hms group investor presentation june 2011
DESCRIPTION
This presentation was prepared for meetings with investors in one-on-one format within Renaissance Capital conference, that took place in Moscow, Russia, on 27-28 June 2011TRANSCRIPT
HMS Group Investor Presentation
June 2011
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
2
Agenda
WHO WE ARE 4
HMS at a Glance 5
History of Growth: Industry Consolidation 6
Shareholder Structure and Corporate Governance 7
FINANCIAL PERFORMANCE IN 2010 & 1Q 2011 8
Financial Performance for 2010 9
EBITDA Development in 2010 10
Revenue & EBITDA Contribution by Segments 2010 11
Financial Highlights for 1Q 2011 12
EBITDA Development in 1Q 2011 13
Revenue & EBITDA Contribution by Segments 1Q 2011 14
CAPEX & Working Capital in 1Q 2011 15
2011 & 2012 BUSINESS UPDATE & OUTLOOK 16
HMS is the Leader on Growing Markets 17
Backlog Analysis 18
Demand Shifts to Integrated Solutions 19
Selected End-market Projects for Mid-term 20
Sources of Best-in-class Margins & Growth 21
CONTACTS 22
APPENDIX 23
3
WHO WE ARE
4
Key investment highlights Key financial indicators for 2005-2010
Attractive industry fundamentals: impressive prospects of oil & gas, nuclear and thermal power and water sectors in Russia and the CIS
The leading provider of flow control solutions in Russia and the CIS, including high-capacity pump systems up to 12 MW
Advanced R&D capabilities: basis for high-margin & sustainable performance and growth
Diversified and well-established customer base with more than 4,000 clients
Operational and product quality excellence
History of resilient financial growth and strong backlog
Strong management team: company founders and top professionals
HMS at a Glance
Notes: Hereinafter “EBITDA” read as “EBITDA adjusted”, “EBITDA margin” read as “EBITDA adjusted margin” and “Net Income” read as “Profit for the period/year”
Source: Company data
Industrial pumps
Revenue Rub 4,427 mln
EBITDA adj. Rub 1,285 mln
Modular equipment
Revenue Rub 1,148 mln
EBITDA adj. Rub 143 mln
EPC
Revenue Rub 1,452 mln
EBITDA adj. Rub 150 mln
Revenue Rub 7,051 mln EBITDA adj. Rub 1,588 mln
New photo
Pump station of Baltic pipeline system, Transneft Oilfield Pump Station 2, Vankor oilfield, Rosneft Oil Pump Station “Tayezhnaya”, Transneft
Profit for the period Rub 991 mln
4,498
6,724
13,399 14,046
14,772
23,070
744 830 1,423 1,644 1,890
3,519
16.5%
12.3%
10.6%
11.7%
12.8%
15.3%
2005 2006 2007 2008 2009 2010
Revenue, Rub mn EBITDA, Rub mn EBITDA margin, %
* 1Q 2011 Key Financials
* * *
5
2007–2008
2003
2009–Today
Oil and gas production Oil transportation Water utilities
2004–2006
1993–2002
EPC Modular Equipment Design and Manufacturing
Pump Design and
Manufacturing Pump Trading
Construction Modular Equipment Design and Manufacturing
Pump Design and
Manufacturing Pump Trading
Modular Equipment Design and Manufacturing
Pump Design and
Manufacturing Pump Trading
Pump Design and
Manufacturing Pump Trading
Pump Trading
Power generation
History of Growth: Industry Consolidation
From pumps to integrated solutions
6
Vladimir Lukyanenko Member of the Board Non-executive Director
Artem Molchanov Member of the Board
Managing Director (CEO)
Shareholder Structure and Corporate Governance
The Board is comprised of professionals with
significant experience in pump and oil and gas
industries
It includes founders, who have led HMS since its
inception
HMS is the core business of the largest
shareholders
Long-term commitment to the business from
shareholders
Source: Company data
Board of Directors Comments
Shareholders Structure
Kirill Molchanov Member of the Board
First Deputy CEO (CFO)
German Tsoy Chairman of the Board Non-executive Director
Yury Skrynnik Member of the Board Director for Strategic
