hms group financial results · revenue 32,351 32,358 0% gross profit 8,840 8,985 -2% ebitda* 5,272...

HMS Group2014 FY IFRS Results

Conference call presentation

28 April 2015

Financial results

Business & Outlook

Appendix

2014 FY 2013 FY chg, yoy

Revenue 32,351 32,358 0%

Gross profit 8,840 8,985 -2%

EBITDA* 5,272 5,238 1%

Operating profit adj.** 3,761 3,823 -2%

Net income adj. ** 1,187 768 55%

Operating profit 855 4,179 -80%

Net income -1,575 1,156 n/a

Total debt 16,967 12,687 34%

Net debt 12,432 11,103 12%

EBITDA LTM 5,272 5,238 1%

Net debt to EBITDA LTM 2.36 2.12

Gross margin 27.3% 27.8% -44 bps

EBITDA margin 16.3% 16.2% 11 bps

Operating margin adj. 11.6% 11.8% -19 bps

Net income margin adj. 3.7% 2.4% 130 bps

Operating margin 2.6% 12.9% -1,027 bps

Net income margin -4.9% 3.6% -844 bps

ROCE 11.1% 13.9% -277 bps

ROE -12.5% 8.6% -2,114 bps

* Hereinafter, read EBITDA as EBITDA adjusted, Net income as Profit for the period / year, EBITDA margin as EBITDA adjusted margin** Operating profit and Profit for the period (Net income) are adjusted by significant nonmonetary one-off items: excess of fair value, impairment of assets and goodwill, and foreign exchange loss from borrowingsNOTE: Herein, revenue and EBITDA 2007-2013 data are adjusted for SKMN disposal

Financial Highlights

3

Financial highlights, Rub mn Revenue performance, 2007–2014

11,505 11,668 12,032 20,379 25,515 31,460 32,358 32,351

2007 2008 2009 2010 2011 2012 2013 2014

Revenue adj., Rub mn Linear ( Revenue adj., Rub mn)

EBITDA performance, 2007–2014

1,306 1,650 1,968 3,670 5,562 6,101 5,238 5,272

11.4%

14.1%

16.4%18.0%

21.8%

19.4%

16.2% 16.3%

2007 2008 2009 2010 2011 2012 2013 2014

EBITDA adj., Rub mn EBITDA margin

CAGR 2007-201416%

CAGR 2007-201422%

Source: Company data, management accounts, exclusive of SKMN

Source: Company data, management accounts, exclusive of SKMNSource: Company data, management accounts

Net income adjusted is not a parameter of financial statements and is cited in this presentation as an example of impact of significant and one-off non-cash items on HMS’ financial results. These factors are connected to a sharp crisis in Russian economy in 2014.

Net income was adjusted by:

Impairment of goodwill and assets

Last year excess of fair value

Foreign exchange loss from borrowings (HMS Neftemash’s Euro 26 mn credit raised for the acquisition of Apollo, intragroup loans, and etc.)

Impairment of goodwill in 2014

On Dec 31, 2014, the Group tested goodwill of KKM, GTNG and IRVKP and concluded that their goodwill had to be impaired:

KKM – The impairment of Rub 1,003 mn resulted primarily from adjustment in discount rate, reflecting geopolitical factors and recent changes in Russian economic environment

GTNG – The impairment of Rub 1,111 mn resulted primarily from changes in the future growth and profitability assumptions in order to bring them in line with expected market developments, past performance of the business and from adjustment in discount rate, reflecting recent changes in Russian economy

RVKP – The full impairment of Rub 73 mn due to changes of the future growth and profitability assumptions and adjustment in discount rate

