17.12.2013

HMS Group announces interim management statement and financial highlights for the nine months ended September 30, 2013

HMS Group announces interim management statement and financial highlights for the nine months ended September 30, 2013

Moscow, Russia December 17, 2013 HMS Group plc (the Group) (LSE: HMSG), the leading pump and compressor manufacturer and provider of flow control solutions and related services in Russia and the CIS, today announces its interim management statement and financial highlights for the nine months ended September 30, 2013. The financial data is based on management accounts only and hasnt been reviewed by external auditors.

9M 2013 HIGHLIGHTS


Backlog decreased by 24% year-on-year to Rub 18,013 million and order intake was down 22% year-on-year to Rub 22,763 million for 9m 2013 due to lack of large-scale projects

Revenue increased by 2% year-on-year to Rub 24,066 million driven by revenue growth in industrial pumps and compressors business segments

EBITDA[1] totaled Rub 3,658 million, down 9% year-on-year; EBITDA margin was 15.2% compared to 17.1% for 9m 2012

Operating profit reached Rub 1,993 million, down 28% year-on-year; operating margin stood at 8.3%

Operating profit adj² decreased by 13% yoy to Rub 2,421 million

Profit for the period totaled Rub 427 million, 71% lower than for 9m 2012; earnings per share (EPS) were Rub 4.18

Profit for the period² adj. was Rub 855 million, down 43% yoy

Net debt grew by 19% year-on-year to Rub 15,162 million, resulting in Net debt-to-EBITDA (LTM) ratio at 2.6x

Return on capital employed (ROCE) LTM³ was 14%


Taking into account lack of large-scale projects that used to deliver a significant contribution to HMS Groups performance, we consider the financial results of the Company for nine months 2013 to be decent. We experienced a 2% growth in revenue to Rub 24 billion against last year, while EBITDA was 9% lower at Rub 3.7 billion.

All our business segments, excluding construction, developed in line with the business plan. Construction sub-segment continued to show disappointing EBITDA-dilutive results in the 3Q 2013. Due to deteriorating environment on the construction market, we made an impairment of our construction assets and posted ca. Rub 1 billion loss in the income statement. At the same time, our compressor business segment supported the Groups performance by delivering impressive results being one year within the Group.

Looking forward, we are confident in bright prospects for our core businesses for the rest of 2013 and beyond despite ongoing uncertainty with timing for a number of targeted projects. HMS strong fundamentals ensure that the long-term outlook for the Company remains positive backed by anticipated investment in oil and gas industry in Russia and promising outlook for our new compressor business.

OPERATING REVIEW

The Groups backlog for 9 months 2013 amounted to Rub 18,012 million, down by 24% year-on-year. A significant part of the backlog for 9 months 2012 was attributable to a lucrative ESPO project. Excluding ESPO, the backlog decreased by 11% year-on-year. The key reason for the decline was lack of new large-scale projects and purposeful refusal from low-margin contracts in construction. The backlog in compressors and oil and gas business segments also experienced a minor decrease in the reporting period. Meanwhile, the industrial pumps (excl. ESPO) business segment grew by 4% year-on-year to almost Rub 7 billion. Negative dynamics in the EPC business segment was caused by a 64% drop in the backlog of the construction sub-segment, while project and design sub-segment was able to increase its backlog by Rub 1 bn.

Decline in the order intake[2] by 22% is explained by the same reasons as those for backlog dynamics.

GROUP PERFORMANCE

Solid performance of industrial pumps and compressors business segments in the reporting period led to increase of the Groups revenue by 2% year-on-year to Rub 24,066 million. EBITDA declined 9% year-on-year to Rub 3,658 million reflecting lack of high-margin projects and poor performance of construction business sub-segment. As a result, EBITDA margin for 9 months 2013 stood at 15.2%.

Rub million

9m 2013

9m 2012

Change y-o-y

Total revenue

24,066

23,563

2%

EBITDA

3,658

4,021

(9)%

EBITDA margin

15.2%

17.1%

(187) bps

The Groups cost of sales, which traditionally account for over 70% of total revenue grew by 4% year-on-year from Rub 16,831 million to Rub 17,423 million driven by full 9 months consolidation of newly acquired KKM and Apollo in 2013 compared to their partial consolidation for 9 months 2012.