Marketing
Nikolay Yamburenko Member of the Board
Head of Industrial Pumps
Philippe Delpal Member of the Board
Independent Non-executive Director
Andreas Petrou Member of the Board Non-executive Director
Cyprus
Gary Yamamoto Member of the Board
Independent Non-executive Director
Founders
7
Free-float36.9%
Vladimir Lukyanenko
24.0%
Other managers
21.8%
German Tsoy17.3%
FINANCIAL PERFORMANCE IN 2010 & 1Q 2011
8
1,890
3,519
12.8%
15.3%
2009 2010
EBITDA margin
1,298
3,027
2009 2010
14,772
23,070
2009 2010
18.0%
36.2%
2009 2010
Revenue, 2009 vs 2010 Comments
Financial Performance for 2010
Source: Company data Source: Company data
Source: Company data
Total revenue up 56% yoy to Rub 23,070 mln
The growth reflects:
Significant increase in size of orders for pump-based integrated solutions
Completion of key projects
Consolidation of GTNG
Stable growth of revenue from ordinary contracts
Organic revenue growth of 47% yoy, excluding impact from GTNG
ROCE, 2009 vs 2010 EBIT, 2009 vs 2010
EBITDA, 2009 vs 2010
Net income, 2009 vs 2010
+133% +1,825bps
+56% +86%
Source: Company data
70
1,581
2009 2010
+2,156%
Source: Company data
9
75.3% 2.5% 9.1%
0.5% 12.6% 1.9% 0.7% 15.3%
Revenue Cost of sales Distribution andtransportexpenses
SG&A Other expenses Operating profit Depreciation &amortisation
Others EBITDA*
Key EBITDA drivers, 2009 vs 2010 (% of revenue)
Comments World HRC price performance in 2010
EBITDA Development in 2010
expenses
EBITDA increased by 86% yoy to Rub 3,519 mln due to:
Strong revenue growth in all business units
Focus on innovative high-margin contracts
Effective cost control
Consolidation of GTNG
EBITDA organic growth of 72% yoy
EBITDA margin increased to 15.3%
SG&A grew less than revenue due to economy of scale and
cost optimization strategy
Source: Company data
operating expenses
20.2bn vs 13.7bn in 2009 |+47.2% yoy revenue in 2010 +56.2% yoy
0
50,000
2009 2010
75.6% 3.3% 12.4%
1.5% 7.3% 2.3% 3.1% 12.8%
Revenue Cost of sales Distribution and transport expenses
General & Administrative
expenses
Other expenses Operating profit Depreciation & amortisation
Others EBITDA
Source: Bloomberg
22%
500
550
600
650
700
750
800
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
World hot rolled coil price index performance, $/tonne
10
Modular equipment:
Sales up 39% yoy, driven by demand from the major oil
companies to equip new oil fields and modernize existing
installed base of modular equipment
EBITDA decreased 24% yoy and EBITDA margin also down to
10.3% due to execution of low-margin contracts concluded in
2009
Highlights by core segments, 2009 vs 2010 Comments
Industrial pumps:
Sales up 70% yoy to Rub 10,712 mln, enjoying strong demand
for integrated pumping solutions primarily in oil transportation
and upstream
EBITDA grew by 134% yoy, and EBITDA margin rose to 22.1%,
primarily attributable to increasing share of contracts for pump-
based integration solutions
Revenue & EBITDA Contribution by Segments
Source: Company data
Industrial pumps
Modular equipment
EPC EPC:
Revenue growth of 46% yoy is primarily attributable to an impact of GTNG acquisition and entering the market of projects and design. Revenue growth, excluding an effect of acquisition, was c. 14% yoy
EBITDA increased significantly to Rub 550 mln, and EBITDA margin rose to 9.0%. Newly acquired GTNG added to EPC’s EBITDA Rub 271 mln
Such a significant EBITDA growth is primarily attributable to a low EBITDA base in 2009, caused by significant price pressure connected to investment cutbacks by oil companies
ebitda +1,548%
revenue +46%
ebitda -24%
revenue +39%
ebitda +134%
revenue +70%
6,308
10,712
1,012
2,367
16.0%
22.1%
2009 2010
Revenue, Rub mln EBITDA, Rub mln EBITDA margin, %