-1,575

1,156-955 422

17 128

768 2,186

576

1,187

-2000

-1500

-1000

-500

0

500

1000

1500

2000

Net income2013

Excess of fairvalue 2013

Impairment ofassets 2013

Impairment ofgoodwill 2013 FX loss 2013

Net income2013 ADJ

Net income2014

Excess of fairvalue 2014

Impairment ofassets 2014

Impairment ofgoodwill 2014 FX loss 2014

Net income2014 ADJ

Impairment of goodwill and other non-cash items impact on HMS Net income

4

Net income & Net income adjusted reconciliation

Comments

Source: Company data

2013 Net income adjustments 2014 Net income adjustments

2,7883,355

-235

490

-8.4%

14.6%

12 months 2013 12 months 2014

Revenue EPC, Rub mn EBITDA EPC, Rub mn EBITDA margin EPC, %

4,207

2,474

572

-255

13.6%

-10.3%


Revenue Compressors, Rub mn EBITDA Compressors, Rub mn EBITDA margin Compressors, %

6,972

10,220

9291,908

13.3% 18.7%


Revenue OG equipment, Rub mn EBITDA OG equipment, Rub mn EBITDA margin OG equipment, %

18,38616,270

3,801 3,137

20.7%

19.3%


Revenue Pumps, Rub mn EBITDA Pumps, Rub mn EBITDA margin Pumps, %

Segments overview: 2014 FY results

5

Revenue -12%EBITDA -17%

Revenue +47%EBITDA +105%

Revenue +20%EBITDA n/a

EPCCompressors

Large projects generated less revenue and EBITDA in 2014 than in 2013 Stable inflow of small and mid-size orders for standard pumps generated

comparable revenue and EBITDA EBITDA margin stayed at 19.3% that is more than average level

Twofold growth in EBITDA and 1.5 times increase in revenue Despite later than expected start of Rospan and the LH project’s execution

and less orders for standard equipment

Postponements of some targeted large tenders resulted in insufficient revenue to compensate a constant level of fixed costs

Adjustment of Rospan project schedule coordinated with the client in part due to delay by the client’s another subcontractor, located in Donetsk, Ukraine, caused by objective reasons, but this postponement will have positive influence on 2015 results

Launched operational efficiency improvement program will show more visible results in 2015

Significantly better 2015 expectations based on the already built backlog

EPC segments demonstrated solid consolidated results with revenue growth by 20% yoy and EBITDA turning positive, where:– project and design (EP) and construction (C) sub-segments showed

growing results both in revenue and EBITDA terms As a result, EBITDA margin grew to 14.6%


Revenue -41%EBITDA n/a

Oil & gas equipmentPumps

General factors that impacted HMS’ performance in 2014 and can impact the company’s future prospects- Delays of clients’ capex under economic uncertainty in Russia+ Started implementation of import substitution policy (machine-building segments only) and, as a result, less competition and better pricing


Customer base development

Revenue contribution by Top-7 clients Comments

Others 43%

Gazprom Neft 5%

Rosneft 13%

Rosneft 9%

Gazprom 15%

Transneft 11%

Surgutneftegas 6%

Transneft 12%

Gazprom Neft 8%

Revenue Rub 32,358 mn

Revenue Rub 32,351 mn

Turkmenia 7%

2013 FY

2014 FY

Lukoil 10%

6

Gazprom 4%

Surgutneftegas 6%

Lukoil 6%

Others 44%

NOVATEK 2%

Well-diversified client base of 4,000-6,000 names, growth of

revenue coming from small-to-mid clients with annual

purchases below Rub 200 mn

Strong and stable base of “Blue-chip” clients, which includes

the largest oil & gas and energy companies in Russia

HMS Group may have different composition of Top-7

customers for each period, depending on the particular

project mix

Prevailing installed base in the key segments ensures

recurring business growth

During 2014, HMS Group sold products and services to

almost 3,000 unique clients, including VOIC, trade

companies, dealers and individual entrepreneurs

During previous several years, HMS Group has been

actively developing its exposure to gas up- and

midstream projects of Gazprom and other Russian gas

producers through development of product mix and

quality excellence

All 4 HMS Group’s business segments are well-

positioned to benefit from their expected participation

in Gazprom’s “Eastern gas program” as well as in other

gas up- and midstream projects

2014 FY 2013 FY chg, yoyDistribution & transportation expenses 1,237 1,352 -9%

% of revenue 3.8% 4.2%Labour costs 462 468 -1%

% of revenue 1.4% 1.4%Transport expenses 431 549 -22%

% of revenue 1.3% 1.7%Lease expenses 70 60 18%

% of revenue 0.2% 0.2%Other expenses 273 275 -1%

% of revenue 0.8% 0.8%

Distribution and transportation costs showed a decrease of 9% yoy

Transport expenses contracted by 22% yoy

Labour costs were almost flat yoy in absolute numbers and as apercentage of revenue

