AT THE FOREFRONT OF THE INDUSTRY ANNUAL …...UWC received a certificate for batch production of...
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ANNUAL REPORT
Transcript of AT THE FOREFRONT OF THE INDUSTRY ANNUAL …...UWC received a certificate for batch production of...
ANNUALREPORT
AT THE FOREFRONT OF THE INDUSTRY
Public Joint Stock Company “Research and production corporation “United Wagon Company” (PJSC “RPC UWC”, UWC, the “Company”, the “Holding”, the “Group”) is the innovative railcar building leader in the area of the “track gauge zone 15201”.
The railway holding is an integrated provider in the area of production, operational leasing, engineering and maintenance of the new generation freight cars, as well as the transportation services.
About Company 2
Key events of 2017 4
Highlights of 2017 8
Message from the Chairman of the Board of Directors 10
Message from the CEO 12
Strategic Report 14
Railway market and UWC’s position 16
Business model 24
Product line and prospective developments 26
Strategy implementation 38
Key investment appeal factors 44
Overview of Business Activities 46
Engineering and innovation 48
Production 52
Operating lease 68
Operation 70
Service 72
Financial Report 76
Overview of financial results 78
Investment activities 85
Corporate Social Responsibility 90
Human resources and occupational safety 92
Environmental protection 102
Development of the regions where we operate 108
Corporate Governance 112
Corporate governance bodies 114
Internal control and risk management 120
Information for shareholders and investors 124
Appendix 130
Disclaimer 130
Brief history of the Company 131
Auditor’s report and consolidated financial statement 133
Brief biographical details of members of the Board of Directors 230
Risk chart 234
Contact information 242
Contents
by the fleet of new generation railcars
Top 3For more information see Operating lease p. 68
For more information see Production p. 52
No. 1by production of freight cars
1 Standard rail gauge of 1520 mm, used in countries of the former USSR and
Finland.
Read our annual report on the website: https://www.uniwagon.com/en/investors/results_and_reports/annual_reports/or download it with QR code on your smartphone.
Annual Report in the Internet
2 1
JSC Tihvin Assembly Plant “Titran-Express” (TAP “Titran-Express”)1
OPERATING LEASE OPERATION SERVICE
About CompanyUWC manufactures and sells freight cars with improved technical and economic characteristics being the leader by their production in Russian and CIS countries. The new generation rolling stock is characterised by improved load capacity, longer service life, operational reliability and lower life cycle cost representing its economic benefits compared to railcars mounted on old generation bogies.
ENGINEERING PRODUCTION
66service centres in the CIS and Baltic countries
For more information see Servicep. 72
JSC “TikhvinСhemMash” (TikhvinСhemMash)
JSC “Tikhvin Freight Car Building Plant” (TVSZ)
LLC Springs Industrial Technology Center (NPC Springs)
JSC “TikhvinSpetsMash” (TikhvinSpetsMash)
For more information see Engineering and innovationp. 48
>480patents in Russia and CIS countries
>50certified models
LLC “All-Union Research and Development Centre for Transportation Technology” (VNICTT)
“UNICON 1520” LLC (UNICON1520)
For more information see Operating leasep. 68
“RAIL1520” LLC, “RAIL1520 SERVICE” LLC, “MRC 1520” LLC, “TH “UWC” LLC (RAIL1520)
Mission To provide for the increase of carrying capacity and operation safety of the railway transport.
Principles and values
Leadership. To become the best in all areas of operation, to set the rate and new industrial standard for business and production technologies.
Sustainability. To make well-considered decisions in economic and social areas, as well as in the area of environmental protection, safety of production and products.
Honesty and integrity. To be devoted to the idea of respect and integrity, first of all in treatment of own employees, as well as customers, partners and suppliers of the Company. The Company’s reputation is of key importance to us.
Staff. To attract gifted and talented employees making every effort for their development in the Company, to create favourable atmosphere in order that contribution of each employee makes a positive impact on the business growth.
Focus on innovation. To develop constantly in an effort to make efficient use of the resources, to maintain the high technological level of production and the team expertise as a crucial competitive advantage.
by the model range of new generation railcars
by production of freight cars
No. 1
Production of railcars and parts
For more information see Operationp. 70
UWC’s geography
Россия
St. Petersburg
Tikhvin
Moscow
Izhevsk
railcars
>13 Top 10on the operational leasing market
637tank containers
UWC’s enterprises have
favourable location in
terms of intragroup flows,
supply of raw materials
and components for
production of railcars and
export of products.
Joint ventures for production of parts
“JV “Wabtec-UWC” LLC (Wabtec-UWC)
“Timken UWC” LLC (Timken UWC)
For more information see Production p. 52
90>1922railcars per annum – production capacity
castings per annum – production capacity
railcars manufactured in 2017
thsd up to
up to
thsd thsd t
thsd
1 The Production segment of UWC’s Consolidated Financial Statements includes financial results of the Company, as
in 2017 the depot’s production capacities were mostly used for providing the Holding’s railcar building enterprises with
components (assembly of bogies and wheel sets).
2 3
Key events of 2017
Business development
MARCH
UWC acquired a stake in the capital of PTK-Holding, a major owner and operator of railway freight cars, by purchasing 19.9% of its shares and selling 100% of Vostok1520 shares in November 2016.
APRIL
UWC established UNICON 1520, which specialises in organising transport services and multimodal logistics of liquid cargo, particularly hazardous liquid cargo, in tank containers and containers.
UWC launched a project to implement a unified resource management system based on SAP S/4HANA.
MAY
TikhvinSpetsMash’s quality management system was certified for compliance with the requirements of international standard ISO 9001:2015.
JUNE
UWC opened the first service centre in the Baltic states, based at the Valga Depoo railcar repair company, part of Skinest Rail (Estonia).
AUGUST
The gondola with unloading hatches (19-9853 model) with carrying capacity of 75 tonnes and body volume of 92 m3, produced by TVSZ, was acknowledged for its best quality rolling stock and complex technical systems, coming in first place in the Rolling Stock category at the Russian Railways 8th annual contest.
SEPTEMBER
TVSZ received a quality certificate from the Association of American Railroads and started shipping large railcar casting (side frames and bolsters for Barber1 S-2-HD® bogies) for American freight cars.
NOVEMBER
UWC became a member of the Russian Union of Industrialists and Entrepreneurs, which represents interests of domestic business communities both in Russia and in the international arena.
DECEMBER
TVSZ and TikhvinChemMash were among the first Russian companies to undergo certification for the compliance of their quality management systems with the new international standard in the railway industry – ISO/TS 22163:2017.
UWC opened a service centre in Latvia based at the Daugavpils Railcar Repair Centre of LDZ ritošā sastāva serviss (LDZ Rolling Stock Service, Ltd.).
Contracts and supplies
JANUARY
UWC supplied 20 tank cars with loading capacity of 75.6 tonnes and a boiler made
of corrosion-resistant steel for shipment of formalin to Metafrax, the largest Russian producer and exporter of chemical cargo.
FEBRUARY
UWC supplied Metafrax with the first consignment of Tpr1 tank cars with loading capacity of 71.7 tonnes and boiler volume of 94 m3 for shipment of methanol.
MARCH
UWC won a tender held by Sredneuralsk Copper Smelter and the company Svyatogor (part of Ural Mining and Metallurgical Company) for the supply of 24 tank cars with loading capacity increased to 77 tonnes for shipment of sulphuric acid.
UWC and KuibyshevAzot, one of the leading enterprises in Russia’s chemical industry, concluded an agreement to supply 100 Tpr tank cars with loading capacity of 60.2 tonnes and boiler volume of 92.7 m3 for shipment of ammonia.
APRIL
NPC Springs began to provide serial supply of high-quality springs for locomotives and metro railcars on a serial basis at Transmashholding, the largest domestic producer of rolling stock for rail transport.
UWC delivered a batch of tank cars with loading capacity of 73 tonnes and boiler volume of 54.5 m3 to transport caustic soda
and other chemical freight to large producers of chemical goods – Khimprom (Kemerovo) and Khimprom (Novocheboksarsk).
UWC and rail operator Lokotrans signed a contract for the supply of 40 boxcars with loading capacity increased to 73 tonnes and effective body volume of 175 m3.
JUNE
UWC and Sberbank Leasing signed an agreement for the supply of 100 hopper cars with loading capacity of 76.5 tonnes and body volume enlarged to 120 m3 for transportation of grain and regrinding products.
UWC supplied a batch of Tpr tank cars to transport ammonia to JSC URALCHEM, one of the biggest producers of mineral fertilisers in Russia, CIS countries, and East Europe.
JULY
UWC started shipping 20 boxcars to Kuchukterminal, a joint transport enterprise of Kuchukasfalt, a large manufacturer of sodium sulphate, and LTB international logistics company.
UNICON 1520 and JSC URALCHEM concluded a contract to provide services related to organising transportation of liquid cargo in tank containers.
1 Barber – a family of bogies produced by the American company Standard Car Truck (Wabtec Corporation) for freight
railcars.
1 Tpr – a gauge for gondolas admitted to routes of the general rail network, external and internal access roads of industrial and transport enterprises, structures and devices which meet the requirements set by the Manual of Con-struction and Rolling Stock Gauge Usage.
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AUGUST
UNICON 1520 and Avestra Group of companies, a large supplier of Russian petrochemical goods to foreign markets, signed an agreement for cooperation and joint activities in the area of transport logistics of liquid chemical cargo and liquefied hydrocarbon gases with use of tank cars and tank containers.
SEPTEMBER
UNICON 1520 and RZD Logistics, the largest multimodal logistic operator in CIS countries and the Baltic states, agreed on transport and logistics cooperation for domestic and global shipments.
UWC and State Transport Leasing Company signed a new contract for the supply of more than 5 thousand gondolas 12-9853 with unloading hatches and 12-9869 with a solid-bottom gondola with loading capacity increased to 75–77 tonnes and body volume of 98 m3. More than 10 thousand railcars were shipped within the scope of previously concluded agreements, and the total cost of the largest contract in recent years exceeded RUB 50 bln, for the supply of more than 15 thousand units of railway equipment.
UWC and Kronospan, the world leader in terms of production of wood chipboard, concluded a contract for the supply of 267 40-foot flatcars with an increased loading volume of 122 m3 and loading capacity of 74 tonnes for shipment of timber products.
OCTOBER
TikhvinSpetsMash shipped a major consignment of 40-foot flatcars for transportation of timber to Vologodskiye Lesopromyshlenniki Group of companies, one of the largest timber companies in Russia’s North-West.
TikhvinChemMash manufactured its thousandth railcar – one of 25 railcars with an increased boiler volume of 88 m3 and an enlarged loading capacity to 73.3 tonnes. These railcars are designed to transport spirit and are supplied to United Transport Company Magistral within the framework of a contract with Rosspirtprom, the largest Russian supplier of ethyl (food-grade) alcohol.
UWC won a tender held by PhosAgro, one of the world’s major producers of phosphorus fertilisers, for the supply of 500 hopper cars for shipment of mineral fertilisers.
DECEMBER
UWC announces the supply of 548 40-foot flatcars for transportation of timber to six companies: Lokotrans railway operator, DV Real Trans Group transport company, ARKHBUM enterprise producing high-quality transport cardboard packaging for various industries, Sibirsky Krai transport company, Mondi international group producing packaging materials and paper, and VIK timber company.
UNICON 1520 signed a contract with KuibyshevAzot to organise a shipment of 600 thousand tonnes of oleum.
New production
JANUARY
UWC received a certificate for batch production of tank cars for molten sulphur with increased boiler capacity of 44 m3 and loading capacity of 72 tonnes.
APRIL
UWC received a certificate for batch production of 80-foot flatcars with loading capacity of 74.5 tonnes for transportation of large-capacity containers and tank containers.
AUGUST
UWC received a certificate for batch production of 40-foot flatcars with loading capacity of 80 tonnes for transportation of containers, including tank containers with dangerous cargo.
SEPTEMBER
UWC received a certificate for batch production of hopper cars for shipment of grain with high-strength aluminium alloy rooves, loading capacity of 77 tonnes, and volume increased to 120 m3.
Share capital
MAY
UWC completed additional public offering of 2,572,741 ordinary shares on the Moscow Exchange at a price of RUB 720 per share for a total amount of RUB 1.9 bln. The securities were acquired by more than 130 institutional and retail investors. The Company’s free-float increased to 21.05%.
JULY
UWC’s shareholder structure underwent changes. The UWC equity stake held by ICT Group Ltd was distributed between companies controlled by the shareholder (United Wagon PLC and Powerboom Investment Limited), and then United Wagon PLC was sold to Doland Business Limited. As a result of these transactions, the stake of United Wagon PLC in the share capital of UWC amounted to 8.5%, while the stake of Powerboom Investment Limited and the indirect stake of ICT Group Ltd amounted to 14.3%.
AUGUST
UWC’s shareholder structure underwent changes. The stake of Doland Business Limited, which holds shares through United Wagon PLC, decreased from 8.5% to 4.2%. The Company’s free-float increased to 26.1%.
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33 19.1 13.3
19.12017
2013 3.9
9.62014
12.42015
15.92016
UWC railcar production volume, thsd
62.02017
2013 3.1
17.12014
36.92015
48.52016
Consolidated revenue, RUB bln
10.5
12.02017
2013 1.4
3.62014
7.02015
2016
EBITDA (excluding subsidies), RUB bln
19.1
CRRC (China)
Uralvagonzavod (Russia)
15.0
15.5Greenbrier (USA/Europe)
18,0Trinity (USA)
37.5
UWC (Russia)
Top 5 world producers of freight cars, production, thsd units1
Own railcar fleet at the end of the period, thsd
Highlights of 2017
Major railcar producers in Russia in 2017, %
UWC
Uralvagonzavod
Altaivagon
RM Rail
Zavod Metallokonstruktsy
Other
33
26
12
7
6
16
57.4
%
share in production of railcars in Russia in 2017
thsd railcars – production volume
thsd railcars – own railcar fleet
UWC demonstrates high growth rates of key indicators...
...maintaining the leading position on the market
1 Source: IINFOLineANALITIKA.
thsd railcars
1 Excluding 4.8 thousand gondolas accumulated in UWC’s fleet for sale to STLC. The sale of these railcars was
recognised in the 2016 Consolidated Financial Statements of UWC.
13.32017
2013 10.2
16.62014
16.02015
16.012016
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Message from the Chairman of the Board of Directors
In the context of developing new products, railcars with improved axle loads are of key importance. We believe that heavy haul railcars are the future of rail transportation, as there are infrastructural restrictions on further growth of the cargo base. Following in the footsteps of a number of other countries, Russia has just begun to increase its capacity of freight rolling stock, and UWC wants to be at the forefront of heavy haul railcar building. In accordance with the Government
Order, integrated works started in 2017 to introduce rolling stock comprised of railcars with an axle load of 27 tf. This year, we will continue to implement this project and we will launch the next generation of railcars into serial production.
Entering into international markets is an important area of UWC business development. Our production competences make it possible to effectively compete with global players and take a broader view of our export potential and prospects abroad. At present, the Company supplies its products to the USA, Europe, Middle East and Africa, and plans to expand further into these regions and enter new markets.
Last year, important changes took place in the Holding’s structure. We implemented the final stage of the transaction with First Heavy Haul Company (FHHC), having sold our equity stake in the latter to the Industrial Investors Group. During the course of UWC’s participation in strategic management of FHHC, the company became one of the Top 10 Russian operators and the most dynamic company on the market in terms of transportation volume.
Now, UWC will focus on its own core business – the development and production of completely new models of rolling stock for both the Russian and foreign markets.
At the same time, we will be looking for new prospective niches and opportunities. Due to the projected active growth of bulk cargo containerisation, UNICON 1520 transport company was established in 2017, specialising in transportation of
chemicals in tank containers. We have a firm belief in its potential and expect active expansion on the market.
UWC’s public activities draw the attention of a wide range of investors. In the reporting year, we approved our information policy, which defines the principles for both mandatory and voluntary disclosure of information in order to improve the transparency of our operations. The UWC management from the Board of Directors, together with other senior and middle managers, regularly participate in meetings with investors and analysts to improve awareness within the investment community about the Company and the industry in general. A successful SPO was attended by more than 100 Russian and international investors and amounted to RUB 1.9 bln, which served as evidence of the Company’s effective interaction with investors in the reporting year.
I would like to express my gratitude to all shareholders and investors for the trust they have placed in the Company. I can assure you that the Board of Directors will keep protecting their interests by ensuring that the process of making management decisions is efficient and transparent, and thus contributing to the further development of the leading railcar building holding in Russia.
NIKOLAI DOBRINOV, Chairman of the Board of Directors
Dear shareholders and investors,
In 2017, United Wagon Company followed its development strategy. We expanded our product range, designed and built completely new railcar models, and entered new foreign sales markets. The set targets were successfully implemented, allowing UWC to not only maintain its leading position in the sector, but also lay the groundwork for future success.
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Message from the CEO
We increased our production volume in 2017, manufacturing more than 19,000 railcars. Growth of the cargo base in various segments of commodities (namely coal, timber, grain, mineral fertilisers and other products) is contributing to an increase in demand for rolling stock. In 2018, UWC’s output will remain at the same level. In accordance with market needs, our production programme is focused on specialised railcars.
Our new focus is on 27 tf and detachable bodies
We place special focus on developing the next generation railcar series with axle load of 27 tf, which will provide transportation for almost 20% more cargo compared to the standard rolling stock. The transition to producing heavy haul railcars is one of the most important stages on the Road Map approved by the Russian government’s Transport Engineering Development Strategy for 2030. In 2018, controlled commercial operation is planned for the route of bulk traffic of heavy haul cargo to the Far Eastern ports. The cost efficiency of freight cars with an axle load of 27 tf will be determined based on the results of the test, and the decision
will satisfy the market demand for upcoming repairs. Taking into account the diversity of UWC customers, expansion of the service network geography is of key importance, including outside of Russia. New centres were launched in the Baltic countries in the reporting year.
Organic growth
Against a background of positive dynamics in terms of sales, lease price and lease rate, the Company’s revenue increased by 28% to RUB 62 bln. At the same time, state subsidies were reduced in connection with the recovery of the sector; in the reporting year, UWC received RUB 1.7 bln, which was almost two times less than in 2016. Accordingly, EBITDA decreased by 7%, but if we do not take into account the subsidies, the adjusted EBITDA indicator increased by 14%, which indicates natural organic business growth.
Our team
Recognising the success and plans in all areas of the Company’s activities, we have never forgotten that the Company owes its achievements to its employees. As a socially responsible company, UWC makes sure that its employees and their families have adequate living standards. Special attention is paid to the town of Tikhvin, where our main production site is located. By participating in the cultural, educational and social life of the town, we lay the foundation for harmonious development among its future generations.
I would like to express my gratitude to all the Company’s shareholders, customers, partners and employees, as only through our joint efforts can we follow our set goals and achieve such remarkable results!
ROMAN SAVUSHKIN, CEO of UWC
will be made on whether to introduce them into the Russian Railways network.
We are continuing to develop another promising technology in the area of heavy haul traffic, namely articulated railcars that allow for increased efficiency of freight railway transportation services. One of our innovative solutions is using articulated flatcars combined with detachable bodies. This railcar will have a loading capacity of 120 tonnes and a storage capacity of more than 160 cubic metres of cargo. This will make it possible to stabilise demand for rolling stock during the year, reduce the required fleet of railcars and their downtime, and increase the cargo delivery speed by up to two times.
Export potential
In 2017, we actively developed our business on the export markets. Overall, contracts for the delivery of several thousands of railcars were signed, with approximately 600 of them shipped in 2017. A network of business agents was established in Europe, Africa, America and the Middle East. Today, UWC is recognised as a global player. Our long-term target is to reach a 20% share of exports in the UWC revenue.
The containerisation trend
An important milestone in the past year was the establishment of the UNICON 1520 Transport Company, which specialises in multimodal transportation of bulk chemical cargo in tank containers. There are great prospects for containerisation in our country. By our estimates, we expect approximately 50% of all petrochemical cargo to be transported in tank containers in the next two-three years. Taking the fast growth and huge potential of this segment into consideration, UWC is developing its own tank containers. Production of the first batch is scheduled for the end of 2018. In the medium term, UWC plans to become one of the Top 3 tank container operators and occupy around 10% of this market.
Maintenance services
The majority of railcars manufactured at our enterprises is approaching the first round of scheduled repairs. In 2017, our five service centres received the 1st category status, i.e. the right to perform depot repairs. This year, their number will continue to grow. This way we
Dear colleagues and partners,
2017 was a really successful year for United Wagon Company. We confidently held our leading positions in the growing market and maintained our status as market maker in the segment of new generation railcars. Remaining one step ahead of its competitors, UWC continues to develop high-technology products, diversify its range of freight cars, open up new sales markets, and develop its maintenance services.
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Photo by Denis Eskov
clients
BUSINESS MODEL
Section contents
Strategic Report
Product line and prospective developments 26
Railway market and UWC’s position
16
Other
UWC
Uralvagonzavod
Altaivagon
RM Rail
Zavod Metallo -konstruktsy
33
26
16
6
7
12
57.4thsd railcars
Major railcar producers in Russia in 2017, %
Business model24
Strategy implementation
38
Strategy priorities:
Developing new high value-added products
Growing export Ensuring up-to-date and quality
services of all kinds Improving operational efficiency
Key investment appeal factors
44
UWC REMAINS IN A LEADING POSITION ON THE GROWING MARKET AND HAS A NUMBER OF ADVANTAGES THAT DETERMINE THE СOMPANY’S CONTINUED SUCCESSFUL DEVELOPMENT
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Railway market and UWC’s position
The cargo base was the driver for railway market growth in 2017. The resulting demand led to recovery of
1,261
2,491
2017
2017
2013
2013
1,237
2,196
1,227
2,298
2014
2014
1,215
2,304
2015
2015
Loading to Russian Railways networks, mln tonnes
Freight turnover to Russian Railways networks, bln tonnes/km
1,222
2,342
2016
2016
2017 – year of new records on the railway market
Loading reaches its maximum in the last five years, a new record for freight turnover in Russia’s history
In the reporting period, the loading amount reached its peak over the last five years
lease rates and a significant increase in procurement of railcars. These trends will continue in the medium term,
(1.3 bln tonnes, which is 3.2% higher compared to last year), and freight turnover made new
Growth in coal shipments (9.1% higher against 2016) mostly on export routes led to increase in loading and freight turnover along with positive trends with regard to global prices. In 2017, China
Russian coal to the country, due to considerable growth in steel production within the Turkish metallurgy sector.
A high margin of coal supplies resulted in additional
Total loading (+3.2%)
Timber cargoes (+2.5%)
Coke (–4.7%)
Ferrous metals (+2.8%)
Oil and oil products (–0.2%)
Grain (+16.4%)
Cement (+0.6%)
Fertilisers (+6.8%)
Ferrous scrap (+4.8%)
Change in the handling structure, 2017 against 2016, thsd tonnes
Coal (+9.1%)
Iron ore (+0.9%)
Construction materials (–5.7%)
29.9
3.1
1.1
1.0
0.7
0.2
–0.5
–0.6
–8.0
39.1
3.6
2.0
The growth of the cargo base has created increased demand for rolling stock
demand for rolling stock and, as a consequence, led to switching a considerable part of the gondola fleet to this transportation segment. Compared to 2016’s transportation
37.954.6
Railcar decommissioning and sales in Russia, thsd units
111.5
100.5
35.2
26.9
47.857.4
2017
2014
2015
2016
Decommissioning Sale
while withdrawal of the fleet will affect demand for rolling stock to a lesser extent.
records in the history of the Russian Federation at 2.5 trillion tonnes/km (6.4% higher than in 2016).
levels, construction cargo demonstrated the biggest drop (by 5.7%), which was caused by low activity in the industry and high competition for rolling stock from cargo shippers.
came in first place in terms of growth in consumption of Russian products with imports increasing by one third. This was a result of a decrease in the country’s domestic coal capacities. In second place
in terms of consumption of Russian coal was Poland, which doubled its supplies from Russia due to depletion of domestic deposits. Turkey came in third place, with an 80% increase in supplies of
As expected, the railcar decommissioning rate decreased twofold in 2017 compared to the previous year, with a total decommissioning of 47,800 units of rolling stock over the year (with more than 1/3 of them being gondolas). As a result of sharp growth in demand for rolling stock in the reporting year, the sales volume exceeded the decommissioning volume for the first time in three years.
Increased demand for gondolas at the market at the end of 2017 resulted in recovery of lease rates to the level of RUB 1,600/day. They are expected to decrease to RUB 1,000–1,200/day for standard
gondolas in proportion to the market saturation, which may already begin to occur in 2018.
Recovery of the lease rates resulted in active
decommissioning of gondolas from the inactive fleet, which reduced to the minimum level of 17,000 units by the end of 2017. At the same time, despite active production growth and
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minimisation of the inactive fleet, the demand for gondolas was not satisfied completely by the end of the reporting year, and a deficit remained as there was no idle fleet within the railway network.
According to experts, the trend towards further growth of the cargo base will ensure the same demand for gondolas in the middle term, despite a decrease in the fleet decommissioning volume.
With regards to rolling stock for transportation of chemical cargo, the situation is particularly challenging as considerable decommissioning of the old
fleet (up to 25%) is expected, while acquiring a new one is associated with high capital intensity. Nevertheless, the market offers various cost effective solutions, such as new generation tanks and tank containers.
Despite the absence of fleet deficit in other segments, the active growth of hopper car and boxcar transportation of grain, fertilisers, and cement could lead to a localised shortage of railcars in the face of the expected fleet decommissioning.
In 2018, the railcar building market will be able to reach
Lease rates for gondolas, RUB/day
Gondola fleet balance, thsd units
Active fleet
Inactive fleet
Surplus
410430450470490510530550570
the balance, and against the backdrop of growing freight traffic, the quality rolling stock on offer will meet the demand. Thus, according to experts, demand for rolling stock will increase in 2018 to the level of 60–65,000 railcars, while the number of railcars being decommissioned will drop to the level of 40,000.
According to estimates from the agency INFOLine, the number of railcars being decommissioned will decrease to 30,000–35,000 units a year, which will lead to a decline in demand for railcars to 50,000–55,000 units a year.
The market stays focused on innovative railcars, with a 62% share in the total production of railcars in Russia. Many producers of standard railcars in Russia and CIS countries could not cope with the competitive environment and left the market.
The Railcar Building Market Continues to be Consolidated
The demand for gondolas in peak shipment periods significantly exceeded the production capacities of facilities that manufacture innovative rolling stock, and so standard gondolas satisfied part of the demand.
New kinds of innovative rolling stock, which will enter the market in 2018 and may occupy up to 100% of the production structure in their market segments: specialised flatcars, boxcars, and a number of chemical tank car models.
Production of new generation and standard railcars in Russia, thsd units
2017
14.7 12.2
2014
24.4 10.8
35.7 21.8
2015
16.5 38.254.6
26.9
57.4
35.22016
New generation railcars
Standard railcars
1,600
400
01’14 07’14 12’14 01’15 07’15 12’15 01’16 07’16 12’16 01’17 07’17 12’17
600
650600
950
550800
1,000
1,200
1,400
1,600
Tank cars oil and petrol
Hopper cars
Multi-purpose flatcars
Gondolas
Tank cars chemicals
Timber flatcars
Tank cars LPG
Boxcars
01’14 01’15 01’16 01’17 12’17
-10
-5
5
10
15
20
25
-10 -5 5 10 15 20
The fleet and freight turnover ratio
Growth of the fleet in January 2018 against January 2017, %
The freight turnover has increased, but the fleet has been reduced
Growth of freight turnover in 2017 against 2016, %
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Structure of railcar production in CIS countries, %
UWC Takes a Leading Position among Competitors
UWC occupies a leading position among its competitors on the Russian market. As of the end of 2017, the Company’s market share was almost 33%.
The following companies are UWC’s main competitors on the Russian railcar building market:
RPC Uralvagonzavod (Sverdlovsk Region, Nizhny Tagil) – the second largest manufacturer of freight
rolling stock in Russia. The vertically integrated company brings together around 40 industrial enterprises, research institutes, and design offices in Russia and Europe;
Altaivagon (Altai) – one of Russia’s leading plants for production of railway freight rolling stock. It is a part of the Siberian Business Union holding, which unites enterprises in the coal
mining, machine building, energy and chemical industries, etc. Altaivagon has three production sites: Altaivagon and the Rubtsovsk branch (Altai), as well as Kemerovokhimmash (a branch in the Kemerovo Region);
Ruzkhimmash (Republic of Mordovia) – a railcar building plant specialising in production of tank cars. It is part of the group RM
Rail, an integrated full cycle producer of freight rolling stock for railways as well as products for the gas and petrochemical industries;
Zavod Metallokonstruktsy (Saratov Region, Engels) – a manufacturer of railway rolling stock (flatcars, dumpcars, gondolas, boxcars) along with metal structures for bridges and construction.
Major railcar producers in Russia in 2017, %
UWC
Uralvagonzavod
Altaivagon
RM Rail
Zavod Metallokonstruktsy
Transmashholding
Roslavl Railcar Repair Plant
Remputmash
RailTransHolding
Other
33
323
4
4
12
7
6
26
Structure of railcar sales of major manufacturers in 2017, thsd units1
UWC
Zavod Metallokonstruktsy
RailTransHolding0.2 1.6
RM Rail
13.6
18.8
1.4
2.7
4.1
4.2
0.3 3.2
Altaivagon
18.8
3.5
6.9
15.0
1.8
4.1
Uralvagonzavod
New generation railcars
Standard railcars
UWC maintains its market positions thanks to a number of competitive advantages:
Advantage UWC UVZ Altaivagon ZMK RM Rail
Specialisation in the production of new generation rolling stock
✓ ✓ ✓ ✓ ✓ ✓
Own bogie model ✓ ✓ ✓ ✓ ✕ ✕ ✕
Diversified range of rolling stock ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Own casting facilities ✓ ✓ ✓ ✓ ✓ ✓ ✓
Modern highly efficient production ✓ ✓ ✕ ✕ ✕ ✕
Own integrated design office ✓ ✓ ✓ ✓ ✓ ✕ ✕
1 According to data from the Industrial Cargoes information service.
Uralvagonzavod
Transmash
Mogilev Railway Car Building Works
Novokuznetsk Railway Car Building Works
Bryansk Railway Car Building Works
Azovmash
Promtraktor
Zavod Metallokonstruktsy
Roslavl Railcar Repair Plant
Barnaul Railcar Repair Plant
Arvamir Machine Building Plant
Stakhanov Railway Car Building Works
RM Rail
UWC
Other < 1,000
Kryukov Railway Car Building Works
Poltavkhimmash
Popasnaya Railcar Repair Plant
Dneprovagonmash
Altaivagon
Kazakhstan Railway Car Building
Diesel plant
7
5
23
13
9
554
4
4
4
3
22
22
21
1 1 1 1
2012
UWC
Roslavl Railcar Repair Plant
Uralvagonzavod
Kryukov Railway Car Building Works
Altaivagon
RailTransHolding
RM Rail
Ukrspecvagon
Mogilev Railway Car Building WorksZavod Metallokonstruktsy
Remputmash
ZIKSTO
Other < 1,000
Transmashholding
28
23
4
5
6
10
3
3
3
22
21
8
2017
20 21
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Russian Federation
North America
Africa
Middle East
Europe
South America
Australia
South-East Asia
St. Petersburg
Tikhvin
Moscow
Izhevsk
Regions of operation
Promising regions
Other regions
Railcars
Global marketUWC actively increases its global presence in regions that have functioning railways or that are building railways, and that use freight rolling stock.
Components
1 With the exception of Cuba, which has similar standards to Russia.
We have real
prospects for
development in global
markets. Russian
production is becoming
quite competitive in
comparison to foreign
producersRoman Savushkin, CEO of UWC
The freight car market in North America is the largest in the world, with the fleet reaching 1.85 mln units. The region employs unified AAR standards for railcars1 and 1435-mm track gauge zone. A growth in demand is expected despite the current market downturn, and a tendency is being seen to shift production of rolling stock and components (including casting) to outside of the USA in order to cut costs. UWC has potential on the market thanks to a low product price as a result of depreciation of the rouble. In relation to this, the Company opened Uniwagon NA, a representative office in the USA that has successfully begun
Regions of operation
to supply components to major players in the railway market.
The freight car fleet in the Middle East consists of 35,000 units. American and modified Russian standards prevail in the region, and the track gauge zone is 1435 mm. The market is actively developing thanks to railway construction; by 2021, it is planned to construct more than two thousand kilometres of railroads as a part of a railway construction project that connects six countries in the Persian Gulf. Additional several thousand freight cars will be required for this project. To participate in this project, the
Company initiated negotiations with potential customers.
The freight car market in Africa is characterised by high growth rates, and the total fleet volume is about 170,000 units. The applied standards and technical requirements for railcars differ significantly from country to country. A large number of railway construction projects with 1435 mm track gauge zone are implemented in the region; it is therefore predicted that thelevel of demand for standard 1435 mm track gauge zone and also narrow 1000 mm and 1067 mm track gauge zones will be at around five thousand railcars a year.
Europe has a freight car fleet consisting of 860,000 units. This region is characterised by high requirements for quality and product certification. UIC standards are in effect in Europe, and the predominant track gauge zone is 1435 mm (track gauge zones of 1520, 1524 and 1668 mm are seen much less frequently). Despite the strong positions held by local manufacturers, UWC has the possibility to enter the market thanks to the high quality and low product price compared to European producers. In recent years, the demand reached five thousand freight cars per year and will remain at this level in the near future.
During 2017, UWC exported about 600 railcars and almost 200 large casting railcar sets to countries outside the CIS, totalling EUR 30 mln. Contracts to supply up to 6,000 railcars have been concluded.
The Company aims to further expand its presence abroad, for which the following is planned:
participating in international tenders for the supply of rolling stock and components;
active marketing, including participating in international
industry exhibitions, establishing contacts, identifying requirements and sending technical and commercial offers to railway companies.
Plans for 2018 include taking part in more than 20 projects in different countries in North and South America, Europe, the Middle East, and Africa.
South-East Asia’s freight car fleet comprises 30,000 units. There are no common standards; both American and European requirements are used. At present, the narrow track gauge zone (1000 and 1067 mm) predominates; a railway with standard track gauge zone (1435 mm) is under construction. Countries in this region invest massively in developing infrastructure in relation to the development of railways, meaning that growth in demand for freight cars is expected, which will amount to several
thousand units a year according to estimates.
The total freight car fleet in South America currently consists of around 145,000 units. AAR standards prevail in this region, with track gauge zones ranging from 1000 mm, 1067 mm, 1435 mm, 1600 mm, and 1676 mm. Thanks to the construction of railways for export of raw materials and agricultural products, demand on the freight car market is increasing and is expected to reach 4,500 railcars per year.
The freight car fleet in Australia consists of a total of 66,000 units. The highest demand is for railcars with 1435 mm track gauge zone, which meets ARA standards; track gauge zones of 1000 mm, 1067 mm and 1600 mm are seen much less frequently. The region is appealing in terms of offering the most innovative solutions for super heavy haul railcars with an axle load of 40 tonnes and more. The predicted demand is 2,500 railcars.
Prospective regions
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111
External flow of products and services
Internal flow of products and services
Revenue
clients
Cargo shipping companies
Operators Leasing companies Foreign clients
thsd railcars are
leased
thsd used railcars are sold from
the fleet
RUB mln
RUB mln
RUB bln from the sale of
railcars from the fleet
11new railcar
models
Market demand
Business model
ENGINEERING
UWC carries out a deep analysis of the market demand in different types of railcars. Based on this analysis and considering specifics and requests of the customer, UWC’s engineering devision develops and certifies railcars and their components. New models are put into production. The R&D centre of UWC designs tooling and organises preparation for the railcar production process. Moreover, the devision implements projects aimed at increasing the prodcuvtion operating efficiency.
637
297
14.7thsd
railcarstank containers
railcars
4.4
13.3
7.8
100
RUB bln
41.8
14.1
6.1
PRODUCTION
UWC’s industrial enterprises produce freight cars on bogies with an increased axle load, in line with their components. More than 50% of UWC’s spare parts are produced in-house.
The own leasing company and third-party clients sale railcars. The ratio between external and internal sales depends on the market environment.
Revenue structure in 2017, %
Sale of railcars (including used ones) and components
Operating lease
Other
0.8
89.3
9.9
62.0RUB bln
Cost of sales structure in 2017, %
Raw materials used for production
Residual value of sold railcars
Labour costs and contributions to social funds
Depreciation
Property tax
Repairs and technical maintenance of railcars
Other
90railcars
LEASING
Railcars of the leasing division are leased under an operating lease to external clients (operators and cargo owners) and its own operator UNICON 1520 of UWC.
SERVICE
For clients an important stage of the value creation is repair of railcars. UWC guarantees quick and quality repairs of rolling stock in its partner service centres and own head railcar repair enterprise.
1.7thsd
railcars repaired in the
own depot
OPERATION
UNICON 1520, UWC’s operator business, provides services for railway transportation of chemical cargoes. The company manages a fleet comprising tank containers, flatcars and tank cars.
RUB bln from the leasing
273 repairs in the own depot
1
2
3
4
5
thsd railcars
* Numerical indicators for 2017.
8
48
1
10
10
23
0
52.1RUB bln
24 25
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Increased service life
Higher capacity
Reduced impact on the railway
Operational reliability
1 Based on the example of UWC’s gondola.
Including repair savings. Route: 1 thousand km.
Disciunt rate: 11%
Customer savings from operation of new generation railcars compared to standard railcars1
1 2.5RUBthsd/day
RUBmln/ten years
UWC manufactures new generation railcars mounted on Barber bogie with an axle load of 25 tf, with higher load capacity, reduced impact on the railway, increased standard service life and operational reliability, thus bringing additional benefit for operators, cargo shippers, and the infrastructure.
New generation railcars
Product line and prospective developments
2726
BOXCAR
For transportation of the wide range of cargoes
CJSC Lokotrans, LLC Kuchukterminal
FLATCAR
Universal Fitting
Timber
UNICON 1520, Eurosib SPb – Transport Systems
CJSC Lokotrans, LLC Kronospan, JSC CG Vologodskiye Lesopromyshlenniki, LLC DV Real Trans Group, JSC ARKHBUM, LLC Sibirsky Krai, LLC Mondi Syktyvkar mill, OJSC VIC, Eurosib SPb
TANK CAR
For chemicals (different models for various cargo types: methanol, ammonia, molten sulphur, sulphuric acid, spirit, etc.
PJSC Metafrax, URALCHEM JSC, PJSC KuibyshevAzot, JSC BSK, PJSC Khimprom, PJSC PhosAgro, LLC UMMC Holding, PJSC Gazprom
HOPPER CAR
For grain For mineral fertilisers For cement
JSC Unified Grain Company, PJSC PhosAgro, LLC Technotransm LLC Logistics 1520, LLC TH RPC Azot
Product line Product line
GONDOLA
With unloading hatches With solid-bottom body
JSC SUEK, PJSC State Transport Leasing Company, JSC PTK,LLC EN+Logistika, Alfa-Leasing, LLC Logistics 1520, LLC VM-Trans, PJSC Kuzbasskaya Toplivnaya Company, OJSC MC Kuzbassrazrezugol
Companies transporting cargoes in UWC railcars
Companies transporting cargoes in UWC railcars
Standard gondola UWC’s new generation gondola Δ Improved characteristics Economic benefit
Bogie technology 18–100 18-9855
Axle load, tf 23.5 25 +6% Improved structure of load-bearing cast parts and the spring suspension system
5–10% reduction of the carriage duty per tonne of cargoLoading capacity 69–71 75–77 +8–10%
Impact on the railway ratio 1 0.97 –3% Improved dynamic characteristics and lower specific motion resistance
Savings up to 30% Due to a special tariff scheme for
empty running
Service life, years 22 32 +45%
Use of a strengthened side frame in undercarriage, high-quality casting and
wear resistant parts
Reduced frequency of the fleet renewal
Frequency of current uncoupling repairs1 21.5 3.4 Up to 7 times less
Lower maintenance costRepair intervals:
Until the first depot repairs 3 8
4 times less scheduled repairs
3 times lower cost of the life cycle
Before overhaul, years 11 16
Between depot repairs, years 2 8
Until replacement of the wheel sets, years 5–7 10–12
Technical and economic advantages of UWC railcars (based on the example of new generation gondolas)
1 Per 1 mln km of running by results of 7 months of 2017. Source: UWC.
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Increase in axle loads represents a natural development of the railway sector.
ALEXEY SOKOLOV,
First Deputy CEO for Strategy and Product of UWC
Heavy haul railcars are the key development trend of the Russian railways for the upcoming decade
up to 35t
Axle load
up to 20.4thsd t
Train weight2
USA
t
up to 30Axle load
up to 20thsd t
Train weight2
China
up to 40t
Axle load
up to 40thsd t
Train weight2
Australia
One of the perspective railway development areas determined by the Railway Transport Development Strategy before 2030 in the Russian Federation is improvement of the freight turnover by increasing the carrying capacity of the railway network. An obvious solution of this objective is to increase the train weight. However, the train length cannot exceed the current standard length (1 km) due to a number of infrastructural restrictions applicable in Russia. That is why it is practicable to increase the train weight by further growth of the railcar loading capacity.
There are two solutions available for this task: gradually switching to production of the rolling stock with the axle load of 27 tf1 and higher; using articulated railcars.
Perspective products: heavy haul railcars
2 Train weight is the weight of a train with coal1 Tonne-force. It is a unit of force equal to the magnitude of the force exerted on mass in a gravitational field.