4,166
5,805
786 599
18.9%
10.3%
2009 2010
Revenue, Rub mln EBITDA, Rub mln EBITDA margin, %
4,189
6,135
33 550 0.8%
9.0%
2009 2010
Revenue, Rub mln EBITDA, Rub mln EBITDA margin, %
11
Significant yoy & qoq growth
Financial Highlights for 1Q 2011
Source: Company data
Rub, mln 1Q 2011 1Q 2010 chg, yoy 4Q 2010 chg, qoq
Revenue 7,051 3,835 +84% 6,912 +2%
Gross profit 2,072 774 +168% 1,845 +12%
EBITDA 1,588 431 +269% 1,268 +25%
Operating profit 1,378 117 +1,083% 883 +56%
Net income (loss) 991 (89) n/a 492 +101%
Total debt 2,688 5,629 -52% 4,648 -42%
Gross margin 29% 20% +919bps 27% +270bps
EBITDA margin 23% 11% +1,130bps 18% +417bps
Operating margin 20% 3% +1,651bps 13% +676bps
Net income margin 14% (2%) +1,638bps 7% +692bps
12
117 10
(210)
(4) (1)(89)
1,378
4
(133)
9
(267)
991
(400)
(200)
0
200
400
600
800
1,000
1,200
1,400
Operatingprofit
Financeincome
Financecosts
Share ofresults ofassociates
Income taxexpense
Netincome
1Q 2010 1Q 2011
70.6%
2.1% 6.4%
1.3% 19.5% 2.0% 1.0% 22.5%
Revenue Cost of sales Distribution &transportexpenses
General &administrative
expenses
Other expenses Operating profit Depreciation &amortisation
Others EBITDA*
expenses Source: Company data
operating expenses
operating expenses 5.7bn vs 3.7bn in 1Q’10 | +52.6% yoy revenue in 1Q’11 | +83.9% yoy
0
10,000
1Q 2010 1Q 2011
Net income drivers in 1Q’10 vs 10’11, Rub mln
EBITDA Development in 1Q 2011
Key EBITDA drivers in 1Q’10 vs 1Q’11, % of revenue
Comments
Source: Company data
EBITDA increased by 269% yoy to Rub 1,588 mln primarily due to:
Execution of large high-margin infrastructure contracts in oil transportation
Margins growth in other segments of a pump market
Consolidation of GTNG
Low EBITDA in 1Q 2010
Effective cost control by hedging of raw materials & supplies prices
Effective SG&A cost control and economy of scale
Higher-than-average profitability of construction contracts
As a result, EBITDA margin increased to 22.5%
Organic EBITDA, excluding consolidation of GTNG, grew by 244% yoy to Rub 1,481 mln
Net income grew to Rub 991 mln in 1Q 2011 compared to a net loss of Rub 89 mln in 1Q 2010 due to the growth of operating profit and reduction of finance costs
79.8%
4.0% 12.5%
0.7% 3.0%
2.1% 6.1%
11.2%
Revenue Cost of sales Distribution &
transport
expenses
General &
administrative
expenses
Other expenses Operating profit Depreciation &
amortisation
Other operating expenses, net &
non-monetary items
EBITDA
13
Modular equipment:
Revenue was down 7% yoy to Rub 1,148 mln, compared to Rub 1,235 mln in the corresponding quarter of 2010
EBITDA increased by 3% yoy to Rub 143 mln in 1Q 2011, compared to Rub 138 mln in 1Q 2010
EBITDA margin was up to 12.4%
These changes reflect average quarterly fluctuations
Highlights by core segments, Rub mln Comments
Industrial Pumps:
Revenue increased by 198% yoy and amounted to Rub 4,427 mln, primarily due to the execution of large-scale projects for the delivery of integrated pumping systems as well as a stable order intake of regular contracts
EBITDA up 446% yoy, mainly as a result of large high-margin contracts in oil transportation, growing profit margin for other types of pumping equipment, as well as a low EBITDA base in 1Q 2010
EBITDA margin grew to 29.0%
Revenue & EBITDA Contribution by Segments
Source: Company data
Industrial Pumps
Modular equipment
EPC EPC:
Revenue grew by 34% yoy to Rub 1,452 mln, primarily due to the consolidation of GTNG
EBITDA was up 119% yoy and totaled Rub 150 mln following the consolidation of GTNG
EBITDA margin increased to 10.3%
Organic revenue, excluding the impact of the GTNG acquisition, decreased by 15% yoy, and organic EBITDA was down by 37% yoy
1,488
4,427
235
1,285
15.8%
29.0%
1Q 2010 1Q 2011