Other expenses held a constant share of revenue

General & administrative costs grew by 12% yoy primary due to:

5% yoy growth in labour costs, and

Increased expenses for changes of provision for impairment of accounts receivable

2014 FY 2013 FY chg, yoyCost of sales 23,511 23,373 1%

% of revenue 72.7% 72.2%Supplies and raw materials 11,238 10,567 6%

% of revenue 34.7% 32.7%Labour costs 5,677 5,489 3%

% of revenue 17.5% 17.0%Cost of goods sold 2,162 2,799 -23%

% of revenue 6.7% 8.6%Other expenses 4,435 4,518 -2%

% of revenue 13.7% 14.0%

Cost analysis

7

Cost of sales Comments

Distribution & transportation expenses

2014 FY 2013 FY chg, yoy

General & administrative expenses 4,340 3,860 12%% of revenue 13.4% 11.9%

Labour costs 2,616 2,482 5%% of revenue 8.1% 7.7%

Provision for impairment of receivables 277 99 181%% of revenue 0.9% 0.3%

Audit and consultancy 229 140 64%% of revenue 0.7% 0.4%

Other expenses 1,218 1,140 7%% of revenue 3.8% 3.5%

General & administrative expenses

Cost of sales increased by 1% yoy:

Supplies and raw materials increased by 6% yoy, and cost of goodssold dropped by 23% yoy, thus their combined contribution to thecost of sales stayed flat and accounted for 41% as a percentage ofrevenue

Labour costs grew by 3% yoy to Rub 5,677 mn


6,0296,751

5,198

509

2,298

176 1,345

6,836

WC 2011 WC 2012 WC 2013 Inventorieschange

Receivableschange &other adj.

Depositschange

Payables &other adj.

WC 2014

Cash flow performance, Rub mn 2014 FY 2013 FY Change yoy

Operating cash flow 960 4,523 -79%

Investing cash flow -1,077 -2,375 -55%

Free cash flow (FCF) -118 2,148 -105%

Financing cash flow 2,996 -1,918 -256%

Cash and cash equivalents 4,535 1,584 186%

Comments Working capital 2013-2014

Cash flow performance, Rub mn Capital expenditures2 2013-2014

Working capital1 grew because of realization of large contracts both in absolute figures and as a share of revenue

Net working capital increase affected cash flow from operating activities, which declined to Rub 1 bn vs. Rub 4.5 bn last year

Free cash outflow dropped to Rub -118 mn

Due to current economic downturn organic capex2 was reduced by 21% yoy, but still HMS Groups is realizing large projects for KKM’s modernization and development of manufacture competences for high capacity oil transfer pumps and nuclear pumps in Russia

Depreciation and amortization increased primarily due to hike in amortization expenses on patents and project documentation (NIITK acquired in 2013) and growth of depreciation expenses on plant and equipment (complete modernization of HMS Livgidromash’s foundry), which in the whole gave 95% of total D&A raise

CAPEX & Working Capital



81Working capital formula - see slide 192 Capex = Organic capex = Purchase of PPE + Purchase of intangible assets


16%of revenue

2013

21%of revenue

2014

1,553 1,2231,341 1,482

1.2x

0.8x

2013 FY 2014 FY

Organic capex, Rub mn Depreciation & amortization, Rub mn Capex to D&A ratio, x

22%of revenue

2011

21%of revenue

2012

2,247

7,359

2,681

3,478

2015F 2016F 2017F 2018F

Debt to be repaid, Rub mn Undrawn credit lines with maturity more than 12 months

3,413 4,551 4,288 4,809 12,064 11,102 12,432

2.08

2.51

1.22

0.87

1.98

2.12 2.36

2008 2009 2010 2011 2012 2013 2014

Net debt, Rub mn Net debt to EBITDA LTM

9

Total debt increased by 34% yoy to Rub 16,967 mn not only due to required working capital, related to execution of large projects, since it was accompanied by a slight 12% yoy increase of net debt. The other reason was a drawdown of available credit lines to have sufficient “liquidity cushion” for redemption of HMS’ ruble bonds matured in Feb 2015