3130
Articulated railcars provide for increase in the train weight without increasing its length and axle load (more load per metre of the train length).
Railcars with the axle load of 27 tf Articulated railcars
Railcars with the axle load of 27 tf allow increasing the train weight without increasing its length.
RUB thsd/day
RUB mln/ten years1.4 3.3
Savings of the customer from operation of the next generation railcars based on the example of UWC gondola mounted on a bogie of 27 tf compared to the standard gondola2
1 As of the end of 2017. Parameters of uncertified railcars may be changed based on R&D results. 2 Including repair savings. Route: 1 thousand km. Discount rate: 11%.
83.5
Prototypes1
m3
m3
t
t
103
120
82
Body volume
Body volume
Loading capacity
Loading capacity
+18%
+18%
compared to the standard analogue
compared to the standard analogue
Gondola
Hopper car
Prototypes1
Gondola
Hopper car
m3
142Body volume
m3
160Body volume
113.5t
Loading capacity
+61%compared to the standard analogue
114.5t
Loading capacity
+65%compared to the standard analogue
2016
design of the next generation bogie with the axle load of 27 tf
2017
certification of two models of solid-bottom gondolas with the axle load of 27 tf, capacity of 100 m3 and 108 m3 and the loading capacity of 84 and 82 tonnes, respectively
production of drop-bottom gondola prototypes with the capacity of 103 m3 and the loading capacity of 82 tonnes and a hopper car with the
2016
presentation of the first prototype of the articulated solid-bottom gondola
2017
production of prototypes of the articulated hopper car with the capacity of 160 m3 and the loading capacity of 113.5 tonnes, the articulated universal flatcar with the length of 60 ft* and the loading capacity of 116 tonnes, and the
capacity of 120 m3 and the loading capacity of 83.5 tonnes
the first stage of trial running of freight cars on the bogies of 27 tf completed Targets for 2018
completing tests and efficiency assessment of the next generation railcars
launch into production of the drop-bottom gondola model (103 m3) and hopper cars for grain and mineral fertilisers (120 m3) on the bogie of 27 tf
articulated gondola with unloading hatches and the body volume of 142 m3 and the loading capacity of 114.5 tonnes
Targetfor 2018
certification of the above indicated models, as well as the articulated flatcar for containers of 60 ft long and the loading capacity of 120 tonnes
*Ft – a unit of length equal to 0.3048 m.
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Perspective products: detachable bodies and tank containers
The carrying capacity of the railway network under infrastructural restrictions can be improved by means of increased average train speed, including the use of technology of transportation in detachable bodies.
ALEXEY SOKOLOV,
First Deputy CEO for Strategy and Product of UWC
The use of technology of transportation in detachable bodies allows solving the problem of railcars standing idle in the fleet during loading and unloading, when approaching ports or in loaded terminals.
As a result, it stabilises the demand for rolling stock and may lead to an increase of the average speed of cargo shipment to two times with the current infrastructure possibility
Advantages of the detachable body transportation technology1:
1 For more information: https://www.youtube.com/watch?v=ynprcO2Igzw.
Allow for permanent use of the railcar underframe.
Eliminate infrastructure “bottlenecks”: loading/unloading can be carried out in non-specialised ports with no special equipment.
Not subject to seasons. Technologically complicated flatcars are always running, while simple bodies are used in accordance with the cargo seasonality.
Do not require any considerable expenses on development, maintenance and storage.
365
3534
2017
production of detachable body prototypes for grain, mineral fertilisers and timber
Detachable bodies Tank containers
Tank container
Prototypes1
Detachable body for grain
Detachable body for timber
20 ft
Length
20ft
Length
m3
54Body volume
m3
162Volume per railcar (3 bodies)
49.5m3
Body volume
m3
149Volume per railcar (3 bodies)
32.5t
Loading capacity97.5 t
Loading per railcar (3 bodies)
Cargo containerisation is the world trend in transportation. Switching from tanks to tank containers in Russia can be accelerated by the massive tank writing off expected in 2018–2019.
UWC expects some 30% of all petrochemical cargoes to be transported in tank containers in 2018 and up to 50% in the medium term.
Target
for 2018
certification of the first tank containers for chemicals of T14 and T20 types
Advantages of tank containers:
growth of the cargo base: expected increase in production of petrochemical cargoes;
multimodal transportation, i.e. the possibility to use motor road, railway and sea transport for one route;
tariff scheme favourable for the cargo shipper, especially for the 3d class cargoes.
%50share of petrochemical cargoes transportation in tank containers according to outlooks in the medium term
Т141
Cargoes: for the wide range of chemicals (xylene, acrylonitrile, caustic soda, styrene, diethylene glycol, butyl acetate, butyl acrylate, FCC, etc.)
25.3 m3
Tank volumeWith heat insulation and steam heating
20ft
Length
Т201
Cargoes: oleum, sulphuric acid, acetone cyanohydrin
18.5 m3
Tank volumeWith heat insulation and steam heating
20ft
Length
1 As of the end of 2017. Parameters of uncertified railcars may be changed based on R&D results.
35.1t
Loading capacity105.3 t
Loading per railcar (3 bodies)
Targets for 2018
production of detachable body prototypes of the solid-bottom gondola type and a detachable body for coiled steel
Models in development1
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Strategy implementation
Priorities and contribution of 2017 to the strategy implementation
Priorities Key performance indicators Targets for 2017 Progress report
1. Developing new high value-added products
Expansion of the range of railcar types produced
Improvement to existing modifications
Increased specialisation of rolling stock
Revenue
Number of certified railcar modifications
Certification of 16 models and modifications, including next generation railcars (with an axle load of 27 tf) and articulated railcars
Partially completed
11 railcar models and modifications have been certified, including two railcars on a 27 tf bogie
Organisation of boxcar production at TikhvinSpetsMash
Completed
71 boxcars were produced at TikhvinSpetsMash
2. Diversification of sales markets
Work with the market “growth points”
Designing railcars for specific customers from various industries and geographical areas
Number of new customers
Number of export projects
Diversification of customers by industry sector
Concluding contracts with new customers and strengthening cooperation with current customers
Completed
New contracts: Alfa-Leasing, Gazprombank Leasing, UniCredit Leasing, Kronospan, PhosAgro, Uralchem, etc.
Continued cooperation with: State Transport Leasing Company, Lokotrans, Bashkir Soda Company, KuibyshevAzot, etc.
Drafting contracts for the export of railcars and components to countries in Africa, South America, and Europe (more than 20 projects are under development)
Completed
More than 20 export projects have been developed throughout the year, new contracts for the supply of railcars to countries in the Middle East and Africa have been signed. Meanwhile, many tenders were cancelled by customers due to finance complications or reduction in the price of transported raw materials
and important; this therefore became a priority focus within the strategy implementation.
In order to conduct the annual assessment of strategic priorities implementation and employee motivation, UWC has developed a KPI System that includes a list of key performance indicators for the objective evaluation of target performance.
The Company’s has developed actively in the first five years since it was founded and has thus laid a firm foundation for long-term sustainable development. The main guidelines are four strategic goals set by the Company.
The priority approaches to implementing the strategy may differ from year to year as
the Company develops, as well as in regard to market conditions and other external factors.
For example, in 2017 diversification of supply markets was a priority in all aspects: expansion of the customer base, geographic and industrial expansion. By 2018, developing export sales became more relevant
Mission
To provide for the increase of carrying capacity and operation safety of the railway transport
Strategic Goals
Maintaining a leading position in Russian innovative railcar manufacturing
Creating synergy through collaborative work between the Holding’s industrial enterprises that produce freight cars, bogies and components, and leasing and transportation companies, the engineering centre and the service department
Actively participating in the technology development programme for heavy haul transportation and upgrading rolling stock by producing high value-added railcars
Developing global markets, building economic relations with major transnational railway companies, and supplying direct exports of products offered by the Holding’s industrial enterprises
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Priorities Key performance indicators Targets for 2017 Progress report
Conclusion of contracts for new types of railcars:
tankers for chemical cargo;
boxcars;
gondolas with an axle load of 27 tf.
Completed
New contracts for the supply of tankers for chemical cargo have been signed with Metafrax, KuibyshevAzot, Uralchem, Khimprom, Rosspirtprom, and UMMC
Contracts for the supply of boxcars have been signed with Lokotrans and Kuchukterminal
Gondolas on the 27 tf bogie are being tested on the railway network; the first contracts are to be signed in 2018
Establishment of a transport company for transporting freight in tank containers and containers, and conclusion of the first contracts
Completed
UNICON 1520 has been established and contracts have been signed with Russia’s leading chemical enterprises and operators (for example, RZD-Logistics)
Sale of standard rolling stock from the fleet of leasing companies
Completed
More than five thousand standard railcars were sold from the fleet
3. Ensuring punctual and high-quality service of all types
Expanding the competencies of service centres
Expanding the geography of the service centre network
Railcar downtime for repairs
Number of service centres
Number of Category I service centres
Advanced repairs of the entire product line at TAP "Titran-Express"
Partially completed
Advanced repairs of gondolas and hopper cars have been carried out
Expansion of the Category I service centre network
Completed
Five service centres of Category I have been opened along the Oktyabrskaya, Moscow, Trans-Baikal, and West Siberian railways
Opening new service centres in the Baltic states
Completed
Four service centres were opened in Latvia, Lithuania, and Estonia
4. Improving operational efficiency
Increased productivity of assembly lines and blank production
Increased productivity of small foundry production
Implementation of projects to reduce cost of sales
Waste reduction at all facilities
Maximum productivity
Time taken in switching to new products
Railcar cost of sales
Total equipment efficiency
Increase in the railcar output to 18–20,000 units
Completed
19,100 railcars have been produced
Increase in the capacity of the TikhvinSpetsMash plant
Completed
The plant has been put into operation at full capacity
Renovation of medium casting production Completed
Project to increase the capacity of small foundry production to up to 840 tonnes of effective casting per month has been implemented
Implementation of projects to localise production of components
Completed
Production was localised for: round bearings within the body, cap screw and springs; friction plates; springs; and wear plates for 27 tf bogies
Implementation of projects to improve technology and increase bottleneck productivity
Completed
Projects to improve hopper production technology (at the request of Guinea), a 40-foot timber flatcar, a 40-foot container flatcar, and a hopper with volume of 101 m3 have been implemented
Development of the production of the first railcar models with an axle load of 27 tf
Completed
The production of gondolas with unloading hatches of 103 m3 has been developed
40 41
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Priorities Key performance indicators Targets for 2018 Risks
1. Developing new high value-added products
Expansion of the range of railcar types produced
Improvement to existing modifications
Increased specialisation of rolling stock
Revenue
Number of certified railcar modifications
Work has continued on designing, launching and commissioning new models of standard and specialised railcars with an axle load of 27 tf and six-axle articulated railcars
Increased competition
Decrease in demand for transportation in several industries due to a general decline of business activity in Russia
Transition of freight traffic to other types of transport
Expanding the model range of bogie mounted railcars with an axle load of 25 tf
Developing railcars and parts for export deliveries
Developing T14 and T20 tank containers and detachable bodies for transportation of grain, mineral fertilisers, timber and coil steel
Certification of 12 new models and modifications of railcars, two tank containers, and three detachable bodies
2. Export development
Building a positive image through first supplies and receiving good references
Price competition taking into account aspects of state support
Accepting offers from Russian banks for export financing
Developing the supply of components and localising railcar production in regions to gain an advantage
Share of export revenue
Number of export projects
Increase of export revenue up to more than USD 40 mln Changing exchange rates
Growing competition on international marketsIncreasing presence in the key regions: the USA and Europe
Drafting at least 20 export projects (tenders and requests) in countries in North America, Europe, the Middle East, Africa and South America
3. Ensuring punctual and high-quality service of all types
Expanding the competencies of service centres
Expanding the geography of the service centre network
Railcar downtime for repairs
Number of Category I service centres
Increasing the number of service centres of category I; assigning five more service centres to category I on West Siberian, East Siberian and Moscow railways.
–
4. Improving operational efficiency
Increased productivity of assembly lines and blank production
Increased productivity of small foundry production
Implementation of projects to reduce cost of sales
Waste reduction at all facilities
Automation of operations
Reduction of labour intensity
Maximum productivity
Time taken in switching to new products
Railcar cost of sales
Total equipment efficiency
Maintaining the maximum production output while preserving quality level
Production from 19 to 20 thousand railcars
Reducing the time taken to transition to new products at TikhvinSpetsMash (from 2 days to 1 day) and at TVSZ (from 14 to 7 days)
Further reduction of costs on mass production
Reduction of equipment downtime by 15%, automation of the repair planning process in an ERP system
Equipping large foundry production with the necessary auxiliary equipment to produce 30,000 large casting railcar sets per year
Delays in supply and installation of equipment
Increasing prices for goods and materials
Priority areas for the 2018 strategy implementation
42 43
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Key investment appeal factors
Demand for Railway Transportation is Growing...
UWC Remains in a Leading Position on the Growing Market…
...and has a Number of Advantages that Determine the Company’s Continued Successful Development
...which Leads to Increase in Rates for Railcar Lease and Production
1,2612017
1,2152015
Loading to Russian Railways networks, mln tonnes
1,2222016
2,4912017
2,3042015
Freight turnover to Russian Railways networks, bln tonnes/km
2,3422016
Production of new generation and standard railcars in Russia, thsd units
New generation railcarsStandard railcars
EFFECTIVE BUSINESS MODEL
UWC has a vertically integrated business model that is unique on the Russian railcar building market, which combines engineering, production, operating leasing, service, and operation.
In 2017, UNICON 1520 was established in the management area, which specialises in providing transport services and combined logistics for bulk cargo, with the aim to develop the container transportation segment. (See Business model, p. 24)
UNIQUE INNOVATIVE PRODUCTS
Advantages of UWC’s innovative railcars:
higher loading capacity; reduced impact on the railway; increased standard service life; increased standard repair interval;
reduced frequency of needing current uncoupling repair.
11 certificates for new models and modifications of innovative railcars were received in 2017; the total number of certificates amounted to 51. (See Product line and prospective developments, p. 26 and Engineering and innovation, p. 48)
In 2017, UWC exported more than 600 railcars and almost 200 large casting railcar sets to countries outside the CIS, totalling EUR 30 mln. (See Railway market and UWC’s position, p. 16)
ADVANCED CORPORATE GOVERNANCE SYSTEM
independent directors; system of internal corporate control;
KPI system.
In 2017: UWC’s Regulations on the Information Policy were approved, which were developed in compliance with the requirements of Russian legislation, other regulatory documents, and global best practices;
27 meetings with investors were held with the participation of Company management; three visits to the industrial site in Tikhvin were arranged for investors and analysts. (See Corporate Governance, p. 113).
GROWTH POINTS OF OPERATIONAL EFFICIENCY
Availability of capacities for production growth:
production capacity – 22,000 railcars per year;
own casting capacities – up to 90,000 tonnes of castings per year;
increase in the share of internally produced components;
improvement of the lean production system.
In 2017, TikhvinSpetsMash was put into operation at full capacity; the capacity of small foundry production was increased. A number of projects to increase bottleneck productivity were implemented, as well as projects in the scope of implementing the Production System. (See Strategy implementation, p. 38 and Production, p. 52)
ACTIVELY ENTERING FOREIGN MARKETS
UWC deliver railcars and components to countries in the Middle East and Africa, as well as to the USA. Projects are being drafted in Europe, South America, South-East Asia and Australia.
Lease rates for standard gondolas, RUB/day
300
700 550
1,600
1, 100
1, 500
Junuary 2015 December 2017
33
26
16
6
7
12
57.4thsd railcars
Production volume of UWC’s railcars, thsd units
Major railcar producers in Russia in 2017, %
UWC
Other
RM Rail
19.12017
12.42015
15.92016
+24%CAGR 2015-2017
Uralvagonzavod
Altaivagon
Zavod Metallokonstruktsy
2017
2015
201610.8 24.4
21.8 35.7
12.2 14.7
57.4
26.9
35.2
01’15 07’15 01’16 07’16 01’17 07’17 12’17
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UWC is a vertically-integrated railcar building holding and is the only company of its kind on the Russian market. UWC possesses both the best engineering and manufacturing facilities and assets, thereby supporting sales and operating lease, as well as operation and maintenance services.
Section contents
Overview of Business Activities
Engineering and innovation
48
68
Production52
70
Operating lease Operation
thsd railcars19.1
to the 2016 level
Production in 2017
+20%
UWC-owned railcar fleet structure by railcar type as of the end of 2017, %
New generation gondolas
Standard tank cars
Other
New generation hopper cars
New generation tank cars
79
5
14
1
1 13.3thsd railcars
72
Service
Russia
KAZAKHSTAN
UZBEKISTAN
TURKMENISTAN
TURKEY
СИРИЯ
ROMANIA
MOL.
UKRAINE
BELARUS
LITHUANIALATVIA
ESTONIA
SWEDEN
NORWAY
DENMARKНИД.
ВЕНГ.
СЛОВ.
ЧЕХИЯ
POLAND
ГЕРМ.FINLAND
IRAQ
АФГАНИСТАН
КИРГИЗИЯ
ПАКИСТАН
ТАДЖИКИСТАН
AZERBAIJAN
ARM.
GEORGIA
IRAN
MONGOLIA NORTHKOREA
SOUTHKOREA
JAPAN
CHINA
Vologda
Zheleznogorsk
Uzlovaya
BataiskEngels
Sterlitamak
Magnitogorsk
Chelyabinsk
Sverdlovsk Sort.
KubakhaKushva
Berezniki
Voinovka
KurganOmsk
Pavlodar
KaragandaKazalinsk
Inskaya
Belovo
Ilanskaya
Krasnoyarsk-Vostochniy
Taishet
Novokuznetsk
ASKIZ
Irkutsk-Sort. Ulan-Ude
Khilok
Tinda
Svobodniy
BelogorskKhabarovsk
Nakhodka
Partizansk
Komsomolsk-na-Amure
Severobaikalsk
Chita
Valuiki
Murashi
Gorky Sort.
Cherepovets
TikhvinPskov
ValgaChernyahovsk
DaugavpilsSt.-Petersburg
Murmansk
Radvilishkis
UWC’s service network
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Engineering and innovation
system design of new generation railcars for 1520 mm gauge tracks, chassis, automatic coupling devices and components;
designing railcars for export deliveries;
development of projects for modernisation of the railcar fleet;
operational support, development and implementation of railcar and chassis repair technologies;
LLC “All-Union Research and Development Centre for Transportation Technology” (VNICTT)
In 2017, VNICTT reached a
qualitatively new level of development. Continuing work on improving models on the basis of proven technologies, we have made a major step forward in the development and production of railcars of the next generation and development of heavy freight traffic technologies
Kirill Kyakk, CEO of VNICTT
UWC’s leading positions in the area of innovative railcar building for 1520 track gauge zone is largely attributed to VNICTT.
and technological solutions in establishing production and operation of freight cars, and forms and methods of organisation and management of manufacturing;
improving UWC economic performance;
review and evaluation of development tendencies in the world car-building industry as well as the situation on the world transport markets.
development of technologies for the production of cast parts of freight cars, research in the field of advanced materials with special properties;
support of projects on reducing cost of sales of serial products, foundry technology optimisation, and application of new structural solutions;
implementation of projects for building new facilities, as well as modernising existing facilities.
UWC includes an Advisory Scientific and Technical Council, which is composed of employees of UWC, its controlled organisations (including VNICTT), as well as other persons with sufficient experience and knowledge in the field of railway transport and railcar building.
The main objectives of the Council are:
participation in the formation of the concepts of innovation, scientific and technical policy of UWC;
review and evaluation of advanced technical ideas
>50certified models
>150technicians whith work experience at the country’s largest railcar building plants
2017 Results
During the past year, 11 railcar models and modifications were certified. The total number of certificates reached 51.
The extension of the model range of next generation railcars with 27 tf axle load, which have no analogues in CIS countries, and which significantly improved the efficiency of cargo transportation, was a particularly significant achievement. The following products were certified during the year:
universal gondolas with increased Tpr dimensions
and unloading hatches, model 12-9548 with a volume of 108 m3;
gondola, model 12-9869-03 with a body volume of 100 m3 and 1-VM dimensions.
The following railcars with 25 ts axial load bogie were certified:
universal flatcar, 40 ft long with a carrying capacity of 77.5 tonnes suitable for transporting dangerous goods, model 13-6851-04;
flat railcar for transportation of containers, 40 ft long with a carrying capacity of 80 tonnes suitable for transporting dangerous goods, model 13-6851-05;
flat railcar for transportation of containers, 80 ft long with a carrying capacity of 74.5 t, model 13-6903;
hopper car for transportation of grain with an aluminium alloy cover with a volume of 120 m3 and a carrying capacity of 77 tons, model 19-9549-02;
This Engineering Centre is a modern research and design complex specialising in railway freight rolling stock.
The main purpose of the VNICTT research and development centre is to create railcar products with high added value, providing economic and technological efficiency of operation compared to other railcar alternatives.
Key activities of VNICTT:
>480patents in Russia and abroad
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The tank car model 15-6901 with a 54.78 m3 boiler is equipped with an undercarriage with an increased 25 ts axial load, which provides efficient use of 75 tonne loading capacity, thereby increasing the loading in the railcar by one third compared to the in-service tanks on a conventional bogie. The service life of the car was increased to 40 years as compared to the 20 years of failure-free operation shown by current analogues, while the mileage between in-shop repairs is 800 thousand km (eight years) vs. 210 thousand km (two
UWC has designed tanks for transporting concentrated nitric acid for URALCHEM
for tank and welds. TikhvinСhemMash acted as a manufacturer of rolling stock. SMZ Arkonik, the largest Russian enterprise for manufacturing high-tech aluminium semi-finished products, became a supplier of corrosion resistant aluminium plates. Finally, Sespel Cheboksary Enterprise, a leading producer of specialised technology, provided welding of tank. As a result, a unique tank-railcar for transporting new generation concentrated nitric acid with essentially improved technical and economic indicators entered the domestic market.
years
by 20the service life of tankers is more compared to used analogues
%by 30increase of railcars’ load capacity compared to tankers used on the traditional bogie
thsd kmby 590
the milage between depot repairs is more compared to railcars on the standard bogie
years) demonstrated by traditional bogie railcars. Since concentrated nitric acid has a high corrosion activity and toxicity, the tank’s construction includes aluminium parts, as this material is inert to the transported cargo.
When developing a radically new car, unique in its characteristics, quality and production technologies, UWC acted as an integrator in scientific and technological cooperation between companies from different areas. VNICTT designed and carried out integrated research of a new material
A key challenge for the next year will be the continuation of a project for developing, launching and commissioning the new models of universal and specialised railcars with an axial load of 27 tf, gondolas with a 103 m3 body volume, and hopper railcars for grain and fertilisers.
The company is also intending to introduce a wider range of railcars on 25 tf bogie – it is planned
to receive certificates for new models of tankers for chemical cargoes, gondola railcars for technological chips, and four-axle dump cars. The development of railcars and components for export deliveries is also being carried out.
In total, the company plans to certify 12 new models and modifications of railcars, two tank-containers, and three types of detachable bodies.
We will continue the development and commissioning of T14 and T20 tank containers, detachable bodies and flat railcars for transportation of grain, mineral fertilisers, timber and steel coils.
The company continues to implement promising projects, including the development of six-axle railcars of an articulated type with increased load capacity and increased body volume.
Plans for 2018
flat railcar for transportation of timber with a 60 ft loading length and a carrying capacity of 72.5 tonnes, model 13-6895;
tank railcar for transportation of ethyl alcohol with a boiler volume of 88 m3 and loading capacity of 73.3 tonnes, model 15-9993-01;
tank railcar for transportation of concentrated nitric acid and other chemical cargos with a boiler volume of 54.8 m3 and a carrying capacity of 75 tonnes with an aluminium boiler, model 15-6901.
The following products were put into serial production at TikhvinSpetsMash:
universal box car with a 175 m3 railcar body and a loading capacity of 73 t, model 11-6874;
flat railcar for containers, 40 ft long with a carrying capacity of 80 t, model 13-6851-01.
In addition, the components for the automatic coupling device for heavyweight railcars and the constituent parts of a fundamentally new monobloc bogie-based braking system, have also been certified.
For export deliveries, two series of railcars were developed, put into production, and shipped to customers:
gondola, model 12-9869-01/02 for 1435 mm gauge (Middle East);
hopper car model for 1435 mm gauge for transportation of aluminium oxide (Republic of Guinea).
There were significant results in the field of cast components in 2017:
moulded bogie parts (side frame and bolster beam, for which the technologies of castings and alloys production were developed to ensure the mechanical properties meeting the relevant international standards) were developed, put into production and commercialised on the highly-competitive US market;
production was started and the required certificates were received for the whole range of cast parts within the programme of launching “heavy haul traffic” with an axle load of 27 tf;
the technologies of surface hardening by high frequency currents, ensuring durability and wear resistance of cast parts, were developed.
An important activity of VNICTT is patenting: as of the end of 2017, 482 UWC patents were registered (compared to 300 patents in 2016). Of these, utility models comprised more than 90%.
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Production
UWC companies manufacture a wide range of high quality products using innovative technology, best practices and modern production facilities:
UWC is a leader in producing new generation railcars in Russia and CIS countries. The Company’s products improve the efficiency of railway freight transportation and contribute significantly to the development of the transport industry in the Russian Federation.
Gennady Veselov,CEO of TVSZ and TikhvinСhemMash
The last year was yet another year of growth demonstrated by UWC production facilities. We increased production volumes of all car-building enterprises of the Holding, developed new products for the domestic and overseas markets, and continued working on increasing production efficiency
19.12017
2013 3.9
9.62014
12.42015
UWC railcar production, thsd units
15.92016
UWC railcar production structure, thsd units
Gondolas
Hopper cars
Tank cars for chemicals
Other
>100industrial robots
4plants for production of railcars and components
2joint ventures for production of components
new railcars sold to third-party clients during the year (STLC, Alfa-Leasing, Unified Grain Company, Locotrans, and Gazprombank Leasing)
76%
railcars produced in 2017, which is in line with the stated targets
19thsd
railcars are to be produced in 2018
19–20thsd
>20automatic and automated lines
new generation railcars (gondolas, hoppers, flatcars, tank railcars, covered railcars, etc.);
railcar castings;
wheel sets;
springs;
other components.
2017
2013
13.0 2.3 0.1
2014
11.6
7.5
3.1 0.8
0.2
2,0
2015
14.6 2.4 1.30.7
0.5
0.5
0.1
2016
0% 100%
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Business model of the Production segment
Producers of rail equipment and automobiles
Railcar repair depots
Export
Leasing companies
Operators/Cargo shippers
Export
State
Regulation
Ministry of Industry and Trade of the Russian Federation
Ministry of Transport of the Russian Federation
clients clients
Gondolas, hopper cars, flatcars
Tank containers
Flatcars, boxcars, etc.
PRODUCTION OF COMPONENTS
components demand
>50%
22thsd railcars
resources
Production staff is > 10 thsd people
Partner educational institutions
Own power plant
Suppliers of parts and materials
Rolled metal products
Axle boxes
Solid-rolled wheels
Other railcar bogie parts
Brake equipment
Scrap
Cast iron
Other
Support Preferencial financing of TikhvinChemMash and TikhvinSpetsMash
% rate subsidies of TVSZ and TAP “Titran-Express” Tax benefits from the Government of the Leningrad Region
PRODUCTION OF COMPONENTS
30 65
80
90railcar sets
of high-strength cast iron parts
castings per annum – production capacity
wheel sets
Cast bogie parts and wheel sets
Wheel sets and bogie assembly
Bearings
30
SpringsBrake components and joint assemblies
integrated bearings railcar sets of rail springs
thsd
thsd thsd
thsdtonnes
thsdup to
up to
up to
up to
up to
up to
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JSC “Tikhvin Freight Car Building Plant” (TVSZ)
TVSZ is a UWC production centre and one of the largest and most advanced enterprises of transport engineering in Europe. It produces new generation freight cars of three types: gondolas, hoppers, and flatcars, as well as components for these cars.
Car assembly and foundry lines of the TVSZ plant, integrated into a single technological complex, provide high performance and flexibility of production. Most of the components for freight cars are also produced at the plant. Together with the general use of automated lines, robots, and optimised plant logistics, this ensures a high and stable product quality at low cost.
In the reporting year, TVSZ produced 17 thousand railcars, which is an 11% increase compared to the previous year. Such positive change resulted from the increase in the number of orders.
The structure of production did not change significantly in 2017 compared to 2016.
In the reporting year, two gondolas on the bogie with an axle load of 27 tf, and a hopper car for transportation of grain with an aluminium alloy cover, and a flatcar for containers 80 ft long were put into production (for more details see Engineering and innovation, p. 48).
TVSZ has a foundry, which is considered one of the best in Europe and Russia.
2017 Results
17.02017
2013 3.9
9.62014
12.32015
TVSZ railcar production volumes, thsd units
15.32016
TVSZ railcar production breakdown in 2017, %
Gondolas
Hopper cars
86
14
Dynamics and structure of casting production, thsd tonnes
2017
2013
55.0 7.2
2014
49.6
33.1
9.8
55.3
35.0
2015
62.3 7.770.0
62.25.7
1.9
2016
Large railcar castings Small and medium railcar castings
In 2017, the plant commenced shipping heavy car casting to the U.S. Side frames and bolsters will be used in Barber S-2-HD® bogies
TVSZ on the US railway heavy casting market
operated on railways in the United States, Canada and Mexico. It is planned to supply up to 5 thousand sets of railcar heavy castings per year.
To be admitted to the U.S. market, the plant passed a certification procedure which included technical audit and the audit of the quality management system, thereby confirming TVSZ’s compliance with requirements of the М1003 standard of the Association of American Railroads.
The results of static and dynamic tests of TVSZ casting samples, carried out by the accredited CTLGroup testing centre, confirmed that the specifications meet American standards.
Its production capacity is a maximum 90 thousand tonnes of castings per year.
In the reporting year, 70 thousand tonnes of casting were produced, which is a 13% increase compared to the 2016 production volume (62.2 thousand tonnes).
In the reporting year, State Transport Leasing Company became the largest purchaser of railcars, having acquired a total of 8.2 thousand open cars produced in 2017 (since
2016, the total volume of deliveries has exceeded 13 thousand units). Large
deliveries were also made to Alfa-Leasing, Rusagrotrans and Gazprombank Leasing.
In 2018, the plant is planning to continue diversification of production, in particular to increase the share of hoppers in its output, and serial production of railcars with an axle load of 27 tf, as well as
Plans for 2018
increase railcar production for export deliveries.
The Company’s strategy provides for implementation of projects to increase the share of own components
in production, increase performance to eliminate bottlenecks in production, and develop the Production system and other measures to improve operational efficiency.
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TikhvinСhemMash plans to further increase production volume in 2018. The company aims to master the production of new models
In 2018, TikhvinSpetsMash is planning to increase its production volume of railcars, expand railcar export, and diversify the production structure, in particular to launch
Plans for 2018 Plans for 2018
JSC “TikhvinСhemMash” (TikhvinСhemMash)
TikhvinСhemMash is an enterprise producing new generation tank cars with improved load capacity, designed for transporting all kinds of chemical cargoes (sulfuric acid, methanol, ammonia, caustic soda, etc.). The plant was launched at the end of 2015. TikhvinСhemMash also plans to produce articulated tank railcars, which have no analogues in the CIS, and tank-containers.
Production lines ensure quick adjustment for production of various types of tank cars depending on customer requirements.
JSC “TikhvinSpetsMash” (TikhvinSpetsMash)
TikhvinSpetsMash was established in 2016 and specialises in the production of innovative specialised railcars, such as flatcars for transportation of timber and timber products, covered cars, etc. Flexible production lines ensure quick adjustment for production of various types of special railcars, including small batches, depending on customer requirements.
In 2017, TikhvinСhemMash produced 747 tank railcars of various modifications, which is a 62% increase over the previous year’s level.
In the reporting year, TikhvinСhemMash set up the production of tank railcars for ethyl alcohol, concentrated nitric acid and other
In the reporting year, while the production capacity and volume of orders increased as planned, TikhvinSpetsMash produced 1.3 thousand cars, which exceeded the previous year’s results by 10 times.
In 2017, TikhvinSpetsMash mastered the production of 60 ft long timber flatcars, 40 ft long universal and container flatcars,
2017 Results
2017 Results
chemicals (for more details see Engineering and innovation, p. 48).
In 2017, the company’s largest clients were Metafrax, Bashkir Soda Company, KuibyshevAzot, URALCHEM and PhosAgro.
and box cars (see section Engineering and innovation, p. 48). In the reporting year, timber flatcars accounted for the major share of output (about 90% of total output).
In 2017, the largest supplies were ordered by Locotrans, DV Real Trans Group, ARKHBUM, Siberian region, Mondi, and VIC.
of tank railcars for transporting chemical products and tank containers for chemicals, including dangerous ones.
the production of gondolas for transportation of industrial chips and four-axle dump cars. Furthermore, it intends to start production of detachable railcar bodies.
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Implementation of a Production System
UWC enterprises have developed a Production System aimed at creating a culture of continuous improvement. This is based on unleashing employees’ potential through their involvement in the development process and eliminating the actions that do not create value for the client.
Proven tools have been introduced within the framework of the Production System, such as 5S and TPM systems, the methodology for assessment of personnel load “Standardised Work”, Kaizen, A3 project, etc.
In 2017, employees filed 121 Kaizen proposals, of which 110 were realised (total remuneration amounted to RUB 84.5 thousand).
In addition, during the year, two A3 projects (out of three submitted projects) were implemented, with an annual economic effect exceeding RUB 5 mln (total remuneration amounted to RUB 200 thousand). Since the Production System was implemented in 2012, the total economic benefit exceeded RUB 250 mln.
Limited Liability Company Springs Industrial Technology Center (NPC Springs)
NPC Spring company produces high-quality springs for freight cars in compliance with strict performance requirements and considering the design features of innovative freight car bogies, and springs for locomotives, electric trains, metro cars, trams and car suspensions. The plant fully meets UWC needs for springs, and actively increases its capacity to meet future demands which result from an increase in the production volume of railcars by the Holding enterprises and by entering new markets in Russia and abroad.
Among the plant’s objectives for 2018 are:
increasing the production of springs for freight railcars, including the supply of springs for RPC Uralvagonzavod;
Plans for 2018
In 2017, NPC Spring produced 1.7 million springs, which is an 18.7 % increase compared to 2016.
In the reporting year, the preparation for production of springs for Alstom locomotives was started at the NPC Springs plant; suspension springs for Peugeot Citroen Mitsubishi Cars Rus were tested, and the springs for the bogie 18-194-1 of RPC Uralvagonzavod were certified, with prototypes produced and tested at T1
2017 Results
1,688.02017
2013 435.7
991.42014
1,043.62015
Spring production volume, thsd units
1,422.02016
cushioning units for NPP TransKuzMach. First deliveries of the specified products are planned for 2018. Furthermore, underground springs for MetroWagonMach, and tram springs for PC Transportation Systems were put into production, and their deliveries were commenced.
start supplying springs for the innovative absorbing device of class T1;
start supplying springs for the assembly line of Peugeot-Citroen in Kaluga;
start supplies of locomotive springs abroad.
New possibilities for data analysis in SAP
UWC started a project for introducing a single SAP S/4HANA-based financial management system at its Tikhvin production facilities. A single SAP BPC solution for automating the planning, budgeting and consolidation tasks is being implemented at other enterprises of the Holding. The decision to start this project was made due to growth in the volume of analysed information and the increase in demands for transparency and controllability of production processes, logistics, maintenance and execution of obligations to clients.
The project is unique for the Russian market for two reasons: firstly, having a unified data model will make it possible to track changes in a timely fashion, to optimise the workflow, avoid replication, and reduce the volume of data by several times; secondly, the target architecture involves the integration with existing ERP
systems through the application of advanced Central Finance technology.
Within the framework of the project, the processes of budgeting and preparation of management accounts will be transformed, duplicative systems and intermediate calculations will be eliminated, and the schedule for closing the RAS and IFRS statements will be optimised through embedded principles of accounting convergence.
As a result of project implementation, financial and tax risks will be reduced significantly, and the financial audit costs and user costs will be reduced through the use of a single data space, which ultimately will contribute to the preservation of UWC’s leading positions as a domestic freight car builder.
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Serial supplies of parts for TMX bogie braking system and joint assemblies SAC-1 for railcars manufactured by UWC enterprises were launched in 2017.
Supply of products made from imported components to Tikhvin Freight Car Building Plant started in 2017, with over 15 thousand bearings delivered.
“JV “Wabtec-UWC” LLC (Wabtec-UWC)
“Timken UWC” LLC (Timken UWC)
A joint venture with WABTEC company entitled Wabtec-UWC produces brake components for freight cars and joint assemblies.
A joint venture with TIMKEN, Timken UWC offers high-tech production of bearings for freight car bogies.
The company is planning to strengthen the localisation and increase the volume of TMX parts supplies in 2018. Furthermore, it is planned
Timken-UWC plans to produce and ship over 55 thousand bearings made of localised components in 2018 to Tikhvin Freight Car Building Plant.
Procurement is important for ensuring the continuity of the production process and, ultimately, meeting the needs of UWC customers: most of the participants are production enterprises such as TVSZ, TikhvinСhemMash, TikhvinSpetsMash, TAP “Titran-Express”, and NPC Springs.
Plans for 2018
Plans for 2018
PROCUREMENT ACTIVITIES
2017 Results
2017 Results
Due to changes in market conditions, it was decided to launch the homologation1 of the automated mode after its prototype was produced at the joint venture.
Bench tests of a bearing produced from localised components were successfully completed.
to work on localisation of automated mode and make a decision on the advisability of assembly localisation.
1 Homologation means bringing the product specifications and parameters to correspondence with the requirements
of standards or requests of the customer’s country.
It is also planned to conduct bench tests of the optimised bearing with increased service life and establish the Timken bearings repair shop.
In 2017, UWC conducted over 450 competitive procedures for a total amount exceeding RUB 40 bln.
Rolled metal products, solid-rolled wheels and bogie parts account for the majority of purchases.
Russian and foreign manufacturers of materials
and components for the machine building industry are among the key suppliers of products for UWC enterprises
Deliveries are mostly made on a competitive basis in accordance with the procurement procedures, with prices fixed for a maximum possible period.
Products procurement structure in 2017, %
Rolled metal products
Axle boxes
Solid-rolled wheels
Rough forged axles
Bogie parts
Brake equipment
Other
7
7
25
8
31
9
13
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Product Suppliers
Rolled metal products EVRAZ PLC, Severstal, Magnitogorsk Iron and Steel Works
Axle boxes SKF, Timken, EPK
Solid-rolled wheels Vyksa Steel Works
Rough forged axles Uralkuz
Bogie parts Metallitmash, Leningrad Steel Works
Brake equipment Rhythm, Transpnevmatika, MTZ TRANSMASH, Knorr-Bremse
Key suppliers
For a large part of suppliers, UWC is a major strategic client, which results in flexible pricing and individual discounts. To ensure reliable deliveries and attractiveness of terms, the following activities are carried out on a regular basis:
checking the quality of products of new suppliers (they are accepted in serial operation only after inspection of trial lots);
conducting market research and price monitoring;
holding negotiations with suppliers;
distributing volumes of individual procurement items among multiple suppliers;
analysing all factors of the final cost formation, including the price of the manufacturer, the cost of loading, shipping, storage, packaging, labelling, etc.
Quality management in the rail industry has specific features such as complex supply chain and the priority of providing traffic, passenger and cargo safety.
UWC enterprises have certificates confirming their compliance with the International Railway Industry Standard (IRIS)1, developed upon the initiative of the Association of the European Railway Industry (UNIFE) based on ISO 9001:2015 “Quality Management System”, with consideration of the industry specifics and best practices of the leading European manufacturers
Quality standards
1 IRIS – International Railway Industry Standard.2 The enterprises should undergo a recertification audit for the transition from IRIS to ISO/TS 22163:2017 during the
period from June 2017 to September 2018.
UWC pays much attention to the rhythm of production and consistently high quality of components, thus it cooperates only with suppliers who clearly demonstrate in practice the quality of their products and services.
Supply chain quality
Furthermore, UWC sets the requirements (see table below), which in particular cover the main quality management processes.
Enterprises of the Holding follow the standard regulating
QUALITY MANAGEMENT
of railway equipment in the field of quality management systems. The implemented principles of these standards ensure a high level of efficiency of business processes, competitiveness, product reliability and innovative attractiveness of their developments and technical solutions.
In 2017, UWC enterprises were among the first Russian companies2
certified for compliance with the requirements of ISO/TS 22163:2017 “Railways. Quality management system. Requirements for
the business management systems for rail industry enterprises”. This is a new standard prepared by UNIFE. This certification proves that the company established and operates an efficient management system which guarantees high quality of manufactured products.
Russian Railways, within the framework of the infrastructure owner policy in the field of strategic quality management, specified that their suppliers and subcontractors shall meet the requirements of ISO/TS 22163:2017.
the procedure of approving and monitoring all suppliers, thus ensuring comprehensive evaluation of the technical, logistic and economic aspects of cooperation.
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Key players of the UWC’s quality management system are the Departments of specific business areas, directly affecting product quality. Overall coordination of this complex is carried out by UWC’s Quality Department.
The system operation is based on the existing
Quality management system
standards, regulations and specifications governing practically the whole lifecycle of products.