Revenue, Rub mln EBITDA, Rub mln EBITDA margin, %
1,235 1,148
138 143
11.2%
12.4%
1Q 2010 1Q 2011
Revenue, Rub mln EBITDA, Rub mln EBITDA margin, %
1,086
1,452
69 150
6.3%
10.3%
1Q 2010 1Q 2011
Revenue, Rub mln EBITDA, Rub mln EBITDA margin, %
ebitda +446%
revenue +198%
ebitda +3%
revenue -7%
ebitda +119%
revenue +34%
14
Key highlights in 1Q‘10 vs 1Q’11 Working capital performance in 4Q’10 vs 1Q’11
Capital expenditures in 1Q’10 vs 1Q’11 Debt position in 1Q’10 vs 1Q’11
CAPEX & Working Capital in 1Q 2011
Source: Company data Source: Company data
total debt -52%
cash -77%
Source: Company data
Rub, mln 1Q 2011 1Q 2010 chg, %
Operating cash flow (840) 1,986 -
Investment cash flow (241) (50) -
Free cash flow (1,081) 1,936 -
Financing cash flow 1,415 264 -
Long-term debt 2,132 3,698 (42%)
Short-term debt 556 1,930 (71%)
Net debt 2,005 2,669 (25%)
Total debt to Equity ratio 0.31 2.66 -
Total debt to EBITDA ratio 1.69 13.07 -
HMS’ internal covenant for Net debt/ EBITDA is 2.5x
Source: Company data
+70%
5,629
2,6882,960
683
15.8%
8.9%
1Q 2010 1Q 2011
Total debt, RUB mln Cash, Rub mln
Effective interest rate, Q-end
58
235
82
1430.7x
1.6x
1Q 2010 1Q 2011
Organic capex, Rub mln Depreciation & amortization, Rub mln
Capex to D&A ratio, x
2,441
4,147
10.6%
15.8%
4Q 2010 1Q 2011
Working capital, Rub mln Working capital to revenue LTM ratio
15
2011 & 2012 BUSINESS UPDATE & OUTLOOK
16
Associate gas processing and transport units
7.5 12.6
97.5
113.8
2009 2010
20%
68% 86.099.2
67.0
73.4
2009 2010
Pump stations
Leading market share in pumps…
… and modular equipment
Source: Frost & Sullivan report 2010
In 2010, HMS Group expanded its presence in the most key segments
The company’s share grew mainly faster than its core segments
Russian government introduced new fuel specifications, and hence, oil companies undertake refinery’s upgrade mainly in “hot cycle”. The market share decrease in refinery & petrochemicals is attributable to HMS Group’s presence only in standard “cold cycle” pumps. Deferred demand is being created for standard “cold cycle” pumps
Decrease in nuclear non-MPC pumps is attributable to the industry’s specifics expressed in long-term only contracts. Revenue from signed in 2009 contracts will be recognized in 2011
227.24.5
2
22.325.2
15.7
16.0
2009 2010
Oil industry - Water injection
pumps
17.6 16.9
46.959.6
2009 2010
Oil industry - Refining &
petrochemical pumps
18.0
64.9
15.3
19.0
2009 2010
Oil industry - Oil transportation
pumps
21.8
28.0
11.8
13.9
2009 2010
Water utilities - Submersible water
well pumps
13.5
22.7
19.3
24.0
2009 2010
Water utilities - Clean water supply and dry-pit sewage
7.6 9.1
30.3
35.9
2009 2010
Water utilities - Household vibration
pumps
HMS is the Leader on Growing Markets
7.3 6.4
18.2
26.8
2009 2010
Power generation - Nuclear non-MPC
pumps
21.325.2
14.7
22.2
2009 2010
Power generation - Thermal pumps
38.0 41.2
76.5 83.9 41.9 46.7 45.0
33.2 47.3
64.5
33.2
33.6 32.8
37.9 25.5 36.0
13%
8% 19% 152% 25% 42% 19% 30% 31%
-4%
261% 28%
68%
20% -13%
51%
Comments
.153.0 172.6
13%
15%
Automated group metering units
21.7 25.1
50.350.0
2009 2010
4%
16%
75.1 72.0
105.0
126.4
2009 2010
HMS Group revenue, US$ mln Others
2009 2010
HMS Group revenue, US$ mln Others
17
Backlog decreased to Rub 15.8 bn
Backlog reduction is attributable to:
– ESPO revenue recognition
– Decline in low-margin construction component of EPC segment
Oil transportation pumps backlog amounts to Rub 6.5 bn, the most part of revenue to be recognized in 2011
Nuclear pumps backlog amounts to Rub 1.5 bn, the most part of revenue to be recognized in 2011
Other products and services backlog remains stable
