory notes maturing between 2017 and 2030. Their carrying value at 31 December 2004 is RR 251 (31 December 2003: RR 203), and gross nominal value is RR 9,129 (2003: RR 9,129).
23. ЗTaxes other than income tax
Сurrent taxes payable other than income tax Current taxes payable comprise the following: 31 December 2004 31 December 2003 Current portion of taxes restructured to long-term 847 1,021 Property, pensions and other taxes 710 986 Penalties and interest on property, pensions and other taxes 617 655 Value-added tax 1,537 1,226 Social taxes 353 401 4,064 4,289
The principal tax liabilities past due accrue interest each day at one three hundredth of the current refinancing rate of the Central Bank of Russia which, at 31 December 2004 was equal to an effective rate of 17% (31 December 2003: 18%). The principal tax liabilities (interest, penalties) past due at 31 December 2004 and 31 December 2003 were approximately RR 40 and RR 40, respectively.
Non-current taxes payable Non-current taxes payable comprise various taxes payable to the Russian Government which were previously past due and which have been restructured to be repaid over a period of up to 10 years following the application of the Russian Government Resolutions No. 1002 dated 3 September 1999 “Terms of the restructuring of payables to the Federal Budget” and No. 927 dated 29 December 2001 “On changes of terms of JSC AVTOVAZ’s tax liabilities and accrued fines and interest payable to the Federal Budget”, as discussed further.
115 4 Financial statements
AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
The carrying value of this debt and its maturity profile is as follows: 31 December 2004 31 December 2003 Current 847 1,021 1 to 2 years 1,479 708 2 to 3 years 316 1,320 3 to 4 years 247 272 4 to 5 years 209 215 Thereafter 2,048 1,890 Total restructured 5,146 5,426 Less: portion of current taxes payable (847) (1,021) Long-term portion of restructured taxes 4,299 4,405
The above liability is carried at amortised cost, calculated by applying the interest rates at inception ranging between 21% and 30%. As at 31 December 2004, fair value of these liabilities was estimated to be RR 5,843 using current market interest rates ranging between 10% and 12%. As at 31 December 2003, fair value of these liabilities was estimated to be RR 5,670 using current market interest rates ranging between 17% and 18%. In the event of the Company’s failure to make current tax payments and payments of restructured tax liabilities by the end of each quarter, the Ministry of Taxes and Duties may, within one month, recommend to the Government to cancel the restructuring agreement and call the entire liability. The Company is in compliance with the terms of restructuring the federal, regional and local tax debts at 31 December 2004.
24. Share capital
The carrying value of share capital and the legal share capital value subscribed, issued and fully paid up, consists of the following classes of shares: 31 December 2004 31 December 2003 Legal Legal No. of statutory Carrying No. of statutory Carrying shares value amount shares value amount Class A preference 4,930,340 2,465 9,861 4,930 340 2,465 9,861 Ordinary 27,194,624 13 ,597 54 ,390 27,194 624 13,597 54,390
Total share capital 32,124,964 16,062 64,251 32,124,964 16 ,062 6,251 Less: treasury share capital Class A preference (312,697) (156) (625) (312,697) (156) (625) Ordinary (17,367,655) (8,684) (34,736) (17,367,655) (8 ,684) (34,736)
Total treasury share capital (17,680,352) (8,840) (35,361) (17,680,352) (8,840) (35,361)
Total outstanding share capital 14,444,612 7,222 28,890 14,444,612 7,222 28,890
AVTOVAZ | 2004 116 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
Ordinary shares give the holders the right to vote on all matters within the remit of the General Shareholders’ Meeting. Class A preference shares give the holders the right to participate in general shareholders’ meetings without voting rights except in instances where decisions are made in relation to re-organisation and liquidation of the Company, and where changes and amendments to the Company’s charter which restrict the rights of preference shareholders are proposed. Preference shares obtain the right to vote on all matters within the remit of the General Shareholders’ Meeting if at the previous Annual Shareholders’ Meeting it was decided not to pay a dividend on preference shares even though the Company had statutory net profit for the year.