For instance, the product quality from the point of view of consumer properties is already ensured at the design and engineering stage. UWC adopted
the Quality Gate system, regulating the development and launch of new car building products at the Company facilities as to meeting the requirements to safety, reliability, quality and cost efficiency of products at all stages of the life cycle1.
1 Detailed information about the Quality Gate system is shown in the 2016 Annual Report of PJSC “RPC UWC”.2 As an exception, it is allowed to make a plan of actions in terms of preparation to certification.
Requirement
Traditional product/SupplierNew product/Supplier
2014–2015 2016 2017
IRIS standard, third-party certification2 + 1–3 years since the
start of supplies
ISO 9001:2008, third-party certification + before the start of
supplies
ISO 14001:2004, third-party certification
+ +
1–3 years after the start of supplies, if required by Tikhvin Freight Car Building Company customers
Internal procedure for interaction with consumers in accordance with the reference manual “Advanced Product Quality Planning and Management Plan. APQP”
+ +
before the start of supplies
Internal procedure for interaction with consumers in accordance with STO 1710-005-2012 Approval of the supplier's production facilities
+ + +
before the start of supplies
The internal procedures of the enterprise in accordance with the reference documentation “Analysis of Types and Consequences of Potential Failures. FMEA”
+ +
before the start of supplies
Introduction of Lean Production elements: 5S + + one year after the
start of supplies
Implementation of 8D problem-solving techniques + + + before the start of
supplies
UWC strives to be a leader in the development of modern product requirements. The quality management system is constantly being further developed in order to ensure the compliance of products with the requirements to safety, reliability and operational comfort.
For instance, UWC implemented SOKOL, an incoming inspection system, which is a powerful informational and analytical tool for making technical and managerial decisions, aimed at improving the quality of company products. This digital product is based on the domestic 1C platform and it has no alternatives in terms of scope, scale, level of integration and services.
A key objective of the system is to identify even minimum deviations and prevent the release of non-compliant products.
Leadership in quality
We are committed not only to comply
with the requirements, but also to tighten them, striving to exceed the client’s expectations Elena
Belyanina, Quality Director, UWC
Advantages of the SOKOL system:
it minimises the human factor through automation and strict regulation of the control route, volume and parameters, and final decision making by the system;
it ensures formation and quick access to a database of all product protocols, acts, passports and quality certificates
used while monitoring the regulatory documents (GOST, TU) and input control maps;
it provides a summary of the qualifications of suppliers;
it guarantees the transparency of the control procedure;
it is easy for the customer to learn and use;
it is functionally flexible and adaptive to new technological processes.
Nowadays, the SOKOL system covers the entire product control procedure during production. It is also planned to apply the system to operation and repair of railcars. The possibility of system integration of all suppliers and partners is being considered for the long term.
UWC requirements to the supplier quality management system
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Operating leaseUWC offers its partners a wide range of opportunities for getting new generation railcars – in addition to direct sales, customers may use operating lease.
A group of leasing companies belonging to the RAIL1520 brand is one of the largest companies
UWC-owned railcar fleet structure by railcar type as of the end of 2017, %
New generation gondolas
Standard tank cars
Other
January
0%
December
100%
New generation hopper cars
New generation tank cars
79
5
14
11
in the Russian market: it holds leading positions for its number of innovative railcars, and furthermore it
As of the end of the reporting year, the UWC fleet owned 13.3 thousand railcars.
Its reduction by 17% compared to 2016 is due to:
the sale of 7.8 thousand pre-owned railcars from its own fleet along with the increasing demand (4.9 thousand railcars of them are gondolas for Federal Freight, and 2.2. thousand hoppers for Rusagrotrans).
2017 Results
The fleet is mainly represented by new generation railcars; their share comprises more than 80% of the total volume.
As of the end of the reporting year, UWC had one of the youngest fleets of freight rolling stock in Russia: the average age of railcars amounted to 3.2 years.
During the year, the average cost of rent of the new generation gondolas owned by UWC showed positive dynamics; as of 31 December 2017, the rental price amounted to RUB 1,436 per day (which is a 25.6% increase compared to 31 December 2016). The gradual increase in railcar revenue conforms to the market trend: positive dynamics of demand resulted in the growth in an average spot market rate for rent of up to 1.6 thousand RUB/day in December of the reporting year. Growth in UWC rate has a time lag to the spot rate because the rent cost is established by contracts and is amended according to the schedule.
New generation railcars Standard railcars
Own railcar fleet dynamics, thsd units
2017
2013
16.01
2014
16.0
16.6
10.2
2015
13.3
2016
Dynamics of changes of the railcar fleet structure, thsd units
2017
13,008 7,806
8,016 7,9622015
10,770 2,497
2016
TOP-3by the fleet of new generation railcars
3.2years is the average age of UWC’s fleet
13.3thsd railcars – UWC’s fleet
To replace the sold cars, the UWC fleet was increased by 4.4 thousand new cars from its own production.
Plans for 2018
In 2018, UWC is focused on direct sales of cars to customers, since the increase in the railcar yield rate makes
Average rental rate for new generation gondolas produced by UWC in 2017, RUB/day
it economically feasible for customers to purchase rolling stock. The company is not planning to extend
its fleet. Rental rates will vary depending on market conditions
“RAIL1520” LLC“RAIL1520 SERVICE” LLC“MRC 1520” LLC“TH “UWC” LLC (RAIL1520)
Among the customers of RAIL1520 are major operators and owners of cargoes, including Vostok1520 (within First Heavyweight Company), SUEK, NefteTransService, EN+Logistika, Uralkali, TH RPC Azot, Acron-Trans, Uralchem-Trans, Rusagrotrans, Eurosib SPb - transport systems, Sibur-Trans, Technotrans, Fintrans GL, TEC Nishegorodskiy Express, RAIL PRO, RusVinyl, Logistics 1520, etc.
is in the top 10 companies specialising in operational leasing of rolling stock.
1,436
1,145
1 Excluding 4.8 thousand gondolas accumulated in UWC’s fleet for sale to STLC. The sale of these railcars was recog-nised in the 2016 Consolidated Financial Statements of UWC.
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In 2017, upon the creation of a transportation company UNICON 1520 UWC joined a promising segment of chemical cargoes transportation in tank cars.
At the end of the year, the UNICON 1520 fleet amounted to 637 tank containers and 297 cars, including flatcars and tanks.
Since its establishment in April 2017 till the end of the reporting year:
63.2 thousand tonnes of cargoes were transported, mainly sodium hydroxide, sulfuric acid, oleum, glycol, coal tar, and lignosulfonate;
over 60 agreements with counterparties were signed (shipping lines, logistics terminals, carriers), to deliver goods to final
2017 Results
is explained by the possibility to develop individual logistics solutions and gain additional competitive advantages, both economic and organisational. Therefore, UNICON 1520 pays special attention to improving
production performance and reducing operating costs. For instance, the turnover of the railcar was reduced to 25 days, and the static load on the tank container increased to 29 tonnes.
UWC sells its stake in First Heavy Haul Company (PTK)1
UWC sold a 19.9% share in PTK-Holding to Prominvestwagon LLC (belongs to the Industrial Investors Group). The transaction amount was RUB 1,773 mln. As a result, Industrial investors consolidated 100% of PTK.
The share in PTK was acquired by the Holding in March 2017 from the Industrial Investors Group through the exchange of 100% of Vostok1520. The cost of the package for the purpose of the transaction was evaluated to be RUB 1,285 mln.
Plans for 2018
In 2018, UNICON 1520 plans to expand its fleet of tank containers up to 1,100 million units. In addition, during
this year the company is intended to purchase flatcars and develop transportation in detachable bodies. A key
objective for 2018 is to double the customer portfolio and expand the range of transported goods.
“UNICON 1520” LLC (UNICON1520)
The operator’s specialisation is the organisation of transport services and multimodal logistics of liquid, including dangerous cargoes. The company’s fleet includes tank cars and fitting flatcars with an increased load capacity, icluding those produced by UWC.
The geography of UNICON 1520 transportation covers not only all regions of the Russian market, but also export destinations in the CIS countries, South-East Asia and the Middle East.
fleet managed by UNICON 1520
During the first nine months of the company’s existence, the leading Russian chemical enterprises FosAgro, OHC Uralchem, KuibyshevAzot, and SIBUR became company customers.
destinations anywhere in the world within the shortest possible period of time at an optimum cost.
On the background of positive dynamics of cargo turnover in the reporting year, there is still a great growth potential in the segment of container shipping, including bulk cargoes in tank containers. The choice of owners in favour of container transport
Operation297andrailcars
637tank cars
The acquisition of a stake in PTK was a transitional stage in the period of formation of the company: it improved the company’s strategic
management, increased its expertise in the field of operating heavy-weight railcars, and, as a result, made the company independent. Over the past year, PTK strengthened its status as the largest owner and efficient operator of railcars with increased load capacity. The company increased its client base and developed transportation technology. In our turn, we withdrew from the asset on favourable terms, earning nearly 40% per annum on the sale of shares
Dmitry Bovykin,First Deputy CEO for General Management of UWC
1 Find the transaction’s detailed description in Appendix, p. 203.
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UWC is committed to provide a high level of service for all users of innovative cars, thus actively developing the service centre network.
JSC Tihvin Assembly Plant “Titran-Express” (TAP “Titran-Express”)
The main UWC service centre is TAP “Titran-Express”, which belongs to the service centres of Category I, and is capable of carrying out all types of railcar repairs. The design capacity of the enterprise provides for repair and upgrade of more than 3.5 thousand freight cars per year. “Titran-Express” became the basis for experimental repairs of the entire range of new generation freight cars manufactured at the enterprises of the Holding. The enterprise’s management system is certified to comply with the requirements of the international railway industry standard IRIS.
Taking into account the objective impossibility for the Russian Railways to cover its network with its own service centres, building a partnership comes to the forefront. This work includes close collaboration with customers, the owner of the infrastructure, and railcar repair and maintenance depots in Russia, Kazakhstan, Belarus, Latvia, Lithuania and Estonia.
UWC service system offers all-inclusive services, thus including comprehensive training for railcar repair enterprises to provide technical maintenance, current, depot and overhaul services.
Key objectives of the service are to reduce car downtime during repairs, reduce the life cycle cost of the innovative rolling stock, and minimise the risks of using counterfeit products and components.
Service centres function on the basis of car-repair depots:
Russia
Railcar Repair Company-1;
Railcar Repair Company-2;
Railcar Repair Company-3;
Zheleznogorsk WRC;
Uralchem-Trans;
TVM;
Balahontsy railcar depot.
Metafrax;
UWRC;
SWRC;
WRC Hillock;
Transasia Holding;
Central Infrastructure Department – Russian Railways branch office.
Kazakhstan
LLP Kamkor Vagon.
Belarus
Belarus Railways State Association;
Saturn-1.
Latvia
LDZ ritosa sastava serviss;
Latvijas dzelzcels.
Lithuania
Lietuvos geležinkeliai.
Estonia
Valga Depoo.
6Service centres of Category I
66Service centres in the CIS and Baltic states
Service
Russia
KAZAKHSTAN
UZBEKISTAN
TURKMENISTAN
TURKEY
СИРИЯ
ROMANIA
MOL.
UKRAINE
BELARUS
LITHUANIALATVIA
ESTONIA
SWEDEN
NORWAY
DENMARKНИД.
ВЕНГ.
СЛОВ.
ЧЕХИЯ
POLAND
ГЕРМ.FINLAND
IRAQ
АФГАНИСТАН
КИРГИЗИЯ
ПАКИСТАН
ТАДЖИКИСТАН
AZERBAIJAN
ARM.
GEORGIA
IRAN
MONGOLIA NORTHKOREA
SOUTHKOREA
JAPAN
CHINA
Vologda
Zheleznogorsk
Uzlovaya
BataiskEngels
Sterlitamak
Magnitogorsk
Chelyabinsk
Sverdlovsk Sort.
KubakhaKushva
Berezniki
Voinovka
KurganOmsk
Pavlodar
KaragandaKazalinsk
Inskaya
Belovo
Ilanskaya
Krasnoyarsk-Vostochniy
Taishet
Novokuznetsk
ASKIZ
Irkutsk-Sort. Ulan-Ude
Khilok
Tinda
Svobodniy
BelogorskKhabarovsk
Nakhodka
Partizansk
Komsomolsk-na-Amure
Severobaikalsk
Chita
Valuiki
Murashi
Gorky Sort.
Cherepovets
TikhvinPskov
ValgaChernyahovsk
DaugavpilsSt.-Petersburg
Murmansk
Radvilishkis
UWC service network
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In 2017, eight new service centres were opened, the total number of service centres reached 66.
In 2017, five service centres were assigned Category I, enabling them to perform to perform all types of repairs. In 2016, only TAP “Titran-Express” received this category. The number of centres of Category II increased to 23, allowing these centres to repair parts in addition to storage of spare parts and performance of the current uncoupling repairs.
2017 Results
662017
2013 28
322014
512015
Dynamics of the number of UWC service centres, units
582016
Service network structure by category of centres as of the end of 20171, units
Structure of repairs provided by TAP “Titran-Express” in 2017
Category I
Current uncoupling repair
UWC railcar repair Third-party railcar repair
Category II
Capital repairCategory III
Depot repairCategory IV
4
1
23
22
6
0
29
33
99
49
66centres
1.6thsd railcars
273railcars
Expansion of the service network in the Baltic States
In the reporting year, within the framework of developing the warranty and post-warranty maintenance programme of new generation freight cars, UWC established service centres in Estonia, Lithuania and Latvia to provide maintenance and repair services for freight cars operating in the Baltic States.
Valga Depot railcar repair depot, belonging to the railway concern Skinest Rail (Estonia), Lietuvos geležinkeliai (Lithuania), and Daugavpils railcar repair centre, belonging to LDZ ritosa sastava serviss (Latvia) have repair documentation and original spare parts, and their employees received training under the special programme.
1 The 1st category refers to scheduled repairs (depot, overhaul), current uncoupling repairs, storage and repair of
spare parts.
The 2nd category refers to the current uncoupling repair, spare parts storage and repair.
The 3rd category refers to the current uncoupling repair, spare parts storage.
The 4th category refers to the spare parts storage.
Plans for 2018
UWC will continue to develop its service network in cooperation with customers, infrastructure owners, railcar repair and maintenance depots.
The company plans to increase the number of Category I service centres. For example, in 2018 UWC plans
to assign the 1st category to five new service centres of the West Siberian, East Siberian and Moscow Railways.
TAP “Titran-Express” will continue to test the technology of in-depot repairs, and the experience gained will be applied to the entire service network.
The company is planning to expand the geography of its service centres outside of Russia. Negotiations are already being carried out with foreign owners of railcars who will soon face the need of maintenance and repair.
The number of repairs conducted by TAP “Titran-Express” decreased by 7% in the reporting year compared to the previous year, and amounted to 1.9 thousand railcars, with over 80% of them being depot repairs. About 14% of
repairs were made for third-party customers, and 86% of repairs for UWC leasing companies.
At the same time, the number of current uncoupling repairs of UWC cars made in partnership
service centres exceeded the previous year level by 1.5 times, to 4.7 thousand compared to 3.0 thousand. Furthermore, it was the first time when the partnership service centres conducted 916 depot repairs during the reporting year.
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ALEXEY TSYPLAKOV,
Deputy CEO for Finance and Economy of UWC
The dynamics of UWC’s key indicators reflects the growing trend on the railcar market and high demand for Company products, which led to the positive sales dynamics. The results of the past year confirm the Company’s ability for organic growth of its financial indicators
Section contents
Financial Report
78 85
Overview of financial results
Investment activities
Indicator 2017 Increase for the year, %
Revenue 62.0 28
Gross profit 9.9 -
EBITDA 12.0 14
Net profit/loss
–4.5 -
Dynamics of UWC’s main financial indicators, RUB bln
Investment structure in 2017 by project status, %
Projects under implementation (launched before 2017)
Maintenance
Projects launched in 2017
Implemented projects in 2017
12
59
12
17
3.5RUB bln
76 77
5.
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of B
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Overview of financial results
Indicator 2013 2014 2015 2016 2017
Revenue 3.1 17.1 36.9 48.5 62.0
Gross profit 1.4 2.1 4.1 9.9 9.9
EBITDA 1.4 3.6 7.1 13.7 12.7
EBITDA excluding subsidies 1.4 3.6 7.1 10.5 12.0
Net profit/loss -5.7 0.5 -9.7 0.6 -4.5
Dynamics of UWC’s main financial indicators, RUB bln
In 2017, the Company’s consolidated revenue reached RUB 62 bln, which was 28% more than in 2016.
Revenue growth was caused by an increase in production and sales volumes, as well as higher prices for railcars and higher rental rates. In addition to that, in the reporting year 7.8 thousand used railcars were sold from our own fleet for a total amount of RUB 14.1 bln. In the course of consolidation, RUB 16 bln in inter-segment revenue was eliminated from UWC’s revenue; the majority of this revenue (RUB 12.9 bln) was received from the sale of 4.4 thousand new railcars
Revenue
to our own leasing unit to replace sold used railcars.
The revenue structure by sources did not face any significant changes compared to the previous year: the main contribution to the consolidated revenue was made by the Production segment.
In 2017, the revenue of the Production segment increased by 26% to RUB 54.7 bln. The growth of this indicator was caused by an increase in production volumes, as well as in sales prices. Moreover, inter-segment turnover from the sale of 4.4 thousand new
railcars to our own leasing unit accounted for RUB 12.9 bln.
In 2017, revenue of the Lease segment increased by 17% from 2016, to RUB 6.1 bln. Despite general reduction of our own railcar fleet, UWC managed to attain positive dynamics of this indicator due to the growth of the average railcar rental rate by 34%.
The “Other revenue” category includes revenue from NPC Springs, VNICTT, UNICON 1520, and UWC’s head office. Most of these turnovers take place between the Group’s companies, for which reason it is eliminated during consolidation.
2017
2013 3.1
17.12014
36.92015
Consolidated revenue1, RUB bln
48.52016
62.0
1 Revenue for 2016 is provided excluding the revenue from Vostok1520, which was sold in November 2016.2 The Production segment manages railcar and casting sales; the Lease segment operates leasing; “Other” indicates
service, operations, etc.
Production Other amendments
Inter-segment revenue
Sale of used railcars from the fleet
Other
Reconciliation of the consolidated revenue for 20172, RUB bln
Lease UWC’s revenue
54.72017
2013 7.1
23.12014
32.12015
Revenue dynamics of the Production segment, RUB bln
43.42016
6.12017
2013 2.7
4.42014
4.32015
Revenue of the Lease segment, RUB bln
5.22016
3.3
14.1
54.76.1 62.0
–16.0 –0.3
78 79
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According to the results of 2017, the cost of sales increased by 35%, to RUB 52.1 bln, mainly due to the growth of expenses on raw materials used for production. These expenses account for a major portion of the cost of sales – 48%. In addition, in the reporting year, 23% (RUB 12.1 bln) of the cost of sales is accounted for by the depreciation of the net book value of railcars sold as part of the programme for replacing the old railcar fleet.
Most of the costs (about 2/3) in the Production segment were related to goods and materials: rolled steel, railcar bogie parts and components, brake equipment, etc.
Depreciation of fixed assets accrued on railcars owned by UWC accounted for the majority of costs (more than 2/3) in the cost of sales structure of the Lease segment.
Cost of sales
Cost of sales structure in 2017, %
Cost of sales structure of the Production segment in 2017, %
Raw materials used in production
Goods and materials
Carrying value of railcars sold
Salary
Payroll and social contributions
Maintenance and repairs of railcars
Depreciation and amortisation
Depreciation and amortisation
Other
Other
10
9
9
10
48
66
23
10
14
1
52.1RUB bln
48.8RUB bln
Commercial, general and administrative expenses increased by 29% compared to 2016, to RUB 2.7 bln, mainly due to growth of
In 2017, EBITDA amounted to RUB 12.7 bln, which is 7% less compared to the previous year.
In 2017, due to rehabilitation of the rail transport sector, the amount of state subsidies granted to buyers of new generation railcars was reduced and subsidies granted to their manufacturers were completely terminated. In the reporting year, UWC was granted RUB 1.7 bln of subsidies (RUB 3.2 bln in 2016), of which RUB 0.7 bln were reflected in the consolidated cost of salest and RUB 1 bln was accounted for fixed assets as it was received for railcars
Commercial, general, and administrative expenses
EBITDA
Cost of sales structure of the Lease segment in 2017, %
Property tax
Maintenance and repairs of railcars
Depreciation and amortisation
Other
64
69
21
2.7RUB bln
1.9RUB bln
costs on administrative staff. Significant amounts are also spent on information, consulting and auditing services, as well as rent.
In the reporting year, these expenses did not increase significantly.
Structure of commercial, general, and
administrative costs in 2017, %
Payroll, social contributions and other staff costs
Information, consulting and audit services
Leases
Railcar-sales related costs
Other
41
26
15
3
15
purchased for our own fleet. Reduced receipts led to decrease in EBITDA in the reporting year.
The Company believes that the large amount of subsidies in 2016 was intended to support the industry during its recovery and does not expect any increase in the support level in the future. It is reasonable to separate the subsidies factor when calculating EBITDA for analysis of the EBITDA dynamics. EBITDA, adjusted for subsidies, increased by 14% to RUB 12 bln.
EBITDA in the Production segment reached RUB
9.7 bln, an increase of 7% compared to 2016. EBITDA margin declined by 3.1 p.p., to 17.7%.
At the segment level, the reduction in subsidies directly impacted the Production Division. EBITDA excluding subsidies increased by 37% compared to the previous year, and the EBITDA margin increased by 1.1 p.p.
EBITDA in the Lease segment amounted to RUB 5.2 bln in the reporting year, up 22% from 2016. The EBITDA margin reached 84.5% (3.4 p.p. more than in 2016). The increase in EBITDA and the Lease segment’s margin
80 81
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were caused by growth of the rental rates and an increased gap between the operating costs and profitability of railcars, as well as reduction of expenses related to railcar ownership resulting from the sale of part of our own fleet.
Consolidated EBITDA excluding subsidies, RUB bln
12.02017
2013 1.4
3.62014
7.02015
10.52016
EBITDA in the Production segment excluding subsidies, RUB bln
8.02017
4.22015
5.9
Net profit, RUB bln
–4.52017
2013 –5.7
0.52014
–9.72015
0.62016
EBITDA in the Production segment, RUB bln
9.72017
2013 –2.9
1.32014
4.22015
9.02016
2016
2013 –2.9
1.32014
In 2017, the Company’s loss before taxation increased. This was caused by a reduction in the volume of subsidies received (excluding subsidies, loss before taxation decreased).
In the reporting year, the Company made a net loss of RUB 4.5 bln compared to net profit of RUB 0.6 bln in 2016.
The decrease in the financial result was caused by the high
Net profit and loss
Loss before taxation, RUB bln
EBITDA in the Lease segment, RUB bln
5.22017
2.82015
4.32016
2013
3.3
2.3
2014
2016 base received due to one-time and non-monetary income: In 2017, the profit tax expense of RUB 875 mln was reflected in the report, while in 2016 the one-time non-monetary income from profit tax of RUB 1.7 bln obtained due to the recognition of the deferred tax asset;
In 2017, the exchange rate difference costs amounted to RUB 154 mln, while in
EBITDA 2017Other profit/expenses
Subsidies
Factor analysis of consolidated EBITDA in 2017, RUB bln
Gross profit (excluding subsidies)
EBITDA 2016
Consolidated EBITDA, RUB bln
2016 the Company generated income from exchange rate differences in the amount of RUB 1.2 bln;
Profit from the discontinued operations of Vostok1520 in 2016 (UWC sold the company in November 2016) amounted to RUB 1.3 bln. No operations were discontinued in 2017.
19.2
28.2
20.5
EBITDA margin, %
20172013
1.4
3.6
2014
7.0
2015
13.712.745.7
2016
20.9
EBITDA
12,7
1,8
–2,5 –0,2
13,7
2017
2016 –2.5
–3.7
82 83
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As of the end of the reporting year, UWC’s debt amounted to RUB 112 bln.
In the reporting year, the Company took a number of actions to optimise its debt load. For example, in August 2017 all loans of TVSZ in the amount of RUB 20 bln were refinanced at Otkritie FC Bank in order to reduce the interest load and optimise the repayment schedule. In November 2017, RUSNANO’s loan of RUB 0.8 bln was refinanced at UniCreditBank in order to reduce the interest load.
The Company continues to cooperate with current creditors and develop partnerships with other major Russian and international banks.
Debt
UWC’s loan portfolio structure by creditors, %
Otkritie
Alfa-Bank
UniCreditBank
Eximbank of Russia
27
55
11
17
Bonds
112RUB bln
Reduced level of the debt load, net debt/EBITDA
Debt repayment schedule1, RUB bln
8.22017
2018
3
8.6
Long-term outlook
2020
5
7.122.1
5.815.0
Medium-term outlook
2019
2022
2023
5.6
23.2
14.8 5.220.02021
Redemption of bonds Repayment of loans
UWC’s investment activities comply with the strategic plans based on approved investment programmes. The Company applies a project-based approach to investment management and provides financing individually for each project.
Investment activities
Key processes and functions are determined in the Regulations on Investment Activities. Investment activities are managed by UWC’s Investment Committee,
chaired by the CEO and comprised of Deputy CEOs and persons authorised by him. The Investment Committee makes resolutions on launch of investment
projects, approves their key indicators and the financing structure, appoints project managers, and makes resolutions on termination or suspension of a project.
1 According to the management reporting. Excluding the loans for working assets in the amount of RUB 26.5 bln.
Strategy implementation priorities
Project groups Project tasks
Improving operational efficiency
Ensuring continuity of production reducing production shutdown risks
replacing equipment with analogues and maintaining production capacity
ensuring environmental, corporate and industrial security
quality assurance and reducing product repair risks
occupational health and safety
Types of the Company investment projects
Net loss 2017
Finance costs, balance
Net profit 2016
EBITDA Profit taxDepreciation
Factor analysis of net profit, RUB bln
Profit from discontinued operations
FOREX
0,20,6
–4,5–1,3
–2,6
–0,9
0,9
–1,4
84 85
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From 2013–2017, a total of RUB 21.7 bln were invested, with one third of this amount having been spent in 2015. Almost half of UWC’s investments as a rapidly developing company was intended for projects for expansion of the range of manufactured products. In addition, some 27% of
investments were aimed at financing the projects for improving operating efficiency.
In 2017, the Company’s investment expenses decreased by 27% to RUB 3.5 bln from 2016. In accordance with the plans, in 2018 UWC’s investment
volume and structure will not face any significant changes.
In 2017, RUB 2.1 bln or 60% of total investments were aimed at continued implementation of projects launched in previous years (for more information about the projects see PJSC “RPC UWC” 2016 Annual Report).
UWC’s investment dynamics and structure1, RUB bln (excluding VAT)
Investment structure in 2017 by project status, %
Projects under implementation (launched before 2017)
2017
2013
1.5 2.84.8
2014
2.7
1.8
1.8
4.27.2
1.84.0
2.0
2015
1.0 1.63.5
0.6 0.3
0.2 0.3
0.4
0.3
0.2
2016
Maintenance
Projects launched in 2017
Implemented projects in 2017
Operational efficiency
Product range expansion
Maintenance Other
12
59
12
17
3.5RUB bln
1 According to UWC’s management statement. Excluding investments for purchase of railcars.
Strategy implementation priorities
Project groups Project tasks
Improving operational efficiency
Reducing cost of sales ensuring production of goods and materials for the Company's own needs
replacing goods and materials with cheaper analogues
reducing consumption of goods and materials, energy saving, etc.
upgrading and reducing expenses on maintenance of fixed assets
improving production processes and logistics
improving productivity, etc.
Reaching production capacity
"fixing bottlenecks"
driving equipment up to the design capacity
correcting design errors
Increasing production capacity
increasing product output and the scope of services without changing the range
Developing new products
Developing new products manufacturing new products, including R&D
ensuring provision of additional services
increasing the sale prices of goods and services
improving the user-friendliness of products
promoting demand
Other Acquisition of assets mergers and acquisitions, buying shares in companies
acquisition of fixed assets which do not increase production capacities
Other maintaining business reputation, social projects, etc.
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3 Investment stage completed.
Projects under implementation include tank car production at TikhvinChemMash, production of special railcars at TikhvinSpetsMash, production of various
Projects under implementation launched before 2017
A total of 28 projects were completed1 in 2017, with the total cost of RUB 2.9 bln (RUB 0.4 bln spent), including:
Projects completed in 2017
Moreover, 14 new projects with the total cost of RUB 0.8 bln (RUB 0.5 bln spent) were started in 2017, including:
development of the corporate ERP System (SAP), phases 1 and 2 (for more information see section Production, p. 52);
production expansion at TikhvinSpetsMash.
Projects launched in 2017
Status of projects under implementation launched before 2017, %
Implemented
Remaining
10
90
15.32
Launching a second assembly line for small capacity railcars at TikhvinSpetsMash
In 2017, a new project was launched at TikhvinSpetsMash in the framework of the task of reaching a certain production capacity. Its viability was due to the fact that two independent production units were established at the premises of one building with a single departure railway track. As a result, there are significant risks of production downtime. In order to prevent crossing of material flows of railway logistics between the two production units, the second line for small capacity railcar production is being created at TikhvinSpetsMash.
1 Family of bogies produced by the American company Standard Car Truck (Wabtec Corporation) for freight railcars. 2 Total cost of projects.
.
Status of implementation of projects launched in 2017, %
Implemented
Remaining
41
59
0.82
RUB bln
RUB bln
components (for more information about these projects see Production, p. 52), establishment of a unit for repairs and upgrade of freight railcars at TAP “Titran-Express” (for more
information see Service, p. 72), production of high-strength cast iron, and establishment of a service metal centre and external warehouse for rolled steel.
Launch of gondolas 12-9548-02 (“Sokhatyi”) into production
In the context of expanding our range of products and in order to launch the serial production of a commercially in-demand type of railcar with improved technical and operating characteristics, UWC together with TikhvinChemMash,
continued to implement the project for launching into production a gondola with a 103 m3 capacity and the centre Draft Sill made of Ω-profile with a cast-in bracket on the railcar bogie Barber 27 tf1, which was started in 2016. As the largest gondola by capacity among those produced in Russia, the gondola was named in honour of the biggest representative of the deer family: “Sokhatyi”.
The investment resource is intended for upgrading the production line, as well as acquisition of the pattern-core equipment for production of such gondolas.
production of cassette-type bearing units at the joint venture Timken-UWC (for more information see Production, p. 52);
blank production of the steel service centre (for more information see PJSC “RPC UWC” 2016 Annual Report).
In 2018, the Company is planning to complete investment projects associated with improving operating efficiency and developing new products; starting from 2019, the majority of funds will be used for supporting investments.
The total cost of projects financed in 2017 amounted to RUB 19 bln.
As of the end of 2017, investments amounted to a total of RUB 17.2 bln.
88 89
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Since its establishment, UWC has been paying special attention to the basics of sustainable development, aimed at reaching a balance between economic efficiency, human capital development and environmental conservation. We believe that a socially responsible company has a strategic advantage over its competitors.
Section contents
Corporate Social Responsibility
92 102
108
Human resources and occupational safety
Development of the regions where we operate
Environmental protection
Structure of environmental protection costs of UWC in 2017, %
Waste management
Air protection
Wastewater treatment
Payments for negative impact
22
3937
2
123RUB mln
90 91
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10.22017
Human resources and occupational safety
Employees are the main value, the key component of success and sustainability for UWC. Attraction, retention and motivation of highly qualified specialists, ensuring a decent standard of living and good health for them represent the Company’s main tasks for human resources management.
UWC’s HR policy has been developed with consideration of the Company’s strategic goals and aims to increase its competitiveness through the efficient use of employees’ professional potential. UWC’s HR Policy is based on five principles:
active involvement of personnel into achievement of strategic goals;
creating an environment for professional and career growth;
continuous improvement and realising of potential;
a balance between authority and responsibility;
an effective material and non-material remuneration system.
In 2017, UWC’s average headcount amounted to 10.2 thousand employees, a 19% increase compared to 2016.
Most of the employees work at TVSZ (81%). In total, more than 90% of UWC’s employees work at the industrial enterprises of Tikhvin.
HR Policy
2013 3.4
6.92014
7.52015
UWC’s average headcount, thsd people
8.62016
Structure of UWC’s headcount by enterprises1
(as of 31 December 2017), %
TVSZ
TikhvinChemMash
NPC Springs
Titran-Express
TikhvinSpetsMash
PJSC “RPC UWC”
VNICTT
Other
1222
3
4
5
81
1 Companies which employees account for more than 1% of the total
headcount of UWC are listed from this point onwards.
Percentage of recruited and dismissed employees in average headcount in 2017, %
Percentage of recruited
Percentage of dismissed
The rather high personnel turnover of about 24% in the Holding in general is balanced by a high level of newly recruited employees (some 30%). The prevailing number of newly employed personnel over the number of dismissed employees is typical for for most of the key enterprises (in some cases, for example, at VNICTT, a high personnel turnover is caused by the internal rotation of employees at UWC enterprises).
The personnel recruitment policy is based on attracting energetic, talented and motivated people with high potential, who are ready to acquire new knowledge and skills and wish to build their careers at an enterprise that has no analogues in the Russian machine building industry.
In case of an open vacancy, priority is given to the Company’s employees and external search starts if no internal candidates meet the vacancy requirements.
Various tools are used to recruit external candidates:
posting vacancies in the media and on free Internet resources;
use of job search sites (SuperJob, HeadHunter);
cooperation with employment centres;
Internal rotation at UWC enterprises
Intensive production development is defined as one of the key strategic tasks for UWC. An organisational resolution was made for its implementation: in November 2017, the personnel of the technological unit of VNICTT was transferred to TVSZ. With high technological competence of our employees we will be able to implement a number of activities aimed at reducing cost of sales and improving the quality and consumer properties of the products, as well as the competency development of the plant’s operating and process services.
cooperation with specialised educational institutions;
holding job fairs;
formation of an external talent pool.
1823
TVSZ
PJSC “RPC UWC”
VNICTT
NPC Springs
11665
836
3325
TikhvinSpetsMash
Titran-Express
62
66
61
35
2419
TikhvinChemMash
92 93
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Workers account for most of the Company’s personnel at almost 8 thousand people.
The average age of UWC employees is around 37 years old. This indicator varies depending on the enterprise from 34 years old (head office of the Holding – UWC) to 41 years old (at TAP “Titran-Express”).
Personnel structure
Structure of UWC’s headcount by enterprises1 (as of 31 December 2017), %
Managers
Employees
Specialists
16
11
73
Personnel structure by education level in 2017, %
Higher education
Elementary vocational
Specialised secondary
Secondary (complete) education
18
2633
23
Men make up roughly 70% of UWC employees with this situation being typical for industrial enterprises. Meanwhile, women prevail in the Holding’s head office: they account for approximately 52% of personnel.
More than a quarter of the Company’s employees have a higher education, while approximately 40% have
a specialised secondary or elementary vocational education. A rather high percentage of employees with a secondary education (around one third of the headcount) is typical for industrial companies. Almost 3/4 of UWC employees are workers (for example, around 92% of employees with a secondary education represent TVSZ).
34
TVSZ
PJSC “RPC UWC”
VNICTT
NPC Springs
35
36
37
TikhvinSpetsMash
Titran-Express
Average age of employees in 2017, years
39
41
37
TikhvinChemMash
70%Men
30%Women
Gender composition of personnel at the enterprises in 2017, people
Men
Women
TVSZ
PJSC “RPC UWC”
VNICTT
NPC Springs
TikhvinSpetsMash
Titran-Express
TikhvinChemMash
37
1 Hereinafter, the personnel structure is analysed as of the end of the reporting year.
103 113
139 79
101 70
328 59
385
195
203
91
6,104 2,485
0% 100%
37Average age
y.o.
94 95
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Flexible approach to product development
Since 2015, VNICTT has been implementing one of the flexible approaches to product development, “Scrum”, as part of certain projects. It is a set of development principles which allows us to provide the customer with products with planned improved properties in short-term iterations (sprints). The strictly fixed limited duration of the sprint makes the development process flexible, predictable, transparent and understandable.
The Scrum approach has been used in the already completed projects for developing a gondola for the Middle East and a hopper car for Guinea, while the Tank-Containers Project is still under implementation. Elements of this approach have already been introduced at other UWC enterprises.
Modern approaches to process management are actively implemented. For example, in 2017 a large-scale training was held in VNICTT, which was aimed at developing communication skills, decision-making competencies and flexible management practices.
The Company is developing an annual assessment system, including an interview with an employee conducted by his or her manager on the results for the year and development of targets for the upcoming year. In addition to that, the Regulations on Appraisal of Employees were enacted in the reporting year. The main tasks of the appraisal are assessing the employees’ potential in terms
of professional and organisational skills, as well as the necessity to advance his or her qualifications.
UWC has a common remuneration policy for all employees, which prescribes the functioning principles of the remuneration system, types of financial remuneration, and the procedure for all forms of compensation to employees.
Material employee remuneration consists of permanent and variable components. The permanent component includes salary and various additional payments required by the Labour Code of the Russian Federation. The variable component consists of
additional incentives and bonuses that depend on the achievement of key performance indicators for the reporting period.
Additional incentives exist as well for motivation of employees. For example, in the reporting year, VNICTT introduced bonuses on the results of monthly performance for employees of the “basic” category. In 2018, the so-called 13th (monthly) salary will be introduced at industrial site enterprises on the results of the year, which depends on an employee’s years of
Remuneration and motivation of personnel
UWC offers uninterrupted comprehensive professional growth for all categories of employees. The Company’s priorities include ensuring constant professional and career development of employees, expanding their skills and abilities, accumulating and transferring their knowledge.
The Company provides employee training in three areas:
compulsory training (occupational, fire and industrial safety);
professional training of workers (including vocational training and retraining and advanced training);
Personnel training and development
2013 2014 2015 2016 2017
Number of trained employees, people 4,031 8,633 11,376 11,646 12,963
Average training expenditures per employee, RUB thsd 2.4 2.9 4.7 8.2 5.2
Trainings provided at enterprises of Tikhvin
specialised seminars and trainings (for development of functional competences).
Employees are trained both using the Company’s in-house resources and by external educational organisations.
In 2017, almost 13 thousand industrial site employees of Tikhvin enterprises underwent training. Training costs amounted to RUB 67.8 mln (direct training costs accounted for RUB 27.1 mln, while scholarships and compensation made up RUB 40.7 mln). The average training time per employee was 250 hours per year over the last few years.
At other UWC enterprises, the average number of training hours per employee is smaller, but costs are considerably higher. The reason is that there are many typical (mainly in-house) educational programmes for production processes, including a three-month training of newly recruited personnel, provided at the industrial site enterprises.
UWC creates conditions for the professional growth of specialists, who are committed to obtaining an academic degree. Graduate students employed by VNICTT have the opportunity to work under a flexible working schedule and are provided with the necessary consultative support of experienced employees.
VNICTT NPC Springs
Number of trained employees, people 80 203
Average training expenditures per employee, RUB thsd 31.6 12.0
Average number of training hours per employee, hours 10 11
Trainings at other enterprises in 2017
employment at our company, productivity, and operational and workplace discipline.
In 2017, the average salary at UWC enterprises increased by 2% compared to 2016, to RUB 50 thousand per month.
Due to growth in consumer prices for goods and services, and in order to increase employees’ income level in 2017, fixed salaries and piece rates were indexed at a number of UWC enterprises, thus ensuring that the average salary level will be higher than average for that region.
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At the same time, Company employees require moral encouragement, such as social recognition of the staff,
Company RegionAverage
salary, RUB thsd
Ratio to the average salary in the region
Industrial site, Tikhvin Leningrad Region 46.2 1.3
NPC Springs Udmurt Republic 37.6 1.4
Average salary level at industrial enterprises in 2017
realising the importance of one’s own contribution, and the opportunity for self-expression. For this purpose,
UWC offers its employees the full range of social guarantees required by the laws of the Russian Federation. In addition, the Company provides its employees with additional benefits and compensation, including payment for meals, mobile communications, voluntary health insurance and free regular medical check-ups, additional paid leave, and other benefits. In cooperation with Future non-state pension fund, UWC implements the non-state pension programme.
Social policy
We have created conditions for
comfortable work and development of our employees. We constantly monitor the situation on the labour market and see that our competitive ability is rather high
Vitaliy Alekseenko, HR and Social Affairs Director at TVSZ
union of machine builders of the Russian Federation. The organisation was established in 2012 and currently unites almost 1.8 thousand employees from TVSZ, TikhvinChemMash, TAP “Titran-Express” and Transmashenergo. The functions of the trade union organisation at NPC Springs are partially performed by a specially established Committee for Social Partnership.
The Company’s expenses on social support of the personnel doubled compared to 2016 and in 2017 reached about RUB 400 mln or almost RUB 40 thousand per employee per annum.
Social costs structure in 2017 by type, %
Compensation for meals
Compensation for living in apartments and hostels
Additional paid leave
Compensation of % on a housing programme
Costs of transfer of personnel to work
Other
22
17
11
10
20
20
386.6RUB mln
Comprehensive housing programme
UWC is implementing a comprehensive housing programme in Tikhvin for the industrial site employees. Nine modern apartment buildings designed for more than 2 thousand apartments have been built in three suburbs of Tikhvin. Plants’ employees can take advantage of the Initial Deposit Financing programme and the Mortgage Interest Partial Compensation programme. The Discounted Rental with Subsequent Purchase programme has been implemented for employees invited from other regions of Russia.