Standard pumps and other equipment, sold from the Company’s warehouses, bring up to Rub 2.5 bn of revenue. Usually these products are not considered in backlog calculation
HMS Group expects backlog to grow by 4Q 2011
Backlog structure performance, Rub bn
Backlog Analysis
9.5
22.8
20.6 19.8
15.8
Comments
Source: Company data
4.3 4.1 2.8 2.7 1.8
0.4 12.1
10.1 10.1 6.5
1.1
1.3
1.4 1.5
1.5
4.0
5.3
6.2 5.6
6.0
31 Dec 09 31 Mar 10 30 Sep 10 31 Dec 10 31 Mar 11
Construction component of EPC Oil transportation pumps Nuclear pumps Others
18
Trunk pipelines construction, km
<2,500
>10,000
2005-2009 after 2009
Source: Frost & Sullivan report 2009 1 Includes pumps for water injection, oil refining and petrochemicals, oil pipelines, energy generation (thermal and nuclear (excluding MCP)), water utilities pumps, household vibration pumps, as well as integrated solutions and aftermarket 2 Core markets for HMS, includes pump stations, automated group metering units, associated gas processing and transport units
Demand Shifts to Integrated Solutions
Russian markets history and forecast, Rub bn Example of integrated solutions for ESPO-I pipeline
Producers Products / Services
HMS and other suppliers including Siemens
Design, production and testing of pumps
HMS
Design of integrated pumping solution
Overall project management
Procurement for supply of engines, cooling sleeves, valves and other equipment
Turn-key commissioning
1. Trunk pump 2. Motor 3. Coupling 4. Oil coolers 5. Adsorptive dryers 6. Air collectors 7. Compressors
8. Joints 9. Friction oil pipelines 10. Air cooling unit 11. Antifreeze feed pipes for oil coolers 12. Antifreeze feed pipes for motor coolers 13. Antifreeze air cooling unit
79
224
2009 2015E
CAGR 18.8% Pumps1
Modular equipment2
10
22
2009 2015E
CAGR 14.0%
HMS core markets transformational development
Thermal power capacity, GW
<5
>20
2004-2010 after 2010
Oil reserves, bn bbl ~60~75
end of 1999 end of 2009
19
Project Brief description Completion Key metrics Comments
Rosneft
Vankor 2 stage Further development. Capex for 2011 US$ 2.6 bn next stage by 2014 Min capex Rub 480 bn HMS participated in previous stages
Yurubcheno-Tokhomsk oilfield Development
Associated gas utilization program (Komsomolskoe, Priobskoe oilfields)
Achievement of 95% level of associated gas utilization HMS participated in previous stages
Lukoil & Bashneft JV
Trebs and Titov fields Joint development of the fields, in stage of project development. Reserves 141 mt
by 2013 Capex US$5-6 bn HMS has good references for previous
projects
Transneft
ESPO expansion 9 oil-pumping stations to be constructed to deliver oil to Khabarovsk and Komsomolsk refineries by 2015
9 OPS by 2015 HMS participated in previous stages
Zapolyarye – Pur-pe pipeline Oil transportation from YANAO and Northern Krasnoyarsk region oilfields
4 OPS by 2015 Capex Rub 120 bn HMS participates in a project design
ESPO expansion 4 OPSs to be constructed to deliver oil to Primorsk refinery by 2017
4 OPS by 2017 HMS participated in previous stages
Pur-pe – Samotlor expansion Construction of 2 OPS. Total capex in 2011 Rub 77 bn 2 OPS by 2017 HMS participated in previous stages
TNK-BP
Russkoe oilfield Giant oilfield in YANAO with specific oil. Project production 20 mtpa
Capex US$ 4.5 bn HMS participates in a project design
Samotlor Further development of an active oilfield in Nizhnevartovsk. by 2014 Capex US$ 4.6 bn HMS participated in previous stages
Uvat 21 oilfields in Tyumen region HMS participated in previous stages
East- and Novo- Urengoy gas & condensate fields
Planned production for 2011 is 3.2bcm, up 17% on 2010 HMS participates in a project design
Verkhnechonsk oilfield Oilfield located in the Eastern Siberia, Irkutsk region. Development was stimulated by close proximity of ESPO pipeline.