Net Debt-to-EBITDA LTM ratio increased to 2.36x from 2.12x last year, but within 2014 the ratio demonstrated high volatility

HMS’ weighted average interest rate was 11% for all loans, including FX-denominated, and 12% for Rub-denominated only, as of 1 April, 2015

In Dec 2014, Standard & Poor’s Rating Services lowered the long-term corporate rating of HMS from “B” to “B-“ and placed it on CreditWatch negative. Also, it downgraded Rub 5.1 bn notes to “CCC+” and placed them on CreditWatch negative. According to S&P, the downgrade reflected their discomfort about Rub 2.1 bn unsecured bond repayment in Feb 2015. At the end of 2014, HMS Group decided to withdraw S&P credit rating

In Jan 2015, HMS made ahead-of-schedule redemption of its ruble bonds

In Apr 2015, HMS Group signed an agreement with UniCredit Bank for 3-year non-revolving credit line worth Rub 1.5 bn in total

Stable net debt is influenced by working capital volatility only 9

Long-term debt64.4%

Comments

Comfortable repayment schedule

Cash1,231

Source: Company data as of 1 April, 2015

Financial position

Source: Company data Source: Company data as of 1 April, 2015

Maturity payment of Rub 3bn bonds 03

Available liquidity Rub 1.2bn

Net debt-to-EBITDA LTM ratio

Floating rate0.1%

Fixed rate99.9%

Short-term debt35.6%

Borrowings in Rub86.4%

Euro 12.9%

Others 0.7%

Low currency and maturity risks

Financial results

Business & Outlook

Appendix

1,8373,807

1,4242,101

1,316

1,559

1,8393,947

2,168

6,630

11,809

13,963

20,679

13,93515,592

33,086 34,814 34,705

2012 FY 2013 FY 2014 FY

Industrial pumps 20,679 13,935 15,592

Oil & gas equipment 6,630 11,809 13,963

Compressors 1,839 3,947 2,168

EPC: Construction 2,101 1,316 1,559

EPC: Engineering 1,837 3,807 1,424

Total, where 33,086 34,814 34,705

standard equipment 24,628 26,548 26,702

integrated solutions 8,458 8,266 8,003

1,133 2,086 1,022744

1,2181,671

1,961 2,289

2,131 3,036

7,873 11,610

12,089

8,867

11,076 18,963

22,333

27,510

2012 FY 2013 FY 2014 FY

Industrial pumps 12,089 8,867 11,076

Oil & gas equipment 3,036 7,873 11,610

Compressors 1,961 2,289 2,131

EPC: Construction 744 1,218 1,671

EPC: Engineering 1,133 2,086 1,022

Total, where 18,963 22,333 27,510

standard equipment 14,647 13,777 18,906

integrated solutions 4,316 8,556 8,604

-27% 25%

159% 47%

17% -7%

64% 37%

84% -51%

18% 23%

-6% 37%

98% 1%

Backlog & Order intake

Source: Company data, Management accounts

11

Backlog for 2012-2014 FY Order intake for 2012-2014 FY

Backlog for 2014 is the largest for the last 3 comparable periods

-33% 12%

78% 18%

115% -45%

-37% 18%

107% -63%

5% 0%

8% 1%

-2% -3%

Industrial pumps of Rub 11,076 mn includeExport pump sales outside former USSRRub 3,641 mn

Backlog of KKM (Compressors)In accordance with a methodology, backlog by segments is composed without intersegment sales to exclude duplications. Therefore, when considering the compressors unit as a stand-alone, it should be increased by intragroup sales by more than Rub 1 bn so it totals more than Rub 3.1 bn, supporting substantial increase of KKM’s revenue and EBITDA in 2015.If we analyze current business situation with KKM, then we can see that:- 1Q 2015 RAS revenue – Rub 0.5 bn- 1Q 2015 RAS backlog with revenue to be recognized in 2015 – Rub 2.2 bn. Herein, please note that RAS and IFRS can differ but in this case we believe that

the difference would not be material- Intragroup contract – Rub 1 bn- In April 2015 KKM has a number of won tenders and signed contracts worth more than Rub 0.4 bnSimple addition of the above figures gives us Rub 4.1 bn and suggests that KKM in 2015 will have a significant growth in revenue