Employees’ health and safety have always been a priority for UWC. The Company has responsibilities to its employees and works to implement advanced safety standards developed in full compliance with the relevant laws of the Russian Federation and world best practices in this field.
The main risks to the health of UWC’s employees are concentrated at the Company’s four largest production sites: TVSZ, TikhvinChemMash, TikhvinSpetsMash and NPC Springs.
Health and safety
Average salary level at UWC enterprises1, RUB thsd
50.12017
2013 41.2
43.72014
44.12015
49.32016
JSC “Tikhvin Freight Car Building Plant” has a primary trade union organisation
at the enterprises of the Tikhvin industrial site, which is a part of the professional
the Regulations on our “Employee of the Month” contest were enacted at the industrial site.
1 A mistake was made in the 2016 Annual Report of PJSC “RPC UWC” when disclosing the indicator for 2016 (average
level was calculated with consideration of bonuses).
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TVSZ was certified for compliance with the International Railway Industry Standard (IRIS), which also includes the requirements of the International Occupational Health & Safety Assessment Series (OHSAS) 18001:2007. Similar certifications are also planned to be conducted at other enterprises of the Tikhvin industrial site. NPC Springs is currently undergoing certification of its occupational health & safety system in compliance with the standard OHSAS 18001:2007.
Health & Safety cost structure in 2017 by enterprises, %
TVSZ
TikhvinSpetsMash
TikhvinChemMash
NPC Springs
216.4RUB mln
88
41
7
Regular monitoring of working conditions and work organisation, as well as the technical condition of the equipment is performed at the Holding’s enterprises as part of the Unified Occupational Health, Industrial and Fire Safety Policy. In accordance with Federal Law No. 426-FZ dated 28 December 2013 “On Special Evaluation of Labour Conditions”, UWC enterprises publish summary data on the results of special evaluations of labour conditions on their official websites.
All hazardous production facilities are covered by an employer liability insurance policy related to workplace injury. The respective categories of employees undergo mandatory, preliminary and periodic medical check-ups at the expense of the organisations.
In an effort to improve the safety culture, the enterprises conduct mandatory training sessions for employees on safe working methods and health and safety, offer professional retraining, and test knowledge of standards, rules and instructions.
The main production enterprises of UWC, namely TVSZ, TikhvinChemMash, TikhvinSpetsMash and NPC Springs, spent a total of more than RUB 200 mln on various organisational, technical, sanitary and hygienic activities (maintaining the amount of 2016). In 2018, TVSZ plans to implement more than 100 activities to improve the labour conditions at a total budget of more than RUB 450 mln.
In 2017, the number of injuries at enterprises decreased: six accidents were registered at TVSZ and one accident at TikhvinChemMash (compared to nine accidents registered at TVSZ in 2016). At the same time, one accident at TVSZ was classified as a serious injury and one accident due to a gross violation of the operational safety requirements for the use of production equipment had a fatal outcome. Investigations prescribed by the law were conducted for all cases. The cause of the accident was identified for each case and actions for prevention of similar cases in the future were developed.
Corporate culture is a combination of ideals, values, beliefs, norms and models of behaviour, which unite all UWC employees. The main principles of human relations and behavioural norms are provided in the Corporate Ethics Code.
Information resources represent the most important communication element of the corporate culture. For example, the electronic and print corporate magazine “UWC Times”, which is published three times a year, has been the corporate culture guide since 2016. The corporate newspaper PROZAVOD, which is published eight times a year, has a circulation of six thousand copies at TVSZ, providing almost all employees with a hard copy. A programme with the same name is broadcasted on Russkoe Radio Tikhvin radio station. The social network VKontakte has a group called “Forum. Tikhvin Freight Car Building Plant” with more than 14 thousand members, where participants communicate actively on work, domestic and other issues.
UWC employees regularly take part in mass sporting events. 2017 was no exception:
TVSZ held four mini-football tournaments and one volleyball tournament, as well as the first athletic competitions (some 1 thousand people participated in these activities);
NPC Springs arranged bowling tournaments, a paintball camp and football matches, as well as a large-scale event called Spartakiad for Company employees;
in December 2017, VNICTT’s football team was granted a personal fair-play award in the winter mini-football tournament “New Year Cup of the Ministry of In-dustry and Trade”.
UWC employees traditionally pay special attention to social responsibility. For example, the following activities were performed in the reporting year:
a volunteer movement was established at TVSZ and managed to hold ten events and take the Memorial Complex “Unmarked Cemetry” under its patronage;
in spring employees of the Tikhvin industrial site planted fir-trees in front of the new residential complexes, which were illuminated prior to the New Year holidays;
on New Year’s Eve, VNICTT personnel collected funds for Abandoned Angel animal shelter.
Children of UWC employees are certainly under special care:
in the reporting year, NPC Springs arranged an excursion to the enterprise for children of the employees for the first time;
19 New Year performances arranged for children of plant employees aged 2-12 in Tikhvin were attended by more than five thousand children;
a New Year party was held for children of VNICTT employees;
all children of employees of the Holding’s enterprises received the same traditional sweet present in a soft toy for the New Year.
Corporate culture
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Environmental protection
Environmental protection is a fundamental principle in UWC’s activities. The Company is constantly looking for advanced technologies and technical solutions to reduce the negative impact on the environment, especially in terms of air pollutant emissions and waste management.
UWC has set up effective environmental management systems at its production sites based on standards laid out in the legislation of the Russian Federation and industry best practices.
TVSZ’s environmental management system is based on the environmental protection management system P 0182-002, which was developed in compliance with the requirements of the GOST R ISO 14001:2016 standard. The provisions of the system apply to all production processes and must be implemented by all structural units, as well as communicated to
Environmental management system
employees of all counter-parties. The system stipulates that the environmental risks associated with production should be assessed, followed by development of an action plan for their minimisation, as well as compilation of a register for significant environmental aspects. Each year a Programme of Environmental Protection Measures is developed on the basis of this register with the results of the Programme being analysed on a quarterly basis.
In the reporting year, TVSZ adjusted the Project of Maximum Permissible Air Emissions and developed
the Draft Standards for Waste Generation and Waste Disposal Limits in the framework of obtaining the environmental permits required for commissioning of a combined heat and power plant (a permit was granted by the respective authorities for the first document, while a permit for the second document is expected to be obtained in 2018).
TVSZ performed monthly control of drinking water quality and parameters at the boundary of the enterprise’s sanitary protection zone as part of the industrial environmental control carried out in the reporting period.
Standard indicators were not exceeded. In the end of 2017, a certified third-party organisation performed monitoring of the gas cleaning equipment’s efficiency, as well as control of compliance with the pollutant emission standards at emission points. Standards were not exceeded.
The environmental activities of TikhvinChemMash and TikhvinSpetsMash are based on compliance with current legislation and internal regulations. In the reporting year, development of the documentation regulating the enterprise’s environmental safety activities continued at TikhvinChemMash as part of establishment of the Environmental Management System. The Draft Standards for Waste Generation and Waste Disposal Limits and the Project of Maximum Permissible Emissions have already been developed and will be submitted to the respective authorities for permits in 2018. TikhvinSpetsMash has also continued developing similar documents, as well as internal standards and regulations coordinating activities of the industrial units in terms of environmental safety.
The environmental management system at NPC Springs is based on compliance with all legislative standards and regulations in matters concerning environmental protection, as well as the requirements of the internal regulatory documents, first of all the Regulations on
Unified sanitary protection zone
In order to comply with the requirements of sanitary and epidemiological legislation, design of the unified sanitary protection zone continued in the reporting year for the group of industrial site enterprises: TVSZ, TikhvinChemMash, TikhvinSpetsMash, and TAP “Titran-Express”. In 2017, required measurements and calculations were made and the project section Assessment of Public Health Risks was developed. The project is expected to be approved by the Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing in 2018.
Industrial Environmental Control. Implementation of the environmental management system standard GOST R ISO 14001–2007 continued at the enterprise.
The enterprise has organised the record keeping and control of production waste (the draft standards of waste generation and waste disposal limits, as well as the certificates for waste of hazard classes 1–4 were developed for 12 types of generated waste) and air emissions (draft maximum permissible emissions were
1 No fines were imposed on UWC’s enterprises for violation of the environmental law in the reporting year.
Structure of environmental protection costs of UWC in 2017, %
Waste management
Air protection
Wastewater treatment
Payments for negative impact
22
3937
2
123RUB mln
developed). According to the monitoring data, the enterprise’s activities have not resulted in any emissions of carcinogenic substances into the atmosphere or contamination of industrial waste water with carcinogenic substances. The regular inspection performed by the Ministry of Natural Resources of the Udmurt Republic in 2017 did not register any violations of the environmental law.
Total environmental protection costs of UWC’s enterprises amounted to RUB 123 mln1.
Herman Kotenko,Head of Labour Protection, Industrial and Environmental Safety at TVSZ
We consider environmental safety of production and
environmental protection to be two of the main priorities in our activities
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1 The table does not include NPC Springs, as its emissions accounted for less than 0.1% of total emissions.
The permissible emission level is under strict control at enterprises of UWC.
A significant increase in pollutant emissions into the atmosphere during the reporting year was mainly caused by the following reasons:
UWC operates a progressive system for safe processing of various waste generated in the course of production. Hazardous waste is decontaminated on a mandatory basis (about 0.25% of total waste), while the rest (over 80%) are mostly sent for recycling.
The majority of waste (95%) is generated at TVSZ. A significant increase in the volume of waste in the reporting year was caused by higher production volumes of railcars and casting.
Air emissions
Waste management
emissions from the combined heat and power plant (TM-Energo), which was incorporated into TVSZ, exceed the emissions from TVSZ several times;
a number of other facilities were included in the Emissions Report following the results of the inventory performed in 2017;
increased production of railcars and casting at the enterprise.
At the same time, almost 100% of pollutants were emissions of hazard classes III and IV: in 2017, Class II emissions were registered at the level of some two tonnes and Class I of approximately 0.1 tonne.
Pollutant emissions into the atmosphere1, tonnes
Pollutant emissions into the atmosphere in 2017 by hazard class, %
I and II
III
IV
27
73
0.5
All waste from TikhvinChemMash, TikhvinSpetsMash and NPC Springs (6.3 thousand tonnes, 2.3 thousand tonnes, and 1.2 thousand tonnes, respectively) accounts for less than 5% of the total waste of UWC. An increase in the volume of waste from TikhvinChemMash and TikhvinSpetsMash, which transfer all waste for disposal at specialised landfills, was caused by higher production volumes and achievement of full capacity. Approximately 60% of waste from NPC Springs is also transferred for disposal at specialised landfills.
Waste of hazard Classes I and II accounted for less than 0.5% of all waste generated by TVSZ, with the majority being Class IV (more than 70%).
TVSZ production waste by treatment method, thsd tonnes
RecyclingAllocated
Equipment, buildings, and facilities at UWC’s enterprises meet all modern requirements in matters concerning resource management and are among the most energy efficient ones, not only in Russia, but in Europe as a whole.
The enterprises implement mainly organisational measures to reduce heat and electricity consumption
Energy efficiency
Consumption dynamics of energy resources1, thsd GJ
Gasoline and diesel fuelGasElectricity
Production waste structure at TVSZ in 2017 by hazard class, %
III
I and II
IV
29
71
0.5
TVZS TikhvinChemMash TikhvinSpetsMash
1 Excluding NPC Springs.
2017
2013 116
2682014
3702015
3,591 178 643,833
3782016
54.514.5
2017
2013
68.717.5
2014
2015
82.1
71.2
21.4
18.6
97.731.5 66.2
60.7
52.6
51.2
40.0
2016
2017
2013
847 1,6352,501
2014
699
638
390
1,1361,852
1,0031,656
7851,180
2015
968 4,3475,338
23
19
15
17
5
2016
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in order to improve energy efficiency.
In the reporting year, gas consumption increased 2.7 times compared to the previous year, as Tikhvin CHPP reached its full capacity (gas consumption at Tikhvin CHPP increased from 315.5 thousand GJ in 2016 to 3 mln GJ in 2017).
In the reporting year, natural gas accounted for more than 80% of the resources consumed, while the percentage of gasoline and diesel fuel in total energy resources was insignificant (less than 0.5%).
Cost of energy resources in the reporting year increased by 68%, mainly due to an increase in electricity costs (by 42%), which resulted from production expansion and growth of gas costs (by 163%) for Tikhvin CHPP operation.
The structure of costs on energy resources, taking into consideration the low gas price, differs from the energy consumption structure with almost 2/3 of costs falling at electricity payments.
Energy resources consumption structure in 2017, %
Electricity
Gasoline and diesel fuel
Gas
19
81
0
1 Excluding NPC Springs.
Energy security of UWC’s enterprises
UWC owns Tikhvin CHPP, commissioned in 2016 with the electric capacity of 110 MW and the heat capacity of more than 25 Gcal/h. The CHPP design features the concept of Smart Power Generation, which makes it possible to reduce costs and increase the efficiency of the power system.
An internal CHPP can respond quickly to changes in the level of energy consumption and handle peak loads, thus balancing the power system and ensuring low specific fuel consumption and emission levels.
Structure of costs on energy resources in 2017, %
Electricity
Diesel fuel
Gasoline
Gas
65
34
01
Dynamics of costs on energy resources1, RUB mln (excluding VAT)
Electricity Gas Gasoline and diesel fuel
2017
2013
715 210946
2014
594
492
279 88632
760125
372
2015
1,012 5521,589
25
21
149
15
17
5
2016
106 107
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Development of the regions where we operate
UWC is fully aware of its responsibility to the population of all regions where the Company operates and above all in the town of Tikhvin, where its main production site is located. By investing into development of the regions, the Company supports creation of a social environment, which promotes the Company’s harmonious business development and meets the interests of all parties involved. Urban development, education, and cultural projects, as well as support to vulnerable sections of the population and to people with disabilities are the priority areas.
UWC is consistently implementing an ambitious programme to develop the town of Tikhvin, aimed at creating a comfortable and modern urban environment. A number of projects that have radically transformed the town were implemented over the past few years with the support from the local administration.
Thus, UWC completed its largest project in urban development in 2017 – arrangement of the surrounding area of ponds of Tabora. A recreation zone with a pedestrian area and the first bicycle paths in the town were created in place of an untended open space with the total area of some four hectares and a festival ground was built for city celebrations and events.
The following work was carried out as part of the development of Tikhvin in 2017:
Urban development projects
landscaping of a garden square near the railway station and the central part of the town, installation of new litter bins and benches;
landscaping around the peacekeeping soldiers monument;
repairs of the asphalt pavement of some pedestrian paths and streets of the town;
installation of several modern bus pavilions;
decoration of public places for celebration of Town Day;
a large-scale study of the town’s transport system for optimisation of the route network;
a combined sweep truck was given to the town as a present;
In the reporting year UWC companies invested some RUB 30 mln into ubran development projects.
Full development of Tikhvin, creation
of a comfortable and modern living environment is important for our enterprises
Gennady Veselov, CEO at TVSZ
UWC traditionally pays significant attention to interaction with regional educational institutions of all levels.
In the reporting year, TVSZ continued implementation of the projects intended for support of secondary education schools in Tikhvin:
additional classes were arranged for graduates to prepare them for the Unified State Exam, invitations were issued to teachers, and textbooks were acquired for advanced study of various subjects;
vocational guidance was provided to students of grades 7–8; excursions to the plant and extracurricular courses concerning its production system were organised.
NPC Springs actively cooperated with the Izhevsk Machine-Building Technical College named after S.N. Borin for organisation of industrial internships. TVSZ continued its active cooperation with the Tikhvin Technical College named after E.I. Lebedev. In the reporting year, more than 150 of its graduates were invited to work at UWC’s enterprises. The Committee for General and Vocational Education of the Leningrad Region with the support of Tikhvin Freight Car Building Plant allocated
Educational support
approximately RUB 30 mln for improvement of its material and technical base in 2017:
classrooms were repaired, new tables, chairs, computers, monitors and projectors were acquired;
a robotics room equipped with plant equipment for training of experts as Operators of Automatic and Semi-Automatic Lines, Machines and Plants is under development;
a special educational programme named Mechatronics is planned to be established.
In the reporting year, TVSZ arranged industrial internships for students of engineering and technical specialties from
Peter the Great St. Petersburg Polytechnic University, Emperor Alexander I St. Petersburg State Transport University, and Emperor Nicholas II Moscow State University of Railway Engineering.
VNICTT also interacts with Emperor Alexander I St. Petersburg State Transport University. For example, in 2017 three young graduates from this university were employed at its design engineering units. Moreover, in the reporting year students cooperated with employees of the technical archive and patent specialists of VNICTT to develop an electronic scientific and technical library and filled it with informational materials from Russian and international field-specific exhibitions and conferences.
Young professionals (WORLDSKILLS RUSSIA) — 2017
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Teffi Social and Cultural Centre
In 2015, a new modern library – Teffi Social and Cultural Centre – which became an intellectual recreation centre for residents of Tikhvin, was opened with the direct support of TVSZ. The project was supported by the Administration of the Tikhvin District and the Government of the Leningrad Region and became a good example of public and private partnership. For two years of construction TVSZ investments amounted to some RUB 40 mln.
The library meets all modern requirements and is equipped with the latest computer equipment and high-speed Internet, with free access to the electronic resources fund. To date, the library fund includes around 15 thousand books, and a selection of newspapers and magazines; the readers also receive access to the electronic library LitRes and the Boris Yeltsin Presidential Library funds.
To date, more than 5.3 thousand people are Teffi’s users, who visited the centre 44.6 thousand times and received about 29 thousand copies of literature in the reporting year.
Plant’s athletic club PRO-WORKOUT 1520
In May 2017, a fitness centre was opened on the territory of TVSZ, providing free trainings for all employees of the Tikhvin industrial
site, who became club members. The centre, with an area of almost 200 m² is divided into three zones: cardio equipment, weight equipment and free weights. Today, about 150 sportsmen visit the centre regularly. Ten of them are Candidate Masters of Weightlifting, two of them are Masters of Sports, and one member set a record in Russia in bench press in the weight category under 90 kg at recent competitions.
In November 2017, the first athletic competitions were held among Tikhvin railcar builders, in which 42 athletes took part.
A city cultural component is one of the fundamental elements of a comfortable urban living environment. TVSZ always takes part in organisation of celebrations, festivals, contests and
Cultural support
Healthy Lifestyle festival
On 3 August, a celebration dedicated to Athlete Day was held in Tikhvin with the support of TVSZ. The festival included an
athletic race, a zumba fitness class, and the strongest athletes took part in a workout competition.
The traditional “Tikhvin in Motion” quest (formerly known as”Running Tikhvin”) took place for the fifth time already and became the main event. Quest participants visited a total of 25 points in Tikhvin and its suburbs and fulfilled 34 tasks.
All winners were awarded with memorable gifts.
TVSZ is a partner of the AdVita charitable foundation, which provides support to adults and children with cancer. For several years the enterprise has sponsored a St. Petersburg team made up of children supported by the foundation, their parents, and volunteers, who take part in the World Children’s Winners’ Games. These are athletic competitions for survivors of cancer. The plant also funds excursions for children supported by the foundation to the Sheredar Rehabilitation Centre, the first holiday camp in Russia to specialise in the psychosocial rehabilitation of children, who survived cancer and blood diseases. In 2017, the enterprise provided financial support to the programme “Family Weekends” aimed at the rehabilitation of families with children, who survived such diseases.
Social support
Since 2014, the Company has been the official partner of the All-Russian Charity Food Bank “Rus”, which provides food assistance to low-income families and families with many children, elderly people, who live alone, families with disabled family members, and homeless people in all regions of the Russian Federation.
traditionally acts as a partner of the All-Russian Competition “Tikhvin Lel” and Town Day.
44,600visits
28,941units given
The library provides everything necessary for concerts, arranges performances, meetings with interesting people, master classes, clubs and hobby associations, training sessions, conferences, round tables, seminars and other events: there is a conference hall, a training hall, a hall for master classes, and youth and children’s rooms, as well as a literary lounge. In 2017, 525 events were held.
TVSZ’ administration is interested in the current status and issues of Teffi and provides constant support in solving relevant issues.
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UWC’s effective corporate governance system is one of the key elements of our success. The consistent improvement of the corporate governance system enables the Company to enhance its operating and financial efficiency.
Corporate Governance
Section contents
114 120
124
Corporate governance bodies
Information for shareholders and investors
Internal control and risk management
The internal control and audit system includes the following elements:
Audit Committee under the Board of Directors;
Internal Auditor;
Internal audit service.
Dynamics of UWC stock quotes and the MOEX Russia Index in 2017
70
80
90
100
110
Flowchart of interaction between UWC’s governance and supervisory bodies
General Meeting of Shareholders
Board of Directors
Internal Auditor.
CEO
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Corporate governance bodies
UWC has set the goal of developing an effective corporate governance system that meets the best governance practices and modern world standards in the field. An atmosphere of trust between all interested parties and high quality of management decision-making rely on the following basic principles of corporate governance:
protection of the rights and interests of shareholders;
fair and equal treatment of all shareholders;
business transparency for the shareholders and investors;
provision of an effective mechanism for cooperation between management bodies;
The General Meeting of Shareholders is UWC’s highest governing body. By taking part in the Company’s General Meeting, shareholders exercise their right to participate in Company management. Under UWC’s Charter and current legislative norms of the Russian Federation, shareholder participation is required to adopt a number of the most important corporate decisions. UWC offers its shareholders equal opportunities to participate in the General Meeting of Shareholders, make proposals to the agenda, and nominate candidates for the Board of Directors and the position of the Internal Auditor.
The procedure for holding a General Meeting of Shareholders is set out in UWC’s Charter and the Regulations on the General Meeting of Shareholders. The Annual General Meeting of Shareholders is held at least once a year (between 1 March and 30 June) and the Extraordinary General Meetings of Shareholders can be convened (by a decision of the Board of Directors, at the request of the Internal Auditor, the External Auditor or a shareholder with a stake of at least 10% of UWC’s voting shares). Meetings may require attendance or allow absentee voting.
In the reporting year, two General Meetings of Shareholders were held.
The Annual General Meeting of Shareholders, which took place on 30 June 2017, adopted the following decisions:
General Meeting of Shareholders
approval of the Company’s Annual Report and Annual Financial Statements (under RAS) for 2016;
distribution of profit, including payment (declaration) of dividends, and losses based on the results of 2016;
approval of the new edition of the Company’s Charter;
determination of the number of members and election of members of the Company’s Board of Directors;
election of the Company’s Internal Auditor and approval of the Company’s External Auditor;
payment of remuneration to members of the Company’s Board of Directors and Committees;
participation of the Company in the Russian Union of Industrialists and Entrepreneurs.
The following agenda items involving approval of related-party transactions were considered at the Extraordinary General Meeting of Shareholders held in absentia on 3 February 2017:
two suretyship contracts to be signed with the State Transport Leasing Company to ensure performance of obligations of Vostok1520 under the financial lease (leasing) contracts with STLC;
a suretyship contract to be signed with the State Transport Leasing Company to ensure performance of obligations of TH UWC under the supply contract with STLC.
UWC’s governance and supervisory bodies operate according to the Company’s
constituent and internal documents, which can be found on the Company’s official website1.
The operating governance and supervisory bodies are shown in the chart below.
1 Constituent and the Internal Documents section https://www.uniwagon.com/investors/corporate_governance/corpo-rate_documents/.2 Information on the activities of the Internal Audit Service, the Internal Auditor and the External Auditor is provided in the Internal control and risk management section, p. 120.
UWC is now a member of RSPP
The Management Board of the Russian Union of Industrialists and Entrepreneurs (RSPP) made a resolution to include UWC into its structure.
RSPP unifies more than 100 sectoral and regional organisations in key economy sectors and consolidates efforts of the business community representing the interests of national business groups both in Russia and abroad.
Governance and supervisory bodies
Flowchart of interaction between UWC’s governance and supervisory bodies2
General Meeting of Shareholders
Board of Directors
Internal Auditor
CEO
Governance bodies
Renumeration and Nominations Committee
Supervisory bodies
Audit Committee
Committees under the Board of Directors
Internal Audit Service
Structure units of the Company Corporate Secretary
External Auditor
decision-making autonomy of the Board of Directors;
maintenance of an effective internal control and auditing system;
full compliance with the law in all aspects of business.
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The Board of Directors is the collegial governance body, which handles the general management of the Company, except for the matters that fall within the competence of the General Meeting of Shareholders. The Board of Directors is a vital tool for protecting the rights and legitimate interests of shareholders, including those with minority holdings.
The activities of the Board of Directors are regulated by the Federal Law On Joint-Stock Companies, the Company’s Charter, and the Regulations on the Board of Directors.
Members of the Board of Directors are elected on the annual basis based on the results of the cumulative voting of the General Meeting of Shareholders. According to the effective edition of the Charter, the Company’s Board of Directors consists of at least five members. In accordance with UWC’s internal documents, independent directors shall account for at least 20% of the seats on the Board of Directors (but not less than three persons) 1.
As of 31 December 2017, the UWC Board of Directors included three independent directors, two non-executive and two executive directors (the composition of the Board of Directors is provided in the Table below) 2.
Board of Directors
In 2017, the Board of Directors held seven meetings (six of them in absentia) and considered the following issues, among others:
cost of the Company’s Auditor services;
placement price of the Company’s additional ordinary shares;
preliminary approval of the Annual Report and the Annual Financial Statements for 2016;
recommendations for profit distribution;
election of the Chairman of the Board of Directors, appointment of the Company’s Corporate Secretary and formation of the Company’s Committees;
approval of related-party transactions and large transactions;5
approval of the Regulations on the Company’s Information Policy.
1 A member of the Board of Directors is deemed independent if s/he has no connection with the Company or any of its
substantial shareholders, business partners, competitors or the government. The independence of members of the Board
of Directors is determined according to the independence criteria set out in the listing rules of the Moscow Exchange and
those of trade operators listing the Company’s stock.2 Following the resolution of the Annual General Meeting of Shareholders held on 30 June 2017, Igor Tsyplakov, Alexey
Tsyplakov and Zumrud Rustamova resigned from their membership in the Board of Directors. Their brief biographical details
are provided in the 2016 Annual Report.
Composition of the Board of Directors3
Nikolai Dobrinov
Status: Chairman
Field of activity: Corporate communications and relations with governmental authorities
Stake in UWC’s charter capital4: –
Term of appointment on the Board of Directors: Since 2013
Ilya Yuzhanov
Status: Independent Director
Field of activity: State and municipal management
Stake in UWC’s charter capital: –
Term of appointment on the Board of Directors: Since 2015
Composition of the Board of Directors:
3 Brief biographical details of the Board members are provided in Appendix, p. 230.4 As of 31 December 2017.5 Information on related-party transactions, as well as large transactions, is shared on the Company’s official website
in the Material Facts section: http://www.uniwagon.com/investors/corporate_disclosure/material_fact_notice/.
Yury Yarov
Status: Independent Director
Field of activity: Public administration
Stake in UWC’s charter capital: –
Term of appointment on the Board of Directors: Since 2016
Roman Savushkin
Status: Executive Director
Field of activity: Strategy and management of transport enterprises
Stake in UWC’s charter capital: 0.922%. No transactions with UWC shares made in 2017.
Term of appointment on the Board of Directors: Since 2011
Dmitry Bovykin
Status: Executive Director
Field of activity: Investor relations and strategic marketing
Stake in UWC’s charter capital: 0.0061%. No transactions with UWC shares made in 2017.
Term of appointment on the Board of Directors: Since 2011
Alexander Pleshakov
Status: Independent Director
Field of activity: Banking
Stake in UWC’s charter capital: –
Term of appointment on the Board of Directors: Since 2015
Igor Mintz
Status: Non-Executive Director
Field of activity: Investments and economic appraisal of investment projects
Stake in UWC’s charter capital: –
Term of appointment on the Board of Directors: Since 2016
7 meetings
were held by the Board of Directors in 2017
23
2
Independent Directors
Non-Executive Directors
Executive Directors
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The Corporate Secretary serves to guarantee compliance by the Company’s officers and management bodies with procedural requirements that ensure the rights and legitimate interests of shareholders. The Corporate Secretary is elected by and reports to the Board of Directors. Functions of the Corporate Secretary include:
interaction with shareholders;
supporting the effective work of the Board of Directors and its committees;
Corporate Secretary
ensuring strict adherence by the management bodies to their purview;
ensuring interaction between the Company’s management, the Board of Directors and shareholders;
monitoring compliance with the requirements of the Federal Law “On Combating the Unauthorised Use of Insider Information and Market Manipulation”2 and related regulatory legal acts.
Anna Mikutskaya was appointed to the position of the Company’s Corporate Secretary in 2015. In 2005, she graduated from Lomonosov Moscow State University (major in law), and in 2008 – from the Academy of National Economy of the Government of the Russian Federation (major in national economy), while in 2015 she took the Corporate Secretary course at the Russian Institute of Directors. An experienced specialist in corporate governance affairs, she worked as the Secretary of the Board of Directors and Corporate Secretary at large organisations (subsidiaries of Gazpromneft and NOVATEK).
The CEO is the Company’s sole executive body and handles the day-to-day management of the Company. The CEO is elected by the
CEO
Board of Directors and reports to the Board of Directors and the General Meeting of Shareholders.
In April 2012, Roman Savushkin was appointed to the position of the CEO1.
1 Brief biographical details of the CEO and the Company’s management are provided on the official website of PJSC
“RPC UWC”: https://www.uniwagon.com/about/management/.2 The following information is published on the official website of PJSC “RPC UWC”:
The procedure for maintaining the List of Insiders, access to insider information, protection of its confidentiality and
control over compliance with laws
https://www.uniwagon.com/media/documents/polozhenie_o_insaydu_pao_npk_ovk.pdf
The List of Insider Information: https://www.uniwagon.com/media/documents/perechen_insayderskoy_informacii_pao_
npk_ovk.pdf.
The UWC Board of Directors has two committees, which task is to provide guidance and advice to the Board of Directors on matters falling within their competence. As of 31 December 2017, only independent directors were members of the committees in compliance with the best international corporate governance practices.
The main purpose of the Audit Committee is to facilitate the effective activities of the UWC Board of Directors in resolving
Committees of the Board of Directors
issues related to strategic management and monitoring the financial and economic activities of the Company, including:
ensuring completeness, accuracy and reliability of financial statements;
providing recommendations on appointment of an external auditor and determining the auditor’s remuneration, as well as monitoring the work of the external auditor;
monitoring the effectiveness of the risk management and internal control system;
monitoring activities to combat corruption and protect insider information.
In November 2017, the Board of Directors approved the Regulations on UWC Information Policy developed in compliance with the requirements of the Federal Law On the Securities Market, the Regulations on Disclosure of Information by Issuers of Issue-Grade Securities1, the Corporate Governance
Regulations on the Information Policy
Code2, regulatory documents of stock exchanges, which list the Company’s shares, and constituent and internal regulatory documents of the Company.
The Regulations determine the goals and principles of information disclosure by the Company, set the list of information subject to mandatory disclosure, the procedure, forms and terms of its disclosure, and the procedure of internal and external communications with interested parties, as well as actions intended for control of compliance with the Company’s information policy.
All members of the Board of Directors attended 100% of meetings from those, in which they could participate in the reporting year.
The terms and procedure for payment, as well as rules for calculating remuneration for members of the Board of Directors are stipulated in the Regulation on Motivation
for Members of the UWC Board of Directors. Remuneration for members of the Board of Directors is paid based on a resolution made by the Annual General Meeting of Shareholders.
In the 2017 corporate year, in accordance with the resolution of the Annual General Meeting of Shareholders dated 30 June 2017, each member of the Board of Directors could receive remuneration in the amount not exceeding RUB 3 mln for their work and RUB 500 thousand for participation in the work of each of the committees under the Board of Directors. Total payments to members of the Board of Directors amounted to RUB 9.48 mln in the reporting year.
In 2017, the Committee comprised of Ilya Yuzhanov (Chairman), Yury Yarov and Alexander Pleshakov held three meetings in absentia.
The main task of the Remuneration and Nominations
1 Approved by the Bank of Russia under No. 454-P on 30 December 2014.2 Recommended for application by joint-stock companies, which securities are admitted to on-exchange trading by
the letter of the Bank of Russia No. 06-52/2463 dated 10 April 2014.
Committee is to facilitate the effective activities of the UWC Board of Directors in resolving issues related to the Company’s organisational structure, personnel policy principles, and defining the requirements for candidates appointed to the management bodies and the criteria for determining their remuneration amount. In the reporting year. The Committee comprised of Alexander Pleshakov (Chairman), Ilya Yuzhanov and Yury Yarov held one meeting in absentia.
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Internal control and risk management
In order to protect the rights and interests of shareholders and investors, UWC employs a system of internal control and audit, which provides oversight over the Company’s financial and economic activities.
The system effectively identifies, prevents and limits financial and operational risks, and detects violations.
The internal control and audit system includes the following elements:
Audit Committee under the Board of Directors (for more information on the Audit Committee see section 5.1. Corporate governance bodies);
Internal Auditor;
Internal Audit Service.
UWC has an Internal Audit Service, which provides support in achieving the Company’s goals.
The Internal Audit Service’s activities are based on the principles of independence and impartiality, for which reason:
the head of the Service reports to the Board of Directors and is appointed and dismissed by the CEO based on the decision of the Board of Directors;
Various risks have an impact on UWC’s business and may provide both an adverse and a positive effect on achievement of business goals. In order to manage and minimise these risks, the Company has adopted a risk-based approach designed to ensure the adoption of the most effective management solutions by the senior staff.
The risk management system allows for timely risk detection, risk analysis and assessment, and adoption of risk minimisation measures. Risk identification and risk management procedures are closely integrated into strategic decision-making processes and the Company’s day-to-day activities.
its head and employees cannot combine their activities with those in other units of UWC.
The Internal Audit Service carries out its activities in accordance with the Internal Audit Regulation, which establishes its main functions as follows:
assessing the effectiveness of the internal control system;
assessing the effectiveness of the risk management system;
assessing the corporate governance.
The key tasks of the Internal Audit Service include developing and implementing a risk-oriented audit plan, in particular:
analysing conformity of the goals of business processes, projects and structural units to the Company’s goals;
identifying and evaluating the risks in business processes;
analysing the effectiveness of control procedures and other risk management activities, including efficient use of the resources allocated for these purposes;
monitoring compliance with the requirements of the law and the Company’s internal documents;
monitoring safety and sufficient security of assets;
taking part in fraud investigations;
evaluating completeness and reliability of financial and management statements, as well as information subject to mandatory disclosure under the law.
The Internal Audit Service coordinates its activities with the Audit Committee under the Board of Directors and the External Auditor of UWC.
In order to control UWC’s financial and economic activities, the General Meeting of Shareholders appoints an Internal Auditor for the reporting year, who performs checks (audits) at his own
The key principles of UWC’s risk management system are as follows:
Strategic approach:
identification and assessment of events that affect achievement of strategic goals;
strategic planning with consideration of the risks.
Priority of preventive measures:
ensuring preventive measures to minimise the probability of risk events and their negative impact on business;
providing the Company’s management with information on possible risks when making management decisions.
Continuity of the risk management process:
identification, assessment and management of business process risks on a permanent basis;
monitoring of risk management activities.
Risk management matrix structure:
formation of risk-control matrices;
creation and management of a system of key risk indicators.
Internal control and audit
Risk management
initiative, according to the resolutions of the General Meeting of Shareholders, the Board of Directors, or at the request of a shareholder owning a combined stake of at least 10% of voting shares. As of 31 December 2017, Alexander Godeyev was the Company’s Internal Auditor.
During the reporting year the Internal Auditor conducted an audit of UWC’s annual
financial statement and Annual Report for 2016, on the basis of which he prepared an opinion on 12 May 2017. The Internal Auditor did not receive any remuneration for 2016.
In order to confirm the accuracy of the consolidated financial statement under IFRS and the financial statement under RAS, UWC hires an independent External Auditor, who is appointed by the General Meeting of Shareholders based on a proposal from the Board of Directors. In 2017, Deloitte & Touche CIS was appointed to the position of the External Auditor. UWC paid actual remuneration in the amount of RUB 14.6 mln (excluding VAT) to the External Auditor for the audit of the financial statement under RAS and the consolidated financial statement under IFRS for 2016.
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In order to improve the risk management process at UWC, the position of the Deputy CEO for Risk Management was established in the reporting year. He heads an independent Risk Management Department reporting directly to the CEO. He has the following functions:
development of the Risk Chart;
keeping risk management policy up-to-date;
regular submission of information on current risks to the senior staff;
monitoring implementation of the risk hedging activities.
The Company regularly interviews the heads of its business units in order to monitor changes in current risks and identify the new ones. The Company constantly adapts and upgrades its risk management procedures it implements, including the ongoing analysis of the competitive environment and analysis of contemporary risk requirements and solutions (including
Risk radar
Organisational structure of the risk management system
The probability of risk growth in future
Significance
Pro
ba
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ty
1
1 3
1.5
1.5 3.5
2
2 4
2.5
2.5 4.50.5
0.5
0
solutions standardised by ISO). In 2018, an individual risk management quality rating is expected to be assigned and an independent assessment of the risk management system efficiency is planned to be carried out.
A key element in the UWC risk management system
is the Risk Chart (for more information see Appendix 6). In the framework of its quarterly updating, the Company performs reassessment of the impact of each risk and regular stress tests. Moreover, the Company is gradually expanding the scope of its Risk Chart by adding new business processes and structural units.
The Risk Radar developed on the basis of the Risk Chart includes financial and economic risks among the main risks for the Company, as well as legal, commercial, marketing, technical and human resource risks.
DEPARTMENT HEADS
AUDIT COMMITTEE UNDER THE BOARD OF DIRECTORS
Monitoring the reliability and functional effectiveness of the risk management system
DEPUTY CEO FOR RISK MANAGEMENT, RISK MANAGEMENT DEPARTMENT
CEO, CREDIT AND INVESTMENT COMMITTEES
1
Identify potential risks and timely inform risk manager from the Risk Management Department
Monitor the implementation of the risk regulation measures and risk reporting
Compile a Risk Chart Business management taking into account the consolidated Risk Chart
2 3
45
Take risk mitigation measures
RISK REPORTING
Motivational risk/ risk of job satisfaction loss
Risk of lossing inellectual righs
Property risk
Banking risk
Financing risk
State regulation/ Country risk
Market risk
Infrastructure riskCurrency risk
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Information for shareholders and investors
As of 31 December 2017, UWC had a charter capital of RUB 115,996,689 split into 115,996,689 ordinary registered uncertified shares with a par value of RUB 1 each. In addition to its outstanding shares, the Company may place a total of 489,559,311 ordinary registered shares with a par value of RUB 1 each. UWC has no preferred shares.
In April 2015, UWC conducted an initial public offering (IPO) on the Moscow Exchange. A total of 12,896,570 shares or 12.22% of the charter capital were sold to investors in the IPO, including 5,556,000 shares of an additional issue and 7,340,570 shares belonging to United Wagon Plc. The offer price was set at RUB 700 per ordinary share. The Company raised RUB 9.028 bln as a result of the placement. More than 50 investors took part in the IPO conducted by UWC. Foreign investors accounted for 38.3% of the demand for the shares. Demand from institutional investors made up 81.6% of the listing volume, including pension funds – 11.1%; retail and affluent private investors acquired 18.4%
of the shares. The Company’s senior management also took part in the IPO.
In May 2016, UWC conducted a secondary public offering (SPO). The Company placed 7,867,948 shares or 6.9% of the charter capital, raising a total of over RUB 5.0 bln. The placement price was set at RUB 640 per share. More than 70 institutional and retail investors, including the Company’s management, acquired the securities.
In April-May 2017, UWC conducted the SPO of 2,572,741 of shares or 2.2% of the increased charter capital, raising a total of over RUB 1.9 bln. The placement price was set at RUB 720 per share. The securities were acquired by more than 130 institutional and retail investors.
Charter capital
Changes in the structure of UWC shareholders
In 2017, ICT Group Ltd’s stake in UWC decreased from 25.05% to 14.3%. According to the information provided by the shareholder, the stake was divided between the companies controlled by ICT Group Ltd: United Wagon PLC and Powerboom Investment Limited, with further sale of United Wagon PLC to Doland Business Limited. As a result of these transactions, United Wagon PLC’s stake in the equity capital of UWC accounted for 8.5%, while Powerboom Investment Limited’s stake and ICT Group Ltd’s indirect share accounted for 14.3%. Later, the stake of Doland Business Limited decreased to 4.2%.
As a result of these transactions and the SPO, free float of UWC increased to 26.2% in 2017.
In August 2017, ICT Group Ltd transferred its equity stake under REPO operations to Sberbank.
Structure of UWC shareholders as of 31 December 2017
Sever Asset Management LLC
PJSC Sberbank
Navigator Managing Company LLC
Managing-Consulting LLC
Other strategic investors
Otkritie Holding JSC
UWC top management
JSC IQG Asset Management
Free-Float
15.9
January
Average share price, RUB (along the right axis)
Daily trading volume (median value per month), RUB mln (along the left axis)
December
26.7
14.3
5.7
7.9
0.9
8.8
8.1
11.6
The Company’s shares are listed on the Moscow Exchange (UWGN ticker) and as of 31 December 2017 were
Shares
included in the first-tier quotation list. The securities are traded under a T+2 trading regime. The shares form part of the main Russian share indices: MICEX Index and RTS Index.