Preference shareholders are equally entitled to dividends along with holders of ordinary shares on the basis of a resolution of the General Shareholders’ Meeting. A resolution regarding the payment and the amount of dividends is taken by the General Shareholders’ Meeting upon recommendations of the Board of Directors in view of financial results for the year.
If the dividend paid on one ordinary share in the current year exceeds the dividend that is payable on one preference share, then the dividend paid on one preference share should be increased to the dividend paid on one ordinary share. As such, the preference holders share in earnings along with ordinary holders and thus the preference shares are considered participating shares for the purpose of the calculation of earnings per share.
In 2004, a dividend was declared and paid in respect of 2003 to holders of preference shares of RR 95 per preference share (2003: RR 17) and to holders of ordinary shares of RR 6 per ordinary share (2003: RR 5).
25. Sales
Net sales revenue comprises: Year ended Year ended 31 December 2004 31 December 2003 Finished vehicles and assembly kits of own production 122,367 101,665 Automotive components of own production 8,927 4,550 Dealership sales of other producers’ vehicles 15,339 12,275 Other sales 13,903 12,282 160,536 130,772
Year ended Year ended 31 December 2004 31 December 2003 Domestic sales 135,318 110,689 Sales outside of Russia 25,218 20,083 160,536 130,772
Demand for finished vehicles is not significantly influenced by seasons of the year. However, there is a slight increase in demand for vehicles prior to the summer months and a decrease in demand prior to the end of calendar year. The seasonality in the demand for vehicles does not ignificantly influence production, inventory levels are adjusted for these movements in demand. Seasonality does not impact the revenue or cost recognition policies of the Group. Substantially all assets of the Group are located in Russia.
117 4 Financial statements
AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
26. Cost of sales
Cost of sales comprises: Year ended Year ended 31 December 2004 31 December 2003 Materials and components used 103,888 81,185 Labour costs 17,257 13,837 Production overheads 7,194 6,963 Depreciation 6,379 6,293 Social expenditure 773 732 Reversal of provision for impairment of property, plant and equipment (Note 14) (303) (501) oss on impairment of property, plant and equipment (Note 14) 415 117 Changes in inventories of finished goods and work in progress (1,916) 1,494 133,687 110,120
27. Distribution costs
Distribution costs comprise: Year ended Year ended 31 December 2004 31 December 2003 Transportation 3,707 2,482 Advertising 1,089 554 Labour costs 553 321 Materials 339 409 Other 651 362 6,339 4,128
28. Administrative expenses
Administrative expenses comprise: Year ended Year ended 31 December 2004 31 December 2003 Labour costs 4,171 3,376 Other local and regional taxes 2,232 1,645 Transportation 622 569 Materials 485 597 Bank services 324 244 Repair expenses 211 176 Consultants’ fees 164 205 Provision for impairment of receivables (272) 110 Other 1,831 1,754 9,768 8,676
AVTOVAZ | 2004 118 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
29. Other operating expenses
Other operating expenses comprise: Year ended Year ended 31 December 2004 31 December 2003 Loss on disposal of property, plant and equipment 747 393 Charitable donations 157 68 Impairment loss on financial assets 121 584 Provisions and settlements of claims and similar charges (265) 121 (Gain)/Loss on disposal of subsidiaries (203) 256 Other 479 724 1,036 2,146
30. Research and development expenses
Research and development expenses comprise: Year ended Year ended 31 December 2004 31 December 2003 Labour costs 311 290 Materials 180 171 Other 212 167 703 628
31. Other gains Year ended Year ended 31 December 2004 31 December 2003 Interest income - ZAO CB Avtomobilny Bankirsky Dom 493 409 Negative goodwill (Note 7) - 458 493 867
32. Finance costs
Finance costs charged to the consolidated statement of income comprise: Year ended Year ended 31 December 2004 31 December 2003 Interest expense (3,451) (3,416) Foreign exchange gain/(loss) 680 (617) Gains on forgiveness of tax interest - 325 (2,771) (3,708)
During 2003 a number of Group’s subsidiaries in Russia were granted forgiveness of interest on taxes due in accordance with the Tax Code.