Rub million

9m 2013

% of revenue

9m 2012

% of revenue

Change

y-o-y

Total cost of sales

17,423

72%

16,831

71%

4%

Supplies and raw materials

8,239

34%

7,779

33%

6%

Labour costs

4,363

18%

4,252

18%

3%

Cost of goods sold

1,581

7%

1,875

8%

(16)%

Other expenses

3,241

14%

2,925

12%

11%

Key components of cost of sales supplies and raw materials combined with cost of goods sold accounted for 41% of revenue, the same percentage as in the previous year.

Labour costs amounted to Rub 4,363 million, up 3% year-on-year due to consolidation of KKM and Apollo. As a percentage of revenue, they remained flat year-on-year.

Distribution and transportation expenses were up 7% year-on-year, achieving Rub 963 million for 9 months 2013. As a percentage of revenue, they comprised 4% in both periods.

General and administrative expenses totaled to Rub 3,089 million for 9 months 2013. The increase in both absolute terms and as a percentage of revenue was primarily caused by growth in provision for impairment of accounts receivable made in the construction assets. Labour costs remained almost flat year-on-year. Tax and duties increased due to payment of local tax under Turkmenia project.

For 9 months 2013, the Group posted impairment of the construction assets of Rub 972 million that negatively affected the Groups operating profit. It declined by 28% year-on-year to Rub 1,993 million. Excluding the impairment and extra gain from the bargain M&A recorded in 1H 2013, the Groups operating profit would decrease by 13% year-on-year.

Interest expenses increased by 34% to Rub 1,139 million compared to Rub 848 million for 9 months 2012 caused by the Groups debt growth. An average interest rate was 9.3% as of December 1, 2013 compared to 9.9% as of December 1, 2012.

For 9 months 2013, the Group accrued an income tax expense of Rub 388 million. Effective tax rate grew to 48% for 9 months 2013 from 25% for 9 months 2012 mainly due to non-taxable effect the following items: impairment of construction assets and gain from the bargain M&A deals

The Groups net profit achieved Rub 427 million, down 71% year-on-year. Net profit excluding paper loss and profit would amount to 855 million, down 43% year-on-year.

SEGMENT PERFORMANCE

Industrial pumps business segment


The industrial pumps business segment designs, engineers, manufactures and supplies a diverse range of pumps and pump-based integrated solutions to customers in the oil and gas, power generation and water utilities sectors in Russia, the CIS and internationally. The business segments principal products include customized pumps and integrated solution as well as pumps built to standard specifications, It also provides aftermarket maintenance and repair services and other support for its products.

Rub million

9m 2013

9m 2012

Change y-o-y

Revenue

12,405

11,088

12%

EBITDA

2,479

2,278

9%

EBITDA margin

20.0%

20.5%

(56) bps

The industrial pumps business segments revenue grew by 12% year-on-year to Rub 12,405 million for 9 months 2013 from Rub 11,088 million for 9 months 2012, while EBITDA increased by 9% year-on-year to Rub 2,479 million. EBITDA margin stood at healthy 20%.

The segments performance in the reporting period was supported by ESPO (+ Rub 962 million), Zapolarye-Purpe (+ Rub 360 million) and Turkmenistan (+ Rub 908 million) projects. Excluding these projects, industrial pumps enjoyed a 16% growth in revenue and 30% in EBITDA year-on-year backed on stable inflow of orders for standard and customized pumps.

Oil and Gas equipment Business Segment


The oil and gas equipment business segment manufactures, installs and commissions modular pumping stations, automated metering equipment, oil, gas and water processing and preparation units and other equipment and systems for use primarily in oil extraction and transportation. The segments core products are equipment packages and systems installed inside a self-contained, free-standing structure which can be transported on trailers and delivered to and installed on the customers site as a modular but fully integrated part of the customers technological process.