Dynamics of UWC share trading volume1 and quotations on the Moscow Exchange in 2017
1 With consideration of transactions being negotiated.
30.0 850
800
750
700
650
600
25.0
20.0
15.0
10.0
5.0
0.0
Date of SPO. Offering price – RUB 720 per share
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The Company’s market capitalisation increased by 1.6% over the reporting year and stood at RUB 91,637.38 mln as of 31 December 2017 versus RUB 90,228.75 mln as of 31 December 20161.
UWC shares demonstrated stability against the general market decline. A fall in quotations in the beginning of May 2017 was caused by the SPO with the discount to the market price (RUB 720 per share). By the end of the year, UWC securities demonstrated dynamics above the average market level.
Indicators 2015 2016 2017
Closing price of the first trading day 706 738 795
Maximum closing price 773 797 828
Minimum closing price 698 641 721
Closing price of the last trading day 739 795 790
Characteristics Exchange-traded rouble bonds series BO-01 Rouble bonds series 01
Issuing volume RUB 15,000,000 RUB 15,000,000
Par value RUB 1,000 RUB 1,000
Date of issue 16 September 2014 4 December 2013
Maturity date 10 September 2019 24 November 2021
Annual first coupon rate 12.5% 8.7%
Annual rate of 2–6 coupons REPO of the Bank of Russia + 3.5% CPI + 3%
Coupon period 182 days 182 days
Trading platform Moscow Exchange Moscow Exchange
UWC share price in 2015–2017
Bond parameters of UWC Finance
Dynamics of UWC stock quotes and the MOEX Russia Index in 2017
1 When calculating market capitalisation as of the end of 2016 and 2017, market price data (the closing price as of the
end date of the corresponding reporting period) was used for UWC ordinary shares as disclosed by PJSC Moscow
Exchange on the website http://www.micex.ru/marketdata/quotes.
UWC Finance LLC, a subsidiary of UWC, is the bond issuer. As of the end of 2017, two bond issues with a total volume of RUB 30 bln were circulated.
Bonds
Dynamics of the coupon rates of the exchange-traded rouble bonds series BO-01, %
70
80
90
100
110
January December
In the reporting year two companies provided analytic coverage of UWC shares: Renaissance Capital and Otkritie Capital. In December
2017, Okritie Capital suspended coverage of the Industrials, including UWC, and revoked the share rating and target price (Hold, RUB 770). As of the end of the reporting year, the rating of Renaissance Capital was MARKET PERFORM with the target share price of RUB 759.
MOEX Russia Index UWC stock quotes
16.0September 2015
15.0March 2017
September 2017 14.5
15.5September 2016
March 2016 15.5
March 2015 12.5
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Dynamics of the coupon rates of the rouble bonds series 01, %
UWC’s dividend policy aims to maintain a balance between distribution of dividends and an increase in the Company’s capitalisation through reinvestment into its own development. Utilising this approach, the Company is increasing its shareholder value in the long term.
The procedure for making a decision on payment of dividends and calculation of the dividend amount is regulated by the effective laws of the Russian Federation, the Charter and the Company’s Regulation on the Dividend Policy. When providing recommendations to the
General Meeting of Shareholders on the amount of dividends and their payment procedure, the Board of Directors is guided by the principle of an optimal combination of UWC’s effective development and respect for shareholders’ rights to receive part of the net profit as dividends. Dividends are paid from the Company’s net profit, which is determined according to the accounting reports (financial statements) prepared in accordance with the Russian law. Dividends can be paid from the retained earnings of previous years. The decision to pay dividends is taken by the UWC General Meeting of Shareholders on the basis of recommendations from the Board of Directors. Moreover, the amount of dividends may not exceed the amount recommended by the Board of Directors.
The Company did not pay dividends for the previous years.
In 2018 UWC plans to introduce its updated dividend policy, which will establish a more transparent mechanism for calculating the amount of dividend payments and will comply with the recommendations of the Bank of Russia, the Moscow Exchange and the best practices.
Dividend policy
Interaction with shareholders and investors
UWC places a high priority on building trust relationships both with existing shareholders and potential investors. The Company has the Department for Relations with Investors and Financial Institutions, which main task is to develop and implement tools of engagement with the investment community in compliance with the best standards for information disclosure and maximum information transparency.
Such tools include arranging meetings and calls with investors and analysts, participating in conferences, preparing presentations and press releases on operational and financial results (for every quarter and every six months, respectively), preparing press releases on other information events relevant for investors, operating a section for investors on the Company’s official website, and regularly mailing the Company’s materials to analysts and investors.
In 2017 the Company:
participated in three investor conferences in Moscow and London;
conducted a non-deal roadshow in London, Stockholm, Helsinki and Tallinn after publication of its financial results for 2016;
conducted a non-deal roadshow in Frankfurt am Main and Vienna after publication of its financial results for the second half of 2017.
In the framework of these events the Company held a total of 27 meetings with investors attended by the Company’s management.
In addition, in the reporting year the Company arranged three visits to the industrial site in Tikhvin for investors and analysts, which included a presentation with the participation of the industrial site’s senior staff as well as an inspection of UWC railcar building enterprises.
In the pursuit of consistent improvement of its information disclosure level, the Company presented information on the structure of its investments and procurements in the Annual Report 2016 for the first time, as well as detailed information about the market, products, business model, etc. The quality of the Annual Report was recognised at the International Vision Awards Competition arranged by the League of American Communications Professionals LLC (LACP, USA), where the Company was awarded silver in the sectoral nomination of the machine building sector.
In the reporting year, the Company adopted a plan of IR activities for 2018 intended to improve its information disclosure tools and develop interaction with existing and potential investors.
6.9May 2017
December 2015 27,4
11.2November 2016
9.1June 2016
December 2014 11.7
June 2015 10.6
June 2014 8.7
7.0November 2017
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1 You may find detailed information about the Company at the official website:
https://www.uniwagon.com/about/history/
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Disclaimer
APPENDIX
The Annual Report of Public Joint Stock Company “Research and production corporation “United Wagon Company” was tentatively approved by the decision of the UWC Board of Directors dated 25 May 2018. The reliability of the data contained in the Annual Report has been confirmed by the Company’s Internal Auditor.
In this report, unless otherwise specified, operational and economic performance indicators were determined in accordance with IFRS.
The analysis of the financial performance results should be viewed in the context of the audited consolidated financial statements of UWC for the year ended on 31 December 2017 and prepared under IFRS.
This Report may include forward-looking statements.
Such statements may contain words such as “suppose”, “believe”, “intend”, “anticipate”, “expect”, “will”, “may”, “forecast”, “plan” and other words with similar meanings. All statements included in this Report (other than statements of historical fact), including, among other things, statements that refer to financial standing, business strategy, plans and objectives of management with regard to future operational activities (including development plans and goals) are forward-looking statements. Such forward-looking statements do not relate to historical or current facts; they cannot be objectively verified, they are based on assumptions and are subject to their inherent risks (known and unknown) and uncertainty. A number of important factors may lead to the fact that actual results, indicators or achievements may differ dramatically from
future results, indicators or achievements, predictions, assumptions or forecasts contained in either express or implied form in such forward-looking statements. Such forward-looking statements are relevant only on the date of this Report, and the Company expressly refuses (to the fullest extent permitted by law) to undertake any obligations in respect of any updates or changes in any forward-looking statements contained in this Report, reflecting any changes in forecasts contained in such statements or any changes in events, conditions or circumstances any such statements are based on. One should not unduly rely on such forward-looking statements when making decisions related to the Company and/or its securities. Nothing in this Report shall be construed as a forecast with respect to profit.
Brief history of the Company1
2004 Start of construction of Tikhvin Freight Car Building Plant.
2010 An agreement signed by ICT Group and Wabtec Corporation on cooperation in technological development. As part of the agreement the Russian company acquired the exclusive intellectual ownership of Barber S-2-R bogie.
2011 Tikhvin Freight Car Building Plant made its first supply of hopper cars to Freight One railway company for pilot-controlled operation.
Operational freight car leasing company RAIL1520 is established.
2012 Official ceremony of Tikhvin Freight Car Building Plant put into operation was held.
LLC “United Wagon Company” was established to manage the operations of Tikhvin Freight Car Building Plant and RAIL1520 leasing company.
ICT Group and Mitsui & Co of Japan agreed to establish a joint venture in the railroad freight car operating lease business.
2013 Tikhvin Freight Car Building Plant launched the first mass-produced railcars
using innovative Barber bogies and entered the railway market of the CIS and Baltic countries.
Tikhvin Freight Car Building Plant was certified for compliance with International Railway Industry Standard (IRIS).
United Wagon Company and Wabtec Corporation signed an agreement to establish a joint venture to develop and manufacture innovative components for freight rolling stock, including heavy haul rolling stock.
Unified Wagon Company and Siberian Coal Energy Company carried out the first major transaction on the Russian market for supply of mass-produced new generation railcars based on bogies with axle load of 25 tf (6,000 railcars) produced by Tikhvin Freight Car Building Plant.
United Wagon Company joined the International Association of American Railroads (AAR), among its members are the largest producers of rolling stock, machine building equipment and owners of railway infrastructure in North America. AAR membership gives the Company an opportunity to exchange the experience, take part in R&D and operational programmes carried out by AAR for mass introduction of new generation rail equipment, in particular, for heavy haul rolling stock.
United Wagon Company signed the first long-term cooperation agreements for maintenance and servicing of new generation freight cars with Wagon Repair Company No. 1, Wagon Repair Company No. 2, Transwagonmash, Siberian Wagon Repair Company, and Kamkor Wagon (Kazakhstan).
2014 United Wagon Company and Timken (USA) signed an agreement on the establishment of a joint venture in Russia to produce Timken®AP-2 TM integrated bearings for innovative railcars.
All-Union Research and Development Centre for Transportation Technology, a design office to conduct experimental work and introduce technological developments in the freight railway transportation sector, was established.
Transportation company Vostok1520, offering a wide range of freight railway transportation services using the railcars with improved performance, was established.
A transaction to acquire 100% stakes in LLC NPC Springs, producing ultra heavy duty railway springs, from OJSC “RUSNANO” and OJSC “Izhevsk Machine-Building Plant”, was carried out.
Statement of management’s responsibilities for the preparation and approval of the consolidated financial statements for the year ended December 31, 2017
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Auditor’s report and consolidated financial statement
LLC ”United Wagon Company” was reorganised into CJSC “Research and production corporation “United Wagon Company”.
2015 RPC United Wagon Company was included in a list of systemically important enterprises of the Russian Federation approved by the Government of the Russian Federation.
RPC United Wagon Company successfully placed 12.22% of its shares on the Moscow Exchange for a total of RUB 9.028 bln as part of an initial public offering (IPO).
RPC United Wagon Company and Wabtec Corporation signed a contract on supply of railcar foundry products on the American market.
Launch of TikhvinChemMash, producing new generation tank cars with improved loading capacity for transportation of the whole range of chemical products.
RPC United Wagon Company acquired a 100% stake in Transmashenergo, the customer for the construction of a gas piston thermal power plant to ensure the energy security of UWC’s production facilities within the Tikhvin industrial site
2016 Launch of TikhvinSpetsMash, producing innovative special railcars, and the first shipment of timber platforms with improved loading capacity to Locotrans railway operator.
NPC Springs handed the first batch of railcar spring sets to the USA.
As part of its strategy to diversify business and expand the service centre network for maintenance and repair of UWC’s new generation railcars, RPC United Wagon Company has acquired 100% of ownership interest in Tikhvin Assembly Plant “Titran-Express”. The plant has become the main centre of the service network.
RPC United Wagon Company has completed a secondary public offering (SPO) of 6.9% of its ordinary shares on the Moscow Exchange for over RUB 5.0 bln.
Establishment of the subsidiary of RPC United Wagon Company in the US – Uniwagon North America Corp. (New Jersey).
PTK-Holding sold 100% of shares in Vostok1520 company owned by RPC United
Wagon Company. The Holding is to acquire a 19.9% share in exchange of the interest sold.
RPC United Wagon Company presented the samples of its perspective products — coupled gondola with a body volume of 135 cubic meters on the 25 tf bogie and a general-purpose gondola with a body volume of 108 cubic meters on the 27 tf bogie.
Launch of VCh120 mass-produced parts of heavy-duty cast iron with isothermal hardening at Tikhvin Freight Car Building Plant within the import replacement programme.
RPC United Wagon Company, as represented by the office of Uniwagon North America Corp. (USA), joined the Railway Supply Institute (RSI) International Association, which unites more than 250 companies in North America that supply equipment, rolling stock and services on the freight and passenger railway transportation market. The membership in the RSI gives the Company an opportunity to actively represent its interests and promote Russian products on the North American market.
Management is responsible for the preparation of the consolidated financial statements that present fairly the consolidated financial position of Public Joint Stock Company “Research and Production Corporation” United Wagon Company” (PJSC RPC UWC or the “Company”) and its subsidiaries (the “Group”) as at December 31, 2017, and the consolidated results of its operations, cash flows and changes in equity for the year then ended, in accordance with International Financial Reporting Standards (“IFRSs”).
In preparing the consolidated financial statements, management is responsible for:
Properly selecting and applying accounting policies;
Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
Providing additional disclosures when compliance with the specific requirements in IFRSs are insufficient to ensure that users are able to understand the impact of particular transactions, other events and conditions on the Group’s consolidated financial position and financial performance;
Making an assessment of the Group’s ability to continue as a going concern.
Management is also responsible for:: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group;
Maintaining adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the consolidated financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRSs;
Maintaining statutory accounting records in compliance with the local legislation and accounting standards;
Taking such steps as are reasonably available to them to safeguard the assets of the Group;
Preventing and detecting fraud and other irregularities.
The consolidated financial statements of the Group for the year ended December 31, 2017 were authorised for issue by management on April 27, 2018.
On behalf of the Management:
ALEXEY TSYPLAKOV IRINA ARKHANGELSKAYA Deputy General Director for Economics and Finance Chief accountant PJSC RPC UWC PJSC RPC UWC (under letter of attorney 8-1463, issued on December 12, 2017)
Independent Auditor’s Report
To the Shareholders and the Board of Directors of Public Joint Stock Company “Research and Production Corporation “United Wagon Company”
Qualified OpinionWe have audited the consolidated financial statements of Public Joint Stock Company “Research and Production Corporation “United Wagon Company” and its subsidiaries (hereinafter — the “Group” or PJSC “RPC UWC”), which comprise the consolidated statement of financial position as at December 31, 2017, and the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, except for the effects of the matters described in the Basis for Qualified Opinion section of our report, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”).
Basis for Qualified OpinionAs disclosed in Note 4 to the consolidated financial statements, the Group recognized revenue from sale of railcars at the amount of RUB 6,589 million for the year ended December 31, 2016. In our opinion, the above revenue should have been recognized in 2017, as some of the revenue recognition criteria set out by IAS 18 “Revenue” had not been met in 2016. If this revenue had been appropriately recognized in 2017, the revenue and cost of sales for 2016 would have decreased and for 2017 would have increased by RUB 6,589 million and RUB 5 374 million, respectively. Net profit for 2016 would have
decreased and for 2017 would have increased by RUB 972 million. The effects of the misstatement on the Group’s consolidated financial statements for the years ended December 31, 2017 and December 31, 2016 are disclosed in Note 4.
As disclosed in Note 26 to the consolidated financial statements, as at December 31, 2017 and December 31, 2016 several subsidiaries of the Group did not comply with certain financial and non-financial covenants of their long-term loan agreements. Non-compliance with these covenants result in penalties being imposed by the banks, including the right to request early repayment of the loans. After the reporting date, the Group received waivers confirming the consent of the most creditor banks not to request early repayment of the existing obligations under the loan agreements (Note 26). The management assessed probability of the call for early repayment of the loans, as low. As a result, the loans in the amount of RUB 48,500 and 38,725 million as at December 31, 2017 and December 31, 2016, respectively, are presented in the consolidated financial statements as non-current, in line with the repayment terms of the loan agreements. In our opinion, according to the requirements of IAS 1 “Presentation of financial statements”, the Group should have classified these loans as current because as at December 31, 2017 and December 31, 2016 the Group did not have an unconditional right to postpone the repayment of these loans for at least 12 months after the reporting date.
We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the
consolidated financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the “IESBA Code”) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Russian Federation, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.
Key Audit MattersKey audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matters described in the Basis for Qualified Opinion section, we have determined the matters described below to be the key audit matters to be communicated in our report.
Why the matter was determined to be a key audit matter
How the matter was addressed in the audit
Impairment of goodwill
As at December 31, 2017 the carrying value of goodwill amounted to RUB 8,042 million (2016: RUB 8,042 million).
Further details are disclosed in Note 15 to the consolidated financial statements.
We consider impairment of goodwill to be a key audit matter because impairment assessment involves the use of significant estimates and assumptions, including forecasted selling price of railcars and their projected production costs, future sales volumes and discount rate.
We obtained an understanding of management’s process of goodwill impairment analysis.
We performed the following audit procedures in respect to the impairment assessment and testing of goodwill prepared by the Group’s management:
checked the appropriateness of goodwill allocation to the relevant cash generating units;
verified that the input data used in the impairment testing models is consistent with the approved budgets and forecasts;
with the assistance of our internal valuation specialists, challenged reasonableness of key assumptions used in management’s forecasts, including the discount rate;
performed sensitivity analysis of the impairment models’ key assumptions within the range of their reasonably possible changes; and
checked adequacy and completeness of the related disclosures in the consolidated financial statements.
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Why the matter was determined to be a key audit matter
How the matter was addressed in the audit
Uncertainty related to going concern
As at December 31, 2017 several subsidiaries of the Group did not comply with certain obligatory financial and non-financial covenants set out in the loan agreements. As a result of non-compliance, the loans became payable on demand.
In addition, the Group incurred losses from continuing operations in 2017 and 2016.
The Group’s management performed an analysis of the negative factors mentioned above and concluded that the use of the going concern assumption is appropriate.
Further details are disclosed in Notes 2 and 26 to the consolidated financial statements.
We focused on this area because the assessment of whether the going concern assumption is applicable has a pervasive effect on consolidated financial statements. Significant judgment is required in assessing the Group’s future operating and financial performance and in respect to the resolution of the issue related to non-compliance with loans’ covenants.
We performed the following audit procedures in respect to this key audit matter:
analysed management’s assessment of the applicability of the going concern assumption, including the plans in respect of elimination of the negative effects of non-compliance with covenants as well as the Group’s plans of future business developments;
verified that after the reporting date the Group received documents confirming intention of most of the banks-creditors not to demand early repayment of the existing borrowings with breached covenants;
analysed management’s forecasts in respect of the Group’s future performance and assessed the reasonableness of the key assumptions used in the forecasts;
verified the completeness and adequacy of the related disclosures in the consolidated financial statements.
Other Information Management is responsible for the other information. The other information comprises the information included in the Annual report and the issuer’s quarterly reports for the 1st and 2nd quarters of 2018, but does not include the consolidated financial statements and our auditor’s report thereon. The Annual report and the issuer’s quarterly reports for the 1st and 2nd quarters of 2018 are expected to be made available to us after the date of this auditor’s report.
Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
When we read the Annual report and the issuer’s quarterly reports for the 1st and 2nd quarters of 2018, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these the consolidated financial statements in accordance IFRSs, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial StatementsOur objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
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Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period, which constitute the key audit matters included herein.
METELKIN EGOR ALEXANDROVICH Engagement leader
April 27, 2018
Entity: PJSC RPC UWC
State Registration Certificate No.77 017552796
issued on May 28, 2014 by Interdistrict
Inspectorate of the Federal Tax Service No.46 for
Moscow
Primary state registration number:
1147746600539
Address: Russia, Moscow,
7/11 Novokuznetskaya St., Bld. 1, Moscow,
115184 Audit firm: ZAO Deloitte & Touche CIS
Certificate of state registration No. 018.482,
issued by Moscow Registration Chamber on
October 30, 1992.
Primary state registration number:
1027700425444
Certificate of registration in the Unified State
Register No. 77 004840299 issued by Moscow
Interdistrict Inspectorate of the Russian Ministry
of Taxation No 39 on 13 November 2002
Member of Self-Regulated Organization Russian
Union of Auditors (Association),
ORNZ 11603080484.
Consolidated statement of profit or loss and other comprehensive income For the year ended december 31, 2017 (in millions of Russian Rubles, unless otherwise indicated)
Notes 2017 2016
CONTINUING OPERATIONS
Revenue 7 62,020 48,505
Cost of sales 8 (52,073) (38,580)
Gross profit 9,947 9,925
Selling, general and administrative expenses 9 (2,625) (2,085)
Share of profit/(loss) of associates and joint ventures 16, 17 370 (113)
Other operating income, net 38 215
Impairment of property, plant and equipment 13 – (195)
Operating profit 7,730 7,747
Finance income 10 2,449 1,137
Finance costs 11 (13,675) (12,589)
Foreign exchange (loss)/gain, net (154) 1,226
Loss before income tax (3,650) (2,479)
Income tax (expense)/benefit 12 (875) 1,726
Loss for the year from continuing operations (4,525) (753)
Discontinued operations
Profit for the year from discontinued operations 6 – 1,322
(Loss)/profit for the year (4,525) 569
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss:
Gain on revaluation of property, plant and equipment – 11,491
Deferred tax liability on revaluation of property, plant and equipment – (2,298)
Other comprehensive income – 9,193
TOTAL COMPREHENSIVE (LOSS)/INCOME (4,525) 9,762
Earnings per share
From continuing and discontinued operations
Weighted average number of ordinary shares outstanding
115,122,662
110,255,213
Loss)/earnings per share, RUB (39) 5
From continuing operations
Weighted average number of ordinary shares outstanding 115,122,662 110,255,213
Loss per share, RUB (39) (7)
The notes on pages 146-229 form an integral part of these consolidated financial statements
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Consolidated statement of financial position as at december 31, 2017 (in millions of Russian Rubles, unless otherwise indicated)
Note December 31, 2017
December 31, 2016
ASSETS
Non-current assets
Property, plant and equipment 13 80,237 83,630
Prepayments for property, plant and equipment
156 895
Intangible assets 14 6,732 5,853
Goodwill 15 8,042 8,042
Deferred tax assets 12 2,949 3,688
Investments in associates and joint ventures 16 1,175 1,288
Loans receivable 22 12,503 10,877
Prepayment for subsidiary acquisition 23 2,000 –
Long-term trade receivables from sale of railcars
19 565 –
Finance lease receivables 201 224
Restricted cash 24 – 1,923
Other non-current assets 672 202
Total non-current assets 115,232 116,622
Current assets
Inventories 18 12,118 10,960
Trade and other receivables 19 3,510 1,701
Finance lease receivables 23 20
VAT receivable 6,847 4,245
Prepayments to suppliers and other assets 21 4,036 3,893
Investment in PTK-Holding JSC 17 1,773 –
Loans receivable 22 56 3,000
Restricted cash 24 807 –
Short-term bank deposits 20 5,038 5,000
Cash and cash equivalents 24 3,799 2,648
Total current assets 38,007 31,467
TOTAL ASSETS 153,239 148,089
Note December 31, 2017
December 31, 2016
EQUITY AND LIABILITIES
Equity and reserves
Share capital issued 25 116 113
Additional paid-in capital 25 22,993 21,169
Reserve on revaluation of property, plant and equipment
13 9,171 9,193
Accumulated deficit (18,579) (14,076)
Total equity and reserves 13,701 16,399
Non-current liabilities
Long-term loans and borrowings 26 75,215 59,489
Bonds 27 29,799 29,869
Long-term finance leases liabilities 156 6
Deferred tax liabilities 12 479 2,423
Accrued expenses for employees remuneration
29 156 –
Payables for acquisition of subsidiaries 28 – 4,104
Total non-current liabilities 105,805 95,891
Current liabilities
Short-term loans and borrowings 26 6,962 12,609
Bonds 27 671 768
Trade and other payables 28 5,393 8,879
Advances received and other current liabilities
29 20,668 13,536
Short-term finance lease liabilities 39 7
Total current liabilities 33,733 35,799
TOTAL LIABILITIES 139,538 131,690
TOTAL EQUITY AND LIABILITIES 153,239 148,089
The notes on pages 146-229 form an integral part of these consolidated financial statements.
The notes on pages 146-229 form an integral part of these consolidated financial statements
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Share capital issued
Additional paid-in capital
Reserve on revaluation of property, plant and equipment
Accumulated deficit
Total shareholders’ equity
Non-controlling -interest Total equity
Balance at January 1, 2016 105 16,159 – (14,645) 1,619 1 1,620
Profit for the year – – – 569 569 – 569
Gain on revaluation of property, plant and equipment (Note 13)
–
–
9,193
–
9,193
–
9,193
Total comprehensive income for the year – – 9,193 569 9,762 – 9,762
Issue of shares during additional public offering, net of issuance costs (Note 25)
8
5,010
–
–
5,018
–
5,018
Disposal of non-controlling interests – – – – – (1) (1)
Balance at December 31, 2016 113 21,169 9,193 (14,076) 16,399 – 16,399
Loss for the year – – – (4,525) (4,525) – (4,525)
Total comprehensive loss for the year – – (4,525) (4,525) – (4,525)
Reclassification of gain on revaluation of property, plant and equipment disposed of during the reporting period
–
–
(22)
22
–
–
–
Issue of ashares during additional public offering, net of issuance costs (Note 25)
3
1,824
–
–
1,827
–
1,827
Balance at December 31, 2017 116 22,993 9,171 (18,579) 13,701 – 13,701
Consolidated statement of changes in equity for the year ended december 31, 2017 (in millions of Russian Rubles, unless otherwise indicated)
The notes on pages 146-229 form an integral part of these consolidated financial statements. The notes on pages 146-229 form an integral part of these consolidated financial statements
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Consolidated statement of cash flows for the year ended december 31, 2017 (in millions of Russian Rubles, unless otherwise indicated)
2017 2016
OPERATING ACTIVITIES
(Loss)/profit for the year (4,525) 569
Adjustments for:
Income tax expense/(benefit) 875 (1,552)
Depreciation and amortization 4,990 5,728
Gain from sale of railcars as part of the railcar fleet replacement program (Notes 7 and 8) (1,976) –
Share of (profit)/loss of associates and joint ventures (370) 113
Effect of discounting of accounts receivable (Note 19) 165 –
Non-operating foreign exchange loss/(gain), net 154 (1,226)
Write-down of inventories to net realizable value 75 388
Loss on disposal of property, plant and equipment and intangible assets 16 176
Change in allowance for doubtful receivables 47
(172)
Gain on disposal of a subsidiary – (562)
Impairment loss on property, plant and equipment – 195
Impairment and write-off of loans receivable – 21
Loss from sale of accounts receivable under cession agreement – 34
Finance costs 13,675 12,589
Finance income (2,449) (1,137)
Operating profit before changes in working capital 10,677
15,164
Movements in working capital:
(Increase)/decrease in trade and other receivables
(2,435)
2,306
Decrease/(increase) in prepayments to suppliers and other assets 706 (3,150)
Increase in VAT receivable (2,603) (1,105)
Increase in inventories (1,498) (3,066)
(Decrease)/increase in trade and other payables (2,633)
2,092
Increase in advances received and other current liabilities 7,181
9,584
Cash proceeds from operating activities 9,395 21,825
2017 2016
Cash received from the sale of railcars under the railcar fleet replacement program (Notes 7 and 13)
14,088 –
Cash paid for purchase of railcars (Notes 7 and 13)
(9,556)
-
Income tax paid (2,169) (811)
Finance costs paid (15,258) (12,101)
Net cash (used in)/generated from operating activities (3,500) 8,913
INVESTING ACTIVITIES
Purchase of property, plant and equipment, including prepayments
(2,890)
(5,955)
Proceeds from disposal of property, plant and equipment and intangible assets
9
63
Purchase of intangible assets (1,502) (1,383)
Loans granted (3,989) (17,478)
Placement of short-term deposits (5,000) (5,000)
Proceeds from repayment of loans granted 6,311 9,920
Proceeds from redemption of short-term deposits 5,000 –
Interest received 1,184 1,087
Net cash outflow on acquisition of subsidiaries (6,104) –
Net cash inflow from disposal of subsidiaries – 1,138
Cash paid on acquisition of investments in associates (1,290) (649)
Net cash used in investing activities (8,271) (18,257)
FINANCING ACTIVITIES
Shareholders’ capital contribution, net 1,827 5,018
Proceeds from loans and borrowings 44,372 32,153
Repayment of loans and borrowings (34,524) (29,670)
Proceeds from issuance and sale of bonds – 1,684
Purchase of own bonds (70) (131)
Finance lease payments (including leaseback), net 150 31
Cash deposited in accordance with covenants (Notes 24, 26) (807) (142)
Redemption of cash deposited in accordance with covenants (Note 26) 1,923 –
Net cash generated from financing activities 12,871 8,943
Net increase/(decrease) in cash and cash equivalents 1,100 (401)
Effect of foreign exchange changes including effect of revaluation of cash and cash equivalents
51
(158)
Cash and cash equivalents, beginning of the year 2,648 3,207
Cash and cash equivalents, end of the year 3,799 2,648
The notes on pages 146-229 form an integral part of these consolidated financial statements.The notes on pages 146-229 form an integral part of these consolidated financial statements
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Notes to the Consolidated Financial Statements for the Year ended December 31, 2017 (in millions of Russian Rubles, unless otherwise indicated)
Information in respect of significant Group’s subsidiaries is disclosed in the table below:
Ownership interest in the Group
Company Place of registration
Principal activities
As at December 31, 2017
As at December 31, 2016
Rail 1520 (BVI) LTD BVI Investment company 100% 100%
RAIL 1520 Finance Cyprus LTD
Cyprus Investment company 100% 100%
RAIL 1520 Cyprus LTD
Cyprus Investment company 100% 100%
RAIL1520 LLC Russia Operating lease of railcars 100% 100%
RAIL 1520 Service (BVI) LTD
BVI Investment company 100% 100%
RAIL 1520 Service Cyprus LTD
Cyprus Investment company 100% 100%
RAIL1520 Service LLC
Russia Operating lease of railcars 100% 100%
RAIL 1520 (BVI) Leasing LTD*
BVI Investment company - 100%
RAIL 1520 Cyprus Leasing LTD
Cyprus Investment company 100% 100%
RAIL 1520 Leasing LLC
Russia Finance lease of railcars 100% 100%
RAIL 1520 Wagon LTD*
BVI Investment company – 100%
RAIL 1520 Wagon Cyprus LTD
Cyprus Investment company 100% 100%
TZK UWC LLC Russia Finance lease of railcars 100% 100%
Kintonia Investments LTD*
BVI Investment company – 100%
Ovilleno Holdings LTD Cyprus Investment company 99% 99%
TyazhMash Joint Stock Company Russia Railway car
manufacturing 99% 99%
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Public Joint Stock Company “Research Production Corporation “United Wagon Company” (PJSC RPC UWC, the “Company”) was incorporated and domiciled in the Russian Federation on December 26, 2011 and is a public joint stock company from March 5, 2015. The Company’s registered and business address is 7/11 Novokuznetskaya St., Bld. 1, Moscow.
As at December 31, 2017, the Company is a holding entity
for the group of companies (PJSC RPC UWC Group or the “Group”) incorporated in the British Virgin Islands (the “BVI”), Cyprus, and the Russian Federation (the “RF”).
Principal activities of the Group include:
Production of railway cars at the manufacturing facility located in the town of Tikhvin, Leningrad region, Russian Federation, and their sale;
Finance and operating lease of railway cars;
Rail transportation services: until disposal of a subsidiary “Vostok1520” LLC in 2016. In 2017 from the date of the renewal of services by one of the Group’s subsidiaries.
The list of the Company’s registered shareholders and their effective ownership interest as at the reporting dates is presented in the table below:
At December 31, 2017
At December 31, 2016
Shareholders Share, % Share, %
Management Company Sever Asset Management LLC 15.91% –
SIB (Cyprus) Limited1 14.33% –
Management Company Navigator Management LLC 11.56% –
Management Consulting LLC 8.14% –
Joint Stock Company Otkritie Holding 7.94% –
Joint Stock Company IQG Assets Management (Joint Stock Company EFG Assets Management)
5.66%
7.98%
United Wagon PLC (ICT-Holding)2 – 25.05%
Open Joint Stock Company RONIN Trust – 9.01%
Other shareholders 36.46% 57.96%
Total 100% 100%
As at December 31, 2017 and 2016, the Group had no ultimate controlling party.
1 The share related to a REPO transaction.2 In July 2017 ICT-Holding sold its share in United Wagon Plc.
1. General Information
Ownership interest in the Group
Company Place of registration
Principal activities
As at December 31, 2017
As at December 31, 2016
VNICTT LLC Russia Engineering and construction bureau 99% 99%
Trade House “UWC” LLC Russia Trading of railcars
and equipment 99% 99%
Springs Industrial Technology Center LLC
RussiaSprings production
99% 99%
TM-energo LLC Russia Power generation 99% 99%
TAP Titran-Express JSC Russia Transport
engineering plant 99% 100%
UW Forge Company LTD Cyprus Investment
company 100% 100%
UWC Centrokuz LLC Russia Transport engineering plant 99% 99%
Restadiana Ventures LTD Cyprus Investment
company 99% 99%
UWC Soyuz LLP*
Kazakhstan
Organization of transportation and transportation of goods
– 99%
Unikon 1520 LLC
Russia
Organization of transportation and transportation of goods
99% –
RAIL 1520 (BVI) Management Company LTD*
BVIInvestment company – 100%
RAIL 1520 Cyprus Management Company LTD
CyprusInvestment company 100% 100%
UWC Finance LLC Russia Issuance of debt securities 100% 100%
RAIL 1520 Tank Cars (BVI) Holding LTD BVI Investment
company 100% 100%
RAIL 1520 Tank Cars Cyprus Holding LTD Cyprus Investment
company 99% 99%
Ownership interest in the Group
Company Place of registration
Principal activities
As at December 31, 2017
As at December 31, 2016
TikhvinChemMash Joint Stock Company
Russia Production of tank cars 99% 99%
TikhvinSpetsMash Joint Stock Company
Russia Production of platform cars 100% 100%
Holm Services Limited
BVI Investment company 100% 100%
Pegadisa Management LTD
Cyprus Investment company 100% 100%
RAIL 1520 IP LTD Cyprus Investment company 100% 100%
Raygold Limited Cyprus Investment company 99,97% 99,97%
AFCT Advanced Freight Car Technology Limited
Cyprus Development of production technology for the plant
99,93% 99,93%
DEANROAD Limited Cyprus Development of production technology for the plant
99% 99%
Tikhvin Railway Car Building Plant Joint Stock Company (TVSZ JSC)
Russia Railway cars manufacturing plant 99,97% 99,97%
Uniwagon North America Corp
USA Investment company 100% –
Starfire Engineering, Inc.
USA Engineering and construction bureau
100% –
Rail Holding LTD BVI Investment company 100% 100%
* in 2017 the Group liquidated the following subsidiaries: RAIL 1520 (BVI) Leasing LTD, RAIL 1520 Wagon LTD,
Kintonia Investments LTD, RAIL 1520 (BVI) Management Company LTD and UWC Soyuz LLP
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Statement of complianceThe Group’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”).
Basis of preparation The entities of the Group maintain their accounting records in accordance with laws, accounting and reporting regulations of the jurisdictions in which they are incorporated and registered. The accounting principles and financial reporting procedures in these jurisdictions may differ substantially from those generally accepted under IFRS. Accordingly, financial statements of the entities of the Group were adjusted to ensure that they are presented in accordance with IFRS.
These consolidated financial statements of the Group have been prepared on the historical cost basis except for certain financial instruments that are measured at fair values at the end of each reporting period, as explained in the accounting policies below.
Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated
financial statements is determined on such a basis, except for leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36.
In addition, for consolidated financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date;
Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs are unobservable inputs for the asset or liability.
Going concern assumption These consolidated financial statements have been prepared on the assumption that the Group will continue as a going concern in the foreseeable future, which implies the realization of assets and settlement of liabilities in the normal course of business.
Under the terms of loan agreements, the Group is required to comply with a number of covenants, including maintenance of certain financial ratios and other non-financial conditions. As at December 31, 2017 the Group’s subsidiaries and PJSC RPC UWC breached a number of financial and non-financial covenants stipulated by loan agreements which
could result in negative consequences for the Group, including declaration of default (Note 26).
All loans and borrowings are presented in these consolidated financial statements in accordance with initial payment terms stipulated in the loan agreements, notwithstanding whether the covenants have been breached as at the reporting date, or not
After the reporting date but before the date of approval of these consolidated financial statements a set of documents was agreed and signed, directly or indirectly confirming that creditors have no intention and/or a further legal right to demand early repayment of the loans and borrowings with breached covenants: official letters were received, confirming that the creditors’ will not demand an early repayment of the loans and the Group eliminated the breach of certain covenants.
In 2017 the Group’s consolidated loss from continuing operations was RUB 4,525 million (2016: RUB 753 million).
In 2017 the production level of 19.1 thousand railcars at manufacturing facilities of the Group was in line with the budget. Based on management forecasts, the minimum expected production level at TVSZ JSC, TikhvinChemMash CJSC and TikhvinSpetsMash CJSC in 2018 will be between 19–20 thousand railcars. The management of the Group also expects stable demand for the innovative railcars in 2018: as at the date of approval of these consolidated financial statements, the Group has entered into contracts or made preliminary arrangements for sale of the whole volume of railcars planned for production in 2018 at prices 5-10% higher than in 2017.
In 2019 and beyond, the Group does not expect a significant decrease of demand for the railcars.
At the end of 2016 and in 2017, the Group refinanced part of its borrowings and adjusted its loan portfolio in such a way that floating (variable) interest rates were set for a significant portion of loan agreements. Floating (variable) interest rates which depend either on the Russian Central Bank (hereinafter — the “CBR”) REPO rate or on the Mosprime rate. The Group’s bonds issued in 2013–2014 also have variable rates depending on the consumer price index (the “CPI”) or the CBR REPO rate (note 27). Accordingly, a steady decline in the CBR REPO rate, Mosprime rates and the CPI, which was observed during 2017, will lead to a significant decrease in the Group’s effective interest rate in 2018. Management of the Group is also negotiating with creditor banks to decrease the remaining fixed interest rates to the current market level or to refinance loans with high interest rates. In case of successful negotiations, this will also allow the Group to reduce the effective interest rate on borrowings.
According to the Group’s management, the above factors will lead to a reduction in the effective interest rate to 10% per annum, which will correspond to the current market rate (Note 32) and will lead to a decrease in interest expenses in 2018 by RUB 1–1.5 billion.
The management believes that these factors taken together will allow the Group to generate profit in 2018.
Functional and presentation currencyItems 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 functional currency of the Group’s subsidiaries is the Russian Ruble (“RUB”). The presentational currency of the consolidated financial statements is the Russian Ruble. These consolidated financial
2. Significant Accounting Policies
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statements are presented in millions of Russian rubles (“RUB million”), except when otherwise indicated.
OffsettingFinancial assets or liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expense is not offset in the consolidated statement of profit or loss unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group.
Foreign currency transactions In preparing the financial statements of each individual Group entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in a foreign currency are not retranslated.
Exchange differences on monetary items are recognized in profit or loss in the period in which they arise.
Exchange rates used in the translation were as follows:
Basis of consolidationThe consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) prepared through December 31 of each year.
Control is achieved when the Company:
Has power over the investee;
Is exposed, or has rights, to variable returns of the investee; and
Has the ability to use its power to affect variable returns.
The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.
When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including:
The size of the Company’s holding of voting rights relative to the size and dispersion of holdings of other vote holders;
Potential voting rights held by the Company, other vote holders or other parties;
Rights arising from other contractual arrangements; and
Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.
The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intragroup balances and any unrealized gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements.
Non-controlling interest in consolidated subsidiaries is identified separately from the Group’s equity therein. Total comprehensive income / (loss) is attributed to non-controlling interests even if this results in the non-controlling interest having a deficit balance.
Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Company.
When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognized in profit or loss and other comprehensive income.
The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss.
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Currency 2017 2016
At the end of the reporting period
RUB/ USD 57.60 60.66
RUB/ EUR 68.87 63.81
Average exchange rates for the reporting period
RUB/ USD 58.35 67.03
RUB/ EUR 65.90 74.23
Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated to the extent they do not represent an impairment loss on the Group’s non-current assets. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
Business combinationsAcquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognized in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except that:
Deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 and IAS 19, respectively;
Liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 at the acquisition date; and
Assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 are measured in accordance with that Standard.
Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another IFRS.
Contingent consideration transferred by the Group in a business combination is measured at fair value at the date of acquisition and included in the total consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.
The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. The contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IAS 39 or IAS 37 with the corresponding gain or loss being recognized in profit or loss.
If the initial accounting for a business combination is incomplete by the end
of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date.
Acquisitions of entities under common control (non-cash payment)If the acquisition of entities under common control is performed by the exchange of shares, any other non-cash method or for a symbolic compensation, such transactions are accounted for on a carryover basis, which results in the historical book value of assets and liabilities of the acquired entity being combined with that of the Group. For material common control transactions the consolidated financial statements of the Group are retroactively restated to reflect the effect of the acquisition as if it occurred at the beginning of the earliest period presented.
In 2014, as a result of the legal restructuring, PJSC RPC UWC acquired all its subsidiaries from United Wagon PLC in exchange for 99,990,000 additionally issued ordinary shares. The transaction was classified as the acquisition of entities under common control and was accounted for retroactively starting from the earliest period presented in these consolidated statements.
GoodwillGoodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net amounts of the identifiable assets and liabilities as at the acquisition date. If, after reassessment, the net amounts of the identifiable assets and liabilities exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain.