119 4 Financial statements
AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
33. Expenditure by nature Year ended Year ended 31 December 2004 31 December 2003 Materials and components used 104,712 82,191 Labour costs 21,981 17,534 Production overheads 7,194 6,963 Depreciation 6,379 6,293 Social expenditure 773 732 Reversal of provision for impairment of property, plant and equipment (Note 14) (303) (501) Loss on impairment of property, plant and equipment (Note 14) 415 117 Changes in inventories of finished goods and work in progress (1,916) 1,494 Transportation 4,329 3,051 Advertising 1,089 554 Other local and regional taxes 2,232 1,645 Bank services 324 244 Repair expenses 211 176 Consultants’ fees 164 205 Provision for impairment of receivables (272) 110 Write-off or loss on disposal of property, plant and equipment 747 393 Loss on disposal of subsidiaries (203) 256 Charitable donations 157 68 Impairment loss on financial assets 121 584 Provisions and settlements of claims and similar charges (265) 121 Research and development 703 628 Other 2,961 2,840 151,533 125,698
34. Income tax (expense) / credit Year ended Year ended 31 December 2004 31 December 2003 Income tax expense – current (2,666) (2,007) Gain on derecognition of income tax liability - 2,454 Movement in deferred tax account (185) (62) (2,851) 385
Following the favourable resolution of the legal proceedings in relation to the tax authorities’ claims, the Group revised its estimates for the income tax liability of RR 2,454 and recorded a respective gain in the statement of income for the year ended 31 December 2003.
AVTOVAZ | 2004 120 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
The tax charge of the Group is reconciled as follows: 2004 2003 IFRS profit before taxation in the Group’s consolidated financial statements 7,426 2 ,
Theoretical tax charge at statutory rate of 24% (2003: 24%) (1,782) (616)
Tax effect of items which are not deductible or assessable for taxation purposes: Tax penalties and interest (44) (394) Non-deductible expenses, net (1,025) (1,059) Gain on de-recognition of income tax liability - 2,454
Income tax (expense)/credit (2,851) 385
During 2004 the Group was subject to tax rates of approximately 24% on taxable profits. Deferred tax assets/liabilities are measured at the rate of 24% as at 31 December 2004 (24% as at 31 December 2003).
Deferred tax liabilities
31 December Movement 31 December Movement 31 December 2002 in the year 2003 in the year 2004
Tax effects of temporary differences: Provisions on trade receivables 167 (70) 97 8 105 General and overhead expenses allocation on inventories 59 (117) (58) 35 (23) Tax losses carried forward - 82 82 38 120 Effect of inflation and different depreciation rates on and impairment of property, plant and equipment (10,868) (179) (11,047) (126) (1,173) Provision for impairment of property, plant and equipment 1 169 249 1 418 (232) 1,186 Impairment loss on investments 98 162 260 (300) (40) Accounts payable and provisions 686 (110) 576 100 676 Discounting of long-term debt (2,316) 167 (2,149) 8 (2,141) Other temporary differences 243 (246) (3) 284 281 Deferred tax liability (10,762) (62) (10,824) (185) (11,009)
По состоянию на 31 декабря 2004 г. у дочерних компаний Группы не было отложенных налоговых активов.
As at 31 December 2004 the Group has no subsidiaries, which have deferred tax assets.
At 31 December 2004 the Company has available Russian tax losses amounting to RR 498. These may offset future taxable profits until year 2014. The maximum offset in each year is limited to 30% of the total taxable profit of the year. A respective deferred tax asset of RR 120 is recorded at 31 December 2004.
