OREANDA-NEWS. July 28, 2009. In spite of the difficult 2008, KAMAZ Group, one of few Russian automobile companies, finished the financial year with a net profit to the tune of 1 billion roubles and a positive cash flow in operating activities to the tune of 0.8 billion roubles.
Proceeds

In the fourth quarter of 2008 the company faced a sharp truck sales slowdown in Russia and CIS countries which had been provoked by the fall of economic activity on the markets of these countries. Unfortunately, in Russia the economic recession most of all affected the industries which are traditionally the main clients of KAMAZ – mining operations, metallurgy, construction and cargo transportation. It became the main reason why the truck sales volumes reduced by 5 thousand vehicles in 2008 in comparison with 2007, or by 9.8%. In 2008 47.5 thousand vehicles in all were realized 11.3 thousand of which were for export.

However, the Group managed to maintain the volumes of proceeds in 2008 on the level of 2007. The proceeds from sales in 2008 made up 96.3 billion roubles, decline against 2007 was less than 1%. The truck sales slowdown was compensated by the growth of profit from realization of spare parts, service, sales of other products, goods and rendered services.
Profitability

EBITDA

In 2008 EBITDA of the KAMAZ Group made 8.6 billion roubles, which is by 4.4 billion roubles less than in 2007. EBITDA profitability was 9.0%, for comparison, it formed 13.4% in 2007.

2007 was one of the most successful years for the world truck industry when against the background of a high investment demand all automobile concerns showed considerably higher results than it is typical for the given industry where the normal EBITDA profitability usually makes about 10-12%.

On the contrary, from the point of view of financial results, 2008 can be named one of the most difficult ones so long as the financial results were influenced not only by the results of usual economical activities but also by considerable writing-off assets, creating extra reserves and other “original” costs connected with the crisis situation in the economy. Such costs of the KAMAZ Group formed 2.8 billion roubles in 2008 and, in the first place, they are associated with reduction of fixed assets and resources, writing-off intangible assets and accounts receivable.

Not taking into account such “original” income and expense items, just to make the comparison with 2007 more concrete, the company’s EBITDA result made 9.4 billion roubles, and profitability was 9.8%, which is a bit lower than an average branch-wise long-term performance.

Material and component expenses grew by 7.1 billion roubles, or by 12% on the level of 2007. Metal and metal consuming components make up more than 30% in the prime cost of a vehicle therefore the change of prices for these materials and components influences the company’s business greatly. Because of the considerable jump in metal prices, for 9 months of 2009 the prime cost of vehicles grew sharply, which lowered the company’s profitability. Already since the 4th quarter of 2009 the prices for metal started lowering. But, in connection with the fact that the order for metal had already been made in the 3rd quarter and in the last quarter of the year production volumes abruptly dropped, the metal price lowering didn’t make profitability higher in 2008. One can expect that this factor will have a positive influence on profitability of production only in the current year.

Personnel costs in the KAMAZ Group of Companies grew by 14% in 2008. It is related with the increase of the number of employees before the crisis in 2008, and also with the growth of an average wage by 19% up to 16.2 thousand roubles. In all the average number of employees of the KAMAZ Group made 76 thousand people in 2008. Realizing its social responsibility, KAMAZ didn’t reduce the personnel on a large scale, notwithstanding the considerable sales slowdown, however the company cuts down costs due to the “natural reduction” of personnel and not employing new people, not paying bonuses, changing the workers’ and employees’ working schedules. Due to these crisis management measures already in the 4th quarter of 2008 personnel costs started decreasing.

Administration and management costs grew a little in 2008, only by 75 million roubles or 1%, as long as the company’s management controls such costs. Besides, the growth of some items of these costs was compensated by that the tax debt reserve for the last periods was reversed.

Commercial expenses increased by 1.1 billion roubles, or 27%. Almost half of this sum included the increase of the reserve for problem debts because of a higher risk of not paying back account receivable. The rest growth of this expense item is, on the whole, personnel costs and third-party services.

Net profit

The net profit for 2008 lowered by 6.4 billion roubles and made up 1 billion roubles. Besides the above mentioned factors, the net profit was very much affected by costs because of the difference of exchange in currency credits to the tune of 2.6 billion roubles, as a result of the Russian rouble devaluation. The sum of debts in foreign currencies (mostly in yen, Euro, USD) was 12.4 billion, or 55% of the total amount of credit and loan indebtedness at the end of 2008. Almost half of the exchange difference losses apply to a long-term loan (with an amortization period till 2034) of the RF Ministry of Finance.

Interest costs also influenced the net profit of the KAMAZ Group. Due to the growth of interest rates and the increase of a clear debt the net interest costs grew by 0.6 billion roubles and made up 1.2 billion roubles.

Also lowering of profit tax costs by 1 billion roubles, first of all, due to lowering of delayed tax costs had a positive influence on the net profit.