Rub million

9m 2013

9m 2012

Change y-o-y

Revenue

5,860

6,350

(8)%

EBITDA

715

1,257

(43)%

EBITDA margin

12.2%

19.8%

(759) bps

Revenue in the oil and gas equipment business declined by 8% year-on-year for 9 months 2013 to Rub 5,860 million, compared to Rub 6,350 million for 9 months 2012. The segments EBITDA dropped by 43% year-on-year to Rub 715 million in the reporting period versus Rub 1,257 million for 9 months 2012. Last year the segment implemented a lucrative Vankor project which contributed over Rub 2 billion to its revenue for 9 months 2012. Excluding Vankor, the segments revenue grew by 56% year-on-year. This year the Oil & Gas equipment business segment served exclusively small and mid-sized orders for standard equipment. Achieved EBITDA margin at 12.2% for 9 months 2013 was an average margin for that type of business activity.

Compressors Business Segment


The compressors business segment designs, engineers, manufactures and supplies a diverse range of compressors and compressor-based solutions, including compressor units and compressor stations, to customers in the oil and gas, metals and mining and other basic industries in Russia. The business segments principal products include customized compressors, series-produced compressors built to standard specifications, and compressor-based integrated solutions.

Rub million

9m 2013

9m 2012

Change y-o-y

Revenue

2,717

493

451%

EBITDA

250

56

346%

EBITDA margin

9.2%

11.4%

(216)bps

The results of the newly-established Compressors business segment started to be consolidated within the Group since 3Q 2012. The segments results were mostly the results of the compressor manufacturer Kazankompressormash (KKM) as an impact of R&D center NIITK bought in 3Q 2013 was immaterial. The results for 9 months 2012 are the results of KKM for 3Q 2012 which makes 9m/9m comparison distorted.

Comparison 3Q 2012 and 3Q 2013 results demonstrate visible improvement: revenue more than doubled achieving record high in 3Q 2013 over Rub 1 billion (+126%), while EBITDA grew from Rub 56 million to Rub 136 million (+143%). Solid performance of the Compressors business segment is a direct result of several new material contracts signed by KKM.

The Group expects the Compressors business segment to generate higher profits in future benefitting from further synergy with NIITK and a growing share of integrated solutions in the segments portfolio.

Engineering, Procurement and Construction (EPC) Business Segment


The engineering, procurement and construction (EPC) business segment provides design and engineering services, project management and construction works for projects for customers in the oil upstream and midstream, gas upstream and water utilities sectors.

Rub million

9m 2013

9m 2012

Change y-o-y

Revenue EPC

3,079

5,632

(45)%

Project and Design

1,539

1,588

(3)%

Construction

1,540

4,044

(62)%

EBITDA EPC

(183)

250

(173)%

Project and Design

206

14

1,371%

Construction

(389)

236

(265) bps

EBITDA margin EPC

(6.0)%

4.4%

(1,038) bps

Project and Design

13%

1%

1,250 bps

Construction

-25%

6%

(3,110) bps

EPC business segment delivered weak results for 9 months 2013 with revenue declined to Rub 3,079 million and EBITDA dropped to Rub -183 million.

The segments lackluster performance was attributable to the construction sub-segment which generated negative EBITDA (Rub -389 million) in the reporting period. Revenue in construction sub-segment declined more than two times from Rub 4,044 to Rub 1,540 million. EBITDA margin growth in project and design sub-segment to 14.2% for 9 months 2013 was not able to offset decline in EBITDA margin in construction.

FINANCIAL REVIEW

CASH FLOWS PERFORMANCE

Rub million

9m 2013

9m 2012

Change y-o-y

Net cash (used in)/from operating activities

(480)

1,902

(125)%

Net cash used in investing activities

(1,489)

(7,868)

(81)%

Net cash used from financing activities

1,656

5,609

(70)%

Free cash flow (FCF)

(1,969)

(5,969)

(67)%

Operating cash flow for 9 months 2013 turned to negative Rub 480 million from positive 9 months net cash flow of Rub 1,902 as a result of changes in working capital.

Working capital grew by 42% year-on-year to Rub 9,084 and comprised 27% of total revenue taken for the last 12 months versus 21% for the previous period. Key factors beyond working capital growth were increase in receivables (Rub 1.2 bn) mainly due to acquired KKM and Apollo and decrease in payables (Rub -1.6 billion) thanks to a received large advance payment in 1Q 2012 for the ESPO contract and further execution of the project.