Export salesEmergence in the backlog export sales outside former Soviet Union (Iraq, China, Europe, etc.) reflects the company’s successful entrance to new markets and geographical diversification of its sales

Summary

12

Slowdown in the Russian economy began in 2013, and HMS Group faced problems with its construction sub-segment which generated

losses. The management fixed them by selling one of its construction companies, SKMN, and restructuring the second one, TGS. As a

result, in 2014 EPC segment, including construction, returned to positive territory

Challenging market conditions in 2014 were further complicated by international sanctions, impacting on the accessibility to credit

resources and their borrowing costs, the depreciated ruble and the more than the threefold raise of the key rate

In 2014 HMS’ management faced another challenge, related to compressor segment and caused by periodic volatility of KKM’s orders

portfolio. The strong backlog of KKM demonstrates that past problems of the compressors segment were temporary and have been

remedied in general already

Against all the odds, HMS Group showed stable revenue with a higher EBITDA and EBITDA margin, an increased backlog and a solid

order intake

2015 outlook for the Russian economy remains unchanged and there are still high uncertainties regarding the long-term trends, but

HMS’ management is positive about 2015 prospects based on current record backlog

From strategic point of view, the company put in great efforts on synergetic diversification by:

Clients, where Gazprom became one of the largest clients

Segments and markets – entrance into a new market of gas projects

Geography – export portfolio reached Rub 3.6 bn or 1/3 of pumps backlog

which should enhance HMS’ resilience to crisis and boost the company’s development, mitigating risks of client and geographical

concentration.

Contacts

13

Company address:7 Chayanova Str.Moscow 125047Russia

Capital marketsPhone +7 (495) [email protected]://grouphms.com/shareholders_and_investors/

HMS Hydraulic Machines & Systems Group Plc is listed on the London Stock Exchange (Main market, IOB):

Identifier Number Number of shares outstandingISIN US40425X2099 117,163,427Ticker HMSGBloomberg HMSG LIReuters HMSGq.L

mailto:[email protected]

http://grouphms.com/shareholders_and_investors/

Financial results

Business & Outlook

Appendix

In 2008-2009, machine-building segments of HMS Group weren’t materially adversely affected by the crisis. Construction segment was damaged because it has different nature of business

Regular business with more than 3 thousand unique clients, which generates the main portion of EBITDA, is relatively resilient to crisis

Risk that a client cancels a large-scale project is lower due to several factors:

Our equipment is installed at the final stage of a project, and for clients it’s more cost-efficient to complete the project than to freeze it or postpone its launching

Equipment costs - c.2-3% of total project capex, so rejection of our equipment doesn’t bring any material savings

Mission critical nature of our equipment - it’s impossible to transport liquids without pumps, and it’s impossible to launch a project without our equipment

In 2008, HMS Group started its first large-scale project Vankor and the works were not frozen during the 2008-2009 crisis. Moreover, the company received Rub 1 bn advance from the client

In 2008-2009, Net debt-to-EBITDA ratio increased from 2.08x to 2.51x, but then in 2010 dipped down to 1.22x

From debt perspective, situation in 2008 was more challenging than the current one, as that year 100% debt was short-term and weighted average interest rate equaled 18.5%

According to HMS’ current backlog, 2015 revenue prospects seem strong

4,578

6,308

4,126 4,166

5,204

4,189

822 1,012529

786255 33

18.0%

16.0% 12.8%

18.9%

4.9%

0.8%

2008 2009 2008 2009 2008 2009

Revenue, Rub mn EBITDA, Rub mn EBITDA margin

100%

86%

0%

14%

2008

2014

Rub loans FX loans

64%

100%

36%

2008

2014

Long-term debt Short-term debt

3,413 4,551 11,102 12,432

2.08

2.51 2.12

2.36

2008 2009 2013 2014

Net debt, Rub mn

HMS resilience to crisis based on 2008-09 impact on its results

15

Debt position 2008-2009 vs. 2013-2014 Revenue & EBITDA breakdown by segments in 2008-2009