The management realized the changing situation on the market in due time, adopted the crisis management program in the 3rd quarter of 2008 and finished 2008 with a positive performance.
Credits and loans

At the beginning of the crisis the company’s debt burden was small, at the beginning of 2008 the net debt made up only 8.4 billion roubles, the ratio of the net debt to EBITDA was 0.6 times, which is much lower than the usual average level in this industry.

Because of the lowered sales volumes in the 4th quarter of 2008, the company’s circulating capital grew due to the increased amount of finished products, goods-in-process, and also stock materials and components to the tune of 11 billion roubles. The growth of stocks was partially compensated by the increase in payables by 2 billion roubles, the decrease in accounts receivable of finance lease by 1 billion roubles, the decrease in financial investments as a result of their sale for 1 billion roubles. As a result, the net debt of the company increased to 15.6 billion roubles at the end of the year.

The amount of credits and loans grew up to 22.4 billion roubles (2007: 12.8 billion roubles), the amount of money grew up to 6.8 billion roubles (2007: 4.3 roubles). Despite the increased debt, the ratio of the net debt to EBITDA according to the results of 2008 made only 1.7 times. Even in “pre-crisis” times the acceptable level of this performance for banks was about 2.5 – 3 times.

On 31 December 2008 the company’s debt portfolio was quite equally represented by long-term and short-term credits and loans. The amount of long-term credits is 10.1 billion roubles and one of short-term credits is 12.3 billion roubles. However, according to the requirements of IAS, a part of long-term credits to the tune of 6.6 billion roubles was reclassified to short-term credits because, in accordance with terms of credit contracts, banks have the right to reclaim the amount of indebtedness ahead of schedule if the company breaches some financial indicators of accounts.

The biggest sum in such “reclassified” credits is syndicated credit indebtedness obtained by the company in 2008. The sum of this debt is 123 billion Euro (5.1 billion roubles). The loan was issued by six foreign banks. The credit period is 3 years. According to the terms of the credit agreement, the banks have the right to reclaim ahead-of-time credit payment in the event if the company doesn’t reach definite financial performances in the ratio of the debt to EBITDA, interest payment and the cost of net wealth. According to the results of 2008, one of the results (the cost of net wealth) was not fulfilled because the net profit gained by the company was less than it had been planned. Taking into account the difficult crisis situation and lack of liquidity on the market it would be difficult for the company to pay debts ahead of time which is understood by our creditor banks with which the company has long-term partnership relations. Therefore the company applied to them with a request to receive an official permission to violate this financial performance.

Indebtedness of credit from EBRD as of the end of 2008 made 0.8 billion roubles. The credit is to be cancelled by even payments till 2011. This credit also provides for that the company will fulfill some finance indicators and limits the company in the amount of guarantees given for daughter enterprises. A rather long period of time passed from the moment this credit had been obtained, and the company can’t fulfill some finance indicators. The company made public the given violations in the accounts of IAS for 2006, 2007, 2008 and informed EBRD about it. The bank didn’t express an intention to reclaim the debt ahead of time.

One of the daughter companies of the Group has a long-term indebtedness to Absolut Bank to the tune of 0.2 billion roubles. According to the terms of the contract, the company must have a definite amount of sale proceeds. The given finance indicator was not fulfilled in 2008. The bank didn’t reclam the debt ahead of time, but, according to the rules of IAS, the credit was reclassified to the category of short-term ones. KAMAZ Inc. has got no guarantees or any other commitments with respect to the given credit.

For the reason that some other credit contracts have got the term of “cross-default”, application of creditor banks (for syndicated credits) or EBRD for the debt reclamation ahead of time can result in the right of other banks to demand that the company should execute all commitments ahead of schedule. However, taking into account the fact that the company has long-term partnership relations with all the rest creditor banks, the management considers that such a situation will hardly happen.

The company’s indebtedness as of 30 June 2009 decreased by 1.2 billion roubles in comparison with 31 December 2008. Notwithstanding the lowering sales volumes in the first half year of 2009, crisis management measures aimed at lowering the sum of the circulating capital due to the sales of redundant remains of the finished products, introduction of materials purchased in 2008 into production processes, reclamation of accounts receivable started to yield their results. According to the company’s management, even if sales lower to 28 thousand vehicles in 2009, minimizing all costs including investment ones, the company won’t rise the level of indebtedness. But its decrease in 2009 doesn’t seem to be possible yet.

The Russian banks (Sberbank, VTB, Gasprombank and private Russian banks) opened considerable credit limits for KAMAZ Inc. and continue crediting the company in the current regime. The amount of opened limits in the largest banks makes up almost 16 billion roubles, the company doesn’t use a considerable part of limits.

Despite the crisis situation KAMAZ didn’t allow payment defaults in all its commitments to the banks and firmly intends not to stick to this rule in the future. According to the company’s management, this guarantees long-term and stable relationships with its creditors.