A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss and other comprehensive income. An impairment loss recognized for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Investments in associates and joint venturesAn entity is considered an associate if the Group has significant influence over its financial and operating activities. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
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A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.
The results and assets and liabilities of associates or joint ventures are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5. Under the equity method, an investment in an associate or a joint venture is initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group’s share of losses of an associate or a joint venture exceeds the Group’s interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate or joint venture), the Group discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.
An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate or a joint venture, any excess of the cost of the investment over the Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable
assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in profit or loss in the period in which the investment is acquired.
The requirements of IAS 39 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Group’s investment in an associate or a joint venture. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.
The Group discontinues the use of the equity method from the date when the investment ceases to be an associate or a joint venture, or when the investment is classified as held for sale. When the Group reduces an interest in the former associate or joint venture and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition.
The Group continues to use the equity method when an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate. There is no remeasurement to fair value upon such changes in ownership interests.
When the Group reduces its ownership interest in an associate or a joint venture but the Group continues to use the equity method, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities.
When a group entity transacts with an associate or a joint venture of the Group, profits and losses resulting from the transactions with the associate or joint venture are recognized in the Group’s consolidated financial statements only to the extent of interests in the associate or joint venture that are not related to the Group.
Non-current assets held for saleNon-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such asset (or disposal group) and its sale is highly probable. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.
When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale.
When the Group is committed to a sale plan involving disposal of an investment, or a portion of an investment, in an associate or joint venture, the investment or the portion of the investment that will be disposed of is classified as held for sale when the criteria described above are met, and the Group discontinues the use of the equity method in relation to the portion that is classified a held for sale. Any retained portion of an investment in an associate or a joint venture that has not been classified as held for sale continues to be accounted
for using the equity method. The Group discontinues the use of the equity method at the time of disposal when the disposal results in the Group losing significant influence over the associate or joint venture.
After the disposal takes place, the Group accounts for any retained interest in the associate or joint venture in accordance with IAS 39 unless the retained interest continues to be an associate or a joint venture, in which case the Group uses the equity method.
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their:
Previous carrying amount; and
Fair value less costs to sell.
Intangible assetsIntangible assets acquired separately, yare carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses.
Internally-generated intangible assets — research and development expenditure.
The Group recognizes internally-generated intangible assets (which are mainly represented by research and development expenditure) when it can demonstrate all of the following.
The technical feasibility of completing the intangible asset so that it will be available for use or sale;
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Its intention to complete, use or sell the asset;
The ability to use or sell the intangible asset;
It is probable that the asset will generate future economic benefits;
The availability of adequate technical, financial and other resources to complete, use or sell the asset; and
Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Expenditure on research activities is recognized as an expense in the period in which it was incurred. Development expenditure, that does not meet the criteria of intangible assets, is charged to the consolidated statement profit or loss and of comprehensive income when incurred.
Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
No amortization is charged for intangible assets that are in the phase of development. Amortization begins when the asset is available for use, that is, when the asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. Intangible assets which have been transferred from intangible assets under development to intangible assets subject to amortization are represented with patents and are amortized over the useful economic lives of the patents ranging between 51 to 174 months. Know-how and production technology development costs are considered to have indefinite useful lives.
Such assets are not amortized and are carried at cost less accumulated impairment losses. The ERP system development and installation costs are amortized over 120 months which is the best estimate of their useful economic lives.
Expenditure, which enhances or extends the performance of intangible assets beyond their original specifications is recognized as a capital improvement and added to the original cost of the intangible asset.
Intangible assets acquired in a business combination —intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
Impairment of tangible and intangible assets other than goodwillAt the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognized in profit or loss.
When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.
Property, plant and equipmentBefore June 30, 2016 all categories of property, plant and equipment were stated at cost, less accumulated depreciation and accumulated impairment losses. Historical cost model was applied.
In 2016 for certain categories of property, plant and equipment management of the Group decided to change the accounting policy to a revaluation model. As at the reporting date Production equipment and motor vehicles and Production plant and buildings categories (Group 1) are stated at revalued amounts, and Railcars and Office equipment and furniture categories (Group 2) — at historical cost.
Starting from June 30, 2016 items of property, plant and equipment from Group 1 are stated in the consolidated statement of financial position at their revalued amounts, being the fair value at the date
of revaluation, less any subsequently accumulated depreciation and impairment losses. Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of each reporting period.
Items of property, plant and equipment from Group 2 are stated in the consolidated statement of financial position at their cost, less any accumulated depreciation and accumulated impairment losses.
Any revaluation increase arising on the revaluation of property, plant and equipment from Group 1 is recognized in other comprehensive income and accumulated in equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognized in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously expensed. A decrease in the carrying amount arising on the revaluation is recognized in profit or loss to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset.
Construction in-progress is carried at cost, less any recognized impairment loss. Cost includes capital expenditures directly related to the construction of property, plant and equipment including an appropriate allocation of directly attributable variable overheads including capitalized borrowing costs on qualifying assets. Depreciation of these assets, on the same basis as for other property assets, commences when the assets are ready for their intended use. Construction in-progress items are reviewed regularly to determine whether their carrying value is fairly stated.
The costs of day to day servicing of property, plant and equipment, including
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repairs and maintenance expenditure, are expensed as incurred.
Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.
The Group recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. The assets being replaced are written off immediately to consolidated statement of profit and loss and other comprehensive income. All other costs are recognized in the consolidated statement of profit or loss and other comprehensive income as an expense as incurred.
The gain or loss arising on the disposal of an asset is determined as the difference
between the sales proceeds and the carrying amount of the asset and is recognized in the consolidated statement of profit or loss and other comprehensive income.
Depreciation is recognized so as to write off the cost or valuation of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
Freehold land and assets under construction are not depreciated.
Depreciation is charged as from the time when an asset is available for use over the following useful economic lives:
The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.
Spare partsMajor spare parts and equipment intended for repair and maintenance of property, plant and equipment, are included in other non-current assets if the Group intends to use them for more than one year. Spare parts are stated at lower of cost and net realizable value. Actual cost consists of cost of purchased materials and, if applicable, direct labor cost and respective part of allocated overheads, incurred to bring spare parts to their existing location and condition. Upon usage, the cost of spare parts is charged to profit or loss.
Inventories Inventories are stated at lower of cost and net realizable value. Actual cost consists of cost of purchased materials and, if applicable, direct labor cost and respective part of allocated overheads, incurred to bring inventory to their existing location and condition. The cost of inventory is based on the weighted average cost principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
Impairment of non-financial assetsAt each reporting date, the Group reviews the carrying amounts of its non-current assets to determine whether there is any indication that those assets have suffered
an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in-use. In assessing value in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount.
An impairment loss is recognized immediately in the consolidated profit or loss.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. Any reversal of that impairment loss is recognized immediately in the consolidated profit or loss.
LeasesThe determination of whether an arrangement is, or contains, a lease is based on the substance of the
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Useful life, years
Office equipment and furniture 1–10
Production equipment and motor vehicles 1–26
Railcars 22–32
Production plant and buildings 11–57
arrangement at the inception date, specifically, on whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
The Group as lessorAmounts due from lessees under finance leases are recognized as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases.
Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term.
The Group as a lesseeAssets under finance leases are recognized as assets at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments.
The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Contingent rentals are recognized as expenses in the periods in which they are incurred.
Payments under operating leases are recognized as an expense on a straight-line basis over the term of the lease. Lease incentives received are recognized as a liability and a reduction to expense on a straight-line basis. Contingent rentals under operating leases are recognized as an expense in the period in which they are incurred.
Financial instrumentsThe Group recognizes financial assets and liabilities in its consolidated statement of financial position when it becomes a party to the contractual obligations of the instrument.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.
Financial assetsFinancial assets are classified into the following categories: financial assets ‘at fair value through profit and loss’, ‘held-to-maturity’ investments, ‘available-for-sale’ financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on a trade
date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. As at the reporting date, the Group had only financial assets classified as loans and receivables.
Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortized cost using the effective interest rate method. Gains and losses are recognized in the consolidated profit or loss when the loans and receivables are derecognized or impaired, as well as through the amortization process. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.
Impairment of financial assetsThe financial assets are assessed for indicators of impairment at the end of each reporting period.
Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of
an allowance account (provision for impairment of receivables).
If, in a subsequent period, the amount of the impairment loss for assets carried at amortized cost decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss and other comprehensive income to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.
Effective interest method The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating interest income over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial instruments.
Derecognition of financial assetsThe Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset
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and also recognizes a collateralized borrowing for the proceeds received.
On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.
On derecognition of a financial asset other than in its entirety (e.g. when the Group retains an option to repurchase part of a transferred asset), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognizes on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part no longer recognized and any cumulative gain or loss allocated to it that had been recognized in other comprehensive income is recognized in profit or loss. A cumulative gain or loss that had been recognized in other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized on the basis of the relative fair values of those parts.
Cash and cash equivalentsCash and cash equivalents comprise cash on hand, balances with banks, short-term interest-bearing deposits and short-term bank overdrafts with original maturities of not more than three months. Restricted cash balances are not considered as part of cash and cash equivalents for the purposes of the statement of cash flows. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the financial year-end date are included in other non-current assets.
Accounts payable and other financial liabilitiesAccounts payable and other financial liabilities are initially recognized at cost, which is the fair value of the consideration received, taking into account transaction costs. After initial recognition, financial liabilities are carried at amortized cost. Interest expense is calculated using the effective interest method. As normally the expected term of accounts payable is short, the value is stated at the nominal amount without discounting, which corresponds with fair value
ProvisionsProvisions are recognized when, and only when, the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. Where the effect of the time value of money is significant, the amount of a provision is the present value of the cash flows required to settle the obligation.
Income taxIncome tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognized in the consolidated profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax liabilities (assets) for the current and prior periods are measured at the
amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantially enacted by the reporting date. Provisions in respect of uncertain tax positions which relate to income tax are included in current income tax at an amount expected to be payable including penalties, if any.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries, associates and joint ventures to the extent that the parent is able to control the reversal of the temporary difference and it is probable that the temporary difference will not be utilized in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to apply in the period when the liabilities are settled or the assets realized.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized.
Deferred tax assets and liabilities are not discounted.
Revenue recognitionRevenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of value added taxes, estimated rebates and discounts. The revenue is recognized in the amount
which is probable that the economic benefits associated with the transaction will flow to the Group, the amount of revenue can be measured reliably.
(i) Sales of railcars and components (castings, components, spare parts)
Revenue from the sale of railcars and inventories is recognized when significant risks and rewards are transferred to the customers. At which time all the following conditions are satisfied:
The Group has transferred to the buyer the significant risks and rewards of ownership of the goods;
The Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
The amount of revenue can be measured reliably;
It is probable that the economic benefits associated with the transaction will flow to the Group; and
The costs incurred or to be incurred in respect of the transaction can be measured reliably
(ii) Rental income
Rental income is generated principally from leasing of railcars and is recognized on a straight-line basis over the term of the relevant lease.
The Group policy in recognition of rental income as a lessor is described in “Leases” paragraph of this note.
(iii) (iii) Rail-based freight transportation services and other services
Rail-based freight transportation services provided by the Group primarily include
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provision of railcars for transportation. The Group recognizes revenue in the amount of fees for provision of railcars, while charges for railway infrastructure services (railway freight tariff of PJSC Russian Railways) are borne directly by the customers.
Revenues from these services are recognized in the accounting period in which the services are rendered, by reference to stage of completion of the specific transactions assessed on the basis of the actual service provided as a proportion of the total services to be provided.
(iv) Interest income
Dividend income from investments is recognized when the shareholder’s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably).
Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition.
Borrowing costsBorrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized and amortized over the useful life of the asset.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.
Other borrowing costs are recognized as an expense in the period in which they are incurred.
Government grantsThe Group receives the following types of government grants:
Compensation of interest expense on bank loans;
Grants related to assets, that is – compensation of expenses for acquisition of long-term assets (railcars) and compensation of expenses for purchase of materials for production of railcars.
Grants related to compensation of transportation costs incurred on sales of produced railcars.
Government grants are recognized at their fair value when there is a reasonable assurance that the grant will be received and the Group will comply with the conditions attached.
Government grants related to compensation of interest expense are credited to profit or loss over the periods of the related interest expense unless the interest was capitalized into the cost of property, plant and equipment in which case they are deducted from the cost of the respective items of property, plant and equipment and credited to the profit or loss on a straight-line basis over the expected lives of these assets.
Government grants related to assets are deducted from the carrying value of the
related asset in the consolidated statement of financial position. Grants are recognized in profit or loss on a straight-line basis over the period of use of a depreciated asset and reduce the amount of depreciation expense, or are recognized immediately in profit or loss if the related asset is sold or disposed of.
Government grants related to compensation of the Group’s transportation costs reduce the amount of such expenses in the consolidated statement of profit or loss and other comprehensive income.
Share capitalOrdinary shares are classified as share capital. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.
Additional paid-in capitalEquity contributions made by shareholders, whereby shares are not issued, are recorded as additional capital within equity whereby such capital contributions do not carry any interest and any future return to the shareholder is at the Group’s discretion.
Loan granted to the parentLoans granted to the parent and other companies under common control and other accounts receivable from these companies are recognized as an asset or a decrease in equity based on the substance of each separate transaction giving rise to such debt. Usually, loans receivable from the parent and other companies under common control are presented as a decrease in equity. These loans may be recognized as an asset where all material arrangements of this transaction (including interest, repayment terms, intention and practical ability to repay the debt, size and adequacy of collateral, etc.) are comparable with the
market ones, and they are expected to be repaid in a relatively short period of time.
Employee benefitsThe Russian companies of the Group are obliged to make defined contributions to the State Pension Fund of the Russian Federation in accordance with the effective Russian legislation. Contributions to the Pension Fund of the Russian Federation related to a defined contribution plan are recognized in the profit or loss in the period to which they relate.
In the Russian Federation, all payments to extra-budgetary funds including contributions to the State Pension Fund are collected through social security charges calculated by the application of a rate from 10% to 30% to the annual gross remuneration of each employee. The rate of the contribution to the State Pension Fund of the Russian Federation varies from 10% to 22%. If the annual gross remuneration of an employee exceeds the limit of RUB 876 thousand (2017 limit) the rate of 10% is applied to the excess amount to determine the amount of the respective contributions. In 2017 contributions were limited to the employee’s income threshold of RUB 755 million, upon the achievement of which contributions are not charged.
Contractual commitmentsContractual commitments comprise legally binding trading or purchase agreements with stated amount, price and date or dates in the future. The Group discloses significant contractual commitments in the notes to the consolidated financial statements.
ContingenciesContingent liabilities are not recognized in the consolidated financial statements unless they arise as a result of a business combination. Contingencies attributed
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to specific events are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed when an inflow of economic benefits is probable.
Relief from property taxIn 2009 the Group signed an investment agreement with the authorities of the Leningrad region. The Group met the conditions of the agreement and was relieved from the property tax payable for all its assets located in that region until 2018.
Annual Improvements to IFRSs — 2014–2016 Cycle
The Group has applied the amendments to IFRS 12 included in the Annual Improvements to IFRSs 2014–2016 Cycle for the first time in the current year. The other amendments included in this package are not yet mandatorily effective and they have not been early adopted by the Group (see the list of new and revised IFRSs in issue but not yet effective below).
IFRS 12 states that an entity need not provide summarised financial information for interests in subsidiaries, associates or joint ventures that are classified (or included in a disposal group that is classified) as held for sale. The amendments clarify that this is the only concession from the disclosure requirements of IFRS 12 for such interests.
The application of these amendments has had no effect on the Group’s consolidated financial statements.
Standards and interpretations that have been issued, but not yet effective.At the date of authorization of these consolidated financial statements, the following Standards and Interpretations were in issue but not yet effective, and have not been early adopted in preparation of these consolidated financial statements:
IFRS 9 Financial Instruments1;
IFRS 15 Revenue from Contracts with Customers (and the related Clarifications)1;
IFRS 16 Leases2;
IFRS 17 Financial Instruments3;
IFRIC 22 Foreign Currency Transactions and Advance Consideration1;
IFRIC 23 Uncertainty Over Income Tax Treatments2;
Amendments to IFRS 2 — Classification and Measurement of Share-based Payment Transactions1;
Amendments to IFRS 10 and IAS 28 — Sale or Contribution of Assets between an Investor and its Associate or Joint Venture4;
Amendments to IAS 40 — Transfers of Investment Property1;
Amendments to IFRS 4 — Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts1;
Amendments to IFRS 9 — Prepayment Features with Negative Compensation2;
Amendments to IAS 28 — Long-Term Interests in Associates and Joint Ventures2;
Annual Improvements to IFRSs 2014–2016 Cycle1;
Annual Improvements to IFRS for 2015–20172;
3. New or revised International Financial reporting statements
New and revised Standards and Interpretations adopted in the current period and applicable to the Group’s consolidated financial statementsThe following new and revised Standards and Interpretations have been adopted in the current period and have affected the amounts reported in these consolidated financial statements.
Amendments to IAS 7 — Disclosure Initiative
Amendments to IAS 12 — Recognition of Deferred Tax Assets for Unrealized Losses
Annual Improvements to IFRSs 2014–2016 Cycle — Amendments to IFRS 12.
Amendments to IAS 7 Disclosure Initiative
The Group has applied these amendments for the first time in the current year. The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes.
The Group’s liabilities arising from financing activities consist of borrowings and certain other financial liabilities. A reconciliation between the opening and closing balances of these items is provided in Note 26. Consistent with the transition provisions of the amendments, the Group has not disclosed comparative information for the prior period. Apart from the additional disclosure in Note 26, the application of these amendments has had no impact on the Group’s consolidated financial statements.
Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses
The Group has applied these amendments for the first time in the current year. The amendments clarify how an entity should evaluate whether there will be sufficient future taxable profits against which it can utilise a deductible temporary difference.
The application of these amendments has had no impact on the Group’s consolidated financial statements as the Group already assesses the sufficiency of future taxable profits in a way that is consistent with these amendments.
1 Effective for annual periods beginning on or after January 1, 2018, with earlier application permitted.2 Effective for annual periods beginning on or after January 1, 2019, with earlier application permitted.3 Effective for annual periods beginning on or after January 1, 2021, with earlier application permitted. 4 Effective date will be determined later, earlier application permitted.
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IFRS 9 Financial Instruments
IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for their derecognition, and in November 2013 to include the new requirements for general hedge accounting. In July 2014, IASB issued a finalized version of IFRS 9 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments.
Key requirements of IFRS 9 are:
Classification and measurement of financial assets. All recognized financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at FVTOCI.
All other debt and equity instruments are measured at their fair values. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading nor contingent consideration recognized by an acquirer in a business combination) in other comprehensive income, with only dividend income generally recognized in profit or loss.
Classification and measurement of financial liabilities. With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in the consolidated statement of profit or loss and other comprehensive income.
Impairment. In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date
to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognized.
Hedge accounting. The new hedge accounting requirements retain the three types of hedging relationship as defined in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced.
The Standard will be effective from January 1, 2018, with early adoption permitted. Depending on the chosen approach to applying IFRS 9, the transition can involve one or more than one date of initial application for different requirements. The full impact of adopting IFRS 9 on the Group’s consolidated financial statements in the year of adoption will depend on the financial instruments that the Group has during 2018 as well as on economic conditions and judgments made as at the year end. The Group has selected not to restate comparatives on initial application of IFRS 9. Based on a preliminary analysis of the Group’s financial assets and financial liabilities as at December 31, 2017 on the basis of the facts and circumstances that exist at that date, the management of the
Group has assessed the impact of IFRS 9 to the Group’s consolidated financial statements as follows:
Classification and measurement. The Group has only financial assets and liabilities which are measured at amortized cost using effective interest method. Upon adoption of IFRS 9 the Group expects to measure respective financial assets and liabilities on the same basis as currently adopted under IAS 39.
Impairment. The Group’s financial assets measured at amortized cost (cash and cash equivalents, accounts receivable, loans receivable) will be subject to impairment provisions of IFRS 9. The Group expects to apply the simplified approach to recognize lifetime expected credit losses for its trade and other accounts receivable and cash and cash equivalents as required or permitted by IFRS 9. In general, the Group’s management anticipates that the application of the expected credit loss model under IFRS 9 will result in earlier recognition of credit losses on financial assets for the respective items and will increase the amount of loss allowance recognized for these items. However, majority of financial assets of the Group is either held in financial institutions with stable credit rating or represented by trade receivables from sales of railcars and operating lease services due from counterparties. Management anticipates that any increase in the amount of loss allowance recognized following the adoption of IFRS 9 will not be significant.
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IFRS 15 Revenue from Contracts with Customers
IFRS 15 is effective for annual reporting periods beginning January 1, 2018, and interim periods within those periods. IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will replace all existing revenue standards, including IAS 18 Revenue, IAS 11 Construction contracts and respective interpretations.
The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This core principle is delivered in a five-step model framework:
Step 1: Identify the contract with the customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to the performance obligations in the contracts;
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Under IFRS 15, an entity recognizes revenue when or as a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is
transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, IFRS 15 requires extensive disclosures.
In April 2016, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance obligations, principal versus agent considerations, as well as licensing application guidance.
The Group will not apply a fully retrospective approach upon transition to IFRS 15 and will book cumulative impact of transition as an adjustment to retained earnings at January 1, 2018. The Group continues to evaluate the impact that IFRS 15 and related clarifications will have on the Group’s consolidated financial statements. As discussed in Note 1, the Group recognizes revenue mainly from sales of railcars produced by the Group’s companies and operating and finance lease of railcars. As at the date of approval of the consolidated financial statements, the Group’s management was in the process of assessing the impact of the application of IFRS 15 on the Group’s consolidated financial statements.
IFRS 16 Leases
IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective.
IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. The standard introduces a
single accounting model for lessees that requiring recognition of the capitalized right to use the asset, as well as the corresponding liability, on the balance sheet. Thus, distinctions of operating leases and finance leases are removed for lessee accounting. This accounting method is applicable for all leases except for short-term leases and leases of low-value assets.
The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exception) less accumulated depreciation and impairment losses, adjusted for any measurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under IAS 17 are presented as operating cash flows, whereas under IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.
Furthermore, extensive disclosures in the consolidated financial statements are required by IFRS 16.
IFRS 16 is effective for annual reporting periods beginning January 1, 2019, and interim periods within those periods. Early application of IFRS 16 is permitted.
The Group has begun evaluating and planning for the adoption and implementation of the new leases standard, including selecting lease accounting system and estimating the overall accounting policy and financial statements impact.
The Group continues to evaluate the impact that IFRS 16 will have on the Group’s consolidated financial statements: for instance, how operating leases will meet the definition of a lease agreement under IFRS 16, and hence how the Group will recognize a right-of-use asset and a corresponding liability in respect of all these agreements unless leases qualify for low value or short-term leases upon the application of IFRS 16. The new requirement to recognize a right-of-use asset and a related lease liability is expected to have a significant impact on the amounts recognized in the Group’s consolidated financial statements and Management is currently assessing its potential impact. It is not practicable to provide a reasonable estimate of the financial effect of IFRS 16 until Management completes the review which is expected to be finalized during the year ended December 31, 2018.
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In the application of the Group’s accounting policies, which are described in Note 2, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods.
Critical accounting estimatesThe key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, 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.
Compliance with tax legislation
Russian tax, currency and customs legislation is subject to varying interpretations and changes occurring frequently. Management’s interpretation of such legislation in applying it to business transactions of the Group may be challenged by the relevant regional and federal authorities enabled by law to
impose fines and penalties. It is possible that the tax treatment of transactions that have not been challenged in the past may be challenged. Fiscal periods remain open to review by the tax authorities in respect of taxes for the three calendar years preceding the year of tax review. Under certain circumstances reviews may cover longer periods.
Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Losses incurred in the previous periods are related to foreign currency exchange losses incurred on revaluation of financial assets and liabilities of the Group. They are not connected with operating activities, and the Group expects to receive profits in future, subsequently, deferred tax assets can be settled. According to RF tax legislation tax losses are carried forward and can reduce current tax base.
While the Group believes it has provided adequately for all tax liabilities based on its understanding of the tax legislation, the above facts may create additional financial risks for the Group (see Note 31).
Related party transactions
In the normal course of business the Group enters into transactions with its related parties. Identification of related parties requires the application of management’s professional judgment. Management believes that the related
party disclosures in these consolidated financial statements provide all information necessary to attract attention to the potential effect of the Group’s transactions and outstanding balances with related parties on Group’s financial position and financial performance (Note 30).
IAS 39 requires initial recognition of financial instruments based on their fair values. Judgment is applied in determining if transactions are at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is market rates for similar types of transactions with unrelated parties and analysis of effective interest rates. Terms and conditions of balances with related parties are disclosed in Note 30.
Management also makes judgments regarding the recoverability of loans granted, probability of their repayment and the amount of the impairment to be recognized in the consolidated financial statements.
Depreciation periods for property, plant, and equipment
The Group assesses the remaining useful lives of items of property, plant and equipment at least annually at the end of each reporting period. If expectations differ from previous estimates, the difference is recognized as a change in accounting estimates, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period.
Impairment of identifiable assets of CGU “Lease”
At the reporting dates, the Group reviews the carrying amounts of identifiable assets of CGU “Lease” to determine whether there is any indication that assets are impaired. Railcars available for operating and finance lease form the major part of identifiable assets of the CGU. This process involves judgment in evaluating the cause for any possible reduction in value, including a number of factors such as changes in current competitive conditions, expectations of decline in the industry, increased cost of capital, changes in the future availability of financing, technological obsolescence, discontinuance of service, current replacement costs and other changes in circumstances that indicate impairment may exist.
Whenever such indications exist management makes an estimate of the asset’s recoverable amount to ensure that it is not less than its carrying value. If the asset’s fair value is not readily determinable or is less than asset’s carrying value plus costs to sell, management necessarily applies its judgment in determining the appropriate cash-generating unit to be evaluated, estimating the appropriate discount rate and the timing and value of the relevant cash flows for the value-in-use calculation.
The Group carried out a review of the recoverable amount of railcars, property, plant and equipment in the “Lease” segment as part of its impairment review of non-current assets at the reporting date. For this purpose, the recoverable amount of railcars was determined based on value in use calculations. Value in use calculation uses cash flow projections
4. Critical accounting estimates and judgements in applying accounting policies
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based on actual operating results and business plan approved by management and corresponding discount rate, which reflects time value of money and risks associated with the Group’s operations. Key assumptions management used in their value in use calculation are as follows:
The Group estimated its future cash flows for the period from 2018 to 2022, after which it assumed a constant amount of cash flow in real terms for the remaining average useful life of the existing assets;
Cash inflow projections are based on the average daily contractual revenue, which is calculated by management as average daily leasing rate for leased rail cars;
Prices for railcar repairs are expected to remain at a level of prices effective in 2017 in real terms.
The pre-tax discount rate used in the calculations was equal to 8.26% in real terms. It has been determined with reference to the estimated weighted average cost of capital of the Group.
Values assigned to key assumptions and estimates used to measure the unit’s value-in-use are consistent with external sources of information and historic data. Management believes that the values assigned to the key assumptions and estimates represent the most realistic assessment of future trends.
As a result of tests performed, in 2017 the Group did not recognize any impairment. Management believes that any reasonable change in key assumptions, which are used for calculation of recoverable amount, will not result in carrying value of CGU exceeding its recoverable amount.
Impairment of goodwill and intangible assets with indefinite useful lives
Determining whether goodwill and intangible assets with indefinite useful lives are impaired
requires an estimation of the value in use of the cash-generating units to which goodwill and the intangible assets have been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.
Allocation of goodwill to CGUs is disclosed in Note 15. Intangible assets with indefinite useful lives were allocated to CGU “Production” which represents operating segment “Production”.
Annually the Group performs the following procedures to test goodwill for impairment:
Analysis of significant events which could have influenced cash flows (restructuring of the Group, implementation of investment programs, change in market trends, terms of financing and taxation, etc.);
Review the list (update of the current list) of identifiable assets and cash-generating units (“CGU”) which will be further tested for impairment;
Those significant CGUs are reviewed, at which goodwill have been allocated (this could be separate business units, subsidiaries and segments). Upon completion of the list a factor of materiality is considered, as well as impairment indicators (reduction in the value of net assets, incompletion of the budget, accounting losses);
Identification of a discounting rate, reflecting an adjusted weighted cost of capital of the Group;
Summarizing the information on the value of assets including goodwill (property, plant and equipment, intangible assets, construction in progress), expected in a middle-term (no more than 5 years) cash inflows-
outflows and forecasted changes in the value of the assets. For this purpose management uses budgets and forecasts prepared during the planning process.
In 2017, upon the impairment analysis, no indicators of impairment of goodwill and intangible assets were identified. Key assumptions used by the Group for impairment testing are disclosed in Note 15.
Critical judgements in applying accounting policies
Classification of the Group’s operations under the railcar fleet replacement program
In the first half of 2017, the Group’s management decided to introduce a program to replace the old fleet of rail cars (previously leased out by the Group under the operating leases) with the new generation of railcars manufactured by the Group. Accordingly, a portion of railcars manufactured during the year ended December 31, 2017 were transferred to property, plant and equipment and leased out under an operating lease to replace a portion of the old railcar fleet that was sold during 2017. The program also assumes that the Group will continue to sell old railcar fleet upon reaching a certain age and/or in case of a favorable market price. The decisions to replace the disposed railcars with new ones will be approved separately subject to the agreement with the lessee and the banks in case the railcars are subject to pledge arrangements.
Thus, management believes the Group will regularly generate revenues from the sale of previously leased old railcars in the normal course of business. In accordance with IAS 16 after the approval of the decision to sell the railcars they were transferred to inventories at their
carrying value. Income from the sale of such railcars was included in the revenue line item of the consolidated statement of profit or loss and other comprehensive income for the year ended December 31, 2017, in particular the sales of railcars item of the respective disclosure (Note 7). Expenses related to the disposal of the old railcar fleet were included in the cost of sale item of the consolidated statement of profit or loss and other comprehensive income and disclosed in the respective note (Note 8).
In preparing the consolidated statement of cash flows, the Group’s management considered requirements of IAS 7, which specifies that cash payments made to produce assets held for lease and subsequently held for sale are classified as cash flows from operating activities, and cash proceeds from the lease and subsequent sale of such assets are also treated as cash flows from operating activities. Accordingly, cash paid for the production/ (acquisition) of railcars and received from the sale of railcars under the railcar fleet replacement program are included in operating activities in the consolidated statement of cash flows.
Timing of revenue recognition for sales of railcars to PJSC GTLK in 2016
On December 19, 2016 the Group entered into a tripartite agreement for sale of 2,312 innovative railcars for the amount of RUB 6,589 million with Public Joint Stock Company “State Transport Leasing Company” (PJSC GTLK or the “Buyer”) and Vostok 1520 LLC (the Lessee), whereby the buyer of the railcars is PJSC GTLK, and the physical receiver of railcars is Vostok 1520 LLC in accordance with the finance lease agreement, concluded between PJSC GTLK (the Lessor) and Vostok 1520 LLC (the Lessee). Under the terms of the sales agreement, PJSC GTLK paid a 100% advance in December 2016, while delivery of the railcars under the contract was due to take place
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until January 31, 2017 after receiving of consent from the Federal Antimonopoly Service (“FAS”), if such consent is required by virtue of the current legislation of the Russian Federation. The reply from the FAS was received on February 21, 2017, confirming the absence of requirements for the coordination of such a transaction by the FAS, and the acts of acceptance for the transfer of railcars were signed in March 2017. These railcars were produced by the Group in the second and third quarters of 2016 and were leased to Vostok 1520 LLC under operating lease contract.
Management of the Group carried out an analysis of the fulfillment of the revenue recognition criteria set out in IAS 18 and concluded that revenue should be recognized in 2016, as an agreement to sell these cars was reached in 2016 and cash was collected in full. At the same time, the probability of the negative decision by FAS was deemed minimal, and therefore not taken into account for the analysis.
If the Group recognized the sale in 2017, the effect on the consolidated financial statements for the year ended December 31, 2016 would be as follows:
If the Group recognized the sale in 2017, the effect on the consolidated financial
statements for the year ended December 31, 2017 would be as follows:
Consolidated financial statement line item
As reported in 2016
The effect if the sale would be recognized in 2017
Would be reported in 2016 if the sale was recognized in 2017
Revenue 48,505 (6,589) 41,916
Cost of sales (38,580) 5,374 (33,206)
Income tax benefit 1,726 (243) 1,483
Loss for the year from continuing operations
(753) (972) (1,725)
Inventories 10,960 5,374 16,334
VAT receivable 4,245 1,186 5,431
Advances received (13,536) (7,775) (21,311)
Deferred tax liabilities (2,423) 243 (2,180)
Accumulated deficit 14,076 972 15,048
Consolidated financial statement line item
As reported in 2017
The effect if the sale would be recognized in 2017
Would be reported in 2017 if the sale was recognized in 2017
Revenue 62,020 6,589 68,609
Cost of sales (52,073) (5,374) (57,447)
Income tax expense (875) 243 632
Loss for the year from continuing operations
(4,525) 972 (3,553)
The Group is divided into business units on the basis of goods manufactured and services rendered, and incorporates two reporting segments:
The “Production” segment is involved in manufacturing and sale of freight railcars of new generation;
The “Lease” segment provides operating and finance lease of freight railcars.
The Group’s principal business activities are within the Russian Federation. Other activities of the Group do not constitute a separate reporting segment and are included in the Other segments. In 2017 as a result of the reorganization of the
manufacturing facility of the Group the results of TAP Titran-Express JSC were transferred to the “Production” segment (Note 15).
Accounting principles of the reportable segments are consistent with the Group accounting policies described in Note 2. The management of the Group assesses performance of operating segments based on profit before tax, finance costs and income, foreign exchange differences, depreciation and amortization and impairment loss (“EBITDA”). This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance.
5. Segment information
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Segment information for the years ended on the dates indicated is presented as follows:
December 31, 2017 Production segment
Lease segment Other segments Total segments Adjustments¬ and eliminations
Consolidated
Revenue 54,742 6,146 3,271 64,159 (2,139) 62,020
including inter-segment revenue 12,944 16 3,010 15,970 (15,970) -
Cost of sales, including: (48,786) (1,900) (3,816) (54,502) 2,429 (52,073)
- Inventories (32,319) (8)
- Payroll (6,644) –
- Property tax (64) (123)
- Maintenance and repairs of railcars (406) (397)
- Depreciation and amortization (4,659) (1,302)
- Write-off of inventories to net realizable value (94) –
- Other (4,598) (68)
Selling, general and administrative expenses (1,176) (416) (409) (2,001) (624) (2,625)
Other operating income/(expenses), net 408 38 (50) 396 (358) 38
Share of profit/(loss) of associates and joint ventures (140) 21 488 369 – 369
Depreciation and amortization 4,658 1,302 241 6,201 (1,210) 4,991
EBITDA 9,708 5,193 (276) 14,625 (1,906) 12,719
Finance income 32 5,820 7,818 13,670 (11,222) 2,448
Finance costs (5,814) (10,451) (8,759) (25,024) 11,349 (13,675)
Depreciation and amortization (4,991)
Foreign exchange loss (153)
Loss before income tax from continuing operations (3,651)
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December 31, 2016 Production segment
Lease segment Other segments Total segments Adjustments¬ and eliminations
Consolidated¬
Revenue 43,435 5,248 5,574 54,257 (5,752) 48,505
including inter-segment revenue 485 36 4,980 5,501 (5,501) –
Cost of sales, including: (36,010) (2,866) (5,227) (44,103) 5,523 (38,580)
- Inventories (23,499) –
- Payroll (5,738) –
- Property tax – (555)
- Maintenance and repairs of railcars – (372)
- Depreciation and amortization (2,978) (1,896)
- Write-down of inventories to net realizable price (294) –
- Other (3,502) (43)
Selling, general and administrative expenses (1,172) (400) (760) (2,332) 247 (2,085)
Other operating income/(expenses), net (65) 371 62 368 (153) 215
Share of loss of associates and joint ventures (122) 9 – (113) – (113)
Depreciation and amortization 2,978 1,896 828 5,702 25 5,727
EBITDA 9,043 4,259 476 13,778 (109) 13,670
Finance income 15 3,231 5,664 8,910 (7,773) 1,137
Finance costs (4,000) (9,725) (6,644) (20,369) 7,779 (12,589)
Depreciation and amortization (5,727)
Foreign exchange gain 1,226
Impairment loss (195)
Loss before income tax from continuing operations (2,479)
Breakdown of the Group’s revenue by main types of sold products and rendered services is presented in Note 7.
In 2017 the Group decided to replace the old railcar fleet. Revenue from the sale of old railcars amounted to RUB 14,088 million; their carrying value at the date of sale was RUB 12,112 million (Notes 7
and 8) and the effect on the EBITDA amounted to RUB 1,976 million. The cost of new railcars amounted to RUB 9,900 million, intersegment revenue from the transfer of the railcars from the “Production” segment to the “Lease” segment amounted to RUB 12 412 million, and the effect on EBITDA amounted to minus RUB 3,722 million. Both of
these transactions are disclosed in the “Adjustments and eliminations” section and their total effect on EBITDA amounted to minus RUB 1,746 million.
In 2017, the key external customer of the “Production” segment was PJSC GTLK, which accounted for 56% of the segment’s external sales. In 2016, the key external
customers of the Production segment were PJSC GTLK and VM-Trans LLC, which accounted for 29% and 31% of the segment’s external sales, respectively.
In 2017, the key external customers of the “Lease” segment were Vostok 1520 LLC and SUEK OJSC, which accounted for 43% and 21% of the segment’s external
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sales, respectively. In 2016 the sales to these customers accounted for 49% and 29% of the segment’s external sales, respectively.
Revenue in other segments includes intragroup sales of railcar components by Springs Industrial Technology Center LLC, intragroup sales of rights to R&D
On November 17, 2016 the Group entered into a sale agreement to dispose of its subsidiary Vostok 1520 LLC, which provided rail transportation services.
The Group classified the disposed subsidiary as a component of the Group in accordance with IAS 5 “Long-term assets held for sale and discontinued
results and patents by VNICTT LLC and management services provided by PJSC RPC UWC.
Segment assets and liabilities, capital expenditures and accumulated depreciation are not disclosed, as this information is not provided to the chief operating decision maker.
Gain from disposal of subsidiary was as follows:
Net cash consideration received from disposal of subsidiary was as follows:
Profit for the year ended December 31, 2016 from discontinued operations was as follows:
6. Discontinued Operations and Disposal of A Subsidiary
operations” as Vostok 1520 LLC was a separate reporting segment. Accordingly, operations of Vostok 1520 LLC were presented as discontinued operations in the consolidated financial statements for the year ended December 31, 2016.
Assets and liabilities of disposed subsidiary as at the date of disposal were as follows:
Carrying value as at November 17, 2016
Property, plant and equipment 5
Intangible assets 1
Deferred tax assets 3
Inventories 41
Trade and other receivables 103
Prepayments to suppliers and other assets 439
VAT receivable 1,303
Cash and cash equivalents 146
Total assets 2,041
Advances received and other current liabilities 345
Trade payables 973
Total liabilities 1,318
Net assets disposed of 723
2016
Revenue 12,365
Other operating income 90
12,455
Net expenses, including: (11,522)
– Cost of sales (11,216)
– Selling, general and administrative expenses (309)
– Finance income 7
– Finance costs and foreign exchange loss (4)
Profit before profit tax 933
Income tax (173)
760
Gain on disposal of subsidiary 562
Profit for the year from discontinued operations 1,322
Consideration received 1,285
Net assets disposed of (723)
Gain on disposal of subsidiary 562
Cash consideration 1,285
Cash and cash equivalent of disposed subsidiaries (147)
Cash inflow from disposal of subsidiary 1,138
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Cash flows from discontinued operations were as follows:
2016
Net cash
- received from operating activities112
- used in operating activities (1)
Net cash inflows 111
Revenue of the Group from continuing operations (excluding finance income — Note 10) comprised the following:
Cost of sales of the Group from continuing operations comprised the following:
In 2017 and 2016 raw materials used in production included government grants received by several subsidiaries of the Group to partially reimburse costs attributable to the production and purchase of innovative freight railcars in the amount of RUB 692 million and In the first half of 2017, the Group’s
management decided to replace the old fleet of railcars previously leased by the Group with the new innovative railcars. Accordingly 7,379 railcars with a carrying value of RUB 12,112 million (Note 13) were transferred from property, plant and equipment to inventories and sold to third
7. Revenue
8. Cost of sales
parties. The largest customer was Federal Freight Company JSC.
The total amount of revenue received by the Group from the sale of these cars was included in the sales of railcars item and amounted to RUB 14,088 million for the year ended December 31, 2017.
2017 2016
Continuing operations
Sales of railcars 55,106 42,898
Operating lease of railcars 6,126 5,210
Sales of castings, components and other inventories (incl. spare parts)
300 50
Revenue from repair services 111 162
Rail transportation services 100 –
Other 277 185
Total revenue 62,020 48,505
2017 2016
Continuing operations
Raw materials used in production 25,226 22,989
Carrying value of railcars sold as part of the railcar fleet replacement program (Note 7)
12,112 –
Payroll and social contributions 5,268 5,953
Depreciation and amortization 4,949 5,690
Property tax 165 710
Write-down of inventories to net realizable value 75 388
Railcar repair and maintenance 203 241
Other 4,075 2,609
Total cost of sales 52,073 38,580
RUB 3,218 million, respectively. In 2017, the “Other” line included grants for the compensation of certification costs in foreign markets in the amount of RUB 11 million (in 2016 no such grants were provided to the Group).