Outflow from investing activity decreased by 70% year-on-year to Rub -1.5 billion. Capital expenditures were Rub 1.1 billion for 9 months 2013, down 5%. The biggest portion of these expenditures was attributable to acquisition of NIITK.

The decline in net cash from financing activity to Rub 1,656 million rubles was a result of high base in the previous period attributable to borrowings acquired for M&A financing.

Free cash flow totaled Rub -2 billion for 9 months 2013.

DEBT AND LIQUIDITY POSITION

Rub million

9m 2013

9m 2012

Change y-o-y

Total debt

16,202

13,967

16%

Long-term debt

11,635

11,928

-3%

Short-term debt

4,567

2,039

124%

Cash and cash equivalents at the end of the period

1,040

1,209

(14)%

Net Debt

15,162

12,758

19%

Net Debt/LTM EBITDA

2.58

2.49

4%

The Groups total debt grew by 16% year-on-year to Rub 16,202 million compared to Rub 13,967 million in the previous period. Over 80% of the total debt was represented by long-term facilities. Debt expansion was caused primarily by growing working capital needs as well as acquisition of NIITK.

Net debt increased to Rub 15,162 million, while net debt-to-EBITDA taken for the last 12 months ratio amounted to 2.58.

The Groups cash position as of September 30, 2013 was Rub 1,040 million compared to Rub 1,209 million as of September 30, 2012.

Available credit lines with maturity in 2015 and further Rub 2.8 billion.

Conference call information

HMS Groups management will host a conference call today at 9 am (New York) / 1 pm (London time) / 3 pm (CEST) / 5 pm (Moscow Time) to present and discuss the nine months 2013 results.

To participate in the audio meeting, please dial in:

Russia Local: 7 495 580 9532

UK Local: 44 (0)20 7190 1596

UK Toll Free: 0800 358 5256

US Local: 1 480 629 9822

US Toll Free: 1 877 941 6013

Conference ID: 4640049

Title: HMS Group 9 months 2013 IFRS results

Webcast Meeting:

To access the live event, clink on the link:

http://www.audio-webcast.com/cgi-bin/visitors.ssp?fn=visitor&id=2100

The managements slide presentation will be published at the HMS Groups website in the investor relations section during the day of the event. A replay of the conference call in the MP3 format as well as the link for the web-cast will be available on the Companys website www.grouphms.com following the event.

Please, join in 5-10 minutes prior to the scheduled start time. Pre-registration is available.

For further information, please contact:

Vera Timoshenko

Head of Investor Relations

Tel: +7 (495) 730-66-01 x 1302 ir@hms.ru

Nozima Karimova

Head of Press Service

Tel: Tel: +7 (495) 730-66-01 karimova@hms.ru

HMS Group is the leading pump and compressor manufacturer, as well as provider of flow control solutions and related services to the oil and gas, nuclear and thermal power generation and water utilities sectors in Russia and the CIS. HMS Groups products are mission-critical elements of projects across a diverse range of industries. It has participated in a number of large-scale infrastructure projects in Russia, including providing pumps and modular equipment to the Vankor oil field and pumping stations on recent trunk pipelines projects linking Russias core oil producing areas to export ports on the Pacific Ocean and Baltic Sea. HMS Groups global depositary receipts (GDRs) are listed under the symbol HMSG on the London Stock Exchange.

The forward-looking statements contained herein are based upon various assumptions, many of which are based, in turn, upon further assumptions, which may include without limitation, the HMS Groups examination of historical operating trends, data contained in the HMS Groups records and other data available from third parties. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The HMS Group does not intend to provide any representation or warranty and does not assume any obligation to update any forward-looking statement contained herein.



[1]EBITDA is defined as operating profit/loss adjusted for other income/expenses, depreciation and amortization, impairment of assets, provision for obsolete inventory, provision for impairment of accounts receivable, unused vacation allowance, defined benefits scheme expenses, warranty provisions, provision for legal claims, provision for VAT and other taxes receivable, other provisions, excess of fair value of net assets acquired over the cost of acquisition. This measurement basis excludes the effects of non-recurring income and expenses on the results of the operating segments.

²Figures are adjusted to impairment of assets and excess of fair value of net assets acquired over the cost of acquisition

³ROCE is calculated as EBIT (LTM) divided by average total debt plus average equity

[2] Under management accounts