121 4 Financial statements
AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
35. Earnings per share
Earnings per share is calculated by dividing the net income attributable to participating shareholders by the weighted average number of ordinary and preference shares in issue during the period, excluding the average number of ordinary shares purchased by the Company and held as treasury shares (see Note 24). 2004 2003 Weighted average number of preference shares outstanding (thousands) 4,930 4,930 Weighted average number of ordinary shares outstanding (thousands) 27,195 27,195 Adjusted for weighted average number of treasury shares (thousands) (17,680) (17,680) Weighted average number of ordinary and preference shares outstanding (thousands) 14,445 14,445 Net income 4,245 3,034 Earnings per share, (basic/diluted) (in RR) 294 210
There are no dilution factors therefore basic earnings per share is equal to diluted earnings per share
36. Barter transactions
Included in sales are non-cash transactions amounting to RR 686 (for the year ended 31 December 2003: RR 1,326). The transactions represent mainly sale of products in exchange for equipment.
37. Contingencies, commitments and guarantees
37.1 Contractual commitments and guarantees
As at 31 December 2004 the Group had contractual commitments for the purchase of property, plant and equipment from third parties for RR 214 (31 December 2003: RR 959). Other than these commitments, there are no other commitments and guarantees in favour of third parties or related companies that were not disclosed in these consolidated financial statements. In 2004, the Company signed a five-year contract with a distributor for exclusive supplies of spare parts for the Company’s vehicles. If the Company dissolves the contract unilaterally or through its fault, the Company will be obliged to pay the distributor a fine in the amount of five-year spare parts supplies, which is estimated by management at RR 14 billion. The future aggregate minimum lease payments under non-cancellable operating leases of land, estimated based on the rental rates in force in 2004, are as follows: 2004 2003 Not later than 1 year 195 259 Later than 1 year and not later than 5 years 638 709 Later than 5 years 574 811 1,407 1,779
The amount of lease payments recognized as an expense for the year ended 31 December 2004 was RR 223 (2003: 258).
AVTOVAZ | 2004 122 AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
37.2 Taxation
Russian tax, currency 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 regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in its interpretation of the legislation and assessments. 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.
As at 31 December 2004 management believes that its interpretation of the relevant legislation is appropriate and that it is probable that the Group's tax, currency and customs positions will be sustained. Where management believes it is probable that a position cannot be sustained, an appropriate amount has been accrued for in these consolidated financial statements.
37.3 Environmental matters
The enforcement of environmental regulation in 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. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalised. Potential liabilities which might arise as a result of changes in existing regulations, civil litigation or changes in legislation or regulation cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believe that there are no significant liabilities for environmental damage.
37.4 Legal proceedings
During 2004, the Group was involved in a number of court proceedings (both as a plaintiff and a defendant) arising in the ordinary course of business. In the opinion of management, there are no current legal proceedings or other claims outstanding which could have a material adverse effect on the result of operations or financial position of the Group.
38. Compensation of the Key Management - Board of Directors and the Management Board
Total compensation of the members of the executive bodies, the Board of Directors and the Management Board, included in labour costs within administrative expenses in the consolidated statement of income (Note 28) amounted to RR 82 for 2004 (2003: RR 35), consisting of salaries and bonuses.
123 4 Financial statements
AVTOVAZ GROUP Notes to the Consolidated Financial Statements at 31 December 2004 (In millions of Russian Roubles)
39. Post balance sheet events
The Annual Shareholders’ Meeting in May 2005 voted for the payment of dividends of RR 23 per ordinary share and RR 23 per preference share in respect of 2004 financial results. Total dividends approved are RR 739.