Peak production by 2014
Additional US$3-4 bn HMS participated in previous stages
Gazprom
Shtokman gas and condensate field The field will become a resource base for Russian pipeline gas and liquefied natural gas (LNG) exports to the Atlantic Basin markets
HMS produces units for complex gas preparation
Gazprom Neft
Priobskoe oilfield Western Siberia. Recoverable reserves ~600 mt HMS participates in a project design
Urmanskoe and Shinginskoe oilfields Eastern Siberia
Sberbank Capital
Dulisma oilfield Irkutsk region. Further development. 3rd resource base for ESPO Total reserves 15 mt HMS participated in previous stages
Taas-yuriah oilfield Sakha region. Further development. Total reserves ~130 mt Capex Rub 15-30 bn
Iraq
Rumaila brownfield Consortium headed by BP Capex US$ 15 bn HMS already submitted technical
survey
Az Zubair Consortium headed by Eni Capex US$ 20 bn HMS participates in a tender
Rosatom
Belene (Bulgaria) Unit 1 by 2017-18 Capex € 5-6.3 bn
Municipal water
Central Asia Irrigation stations for Uzbekistan and Turkmenia HMS has good references from
previous projects
Grozvodokanal Modernization and reconstruction of water utilities in Chechnya Capex about Rub 100 bn HMS participated in previous stages
Financial and Operational highlights
Selected End-market Projects for Mid-term
Source: Public information, Company data
Increased number of HMS end-market projects
20
Financial and Operational highlights
Sources of Best-in-class Margins & Growth
HMS Group high and sustainable margins are the result of a number of cumulative factors
Mix of growing markets Unfolding innovative projects
Shift in structure of demand
First class customer base
Strong negotiation force over customers
Unique pump R&D Exceptional project design capabilities
End-to-end solutions capabilities: from design to implementation and after-market
Growth through integrated solutions: ahead of market with lower capex
Further bolt-on acquisition growth strategy based on successful track record of integrated acquisitions
United team of founders and high professionals
High market share Technical entry barriers for international majors
Multidecade track record with customers
Installed base
Focus on operations excellence and project execution
REVENUES &
MARGINS
POTENTIAL
21
General Inquiries [email protected] Alexander Rybin Head of Capital Markets Tel: +7 (495) 730-66-12 [email protected] www.grouphms.com 7 Chayanova Str. Moscow 125047 Russia
Inna Kelekhsaeva IR Officer Tel: +7 (495) 730-66-01 [email protected]
Сontacts
22
APPENDIX
23
Calculations
All numbers 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 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 expense, warranty provision, 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
EBIT is calculated as Gross margin minus D&T and SG&A expenses
Total debt is calculated as Long-term borrowings plus Long-term financial lease liabilities plus Short-term borrowings plus
Short-term financial lease liabilities
Net debt is calculated as Long-term borrowings plus Long-term financial lease liabilities plus Short-term borrowings plus Short-
term financial lease liabilities minus Cash & cash equivalents
ROCE is calculated as EBIT divided average Debt plus Equity
Working capital is calculated as Inventories plus Trade and other receivables minus Trade and other payables
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
24
RUB,’000 31 March 2011 31 December 2010
ASSETS Non-current assets: Property, plant and equipment 5,980,920 5,948,674 Other intangible assets 285,890 310,156 Goodwill 1,783,915 1,783,915 Investments in associates 510,712 507,141 Deferred income tax assets 135,372 130,779 Other long-term receivables 26,597 27,123 Total non-current assets 8,723,406 8,707,788
Current assets: Inventories 3,363,911 2,840,745 Trade and other receivables and other financial assets 8,572,511 10,399,853 Current income tax receivable 62,323 38,086 Prepaid expenses 28,875 39,361 Cash and cash equivalents 683,252 351,086 Restricted cash 5,829 4,978 12,716,701 13,674,109 Non-current assets held for sale 96,095 96,095
Total current assets 12,812,796 13,770,204
TOTAL ASSETS 21,536,202 22,477,992
EQUITY AND LIABILITIES EQUITY Share capital 48,329 42,510 Share premium 3,523,535 210,862 Currency translation reserve (471,187) (234,785) Retained earnings 3,891,200 2,897,296 Other reserves 122,852 38,987