Comments

Industrial pumps Oil & gas equipment Construction

1 Apr 2009Wtd av interest rate

18.5%

1 Apr 2015Wtd av interest rate

11.0%

Source: Company dataSource: Company data as of 1 April 2015

Consolidated statement of Financial position 2014 FY

Consolidated statement of Profit or Loss 2014 FY

Consolidated statement of Cash flows 2014 FY

Calculations and formulas

19

All figures in millions of Russian Rubles, unless otherwise stated

Management of the Group assesses the performance of operating segments based on a measure of adjusted EBITDA, which is derived from the consolidated financial statements prepared in accordance with IFRS

EBITDA is defined as operating profit/loss from continuing operations adjusted for other operating income/expenses, depreciation and amortisation, impairment of assets, excess of fair value of net assets acquired over the cost of acquisition, defined benefits scheme expense and provisions (including provision for obsolete inventory, provision for impairment of accounts receivable, unused vacation allowance, warranty provision, provision for legal claims, tax provision and other provisions). This measurement basis, therefore, excludes the effects of a number of non-recurring income and expenses on the results of the operating segments

EBIT is calculated as Gross profit minus Distribution & transportation expenses minus General & administrative expenses minus Other operating expenses

Total debt is calculated as Long-term borrowings plus Short-term borrowings

Net debt is calculated as Total debt minus Cash & cash equivalents at the end of the period

Working capital is calculated as Inventories plus Trade and other receivables, excluding Short-term loans issued, Bank deposits and Promissorynotes receivable, plus Current income tax receivable minus Trade and other payables minus Short-term provisions for liabilities and charges minus Current income tax payable minus Other taxes payable

ROCE is calculated as EBIT LTM divided by Average Capital Employed (Total debt + Total equity)

ROE is calculated as Total equity period average divided by Profit for the period

Backlog is calculated as the preceding backlog plus new or additional customer orders booked during the reporting period, less amounts of contract value booked as revenue under ‘‘Russian GAAP’’ on an unconsolidated basis under the relevant contracts, plus or minus adjustments made in the judgment of the Group’s management. The Group may also make certain adjustments to bookings to reflect amendment, expiry or termination of contracts, cancellation of orders, changes in price terms under contracts or orders, or other factors affecting the amount of potential revenue which the Group believes may be recognized under such contracts. The Group’s backlog estimates are not an indication of potential revenues. Actual revenues and other measures of financial performance under IFRS may differ materially from any estimate of backlog, and changes in backlog between periods may have limited or no correlation to changes in revenue or any other measure of financial performance under IFRS

Notes to the presentation and formulas used for some figures’ calculations

The information contained herein has been prepared using information available to HMS Group (“HMS” or “Group” or

“Company”) at the time of preparation of the presentation. External or other factors may have impacted on the

business of HMS Group and the content of this presentation, since its preparation. In addition all relevant information

about HMS Group may not be included in this presentation. No representation or warranty, expressed or implied, is

made as to the accuracy, completeness or reliability of the information.

Any forward looking information herein has been prepared on the basis of a number of assumptions which may prove

to be incorrect. Forward looking statements, by the nature, involve risk and uncertainty and HMS Group cautions that

actual results may differ materially from those expressed or implied in such statements. Reference should be made to

the most recent Annual Report for a description of the major risk factors. This presentation should not be relied upon

as a recommendation or forecast by HMS Group, which does not undertake an obligation to release any revision to

these statements.

This presentation does not constitute or form part of any advertisement of securities, any offer or invitation to sell or

issue or any solicitation of any offer to purchase or subscribe for, any shares in HMS Group, nor shall it or any part of

it nor the fact of its presentation or distribution form the basis of, or be relied on in connection with, any contract or

investment decision.

Disclaimer

20

hms group financial results · revenue 32,351 32,358 0% gross profit 8,840 8,985 -2% ebitda* 5,272...

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