In accordance with the Russian Government Resolution dated 28 April 2005 certain tax fines, penalties and interest previously accrued by the Company, have been provisionally forgiven. This forgiveness is contingent upon the Company’s compliance with a revised repayment schedule for the outstanding principal. The precise amount to be forgiven, the precise repayment schedule and the timing of determining both have yet to be agreed with the tax authorities.
On 28 June 2005, the Company completed the issue of RR 5,000 Rouble denominated documentary coupon bearer bonds. The bonds are issued at par value and mature in 5 years. The rate for the first two coupons, which was determined at the auction, was 9.7% per annum. The coupon rates of the third to tenth coupons are to be set by the issuer.
AVTOVAZ | 2004 124 Information reference at 31 December 2004
Location and mailing address of JSC AVTOVAZ: 445633 Russian Federation, Samara Region,Togliatti, Yuzhnoye Shosse, 36 Website: www.lada-auto.ru
Date of the Company’s state registration: 5 January 1993, registration number- 2925.
Contact details of Shareholder Relations: Property Department of JSC AVTOVAZ Telephone: (8482) 73-80-97 Facsimile: (8482) 73-81-61 E-mail: [email protected]
Keeper of the Shareholders’ Register: Open Joint Stock Company “Tsentralny Moskovskiy Depositariy” 105082 Moscow, ul. B. Pochtovaya, 34, build. 8 Telephone / facsimile: (095) 2211-333 Website: www.mcd.ru
Regional branches of OAO “Tsentralny Moskovskiy Depositariy” which receive documents for processing in the Shareholders’ Register of JSC AVTOVAZ:
163061 Arkhangelsk, ul. Voskresenskaya, 12, telephone: (8182) 65 75 44 670031 Ulan-Ude, ul.Tereshkovoi, 42, office 24, telephone: (3012) 43 43 11 620026 Yekaterinburg, ul. Soni Morozovoi, 180, office 320, telephone: (3432) 24 05 09 357100 Cherkessk, ul. Kavkazskaya, 19, office 308, telephone: (87822) 5 47 06 167000 Republic of Komi, Syktyvkar, ul. Kuratova, 85a, office 507, telephone: (8212) 21 60 71 156000 Kostroma, ul. Pyatnitskaya, 49, telephone: (0942) 31 62 79 603006 Nizhny Novgorod, ul. Gorkogo, 151, office 505_, telephone: (8312) 78 91 61 644037 Omsk, ul. Nekrasova, 1, telephone: (3812) 23 01 55 440600 Penza, ul. Volodarskogo, 47, telephone: (8412) 56 28 16 614000 Perm, ul. Lenina, 50, telephone: (3422) 19 68 87 683031 Petropavlovsk-Kamchatsky, prospect Marksa, 35, telephone: (41522) 6 24 70 390046 Ryazan, ul. Mashinostroitelei, 4a, telephone: (0912) 24 04 22 443100 Samara, ul. Chetverty proezd, 57b, 57b1, office 508, telephone: (8462) 67 34 41 410005 Saratov, ul. B.Sadovaya, 239, build. 42, office 201, telephone: (8452) 45 96 55 193029 St. Petersburg, Bolshoi Smolensky prospekt, 12, floor 1, telephone: (812) 380 34 64, 380 34 65 362040 Republic of Northern Osetia-Alania, Vladikavkaz, ul. Mira, 46, telephone: (8672) 54 96 82 170000 Tver, ul. Semionovskaya, 30, office 55, telephone: (0822) 34 44 93 445051 Togliatti, ul. Frunze, 6a Telephone: (8482) 34 52 59, 53 40 38 300000 Tula, prospect Lenina, 77, office 619, telephone: (0872) 31 60 64 625000 Tyumen, ul. Respubliki, 61, telephone: (3452) 24 78 01 426057 Republic of Udmurtia, Izhevsk, ul. 10-letiya Oktyabrya, 53, telephone: (3412) 22 12 53 454084 Chelyabinsk, ul. Timiryazeva, 21, telephone: (3512) 65 87 10
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