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Selling, general and administrative expenses of the Group from continuing operations comprised the following:
Finance income of the Group from continuing operations comprised the following:
Finance costs of the Group from continuing operations comprised the following:
Transportation costs for the delivery of railcars to the buyer were decreased by the amount of grants of RUB 96 million The Group receives subsidies from
the Ministry of Industry and Trade of the Russian Federation, granted within the state-run program on partial compensation of the interest payable on bank loans used for the modernization
9. Selling, general and administrative expenses 10. Finance income
11. Finance costs
2017 2016
Continuing operations
Payroll, social contributions and other staff costs 1,075 637
Information, consulting and audit services 363 346
Leases 357 353
Railcar-sales related costs 119 6
Advertising expenses 87 30
Other taxes 78 53
Travel expenses 50 52
Expenses for the disposition of railcars information 48 38
Change in allowance for doubtful accounts receivable 47 (172)
Depreciation and amortization 41 37
Transportation costs for the delivery of railcars to the buyer 29 215
Disposal and write-off of property, plant and equipment 13 176
Change in railcar warranty provision (38) (10)
Other 356 323
Total selling, general and administrative expenses 2,625 2,085
received in 2017 as a compensation for export railcar transportation costs.
of the qualifying railcar fleet. Since 2014 onwards the Group also receives subsidies for partial compensation of the interest payable on bank loans used for the acquisition and production of innovative railcars.
2017 2016
Continuing operations
Interest income on loans granted 1,407 623
Interest income on deposits, cash and equivalents 963 514
Interest income from accounting of financial assets using the effective interest rate (accounts receivable) (Note 19)
79 –
Total finance income 2,449 1,137
2017 2016
Continuing operations
Interest expense on loans and borrowings 9,865 8,753
Interest expense on bonds 3,133 3,779
Cost of guarantees and sureties 875 668
Bank commissions 214 318
Interest expense on liabilities for acquisition of subsidiaries 184 369
Write-off of bank commissions for early repayment of loan 118 340
Government grants (577) (624)
Less: amounts included in the cost of qualified assets:
Capitalized interest expense(137) (1,014)
Total finance costs 13,675 12,589
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Income tax expense/(benefit) recorded in the statement of profit or loss and other comprehensive income comprises the following:
Deferred tax assets/(liabilities) as at December 31, 2017 and 2016 are presented as follows:
The movements in deferred tax during the years ended December 31, 2017 and 2016 were as follows:
The following amounts, determined after appropriate offsetting, are presented in the consolidated statement of financial position as at December 31, 2017 and 2016:
As of December 31, 2017, the income tax rates applicable to the entities of the Group were as follows:
Russian companies — 20%;
Cyprus companies — 12.5%.
12. Income tax
2017 2016
Current income tax expense (2,080) (443)
Deferred income tax benefit 1,205 2,169
Total income tax (expense) / benefit for the year from continuing operations
(875) 1,726
Below is a reconciliation of income tax calculated using the income tax rate effective in the Russian Federation to the actual income tax expense recorded in the consolidated statement of profit or loss and other comprehensive income:
2017 2016
Loss before income tax (3,650) (2,479)
Theoretical tax credit at statutory tax rate of 20% 730 496
Tax effect of items which are not deductible or assessable for taxation purposes:
Unrecognized tax losses of foreign subsidiaries of the Group
(301) (932)
Reduction of current income tax for previously unrecognized deferred tax asset on tax losses
– 802
Recognition of previously unrecognized deferred tax asset on tax losses carried forward
– 2,202
Effect of different income tax rates and taxation rules applicable to foreign subsidiaries of the Group
(1,254) (699)
Taxes accrued for prior years (41) (36)
Share of profit/(loss) of joint venture 74 (23)
Other items (83) (84)
Income tax (expense)/benefit (875) 1,726
2017 2016
Tax losses carried forward in Russian companies of the Group
6,047 5,798
Effect of recognition of sales of railcars in different periods – (275)
Accounts receivable 50 36
Accruals 183 98
Inventories (137) (10)
Property, plant and equipment (3,384) (4,113)
Loan commission (9) 10
Intangible assets (298) (312)
Other 18 33
Deferred tax asset, net 2,470 1,265
2017 2016
Deferred tax asset at the beginning of the year, net 1,265 1,496
Deferred tax benefit 1,205 2,169
Deferred tax expense from discontinued operations – (102)
Deferred tax liability from revaluation of property, plant and equipment
– (2,298)
Deferred tax asset at the end of the year, net 2,470 1,265
2017 2016
Deferred tax asset 2,949 3,688
Deferred tax liability (479) (2,423)
Deferred tax asset, net 2,470 1,265
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for tax purposes.
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As at December 31, 2017 and 2016, temporary differences associated with undistributed earnings of subsidiaries are not recognized in the consolidated financial statements as the Group is able to control the timing of the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable future.
As at December 31, 2016 the Group recognized a deferred tax asset in respect of unused tax loss carry forwards of RUB 3,004 million. The deferred
Movements in the carrying value of property, plant and equipment were as follows:
13. Property, plant and equipment
Railcars Equipment and motor vehicles
Production plant and buildings
Office equipment and furniture
Construction in progress (i)
Total
Cost
As at January 1, 2016 38,894 22,330 14,482 325 14,804 90,835
Additions – 10 – – 5,301 5,311
Transfers 72 12,001 6,191 3 (18,267) –
Disposals (11) (52) (33) (10) (73) (179)
Disposal of subsidiary – (9) – (4) – (13)
Gain on revaluation – 6,919 4,572 – – 11,491
Netting of accumulated depreciation on revaluation – (7,916) (1,734) – – (9,650)
As at December 31, 2016 38,955 33,283 23,478 314 1,765 97,795
Additions – – – – 14,155 14,155
Transfers 640 3,551 940 54 (5,185) –
Transfer of railcars from inventories 532 – – – – 532
Disposals (55) (82) (5) (7) (14) (163)
Railcar fleet replacement (additions) 9,900 – – – (9,900) –
Railcar fleet replacement (sales) (16,610) – – – – (16,610)
As at December 31, 2017 33,362 36,752 24,413 361 821 95,709
Accumulated depreciation and impairment
As at January 1, 2016 9,744 6,922 1,482 147 (51) 18,244
Depreciation charge 1,727 3,021 587 78 – 5,413
Disposals (8) (11) – (10) – (29)
Disposal of subsidiary – (6) – (2) – (8)
Netting of accumulated depreciation on revaluation – (7,916) (1,734) – – (9,650)
Impairment loss – 194 1 – – 195
As at December 31, 2016 11,463 2,204 336 213 (51) 14,165
Depreciation charge 1,287 3,802 742 60 – 5,891
Disposals (18) (59) (2) (7) – (86)
Railcar fleet replacement (depreciation) (4,498) - – - – (4,498)
As at December 31, 2017 8,234 5,947 1,076 266 (51) 15,472
Residual value
As at December 31, 2016 27,492 31,079 23,142 101 1,816 83,630
As at December 31, 2017 25,128 30,805 23,337 95 872 80,237
tax asset was recognized because management had the confidence in their recoverability, Production segment where
they had been previously unrecognized generates positive financial results, and its performance shows positive dynamics.
(i) Construction in progress includes primarily expenses for the construction of the railway car manufacturing
plant and equipment being prepared for installation.
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Information on capitalized borrowing costs and interest rates used for calculation is presented in Note 11. Information on property, plant and equipment pledged as collateral is disclosed in Note 26.
Total expenses incurred by the Group in connection with the production of railcars, which were transferred to property, plant and equipment during 2017 and held for subsequent leases as at December, 31 2017, were reduced by RUB 987 million of government grants received by the Group as compensation for the costs of production and acquisition of innovative railcars.
The Group’s Production equipment and motor vehicles, Production plant and buildings are accounted for at their revalued amounts, representing the fair value at the date of revaluation, less any subsequently accumulated depreciation and accumulated impairment losses. Revaluation of these groups of property, plant and equipment was performed by independent appraiser as at June 30, 2016. The fair value of the revalued property, plant and equipment was determined using the cost approach that reflects capital expenditures/ investments required for the construction or acquisition of an asset with similar characteristics,
adjusted for the actual age of the assets. The Group’s management considers that the carrying amounts of revalued categories of property, plant and equipment approximate their fair value as at December 31, 2017.
The key assumptions used in the valuation were the degree of deterioration (29% at revaluation date) and the replacement cost. Even a slight increase in the degree of deterioration will result in significant decrease in fair value of property, plant and equipment, and slight increase in the replacement cost will result in significant increase in fair value of the assets.
The majority of revalued fixed assets are specific, thus, direct analogues are not available at the market and therefore an independent appraiser applied the method of indexation of costs incurred during construction, acquisition or installation of the assets to estimate the replacement cost. Considering the unique characteristics of the revalued items, assumptions used in assessment of fair value, and level of observable input data, the fair value was categorized into Level 3.
Details of the Group’s revalued items of property, plant and equipment and information about the fair value hierarchy as at the reporting period are as follows:
Level 1 Level 2 Level 3 Fair value as at December
31, 2017
Equipment and motor vehicles – – 17,859 17,859
Production plant and buildings – – 16,501 16,501
Had the Group’s equipment and motor vehicles, production plant and buildings been measured on a historical cost basis, their carrying amount would have been as follows
December 31, 2017
December 31, 2016
Equipment and motor vehicles 10,529 11,922
Production plant and buildings 11,947 12,126
Movements in the carrying amount of intangible assets were as follows:
14. Intangible assets
Intangible assets at the development stage
Know-how and patents
Soft¬ware Total
Cost
As at January 1, 2016 1,100 4,263 294 5,657
Additions 1,002 73 141 1,216
Acquisition of subsidiaries – – (1) (1)
Disposal of subsidiaries – (6) – (6)
Transfers (414) 470 (56) –
As at December 31, 2016 1,688 4,800 378 6,866
Additions 988 190 100 1,278
Disposals (6) (3) – (9)
Transfers (644) 639 5 –
At December 31, 2017 2,026 5,626 483 8,135
Accumulated depreciation
As at January 1, 2016 – 571 65 636
Depreciation charge – 319 61 380
Disposals – (3) – (3)
Transfers – 16 (16) –
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The Group is engaged in research and development of freight rolling stock technologies.
Intangible assets at the development stage include capitalized expenses for development of casting and railway car building technologies for future use in production of the new generation railway cars in the town of Tikhvin.
As at December 31, 2017 and 2016, the historical cost of internally generated intangible assets was RUB 3,045 million and RUB 2,072 million, respectively. As at December 31, 2017 and 2016, accumulated amortization of such intangible assets amounted to RUB 25 million and RUB 14 million, respectively. The total amount of additions of internally generated intangible assets in 2017 and 2016 amounted to RUB 980 million and RUB 988 million with amortization charges of RUB 11 million and 12 million, respectively.
In 2017 and 2016, the Group registered a number of patents in the amount of RUB 30 million and RUB 42 million, respectively, in respect of exclusive rights to industrial designs and technical
specifications. Registered patents were transferred from intangible assets under development to know-how and patents in the respective reporting periods.
In 2017, the Group acquired a license pack for SAP ERP system. Total capitalized costs amounted to RUB 75 million. The Group also made advance payments of RUB 3 million for the development of SAP implementation methodology, which is included in other long-term assets in the consolidated statement of financial position.
SAP licenses are included in “Software” item of this disclosure, together with the ERP system implemented at TVSZ JSC.
Production technologies development costs are considered to have indefinite useful lives and are carried at cost less accumulated impairment losses. The total amount of know-hows and patents with indefinite useful lives was RUB 2,066 million and RUB 1,404 million as at December 31, 2017 and 2016, respectively.
Intangible assets pledged as collateral are disclosed in Note 26.
The carrying value of goodwill was allocated to the following cash-generating units (“CGUs”):
15. Goodwill
Carrying value
December 31, 2017
December 31, 2016
CGU — “Production”:
TVSZ JSC 108 108
TM-energo LLC 5,436 5,436
TAP Titran-Express JSC 2,498 –
CGU — “Repair and maintenance of railcars”
TAP Titran-Express JSC
–
2,498
Total 8,042 8,042
In 2015 the Group acquired TM-energo LLC and TAP Titran-Express JCS and recognized goodwill in the amount of RUB 7,934 million.
Goodwill recognized on acquisition of TM-energo LLC was allocated to CGU “Production”.
According to management’s assessment, CGU “Production”, consisting of the power station and railcar manufacturing plant, represents the smallest group of assets generating cash flows, significantly independent from cash flows from other assets or group of assets.
Management’s assessment on allocation of goodwill recognized on acquisition of TM-energo LLC to CGU “Production” was based on the following assumptions:
CGU “Production”, particularly railcar manufacturing plant, is a main beneficiary of the acquisition, receiving main synergetic effect;
TVSZ JSC signed a long-term lease agreement of production facilities of the power station, maintenance and management of TM-energo LLC are performed by personnel of the plant;
TVSZ JSC received the permission of the Market Council for a sale of part of the energy produced by TM-energo LLC on the retail market (no more than 25% from the level of energy consumed within the Group).
Goodwill arising on the acquisition of TAP Titran-Express JSC was initially allocated to CGU “Repair and maintenance of railcars”, because the initial purpose of the acquisition was to get a facility allowing the Group to carry out current and capital repairs of both railcars owned and leased out by the Group and railcars owned by third parties. In 2017 the Group’s management decided to replace the old railcars manufactured during 2011 to 2014 with the new innovative railcars produced in 2017. As a result the need
Intangible assets at the development stage
Know-how and patents
Soft¬ware Total
As at December 31, 2016 – 903 110 1,013
Depreciation charge – 309 81 390
At December 31, 2017 – 1,212 191 1,403
Residual value
As at December 31, 2016 1,688 3,897 268 5,853
As at December 31, 2017 2,026 4,414 292 6,732
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in repairs, which are usually carried out once in 5 years or later, has significantly decreased. Thus, the availability of free production capacities of TAP Titran-Express JSC, a significant number of qualified employees and location in the production site resulted in a re-profile of TAP Titran-Express JSC’s facility. In particular, the facility became a part of the railcar production process of the Group. In 2017, TAP Titran-Express JSC mainly operated as one of the Group’s railcar production facilities for the assembly of railcars and the preparation of components. At the same time, the company continued to provide railcar repair services, however, the share of such services in the total revenue of TAP Titran-Express JSC was insignificant.
As at December 31, 2017, after the inclusion of restructuring TAP Titran-Express JSC to the Group`s railcar production process, CGU “Production” represented the lowest level within the Group at which the goodwill is monitored for internal management and management reporting purposes. Neither before nor after the aggregation of CGU “Production” it does not exceed the “Production” reporting segment (Note 5).
Information about annual impairment testAt December 31, 2017 the Group performed an impairment test of goodwill. For this purpose, the recoverable amount of the CGU “Production” was determined based on value in use calculations. Value in use calculation uses cash flow projections based on actual operating results and business plan approved by management and corresponding discount rate, which reflects time value of money and risks associated with the Group’s operations.
Key assumptions management used in their value in use calculation as at December 31, 2017 are as follows:
Forecasted cash flows are based on business plan of the Group for 2018–2024, approved by Management and assuming increase in gross margin and increase in prices for raw materials during this period. The expected increase in gross margin is based on achievement of heavy castings plant full production capacity after the commissioning of the 4th production line, which will allow to utilize the balance of capacities for the sales to external customers and to increase revenues not only from the sale of finished railcars, but also from the sale of castings and components.
The business plan includes key industry and market trends, such as appearance of new competitors, change in structure of demand for railcars, implementation of innovation technologies etc. The macroeconomic trends used by the Group`s management reflect the lower threshold of the long-term forecast of the Central Bank of the Russian Federation.
Cash flows after 2024 were determined by extrapolation using a steady growth rate equal to 2.6% per year, which is estimated based on historical experience and expectations of market development and reflects the forecasted long-term growth rates of Russian industry.
The Group calculated the average selling prices for railcars for 2018 on the basis of the current price lists and contracts for the sale of finished products actually concluded by the Group.
Discount rate for CGU “Production” was calculated based on weighted-average cost of capital for the Group before taxation; its nominal value is 15.96%.
The analysis indicated that the estimated recoverable value of CGU “Production” exceeded its carrying amount.
Sensitivity AnalysisThe management believes that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit.
The Group’s significant associates and joint ventures include:
16. Investments in Associates and Joint Ventures
Ownership and voting interest of the Group
Name Type of investment
Place of incorporation and operation
December 31, 2017
December 31, 2016
MRC 1520 LLC Joint venture Moscow, Russia 50% 50%
Timken UWC LLC Associate Tikhvin, Russia 49% 49%
JV Wabtec-UWC LLC Associate Tikhvin, Russia 49% 49%
MRC 1520 LLCDuring 2012, the Company entered into a joint venture agreement with MRC 1520 LLC and Mitsui Corporation and acquired a 50% share in IMRCR Limited, the owner of MRC 1520 LLC.
The joint venture commenced its operations in 2013. The joint venture’s primary business is operating lease and sale of railcars to transportation and manufacturing companies within Russia.
The Group’s share in profit of the joint venture for 2017 and 2016 recognized in the consolidated statement of profit or loss and other comprehensive income amounted to RUB 21 million and RUB 10 million, respectively. Summarized financial information in respect of the Group’s joint venture and its reconciliation to the carrying amount of the interest in the joint venture are set out below. The summarized financial information below represents amounts shown in the joint venture’s consolidated financial statements prepared in accordance with IFRSs adjusted by the Group for equity accounting purposes.
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December 31, 2017
December 31, 2016
Cash and cash equivalents 131 44
Trade receivables 5 5
Property, plant and equipment 569 612
Deferred tax assets 3 –
Other current liabilities (13) (8)
Non-current liabilities – (1)
Net assets of the joint venture 695 652
Group’s ownership interest in the joint venture 50% 50%
Carrying amount of the Group’s interest in the joint venture
347 326
2017 2016
Revenue 131 143
Profit and total comprehensive income for the year 42 20
Share of profits of joint venture 21 10
The above profit for the year includes the following:
2017 2016
Depreciation and amortization (42) (44)
Interest income – 2
Interest expense – (9)
Income tax expense (11) (5)
Foreign exchange loss (3) –
Timken UWC LLCIn 2015, the Group signed an agreement on establishing an associate Timken UWC LLC with Timken Lux Holdings II S.A.R.L. and establishing TUBC Limited, the shareholder of Timken UWC LLC. The Group owns a 49% share in TUBC Limited.
The principal activity of the associate is the production of bearings for freight railcars. In 2015 and 2016 years, Timken UWC LLC was constructing a plant for production of bearings. The associate commenced its operating activity in 2017. Timken UWC LLC is an associate of the Group as the Group
has significant influence over its financial and operating activities, i.e. the Group has decision-making powers but cannot control activities of Timken UWC LLC.
In February and October 2016, the Group acquired 98 of additionally issued shares of Timken UWC LLC at 97.6 and 92.6 USD per share, respectively. Total amount of additional investments in associate comprised RUB 649 million at exchange rate effective at the date of acquisition of additional shares.
The Group’s share in the loss of the associate recognized in the statement of profit or loss and comprehensive income for 2017 and 2016 was RUB 139 million and RUB 122 million, respectively.
Summarized financial information in respect of the Group’s associate and its reconciliation to the carrying amount of the interest in the associate are set out below. The summarized financial information below represents amounts shown in the associate’s consolidated financial statements prepared in accordance with IFRSs adjusted by the Group for equity accounting purposes.
December 31, 2017
December 31, 2016
Cash and cash equivalents 158 504
Accounts receivable 187 170
Inventories 298 107
Property, plant and equipment 1,312 1,418
Deferred tax assets 156 12
Trade payables (399) (234)
Other current liabilities (33) (13)
Net assets of the associate 1,679 1,963
Group’s ownership interest in the associate 49% 49%
Carrying amount of the Group’s interest in the associate
823 962
2017 2016
Revenue 298 –
Loss and total comprehensive loss for the year (284) (250)
Group’s share in (loss)/profit of the associate (139) (122)
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The above loss for the year includes the following:
2017 2016
Cost of sales (480) (4)
Selling expenses (145) (201)
Foreign exchange loss (21) (58)
Other expenses (8) (29)
Income tax benefit 72 42
JV Wabtec UWC LLCIn 2015 the Group signed an agreement on establishing an associate JV Wabtec UWC LLC with Wabtec Corporation and establishing WABTEC-UWC LTD, the shareholder of JV Wabtec UWC LLC. The Group owns a 49% share in WABTEC-UWC LTD. The principal activity of the associate is the development and production of innovative components for freight rolling stock, including the heavy one. JV Wabtec-UWC LLC is an associate of the
Group as the Group has significant influence over its financial and operating activities, i.e. the Group has decision-making powers but cannot control activities of JV Wabtec-UWC LLC. As at the reporting date, the associate did not commence its operations. At December 31, 2017 and 2016, the carrying value of the Group’s interest in the associate amounted to RUB 6 million and RUB 0.4 million respectively. The Group’s share in the profit of the associate for 2017 was RUB 0.2 million.
In 2016, the Group and Industrial Investors Group made an arrangement on a transaction. According to the transaction’s terms Joint Stock Company Pervaya Tyazhelovesnaya Kompaniya (PTK JSC), a member of the Industrial Investors Group, acquired 100% share in the company Vostok 1520 LLC, and the Group, in turn, has to purchase 19.9% of shares of PTK-Holding JSC, a shareholder of PTK JSC.
In November 2016, the Group completed the first stage of the transaction: sold a 100% share in Vostok 1520 LLC to PTK JSC (Note 6). The next stage was the acquisition of a 19.9% share in PTK-Holding JSC, which was completed in April 2017. The consideration paid for the acquisition of 19.9% share in PTK-Holding JSC was equal to the consideration received for the sale of Vostok 1520 LLC and amounted to RUB 1,285 million. As a part of this transaction in March 2017 the Group and Industrial Investors Group entered into an option agreement. According to the option agreement PTK JSC received a call option to purchase under certain conditions 19.9% of shares of PTK-Holding JSC. The call option could be exercised during the period from 1 January to April 30, 2018 and the exercise price of the call option should be equal to the fair value of the seller’s share in PTK-Holding JSC as at the option exercise date and should be confirmed by an independent valuation.
In 2016 apart from Vostok 1520 LLC, a leasing company NitroChemProm LLC became a part of PTK-Holding JSC. As a result, PTK JSC became the largest owner and operator of innovative railway freight cars with a car fleet of more than 23 thousand units.
The Group also agreed to assist NitroChemProm LLC with refinancing its loan portfolio. As part of this assistance the Group purchased a promissory note issued by NitroChemProm LLC of RUB 5,500 million with a maturity date not earlier than 2027 and an annual interest rate of 10%, which was then pledged to the new creditor bank (PJSC Sberbank). As at December 31, 2017 and
17. Investment in Ptk-Holding JSC
2016, the promissory note was presented as loans to related parties (Note 22).
As a result of the above transactions, in 2017 the Group received a 19.9% share in the associated company PTK-Holding JSC and the right to appoint two out of six members in the Board of Directors. This together with the purchased promissory note of NitroChemProm LLC allowed the Group to classify this investment as an associate, since the Group has a significant impact on the financial and operating activities of the company, i.e. the Group has decision-making powers but cannot control activities of PTK-Holding JSC.
Accordingly, during 2017 the Group accounted for the investment in PTK-Holding JSC as an associate and recognized the share of the profit of PTK-Holding JSC in the consolidated statement of profit or loss and other comprehensive income in the amount of RUB 1,161 million. As at December 31, 2017, management of the Group assessed that it is highly probable that the call option will be exercised by PTK JSC. That was confirmed in April 2018 (Note 33), when the Group received a notification from PTK JSC stating that they exercise the call option and will redeem the Group’s 19.9% share in PTK-Holding JSC for a consideration equal to the shares fair value of RUB 1,773 million. Accordingly, for the purpose of these consolidated financial statements the Group’s share in the profit of PTK-Holding JSC was adjusted for the difference of RUB 673 million between the carrying amount of the investment calculated using the equity method and the consideration receivable by the Group for the sale of investment under the call option. Thus, the Group’s income from equity interests in PTK-Holding JSC for the year ended December 31, 2017 was RUB 488 million (RUB 1,161 million less RUB 673 million) and was included in the share in profit/ (loss) of associates and joint ventures line of the consolidated statement of profit or loss and other comprehensive income; the investment in PTK-Holding JSC of RUB 1,773 million was included in current assets in the consolidated statement of financial.
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December 31, 2017
December 31, 2016
Raw materials and components for railcar production 9,474 8,151
Finished goods (railcars) 2,304 2,563
Other inventories 340 246
Total inventories 12,118 10,960
December 31, 2017
December 31, 2016
Trade receivables from operating lease and other services 2,306 703
Trade receivables from sale of railcars 863 708
Trade receivables from sale of castings, components and other inventories
265 193
Trade receivables from repair of railcars 92 83
Other receivables 30 104
Allowance for doubtful trade and other receivables (46) (90)
Total trade and other receivables 3,510 1,701
2017 2016
Balance at the beginning of the year 90 295
Reversal of the allowance for doubtful trade receivables (10) (193)
Use of the allowance for doubtful trade receivables (77) –
Reversal of the allowance for doubtful trade receivables from discontinued operations
– (21)
Write-off of the allowance for doubtful trade receivables of a disposed of subsidiary
– (3)
Write-off of the allowance for doubtful trade receivables of a disposed of subsidiary
43 12
Balance at the end of the year 46 90
December 31, 2017
December 31, 2016
Past due 31 — 90 days 104 459
Past due 91 — 180 days 973 21
Past due 181 — 365 days 283 70
Past due over 365 days 16 32
Total 1,376 582
Inventories comprised:
Trade and other receivables comprised the following:
18. Inventories
19. Trade and Other Receivables
As at December 31, 2017 and 2016, receivables from operating lease and other services included receivables due from the Group’s related party Vostok 1520 LLC in the amount of RUB 2,092 million and RUB 495 million, respectively. In October 2017 the Group and Vostok 1520 LLC signed an additional agreement to the principal lease agreement. According to the additional agreement the credit period for Vostok 1520 LLC was increased up to 5 months. This led to an increase in accounts receivable balance.
Movements in the allowance for doubtful trade and other receivables during the years ended December 31, 2017 and 2016 were as follows:
As at December 31, 2017, receivables from sale of railcars included accounts receivable for the export sales of railcars in the amount of RUB 349 million. The export agreement provides a deferred repayment schedule with credit period up to 48 months from the date of shipment. Accounts receivable under this agreement were accounted at amortized cost using the effective interest rate, which reflects the time value of money and equals to 7%. The difference between the carrying amount and the fair value of the asset was charged to
revenue from the sale of railcars in the amount of RUB 165 million. Non-current portion of receivables under this agreement was included in the Group’s consolidated statement of financial position in non-current receivables from the sale of railcars in the amount of RUB 565 million.
Management determines the allowance for impairment of receivables based on assessment of customers’ credit quality, changes in industry trends, subsequent receipts and historical experience. The status of trade receivables that are past due but not impaired at the reporting date is as follows:
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Currency Interest rate, %
December 31, 2017
December 31, 2016
PJSC Promsvyazbank (Cyprus branch)
RUB 9.00% 5,038 –
Rigensis Bank (Latvia) RUB 10.65% – 5,000
Total short-term deposits 5,038 5,000
Short-term deposits with banks including accrued interest comprised: Loans issued including interest accrued were as follows:
Prepayments to suppliers and other assets comprised:
20. Short-Term Bank Deposits 22. Loans Receivable
21. Prepayments to Suppliers and Other Current Assets
As at December 31, 2017 and 2016, the Group deposited available cash of RUB 5,000 million with PJSC Promsvyazbank (Cyprus branch) and Rigensis Bank (Latvia) with annual interest rates of 9% and 10.65%, respectively. The deposit with PJSC
As at December 31, 2017 and 2016 Prepaid taxes and social contributions include
In 2016 and 2017 ICT Finance Ltd issued guarantees in respect of loans issued to SZIZhK CJSC and Business Engineering CJSC. According to the guarantees ICT Finance Ltd is liable to make payments under the loan agreements in case the borrowers fail to fulfill their obligations to pay the debt.
Promsvyazbank (Cyprus branch) matures on June 14, 2018.
The interests accrued but not paid as at Decem-ber 31, 2017 were RUB 38 million (as at Decem-ber 31, 2016, all accrued interests were paid).
prepaid income taxes of RUB 695 million and RUB 266 million, respectively
In 2016 as part of the acquisition of shares in PTK-Holding JSC (Note 17) the Group also agreed to assist NitroChemProm LLC with refinancing its loan portfolio. As part of this assistance the Group purchased a promissory note issued by NitroChemProm LLC of RUB 5,500 million.
Currency Interest rate, %
December 31, 2017
December 31, 2016
Loans to related parties
Secured
SZIZhK CJSC RUB 11.00% 2,529 1,915
Business Engineering CJSC RUB 11.00% 719 511
Unsecured
NitroChemProm LLC RUB 10.00% 6,067 5,517
SZIPK CJSC RUB 15% 1,375 1,196
IST-Capital LLC RUB 11.50% 1,316 1,184
Re Test Cyprus LTD USD 6.40% 471 392
PTK Holding JSC RUB 1–10.75% 42 -
Re Test LTD USD 6.40% 4 4
TTC RT LLC RUB 7.50% 2 2
United Wagon PLC USD 6.4% - 203
Doland Business Ltd USD 8.00% - 2,929
Doland Business Ltd RUB 11.00% - 4
Loans to third parties
BLK-Proekt LLC RUB 10.00% 32 19
TUR LLC RUB 11.00% 4 1
Total loans receivable
Short-term loans
12,559
56
13,877
3,000
Long-term loans 12,503 10,877
Total loans receivable 12,559 13,877
December 31, 2017
December 31, 2016
Prepayments to suppliers 2,453 3,302
Prepaid taxes and social contributions 796 275
Bank guarantees and sureties 625 166
Prepaid expenses 201 187
Prepayment to customs 65 91
Allowance for doubtful prepayments (104) (128)
Total prepayments to suppliers and other assets 4,036 3,893
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In December 2017, the Group entered into a preliminary agreement for the acquisition of 100% shares of SZIPK CJSC and made an advance payment in the amount of RUB 2,000 million, which was recorded in the
As at December 31, 2017, the Group’s issued and registered share capital amounted to RUB 116 million, divided into 116 million ordinary non-certificated registered shares with par value of RUB 1 each. The share capital was fully paid as at the reporting date.
On February 8, 2017, the Group’s shareholders approved a decision to increase the share capital of the Group by an additional issue of 7,500,000 ordinary shares. In May 2017 the Group held an additional public offering of 2,572,741 shares by listing its shares on the Moscow stock exchange for RUB 1,853 million (based on the issuance price of RUB 720 per share with a par value of RUB 1). The difference between the issuance price and
As at December 31, 2017 and 2016 the Group placed cash in overnight deposits to gain interest income. The interest rate on ruble deposits ranges from 5% to 8% and for deposits in US dollars the interest rate is set at 1.55%.
Restricted cashUnder the credit facility agreement concluded between the Group’s subsidiary and Alfa-Bank JSC a pledge agreement was signed in respect of the bank collateral account. In accordance with the terms of the agreement,
Cash and cash equivalents comprised:
23. Prepayment for Subsidiary Acquisisiton
25. Share and Additional Paid-in Capital
24. Cash and Cash Equivalents
respective line of the consolidated statement of financial position. As at the reporting date, the Group had not received control of the acquired entity as its shares were pledged as collateral.
the par value was recorded in additional paid-in capital of the Company. Issuance costs comprised RUB 26 million.
On March 29, 2016, the Group’s shareholders approved a decision to increase the share capital of the Group by an additional issue of 8,500,000 ordinary shares. In May 2016 the Group held an additional public offering of 7,867,948 shares by listing its shares on the Moscow stock exchange for RUB 5,036 million (based on the issuance price of RUB 640 per share with a par value of RUB 1). The difference between the issuance price and the par value was recorded in additional paid-in capital of the Company. Issuance costs comprised RUB 18 million.
the collateral account shall accumulate proceeds from the railcar lease services under a number of the Group’s lease contracts. The use of funds deposited in the collateral account is only possible for repayment of the short-term portion of the loan from Alfa-Bank JSC.
As at December 31, 2017, the amount of restricted cash accumulated on the collateral bank account of RUB 807 million was included in current assets in the consolidated statement of financial position.
December 31, 2017
December 31, 2016
Bank deposits in RUB 3,072 1,707
Current accounts in RUB 704 920
Current accounts in EUR 13 9
Current accounts in USD 7 12
Bank deposits in foreign currency 3 –
Total cash and cash equivalents 3,799 2,648
In July 2015, in accordance with covenants imposed by the syndicated loan agreement with Vnesheconombank and Eurasian Development Bank one of the Group’s subsidiaries deposited cash to the reserve bank account until December 23, 2025. Under the terms of the loan agreement, the use of deposited funds is possible only with the consent of the creditors, and the amount of
funds should be sufficient to cover a short-term portion of the principal and interest accrued in the next 6 months. As at December 31, 2016, the deposited funds in the amount of RUB 1,923 million were recorded in non-current assets in the line item restricted cash. In 2017, the funds held in the reserve account were used to repay the syndicated loan as a part of the refinancing arrangement (Note 26).
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Loans and borrowings comprised:
26. Loans and Borrowings
Maturity Interest rate (at December 31, 2017) December 31, 2017
December 31, 2016
At amortized cost, including:
RUB-denominated
Otkritie FC Bank PJSC 2024 Floating Key rate of the CBR +2.5% 27,806 –
Alfa-Bank JSC 2023 Fixed 12.7% 18,993 19,172
Otkritie FC Bank PJSC 2021–2023 Fixed 13.8–15% 9,000 7,500
Otkritie FC Bank PJSC 2021 Floating Key rate of the CBR +3.5% 8,944 533
Khanty-Mansiysk Bank Otkritie PJSC 2018–2020 Floating MosPrime 3m +2.5% 7,517 7,304
National Bank Trust PJSC 2023 Floating Key rate of the CBR +2.5% 3,946 -
Otkritie FC Bank PJSC 2022–2024 Floating 9.25%* 2,940 2,902
National Bank Trust PJSC 2020 Floating MosPrime 3m + 1,5% 1,385 -
UniCredit Bank JSC 2024 Floating MosPrime 3m + 1,5% 806 -
ROSEXIMBANK JSC 2021 Fixed 9% 778 125
Fund of industry development 2021 Fixed 5% 62 62
Vnesheconombank and EDB 2022 Fixed 11.8% – 16,027
Otkritie FC Bank PJSC 2017 Floating MosPrime 3m + 4% – 5,704
Gasprombank (JSC) 2022 Fixed 12.15% – 1,998
TM Energo Finance Ltd 2019 Fixed 11.75% – 1,973
Otkritie FC Bank PJSC 2020 Floating MosPrime 3m + 1.5% – 1,391
RUSNANO Group 2017 Fixed 14% – 800
MOSCOW CREDIT BANK PJSC 2017 Fixed 14% – 783
Inbank LLC 2021 Fixed 15% – 175
Khanty-Mansiysk Bank Otkritie PJSC 2017 Fixed 13.5% – 50
Khanty-Mansiysk Bank Otkritie PJSC 2017 Floating Key rate of the CBR +3.5% – 28
United Wagon PLC 2018 Fixed 6.5% – 8
EUR-denominated
Otkritie FC Bank PJSC 2022 Fixed 10% – 4,437
Khanty-Mansiysk Bank Otkritie PJSC 2017 Floating Euribor + 5.7% – 1,107
USD-denominated
Doland Business Ltd 2017 Fixed 8% – 19
Total loans and borrowings 82,177 72,098
Less: current portion 6,962 12,609
Long-term loans and borrowings 75,215 59,489
*Within the range of the key rate of CBR + 1.5% and the rate for investment projects support program +2.5%.
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Security on loans and borrowingsUnder the terms of the borrowing agreements as at December 31, 2017 and 2016, the Group provided the following types of security:
Property, plant and equipment with a carrying value of RUB 63,297 and 62,015 million accordingly;
Intangible assets with a carrying value of RUB 0.31 and 86 million accordingly;
Rights to claim proceeds from export revenue in the amount of RUB 914 and 0 million accordingly;
Other financial instruments with a carrying value of RUB 89 and 0 million accordingly.
At December 31, 2017 under the terms of the borrowing and security agreements the Group
Reconciliation of financial liabilities The change of financial liabilities including cash and non-cash movements is presented below. Liabilities arising from financial activities are those for which cash flows were or future cash flows will be classified in the Group’s consolidated statement of cash flows as cash flows from financing activities.
CovenantsUnder the terms of the loan agreements, the Group is required to comply with a number of covenants and restrictions, including maintenance of certain financial ratios and other non-financial conditions. Non-compliance with these covenants may result in negative consequences for the Group, including declaration of default.
Compliance with covenants during the year ended December 31, 2017
As at December 31, 2017 PJSC RPC UWC breached an obligatory financial covenant stipulated in the loan agreement, in particular prevention of the deterioration of the financial position of the Company. This covenant prohibits the increase of the financial liabilities of the borrower, including the provision of guarantees exceeding 10% of the net asset value of the borrower in favor of the third parties that are not subsidiaries of the Group. This covenant drives default. This means if the covenant is breached the creditor bank may exercise the right to demand an early repayment of the debt.
provided the pledge of share in the following subsidiaries: RAIL1520 LLC (100%), RAIL 1520 Cyprus Ltd (75%), TM-Energo (100%), TikhvinSpecMash CJSC (100%).
At December 31, 2016 the Group provided the pledge of share in the following subsidiaries: TVSZ JSC (100%), Advanced Freight Car Technology Limited (100%), DEANROAD Limited (100%), Raygold Limited (99.9%); RAIL1520 LLC (100%), RAIL1520 Service LLC (100%); PJSC RPC UWC (13.7852%), RAIL 1520 Cyprus Ltd (75%), TikhvinChemMash CJSC (100%), TM-Energo (100%), TikhvinSpecMash CJSC (100%).
Repayment scheduleThe repayment schedule of loans and borrowings for five years ending December 31, 2022 and thereafter is as follows:
Amount to maturity
2018 6,962
2019 10,422
2020 11,086
2021 16,382
2022 5,544
Thereafter 31,781
Total 82,177
Year ended December 31
Non-cash changes
January 1, 2017 Cash flows from financial activities
Foreign exchange difference
Other non-cash changes
Net interest payments
December 31, 2017
Bank loans 69,061 12,726 504 126 (302) 82,115
Bonds 30,637 (70) – – (97) 30,470
Borrowings from related parties 2,175 (2,078) (1) – (96) –
Other borrowings 862 (800) – – – 62
Finance leases 13 150 – 32 12 195
102,748 9,928 501 158 (495) 112,842
The reason for the breach was providing the guarantee in favor of Vostok1520 LLC under its leasing payments to PJSC GTLK. Due to the violation of the obligatory terms of the loan agreement, the creditor bank was entitled the right to demand an early repayment of the entire debt amount within the relevant loan agreement. On March 23, 2018, PJSC RPC UWC entered into additional agreements with PJSC GTLK and Vostok1520 LLC, according to the agreement the amount of liability of the guarantee was reduced to RUB 812 million, which eliminated the breach of the covenant provided by the loan agreement.
In September 2017 a subsidiary of the Group breached the obligatory financial covenant with respect to monthly turnover on its current accounts in the bank (Otkritie FC Bank PJSC). The bank applied 0.5% penalty charges for outstanding balance of the loan and obliged the Group to pay RUB 45 million (the penalty is included in the finance costs line of consolidated statement of profit and loss and other comprehensive income). The bank notified the Group that does not plan to apply other sanctions for this breach. As at December 31, 2017 the borrower fulfilled the covenant for the corresponding reporting period. In addition as at December 31, 2017 the same subsidiary of the Group breached the obligatory financial covenant stipulated in a loan agreement with Otkritie FC Bank PJSC that was transferred to National Bank Trust PJSC. The covenant prohibits providing guarantees to the third parties for the amount
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higher than 10% of the carrying value of the borrower’s assets calculated according to the statutory financial statements. The company provided a guarantee for a promissory note issued by its related party Nitrokhimprom LLC. Both breached covenants drive default. As at the date of approval of these consolidated financial statements, the management of the Group believes that the waiver from the application of sanctions for this covenant received from Bank FC Otkritie PJSC continues in 2017, despite the transfer of the debt to National Bank Trust PJSC.
As at December 31, 2017, one of the group’s subsidiaries breached a number of obligatory default financial covenants stipulated in the loan agreement with Bank FC Otkritie PJSC. In particular: the ratio of the accounts payable less inventory and accounts receivable to total assets, determined in accordance to the statutory financial statements and the ratio of intra-group (settlements with the companies of the Group) accounts payable and accounts receivable balances to the total amounts of accounts payable and accounts receivable. This loan agreement was concluded as part of the refinancing of the syndicated loan received by the Group’s main manufacturing asset from Vnesheconombank (“VEB”) and the Eurasian Bank of Development (“EABR”). The sanction applied to the borrower was an increase of the interest rate by 1% (one percentage point) from February 8, 2018. As at the date of approval of these consolidated financial statements, the Group has received a letter from the bank confirming that the bank does not have plans to impose additional sanctions, apart from those previously notified to the borrower.
In addition as at December 31, 2017 the Group breached a number of other obligatory financial covenants stipulated in the loan agreements with Bank FC Otkritie PJSC. The maximum exposure for non-compliance with these covenants are penalties, but not an early demand for the debt repayment.