Equity attributable to the shareholders of the Company 7,114,729 2,954,870 Non-controlling interest 1,453,681 1,508,263
TOTAL EQUITY 8,568,410 4,463,133
LIABILITIES Non-current liabilities: Long-term borrowings 2,132,174 3,864,176 Finance lease liability - 9 Deferred income tax liability 950,249 745,762 Pension liability 267,648 262,525 Provisions for liabilities and charges 52,787 35,691
Total non-current liabilities 3,402,858 4,908,163
Current liabilities: Trade and other payables 7,789,261 10,799,358 Short-term borrowings 550,418 775,242 Provisions for liabilities and charges 268,106 312,213 Finance lease liability 5,247 8,446 Pension liability 25,219 24,736 Current income tax payable 21,341 115,340 Other taxes payable 905,342 1,071,361
Total current liabilities 9,564,934 13,106,696
TOTAL LIABILITIES 12,967,792 18,014,859
TOTAL EQUITY AND LIABILITIES 21,536,202 22,477,992
Source: Company data
Statement of Financial Position
25
Source: Company data
Statement of Comprehensive Income RUB,’000
Three months ended 31 March 2011
Three months ended 31 March 2010
Revenue 7,051,377 3,834,974 Cost of sales (4,979,520) (3,060,568)
Gross profit 2,071,857 774,406 Distribution and transportation expenses (150,620) (152,313) General and administrative expenses (450,891) (480,540) Other operating expenses, net (92,228) (25,028)
Operating profit 1,378,118 116,525 Finance income 3,778 9,719 Finance costs (133,292) (209,948) Share of results of associates 9,196 (4,221)
Profit/(loss) before income tax 1,257,800 (87,925) Income tax expense (267,293) (1,395)
Profit/(loss) for the period 990,507 (89,320)
Profit/(loss) attributable to: Shareholders of the Company 996,562 (96,503) Non-controlling interest (6,055) 7,183 Profit/(loss) for the period 990,507 (89,320)
Currency translation differences (289,207) (33,607) Currency translation differences of associates 1,540 392
Other comprehensive loss for the period (287,667) (33,215)
Total comprehensive income/(loss) for the period 702,840 (122,535)
Total comprehensive income/(loss) attributable to: Shareholders of the Company 760,160 (120,628) Non-controlling interest (57,320) (1,907) Total comprehensive income/(loss) for the period 702,840 (122,535)
Basic and diluted earnings per ordinary share for profit/(loss) attributable to the ordinary shareholders (expressed in Rub per share) 8.98 (0.94)
26
Source: Company data
Cash Flow Statement RUB,’000
Three months ended 31 March 2011
Three months ended 31 March 2010
Cash flows from operating activities Profit/(loss) before income tax 1,257,800 (87,925)
Adjustments for: Depreciation and amortisation 143,229 81,510 Loss/(gain) from disposal of property, plant and equipment and intangible assets 1,688 (6,221) Finance income (3,778) (9,719) Finance costs 121,082 208,528 Pension expenses 10,112 38,305 Warranty provision (28,958) (11,857) Write-off of receivables 10,984 - Interest expense related to construction contracts (1,632) (7,787) Provision for impairment of accounts receivable (34,513) 47,634 Investments impairment provision 343 - Provision for obsolete inventories 31,435 89,595 Foreign exchange translation differences 12,210 1,420 Provision for VAT receivable (5,819) - Provisions for legal claims (69,111) 13,209 Share of results of associates (9,196) 4,221 Other non-cash items (179) (2)
Operating cash flows before working capital changes 1,435,697 360,911 Increase in inventories (607,855) (138,274) Decrease/(increase) in trade and other receivables 1,716,233 (1,584,048) (Decrease)/increase in other taxes payable (141,583) 424,768 (Decrease)/increase in accounts payable and accrued liabilities (2,941,933) 3,182,260 Restricted cash (851) (298)
Cash (used in)/generated from operations (540,292) 2,245,319 Income tax paid (177,300) (56,899) Interest paid (122,528) (202,857)
Net cash (used in)/from operating activities (840,120) 1,985,563
Cash flows from investing activities Repayment of loans advanced 453 53 Loans advanced - 4,066 Proceeds from sale of property, plant and equipment and intangible assets 2,226 373 Interest received - 3,323 Purchase of property, plant and equipment (235,326) (57,622) Acquisition of intangible assets (7,948) -
Net cash used in investing activities (240,595) (49,807)