The management of the Group estimated the probability that banks will use their right and demand an early repayment of the borrowings is low and therefore as at December 31,
2017 such borrowings were presented in these consolidated financial statements as non-current liabilities according to the initial payment terms stipulated in the loan agreements.
Compliance with covenants during the year ended December 31, 2016
As at December 31, 2016 the Group breached a number of obligatory financial and non-financial covenants.
As at December 31, 2016 one of the Group’s subsidiaries breached an EBIT to Interest paid covenant set out by Alfa-Bank JSC. The covenant is calculated based on statutory financial statements of the borrower on a quarterly basis. In April 2017 after the decision of the bank’s credit committee, an additional agreement was signed, which moved the first compliance period from the fourth quarter 2016 to the first quarter 2017. During the first quarter of 2017 the Group complied with this covenant and during 2017 the Group was in compliance with all of its existing covenants according to this loan agreement.
In the first half of 2016 one of the Group’s subsidiaries breached a Debt Service Coverage Ratio covenant set out in the syndicated loan agreement with Vnesheconombank (“VEB”) and Eurasian Bank of Development (“EABR”). In addition to that, at December 31, 2016 the subsidiary-borrower breached a minimal working capital requirement and starting from June 30, 2016 a non-financial obligation to merge with TikhvinChemMash CJSC. In August 2017 the Group refinanced this syndicated loan agreement and entered into the loan agreement with Otkritie FC Bank PJSC with repayment date in 2024 and the available credit facility of RUB 20,000 million.
As at December 31, 2016 one of the Group’s subsidiaries breached a covenant stipulated in a loan agreement with Otkritie FC Bank PJSC, prohibiting guarantees provision to third parties for the amount higher than 10% of the carrying value of the borrower’s assets according to statutory financial statements. In April 2017 the Group received an official letter confirming that
the bank has no plans to impose sanctions in relation to this loan agreement.
As at December 31, 2016 one of the Group’s subsidiaries breached a Net debt to EBITDA and positive net assets covenants set out in a loan agreement with Otkritie FC Bank PJSC. In 2017 the borrower signed the additional agreement with the bank, which moved the first compliance period to the fourth quarter of 2018.
The management of the Group estimated that probability that banks will use their right and demand an early repayment of the borrowings
is low and therefore as at December 31, 2016 such borrowings were presented in these consolidated financial statements as non-current liabilities according to the initial payment terms stipulated in the loan agreements. This was confirmed in 2017, as no banks exercised their right to demand an early repayment of the debt.
Available credit facilitiesAs at December 31, 2017 the Group’s total unused credit facilities amounted to RUB 600 million and related to the following credit lines:
Maturity Interest rate Available till Amount
ROSEXIMBANK JSC 2019 7.5% 29 December 2018
600
Total 600
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Maturity Effective interest rate for 2017
December 31, 2017
December 31, 2016
Series 01 November 24, 2021
6.70% 14,799 14,869
Series BO 01 September 10, 2019
14.29% 15,000 15,000
Series BО-P031 August 30, 2022
14% – –
Total 29,799 29,869
In 2014 and 2013 the Group issued and placed 30,000,000 bonds (Series BO 01 and Series 01) at par value of RUB 1 thousand each on the MICEX.
In addition in 2017 the Group issued and placed 5,000,000 bonds (Series BO-P03) at par value of RUB 1 thousand each on the MICEX.
As at December 31, 2017 and 2016, subsidiaries of the Group held bonds for RUB 5,201 million and RUB 131 million, respectively, for a purpose of their future resale on the market.
The annual coupon rate of the bonds was set at:
CBR REPO rate for bonds of Series BO 01 on the 7th day prior to coupon payment + 3.5% with interest being paid semi-annually. In 2017 the following rates were used:
6.86% from January 1, 2017 to May 30, 2017;
7.04% from May 31, 2017 to November 28, 2017;
Trade and other payables comprised:
27. Bonds 28. Trade and Other Payables
4.12% from November 29, 2017 to December 31, 2017;
CBR REPO rate for bonds of Series BO 01 on the 7th day prior to coupon payment + 3.5% with interest being paid semi-annually. In 2017 the following rates were used:
15.0% from January 1, 2017 to March 13, 2017;
14.5% from March 14, 2017 to September 11, 2017;
13.5% from September 12, 2017 to December 31, 2017;
14% for bonds of Series BO-P03 for the first coupon period (from September 5, 2017 to December 31, 2017);
14.0% September 5, 2017 to December 31, 2017.
The bonds are guaranteed by certain entities of the Group.
The carrying value of the bonds issued and placed by the Group was as follows:
The balance of interest accrued as at December 31, 2017 and 2016 in the amount of RUB 671 million and RUB 768 million,
1 As at the reporting date Series BO-P03 bonds are held by a subsidiary of the Group.
respectively, is included in the consolidated statement of financial position as the short-term portion of the bonds
December 31, 2017
December 31, 2016
Trade payables 5,109 8,084
Payables for property, plant and equipment and intangible assets
284 405
Accounts payable under guarantees – 267
Payables for acquisition of subsidiaries – 123
Total trade and other payables 5,393 8,879
At December 31, 2016 the total payables for share of TM-energo LLC acquired in 2015 amounted to RUB 4,227 million. Including RUB 123 million presented in payables for acquisition of subsidiaries within short-term liabilities and RUB 4,104 million presented as long-term payables in the consolidated statement of financial position with maturity date of August 28, 2019. At June 23, 2017
the Group fully repaid the amount of payables ahead of schedule, including interest accrued over the period of using the commercial loan.
Interest accrued for the period of the commercial loan is recognized in finance costs of the consolidated statement of profit or loss and other comprehensive income.
1 As at the reporting date all bonds of this series are held by a subsidiary of the Group.
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Advances received and other current liabilities comprised: The Group, in the ordinary course of business, enters into various transactions with related parties, such as sale and purchase of railcars spare parts or financing and investing transactions.
The nature of the related party relationships for those related parties, with whom the Group entered into significant transactions or had significant balances outstanding at December 31, 2017 are entities with significant influence over RPC UWC, associates and joint ventures. Transactions with United Wagon Plc, that was a parent company in 2016, were included within the transactions of the
29. Advances Received and Other Current Liabilities 30. Related Party Transactions
The line provisions and accrued expenses includes the short-term part of the remuneration for 2017 payable to the key management personnel in the amount of RUB 332 million (including social contributions taxes). The long-term part of the remuneration payable not earlier than 12 months is presented as accrued expenses for employees
December 31, 2017
December 31, 2016
Advances received from customers, including: 15.810 9.242
Advances received for sale of goods (railcars) 15.527 8.811
Operating lease prepayments 227 361
Taxes payable 3.884 3.276
Provisions and accrued expenses 799 640
Payables for acquisition of intangible assets – 204
Other short-term payables to employees 175 174
Total advances received and other current liabilities 20.668 13.536
remuneration in the consolidated statement of financial position in the amount of 156 million rubles (including social contributions taxes).
The estimated liability of remuneration is based on the assumption that the approved key performance indicators will be achieved for 100%.
entities with significant influence over RPC UWC in 2017.
The balances with other related parties as at December 31, 2016 includes balances with PTK-Holding JSC and balances with its subsidiaries Nitrokhimprom LLC and Vostok 1520 LLC. Vostok 1520 LLC is a former subsidiary of the Group that was disposed in November 2016 (Note 6). In 2017 for the purposes of this disclosure due to the acquisition of 19.9% shares in PTK-Holding JSC (Note 17), transactions and balances with Nitrokhimprom LLC and Vostok 1520 LLC are presented as transactions with associates and joint ventures.
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As at December 31, 2017 and 2016 the Group had the following balances with its related parties: For the years ended December 31, 2017 and 2016 the Group’s transactions with its related parties were as follows:
December 31, 2017
December 31, 2016
Trade and other receivables
Entities with significant influence over RPC UWC 15 62
Associates and joint ventures 2,211 47
Other related parties – 561
Loans granted and deposits
Parent company – 203
Entities with significant influence over RPC UWC 6,415 13,136
Associates and joint ventures 6,108
Other related parties – 5,517
Prepayment for the acquisition of the subsidiary
Entities with significant influence over RPC UWC 2,000 –
Prepayments to suppliers and other assets
Entities with significant influence over RPC UWC 995 20
Associates and joint ventures 485 –
Other related parties – 1,990
TOTAL ASSETS 18,229 21,536
Loans and borrowings
Parent company – 8
Entities with significant influence over RPC UWC – 2,167
Trade and other payables
Parent company
–
267
Entities with significant influence over RPC UWC 662 473
Associates and joint ventures 48
Other related parties – 155
Advances received
Associates and joint ventures 6,183 –
Other related parties – 256
Payables for acquisition of subsidiaries
Entities with significant influence over RPC UWC – 4,227
TOTAL LIABILITIES 6,893 7,553
Compensation to key management personnelCompensation to key management personnel and to the Board of Directors is made up of a contractual salary and a performance bonus depending on operating results. The
total amount of the remuneration to the key management personnel and to the Board of Directors for the year ended December 31, 2017 and 2016 amounted to RUB 459 and 119 million (including social contributions taxes).
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2017 2016
Sales of railcars and inventories
Entities with significant influence over RPC UWC 7 77
Associates and joint ventures 64 1
Lease income
Associates and joint ventures 3,329 –
Income from consulting activities
Associates and joint ventures 11 28
Rent income
Associates and joint ventures 95 28
Entities with significant influence over RPC UWC 3 2
Other income
Entities with significant influence over RPC UWC 29 –
Associates and joint ventures 75 63
Purchase of inventories for railcar production
Entities with significant influence over RPC UWC (117) (160)
Associates and joint ventures (295) –
Cost of goods sold (other) and maintenance
Entities with significant influence over RPC UWC (707) (563)
Associates and joint ventures (47) –
Expenses on consulting activities
Parent company – (230)
Finance income
Parent company – 22
Associates and joint ventures 552 –
Entities with significant influence over RPC UWC 1,094 740
Finance expense
Parent company – (268)
Entities with significant influence over RPC UWC (1,099) (601)
Foreign exchange loss
Parent company – (70)
Entities with significant influence over RPC UWC (51) (109)
Associates and joint ventures (1) (1)
Other expense
Entities with significant influence over RPC UWC (130) (44)
Associates and joint ventures (8) –
Purchase of property, plant and equipment
Entities with significant influence over RPC UWC (90) (8)
December 31, 2017
December 31, 2016
Less than one year 5,804 5,191
Later than 1 year and not longer than 5 years 16,220 14,253
Over 5 years 1,758 4,559
23,782 24,003
Name of debtor Name of creditor
Start of validity period
The end of the validity period
Currency of the contract
The amount of the contract*
Vostok 1520 LLC PJSC GTLK March 31, 2017
September 30, 2034 — January 31, 2035
RUB 812
Total 812
As at December 31, 2017 and 2016 the promissory note issued by Nitrokhimprom LLC and acquired by the Group was transferred as a guarantee for the liabilities of Nitrokhimprom LLC (Note 17).
As of December 31, 2016, there were no guarantees issued by the Group with respect to leasing payments.
Operating leases
The Group as a lessor
Operating leases relate to the railcars owned by the Group with lease terms of between 5
*As at March 23, 2018 the Group signed additional agreements to the guarantees issued during 2017. According to the guarantees, the Group acted as a guarantor of leasing payments of its related party Vostok 1520 LLC to the creditor PJSC GTLK. Based on the additional agreements the total amount of the guarantees were reduced from RUB 52,744 to 812 million.
to 10 years, with an option to extend at the discretion of the lessee. All operating lease contracts contain market review clauses in the event of changes in market conditions. The lease contracts do not contain step up rent increases during the lease period. The lessee does not have an option to purchase the railcar at the expiry of the lease period.
Non-cancellable operating lease payments receivable are presented as follows:
Operating environmentBecause Russia produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas on the world market.
During 2017 the oil and gas prices remained low. The management cannot reasonably estimate future price changes and the impact they may have on the financial position of the Group.
Starting from 2014, sanctions have been imposed in several packages by the U.S. and the E.U. on certain Russian officials, businessmen and companies. These sanctions remained in 2017. Moreover, downgrade of Russia’s long-term foreign currency sovereign rating by international credit agencies has led to reduced access of the Russian businesses to international capital and export markets, increased inflation, economic recession and other negative economic consequences.
The impact of further economic developments on future operations and financial position of the Group is at this stage difficult to determine.
Taxation The Russian business legislation continues to be subject to rapid changes. Management’s interpretation of such legislation as applied to the activity of the Group may be challenged by the relevant regional and federal authorities. Recent events suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. Fiscal periods generally remain open to tax audit by the authorities in respect of taxes for three calendar years proceeding the year of tax audit. Under certain circumstances reviews may cover longer periods. Management believes that it has provided adequately for tax liabilities based on
its interpretations of tax legislation. However, the relevant authorities may have differing interpretations, and the effects on the financial statements could be significant.
The Group identified possible contingent tax liabilities for the three-year period ended December 31, 2017. Management estimates that the Group’s possible exposure in relation to the aforementioned tax risks will not exceed 3% of the Group’s total revenue for the year ended December 31, 2017.
Legal proceedingsFrom time to time the Group has been and continues to be the subject of legal proceedings and adjudications, none of which has had, individually or in the aggregate, a material adverse impact on the Group. Management believes that the resolution of such matters will not have a material impact on the Group’s financial position or operating results.
Environmental issuesThe enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognized immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage. The Group undertook monitoring of the environment at the construction site and within the limits of its impact on the natural environment at an environmental survey stage. No adverse impact of the dump operations on the environment has been found.
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Capital expenditure commitmentsAs at December 31, 2017 and 2016 the Group had contractual capital expenditure commitments in respect of property, plant and equipment totaling RUB 387 and 1,150 million.
31. Commitments and Contingencies
Guarantees issuedGuarantees issued under lease payments as of December 31, 2017 are as follows:
Fair value of financial instruments that are not measured at fair value on a recurring basis but for which fair value disclosures are requiredThe carrying amounts and fair values of the Group’s loans borrowings as at December 31, 2017 and 2016 were presented as follows^
Inputs of Level 2 of the fair value hierarchy were used to measure the fair value of bank loans and borrowings received from third parties and related parties.
The fair value of financial liabilities was determined in accordance with generally accepted valuation techniques based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the weighted average interest rate on loans (in Rubles and with maturity period of 3 years) received by non-financial organizations from credit institutions.
In determining the fair value of financial liabilities, management of the Group relied on the assumption that the carrying amount of variable rate financial liabilities approximates their fair value at December 31, 2017, as it reflects changes in market conditions, takes into account the risk premium and the time value of money. A similar assumption was applied in determining the fair value of the Group’s bonds, which have a floating rate correlating with the consumer price index (CPI) or CBR REPO rate (Note 27), and, therefore, their carrying amounts approximate their fair values as at the reporting date.
To calculate the fair value of fixed rate loans received in Russian rubles in 2017 and 2016 the Group applied market value of borrowed capital at a rate of 10.43% and 12.76%, respectively, which does not include the effect of received governmental grants. Also in 2016 rates of 6.47% and 5.23%, respectively, were applied to calculate the fair value of fixed rate loans and borrowings received in euros and US dollars. In 2017 the Group had no loan and borrowings in a currency other than the Russian rubles.
Fair value of accounts receivable, short-term loans granted, short-term bank deposits, cash
December 31, 2017
December 31, 2016
Financial assets
Loans receivable 12,559 13,877
Short-term deposits 5,038 5,000
Trade and other receivables (including long term accounts receivables)
4,075 1,701
Cash and cash equivalents 3,799 2,648
Investment in JSC PTK-Holding 1,773 –
Restricted cash 807 1,923
Finance lease receivables 224 244
Financial liabilities at amortized cost
Loans and borrowings 82,177 72,098
Bonds 30,470 30,637
Trade and other payables 5,568 9,258
Accounts payable on acquisition of subsidiaries – 4,104
Provisions and accrued expenses 955 640
Finance lease liabilities 195 13
December 31, 2017 December 31, 2016
Carrying amount
Fair value Carrying amount
Fair value
Loans and borrowings with variable interest
53,344 53,344 18,970 18,970
Bonds 30,470 30,470 30,637 30,637
Loans and borrowings with fixed interest
28,833 31,593 53,128 53,687
112,647 115,407 102,735 103,294
and cash equivalents corresponds to their carrying value, excluding assets at amortized cost (Note 19). For assessment of the fair value for long-term loans granted to third and related parties, inputs from Level 2 of fair value hierarchy were used. Fair value was estimated based on discounted cash flows with key assumption — discount rate. The discount rate reflects the weighted average interest rate on loans received by the Group, as it takes into account credit risk (estimated by management of the Group as average) of all borrowers, including those to whom the Group has issued the loans.
As at December 31, 2017 and 2016 fair value of the loans granted was higher than their carrying value by RUB 499 and 403 million respectively.
Liquidity riskLiquidity risk is the risk that the Group will not be able to settle all liabilities as they fall due. The Group’s liquidity position is carefully monitored and managed by the treasury function. Management controls current liquidity based on expected cash flows and revenue receipts through establishing and maintaining a cash fund sufficient to cover its contractual obligations for the period of three to six upcoming months. Such funds are normally kept as highly liquid short-term bank deposits, and are available on demand. In addition, the Group’s policy is to continually maintain a diversified portfolio of open credit lines with reputable banks, which serve to secure for the Group a stable ad hoc borrowing capability.
The following tables detail the Group’s remaining contractual maturity for its financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay.
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Risk management is being carried out by the Group in relation to financial (credit, market, currency, liquidity and interest rate), operating and legal risks. The main purpose of financial risk management is to determine risk limits and to further uphold the limits determined. Operating and legal risk management shall provide reliable
32. Financial Risk Management
performance of internal policy and procedures of the Group to minimize these risks.
Main categories of financial instrumentsThe Group’s financial assets and liabilities at the reporting dates comprised the following:
The following tables detail the Group’s expected maturity for its financial assets, except for cash and cash equivalents. The table has been drawn up based on the undiscounted contractual maturities of the financial assets including interest that will be earned on those assets.
Market riskThe Group is exposed to the risks of changes in foreign currency exchange rates and interest rates. The Group does not use any derivatives to manage its exposure to foreign currency and interest rate risk. Management sets limits on the value of risk that may be accepted, which is monitored on a monthly basis.
There have been no changes as to the Group’s exposure to market risks or the manner in which these risks are managed and measured
Sensitivities to market risks included below are based on a change in a factor while holding all other factors constant. In practice this is unlikely
Less than 12 months
From 1 to 5 years
Over 5 years
Total
December 31, 2017
Fixed interest rate instruments 5,610 26,234 11,827 43,671
Variable interest rate instruments* 13,715 77,273 23,375 114,363
Finance lease liabilities 43 159 – 202
Non-interest bearing liabilities 5,568 – – 5,568
Provisions and accrued expenses 799 156 – 955
Total 25,735 103,822 35,202 164,759
December 31, 2016
Fixed interest rate instruments 12,514 48,976 24,799 86,289
Variable interest rate instruments 12,399 49,390 – 61,789
Finance lease liabilities 7 6 – 13
Non-interest bearing liabilities 13,361 – – 13,361
Provisions and accrued expenses 640 – – 640
Total 38,921 98,372 24,799 162,092
Less than 12 months
From 1 to 5 years
Over 5 years
Total
December 31, 2017
Fixed interest rate instruments 5,362 4,297 16,595 26,254
Non-interest bearing assets 6,090 651 – 6,741
Finance lease receivables 54 217 75 345
Total 11,506 5,165 16,669 33,340
December 31, 2016
Fixed interest rate instruments 8,702 7,147 6,653 22,502
Non-interest bearing assets 1,702 – 1,923 3,625
Finance lease receivables 54 217 129 399
Total 10,458 7,364 8,705 26,526
*This calculation of future undiscounted cash flows that are fell due by the Group does not include the effect of the possible application to the Group future penalties with respect to the bank loans with the breached covenants (Note 26). If the Group does not remedy the breach of the covenants, future payments with respect to the variable interest rate instruments would increase as follows: within 12 months by RUB 241 million, within one to five years by RUB 1,190 million, exceeding 5 years on RUB 797 million.
to occur and changes in some of the factors may be correlated — for example, changes in interest rates and changes in foreign currency rates.
Currency riskForeign currency risk is the risk that the financial results of the Group will be adversely impacted by changes in exchange rates to which the Group is exposed. During 2017 and 2016 the Group entered into certain transactions denominated in USD and EUR.
The table below summarizes the Group’s exposure to foreign currency exchange rate risk at the reporting date relative to the functional currency of the respective entities of the Group:
December 31, 2017 December 31, 2016
Monetary financial assets
Monetary financial liabilities
Net monetary position
Monetary financial assets
Monetary financial liabilities
Net monetary position
USD 598 198 400 3,543 283 3,260
EUR 1,290 197 1,093 626 5,785 (5,159)
Total 1,888 395 1,493 4,169 6,068 (1,899)
The table below details the Group’s sensitivity to weakening of Russian Ruble against the respective foreign currencies by 10%, all other
variables being held constant. The analysis was applied to monetary items at the reporting dates denominated in respective currencies.
USD — impact EUR — impact
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Gain/(loss) 40 326 109 (516)
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The strengthening of the Russian Ruble in relation to the same currencies by the same percentage will produce an equal and opposite effect on the consolidated financial statements of the Group to that shown above.
During 2017 the Group entered into several forward contracts to hedge its foreign exchange risks in respect of the acquisition of certain components and raw materials. A net loss from forward transactions amounted to RUB 47 million and was included into the line foreign exchange gain/(loss), net. As of December 31, 2017, the Group does not have open forward contracts.
In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk because the year-end exposure does not reflect the exposure during the year.
Interest rate riskThe Group is exposed to the interest rate risk because entities in the Group borrow funds at both fixed and variable interest rates. The Group manages the risk by maintaining an appropriate mix between fixed and variable rate borrowings. The Group is also exposed to interest rate risk with respect to bonds with variable interest rates and to a certain extent to the effects of fluctuations of interest rates arising from changes in financial markets. This exposure extends to cash flow and fair
value risks on its future borrowings and lease receivables. The Group reduces this risk by including in its lease agreements an option to increase lease rates in case of significant changes in market conditions.
The sensitivity analysis below has been determined based on the exposure to interest rates for bonds and variable interest rates borrowings at the reporting date. The analysis assumed that the balance at the end of the period remained unchanged during the reporting period. A 3% increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.
If interest rates had been 3% higher (lower) and all other variables were held constant, the Group’s loss for 2017 and 2016 would increase/(decrease) by RUB 2,406 and 1,380 million.
Credit riskThe Group is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Exposure to credit risk arises as a result of the Group’s transactions with counterparties giving rise to financial assets.
The Group’s maximum exposure to credit risk by class of assets is reflected in the carrying amounts of financial assets as follows:
December 31, 2017
December 31, 2016
Loans receivable 12,559 13,877
Short-term deposits 5,038 5,000
Cash and cash equivalents 3,799 2,648
Trade and other accounts receivable 4,075 1,702
Investment in PTK Holding JSC 1,773 –
Restricted cash 807 1,924
Finance lease receivables 224 244
Total 28,275 25,395
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group only transacts with entities with a reliable credit rating using publicly available financial information and its own trading records to rate its major customers. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties to avoid excessive concentrations of risks. Credit exposure is controlled by credit limits that are reviewed and approved by the risk management committee annually.
Concentration of credit risk for account receivables from sale of railcars is about 64% as at reporting date. The balance is formed by outstanding amounts from external customer, however, Management of the Group considers credit risk to be limited as revenue from sale of railcars is divided between a large numbers of
customers. Accounts receivable from operating lease of railcars are represented for more than 91% by receivables from Vostok 1520 LLC, which was earlier one of the Group’s subsidiaries.
The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.
The credit risk associated with loans issued is limited because the counterparties for the majority of loans are related parties well known to the Group. The Group also has a significant concentration of credit risk in regards to loans provided to Nitrokhimprom LLC.
Capital risk managementThe Group manages its capital to ensure that it will be able to continue as a going concern while maximizing the return to stakeholders through optimization of the debt and equity balance within the limits imposed by its providers or finance. The capital structure of the Group consists of net debt (borrowings and bonds as detailed in Notes 26 and 27, offset by cash and cash equivalents balances), and equity.
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At January 15, 2018 Otkritie FC Bank PJSC obtained the control share (more than 99%) in equity of certain shareholders of the Group (Management Company Navigator LLC and Management-Consulting LLC). This gives the bank significant influence over the Group.
In April 2018, before the date of the approval of these consolidated financial statements the shareholders of PTK-Holding JSC notified the Group about execution of their rights to exercise the option agreement. According to the option agreement the
33. Subsequent Events
shareholders of PTK-Holding JSC under certain conditions before April 30, 2018 had a call — option to buy out the Group’s share in the equity of PTK-Holding JSC (Note 17). The call option was exercised, the option compensation due to the Group amounted to RUB 1,773 million. The amount of the compensation equals to the fair value of the Group’s share in PTK-Holding JSC based on the independent valuation. This event occurred after the reporting date and was classified as adjusting, therefore the value of the assets held by the Group as at December 31, 2017 was adjusted accordingly.
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Biographical details of members of the Board of Directors
Member of the Board of Directors
Work history Work experience in the sector Education
Nikolai Dobrinov One of the partners and founders of the ICT Group, where he held management positions in a number of project companies and was in charge of relations with governmental authorities and corporate communications. At the moment, he is the Deputy CEO of ICT Group.
Prior to establishment of ICT Group in 1993, Mr. Dobrinov was the Deputy Chairman of the Management Board at the Development Fund of St. Petersburg and the North-West Region. In 1983–1990, he worked in Komsomol organisations of the Leningrad Region and later became a secretary of the Leningrad Regional Committee of the Leninist Young Communist League of the Soviet Union.
Nikolai Dobrinov began his career at the Burevestnik Electromechanical Plant in the Leningrad Region city of Gatchina.
Since 2013 Ordzhonikidze Moscow Institute of Management, graduated in 1980.
Russian Foreign Trade Academy, graduated in 1993.
Ilya Yuzhanov Ilya Yuzhanov is a member of the RUSNANO Board of Directors and also a member of the Supervisory Board of NPO National Settlement Depository and the Supervisory Board of the Association of Independent Directors.
In 2011–2015, he served as the Chairman of the Supervisory Board at AK ALROSA.
In 2004–2013, he was a member of the Supervisory Board of NOMOS-BANK.
In 2000–2011, Ilya Yuzhanov was a member of the boards of directors at such companies as RAO UES of Russia, Uralkali, NOVATEK, Kirov Plant, Polymetal, and Holding MRSK.
Previously, Mr. Yuzhanov held various positions in the city administration of Leningrad/St. Petersburg, served as the Chairman of the State Committee of the Russian Federation for Land Resources, Minister of Land Policy, Construction and Housing and Utilities Infrastructure of the Russian Federation and the Russian Minister of Anti-Monopoly Policy and Support for Entrepreneurship.
Since 2015 Leningrad State University, graduated in 1982.
Candidate of Economic Sciences
Igor Mintz Igor Mintz is the Managing Director and Director of the Corporate Finance at O1 Group.
From 2013 to 2015, he headed the Board of Directors of Olo del Peru telecom operator.
From 2010 to 2014, he was engaged in the analysis of investment appeal of venture projects in various economic sectors at MC Kaskol and worked at ICT Group where he headed the foreign investment area as the Managing Director.
From 2007 to 2009, Mr. Mintz worked in the Department of Management Accounting and Internal Control at Commercial Bank SDM Bank.
Since 2011 Moscow State Institute of International Relations, graduated in 2009.
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Member of the Board of Directors
Work history Work experience in the sector Education
Alexander Pleshakov
Alexander Pleshakov is the President of Non-Profit Partnership Guild of Financial Managers. Previously, he held various management positions in the banking sector, including the post of the Deputy President at JSCB NOVIKOMBANK, as well as a Board member (2007–2008) and the Deputy Chairman of the Management Board of Gazenergoprombank (2004–2007).
In 2000–2004, he was a member of the Federal Commission for the Securities Market.
In 1998–2000, Mr. Pleshakov served as a deputy department head at the Russian Ministry of Property Relations.
Since 2015 Mozhaisky Military Engineering Institute, graduated in 1993.
Academy of National Economy of the Government of the Russian Federation, graduated in 2000.
Candidate of Technical Sciences
Yury Yarov Yury Yarov is a member of the Board of Directors of the Kaliningrad Enterprise ERA and the Scientific Production Association of Hydraulic Machines.
In 2008–2015, he was an advisor to the Chairman of the Management Board of the Advisors’ Office of the Eurasian Development Bank.
In 2007–2008, he was the President of the United Shipbuilding Corporation.
In 2004–2008, he was the head of FSUE Northern Design Bureau, which specialises in the designing of warships.
In 1993–1996, he oversaw social affairs as the Deputy Prime Minister of the Russian Federation. In 1996, Mr. Yarov was appointed the Deputy Head of the Administration of the President of the Russian Federation. In 1998, he was appointed the Authorised Representative of the President in the Federation Council of the Federal Assembly of the Russian Federation. In 1999, he served as the Chairman of the Executive Committee and the Executive Secretary of the CIS.
In 1991, he was appointed a representative of the President of the RSFSR in St. Petersburg and the Leningrad Region and was elected as the Deputy Chairman of the Supreme Soviet of the RSFSR.
In 1978–1985, he served as the CEO of the Burevestnik Plant.
Since 2004 Leningrad Institute of Technology, graduated in 1964.
Leningrad Institute of Engineering and Economics, graduated in 1974.
Roman Savushkin Roman Savushkin joined the Company in January 2012.
Prior to this, he headed RAIL1520, which specialises in operational leasing of the freight rolling stock, where he was responsible for developing the strategy and management of the company. Previously, he worked in the transport engineering industry and held senior positions at a number of manufacturing, leasing and engineering companies, such as enterprises of the Titran Group, Brunswick Rail, Railcar Engineering Centre, Commercial Transport Systems and others.
Since 2007 The St. Petersburg State University of Railways — graduated in 1998.
University Antwerp Management School (Belgium), Executive MBA, graduated in 2009.
Candidate of Technical Sciences
Dmitry Bovykin Dmitry Bovykin joined the Company in January 2012.
Prior to this, he worked at Brunswick Rail, a leasing company, where he was responsible for investor relations and strategic marketing. Before that, he handled market research at such companies as Kraft Foods and Wimm-Bill-Dann.
Since 2007 Moscow Institute of Physics and Technology, graduated in 2001.
Risk description Probability Exposure Potential effect of occurrence Risk management/mitigation methods Change versus 2016
FINANCIAL AND ECONOMIC RISKS
Financial risk
Risk of the creditor unilaterally imposing a substantial change in the rate of raising capital
Risk of a substantial change in the basic conditions of financing
Low Medium Formalising financing conditions in long-term loan agreements
Need to raise additional funds from shareholders
Need to put up additional collateral
Formalising financing conditions in long-term loan agreements
Monitoring compliance with covenants in loan agreements and other financing conditions, and modifying the terms of loan agreements ahead of time
Reducing the volume of debt burden
Compensating expenses by increasing the lease rates
Reviewing the distribution pattern of borrowed funds to ensure priority funding of business areas with higher return on equity
No change:
The economic situation in Russia stabilised
Oil and gas income exceeded the target by 3% (statistics of the Ministry of Economic Development for 2017)
Oil price did not decrease below USD 60. Projected price included in the 2018 budget is USD 43.8 per barrel
Rouble strengthening in 2017 amounted to 5% (RUB/USD rate as of 1 January 2018 was RUB 57.60)
the rate of the Central Bank of Russia reduced to 7.5% (minimum rate for the whole history of the refinancing rate of the Central Bank of Russia)
Currency risks
The risk of a substantial fluctuation in exchange rates
Low Medium Rise in financing cost
Occurrence of losses from exchange rate differences in loan agreements and in equipment and parts supply agreements
Localising production of imported parts
Forward contracts with a fixed exchange rate
Minimising the volume or conversion of foreign currency credits
Hedging currency risk, closing open forex positions
The risk decreased:
The RUB/USD rate expected as of 1 January 2019 is RUB 60.00 in case of high volatility caused by introduction of sovereign sanctions (forecast by Alfa-Bank)
Capital and liquidity risk
Risk of insufficient cash over the short or long term
Low Medium Failure to meet current financial commitments
Insufficient own working capital to ensure operations
Boosting the proportion of long-term sources of financing in the overall volume
Constant monitoring and managing balance-sheet liquidity
Constant working with banks to raise additional financing
No change:
Recovery of the rolling stock lease market and increased demand for new railcars led to an increased cash flow from operating activities
Production of freight cars increased by 60%, to 58,338 pieces over a year (statistics of the Ministry of Economic Development for 2017)
Tax risk
Varying interpretations of tax laws
Increase in tax rates
Low
Low
Medium
Medium
Additional charge of VAT, the income tax, payment of tax penalties
Increased tax payments
Structured document management, timely submission of documents for tax inspections
Monitoring changes in requirements with regards to “controlled indebtedness”
Timely preparation of documents with regards to transfer price transactions
Acceptance, clarifying target budget indicators
The risk increased:
Introduction of changes into the tax laws in 2016
The new risk:
Increase in VAT to 22% is unlikely to take place in 2019 taking into consideration the expected inflation of 4% for 2018–2020 (forecast by the Ministry of Economic Development)
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Risk chart
Risk description Probability Exposure Potential effect of occurrence Risk management/mitigation methods Change versus 2016
Banking risk
Risk of termination of operating activities, suspension of bank account transactions
Risk of Western sanctions to include the Russian sovereign debt
Low Medium Failure to meet credit commitments and payment obligations to counterparties
Suspension of Company operations
Opening back-up accounts with other banks
Evaluating financial health of banks / credit rating (of countries) when opening accounts
Selecting partner banks with the rating not lower than BBB-
No change:
The Central Bank of Russia announced completion of main works for rehabilitation of the banking sector in 2017
Non-residents at the federal loan bond market accounted for 33.9% being the highest indicator since January 2012 (according to data of the Central Bank of Russia as of 14 March 2018)
Credit risk
Risk of default by one or more lessees that account for a significant proportion of the portfolio, and the risk that the portfolio will generate a loss
Low Medium Lessee default
Contractual arrears
A proportion of railcars standing idle
Forced reduction in the lease rate when remarketing
Performing credit analysis of the customer
Regular monitoring of the customer’s current financial health
In case of the assumed lessee default, timely selection of a new lessee and entering into agreements in order to eliminate idle time of railcars
No change:
Stabilisation of the freight transportation market and withdrawal of financially insolvent companies from the market
The growth rate of cargo transportations by rail amounted to 3.2% in 2017
Sales of new railcars increased to 19,000 units without growth of the leasing portfolio
LEGAL RISKS
Compliance risks
Risk of the counterparty insolvency
Low Medium Bankruptcy of counterparty / lessee / supplier
Failure to fulfil current contracts / obligations
Litigation
Failure to refund VAT
Complete due diligence of customers and suppliers upon concluding an agreement
Subsequent monitoring to identify violations of agreement terms
Continuous monitoring of the counterparty legal status
No change:
Stabilisation of the economic situation in Russia
GDP’s growth rate in Russia reached 1.5% in 2017 compared to reduction of 0.2% in the previous year
Property risks
Risk of property rights loss
Risk of company management loss
Low High Loss of control over the company
Litigation
Loss of ownership over assets (property and companies)
Control over creation of the corporate organisational structure
Creation of a control system with respect to assets acquisition and management
Directors and Officers Liability Insurance (D&O)
No change
Intellectual property risk
Risk of losing intellectual property rights
Risk of unlawful patent use
Low Medium Emergence of lower-priced competitive equivalents on the market
Shortfall in revenue from licensing agreements
Litigation
Legal formulation of mechanisms to preserve protection of intellectual property
Introducing a non-disclosure regime, concluding non-disclosure agreements
Monitoring production volumes of licensed companies
Timely development of new intellectual property
No change
COMMERCIAL RISKS
Market risk
Risk of substantial changes in raw material prices; risk of changes in lease rates on the market
Low High Substantial decline in lease rates
A fall in revenue
Margin decrease
Contracting parts supply by methods that are not dependent on the market situation
Increasing the fleet proportion of innovative railcars that are least susceptible to falling prices
Exercising the option to change the lease rate in lease agreements
Increasing and diversifying the customer base
Reducing expenses and product costs
The risk decreased:
Recovery of the rolling stock lease market
Demand for new railcars increased by 60% (statistics of the Ministry of Economic Development for 2017)
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Risk description Probability Exposure Potential effect of occurrence Risk management/mitigation methods Change versus 2016
Risk of losing customers
Risk of losing customers if cooperation is no longer advantageous
Low Medium Drop in revenue as a result of a shrinking lease portfolio
A proportion of railcars standing idle
Additional administrative expenses on the urgent expansion of the customer base / products sold at unacceptable prices
Diversifying the customer base of lease companies
Selling products to related companies
Constant improvement of the railcar quality
No change
Risk of losing competitive advantage
Risk of competitors emerging on the market with more attractive prices and lease rates for railcars with similar quality characteristics
Low Medium Reduction in rates and prices for innovative railcars
Prioritising innovative products when forming the railcar fleet
Licensing the production of innovative railcars
Expanding and diversifying the customer base
Investing into R&D
No change
Service risk
Risk of absence of service centres for technical and service maintenance of innovative Barber bogies
Low Medium Delays, downtime
Financial losses
Barber bogies service problems
Drop in demand for Barber bogies and railcars mounted on them
Purchasing own railcar repair shops
Expanding the network of innovative railcars repair service centres
Barber bogies repair training
Distribution of component parts via the service centre network
No change:
The network of new generation railcar service centres includes 66 centres in charge of the rolling stock repairs in the territory of the Russian Federation, the CIS and Baltic countries
MARKETING RISKS
Reputation risks
Risk of losses due to unfavourable image of the Company perceived by lessees, counterparties, business partners, regulatory authorities, and creditors
Low Weak Worsening of the Company’s business reputation
Loss of good mutual relations with counterparties. Creditors and counterparties doubting sustainability and solvency of the Company
Spreading negative information about the Company, loss of reputation on the employment market and resulting inability to recruit proper employees on such market
Loss of the market share
Verification and tracking of market information about the business partner
Building long-term relations with press and mass media, checking sources of information, monitoring and retraction of misinformation
Forming and maintaining positive business reputation
Developing the corporate staff, team-building
Promoting the Company’s positive image through social media and by feedback from the Company’s staff
No change:
The Company’s market share was 33% (No. 1 in Russia)
High public ratings from leading agencies of the Russian Federation
UWC’s shares included in the MICEX index
Improving ranking positions (RBC-500, INFOLine)
Positive feedback in the media
Government regulation / sovereign risks
Risk of changes in the country’s political situation and/or deterioration in the business climate
Risk of greater regulation of the sector or a change in standards
Risk of a reduction in state support for the transport engineering business
Low Medium Loss of a proportion of existing competitive advantages
A decline in demand and sales volumes
Participating in various sectoral associations (the Union of the Producers of Railway Equipment, the Association of Railcar Builders)
Cooperation with Russian Railways
No change:
Implementation of a state programme for replacement of obsolete railcars and promoting production of the innovative rolling stock
Decree of the Russian Government No. 175 of 20 February 2018 approved the subsidies from the federal budget to be granted to organisations to compensate part of costs related to acquisition of the freight rolling stock
The sovereign risk remains high due to the complex international political situation
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Risk description Probability Exposure Potential effect of occurrence Risk management/mitigation methods Change versus 2016
TECHNICAL RISKS
Infrastructure risk
Risk of IT problems
Risk of falling behind the schedule for business processes automation
Low Weak Full or partial loss of the Company’s data
Temporary suspension of the Company’s operations
Using fault-tolerant virtualisation systems
Storing e-mails on a remote server
Housing the server somewhere out of office
Controlling information conveyed outside by employees
Data back-up
Division by data access levels depending on the authority of the employee
No change
Automation risk
Risk of business processes efficiency loss due to violation of the planned automation schedule
Low Weak Poor efficiency of the Company’s business processes implementation
Controlling the timely implementation of access provision automation plans
No change
HR RISKS
Human resources risk
Risk of losing key staff with access to the Company’s commercial secrets
Medium Weak Loss of the Company’s key customers
Leakage / loss of important financial information or commercial secrets
Loss of intellectual resources with resignation of the key staff
Establishing procedures to restrict access to information in line with employees’ authority, introducing a non-disclosure regime
In-house security vetting of staff at recruitment, proficiency tests
No change
Motivational risk / risk of job satisfaction loss
Risk of failure of current corporate principles to meet expectations of the majority of employees
Medium Weak Resignations of the key staff due to reduced motivation
Financial losses due to staff turnover or leakage of commercial information
HR branding
Introduction and improvement of employee incentive programmes
Maintaining a competitive rate of employee remuneration
No change
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CONTACT INFORMATION
Public Joint Stock Company “Research and production corporation “United Wagon Company” (PJSC “RPC UWC”)
7/11 Novokuznetskaya St., bld. 1, 115184, Moscow, Russia
Tel.: +7 (499) 999 15 20
Fax: +7 (499) 999 15 21
http://www.uniwagon.com
Contact Information for Investor Inquiries
Investors and Financial Institutions Relations Department
http://www.uniwagon.com/#investors
Contact Information for Shareholder Inquiries
Corporate Governance Department
Contact Information for Media Inquiries
Corporate Communications Department
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