Cash flows from financing activities Repayments of borrowings (4,176,052) (1,131,519) Proceeds from borrowings 2,218,829 1,431,873 Payment for finance lease (3,208) (3,538) Acquisition of non-controlling interest in subsidiaries - (32,362) Cash received from additional share issue of subsidiary 80 - Proceeds from share issue, net of issue costs 3,375,240 -
Net cash from financing activities 1,414,889 264,454
Net increase in cash and cash equivalents 334,174 2,200,210
Effect of exchange rate changes on cash and cash equivalents (2,008) 1,726
Cash and cash equivalents at the beginning of the period 351,086 758,127
Cash and cash equivalents at the end of the period 683,252 2,960,063
27
Source: Frost & Sullivan report 2009, Transneft website (www.transneft.ru)
Novorossiysk
Moscow
Unecha
Primorsk
Kozmino
Skovorodino
Verkhnechonskoye
Tengiz
Timano-Pechora basin
Caspian Pipeline Consortium expansion (35 MMt, 1,510 km)
Baltic Pipeline System-II (50 MMt, 1,000 km)
ESPO-I and ESPO-I capacity expansion (50 MMt, 2,694 km)
Russia
ESPO-II and ESPO-II capacity expansion (47 MMt, 2,046 km)
Talakanskoye
Purpe-Samotlor (25 MMt, 430 km)
Vankor Salymskoye
Samotlor
Nizhnevartovsk
Priobskoye
Purpe
Prirazlomnoye
Tyamkinskoye
Russkoye
Taishet
Zapolyarnoye-Purpe (45 MMt, 536 km)
Syzran
Tikhoretsk-Tuapse 2 (12 MMt, 295 km)
Haryaga Yuzhny
Khylchuyu
Haryaga-Yuzhny Khylchuyu (8 MMt, 160 km)
Yurubcheno-Tokhomskoe
Yurubcheno-Tokhomskoe-Taishet (18 MMt, 600 km)
Tuapse
Tikhoretsk
Komsomolsky NPZ -port De-Kastry (9 MMt, 313 km)
Oil pipeline projects
Mature oil producing regions
Underdeveloped oil producing regions
Developing oil fields
HMS participation confirmed
Oil products pipeline projects
Komsomolsky NPZ
De-Kastri
“Yug” (South) (9 MMt, 1,465 km)
Komsomolsky NPZ -De-Kastry (n.d., 300 km)
169.196.203
170.70.67
147.193.150
69.114.167
65.152.175
200.193.188
227.24.52
207.213.225
137.165.78
New Milestone Projects Oil & Gas Production and Oil Transportation
Zapolyarnoye
South
> 3 bn tons of oil reserves to
be developed in the next
several years
Oil production development
> 10,000 km of pipelines to be constructed or
replaced
> 140 of pump stations to be constructed or
reconstructed
> 550 reservoirs with total capacity of almost
10 mln m3 to be reconstructed
Transneft investment program 2010-2017
Central Asia
Rapidly growing sales of modular equipment to oil and gas sector in Kazakhstan
Iraq
Significant installed base of HMS pumps from Soviet and post Soviet periods
Currently undertaking projects for Oil Ministry and BP
Export markets
26 oil refineries are to be
reconstructed
Oil refining development
28
TGC-13 (Enisei) Investments 2010-2015: RUB 10 bn
TGC-9 Investments 2010-2015: RUB 28 bn
TGC-8 Investments 2010-2015: RUB 18 bn
TGC-7 (Volga) Investments 2010-2015: RUB 11 bn
TGC-6 Investments 2010-2015: RUB 16 bn
TGC-5 Investments 2010-2015: RUB 14 bn
TGC-3 (Mosenergo) Investments 2010-2015: RUB 39 bn
TGC-14 Investments 2010-2015: RUB 8 bn
TGC-12 (Kuzbas) Investments 2010-2015: RUB 21 bn
TGC-11 Investments 2010-2015: RUB 26 bn
TGC-10 (Fortum) Investments 2010-2015: RUB 47 bn
TGC-4 Investments 2010-2015: RUB 21 bn
TGC-2 Investments 2010-2015: RUB 28 bn
TGC-1 Investments 2010-2015: RUB 73 bn
Source: Frost & Sullivan report 2009
Nuclear Power Plants HMS participation confirmed Projects under construction Planned projects
Leningradskaya-II
Kalininskaya
Rostovskaya
Novovoronezhskaya-II
Beloyarskaya
Kurskaya Smolenskaya
Kolskaya
169.196.203
170.70.67
147.193.150
69.114.167
65.152.175
200.193.188
227.24.52
207.213.225
137.165.78
New Milestone Projects Thermal and Nuclear Power Utilities
South
Rostovskaya
Summary of total investments in power generating capacity
Selected nuclear power plant projects abroad using Russian technology
Number of power units to be constructed or reconstructed
Additional generation capacity, MW
Investments 2010-2015 (RUB bn)
TGC n/a 13,627 359
OGC n/a 11,962 467
Nuclear plants (Russia)
41 21,500 808
Nuclear plants (Foreign)
17 17,880 1,940
Name Country No of power units / Unit capacity (MW)
Investments 2010-2015 (RUB bn)
Belene NPP Bulgaria 1 / 1,000 128
Tianwan NPP China 2 / 1,000 86
Kudankulam NPP India 2 / 1,000 65
Mokhovtse NPP Slovakia 2 / 440 53
Akkuyu NPP Turkey 4 / 1,200 27
Other projects
Ukraine 2 / 1,200
1,581 Belarus 2 / 1,200
Armenia 1 / 1,200
Vietnam 1 / 1,200
29
Kirov
Perm
Barnaul
Petrozavodsk
Vladimir
Rostov-on-Don
Azov
Kaluga
Tver
Orenburg
Omsk
Tyumen Krasnodar
393471
606724
844
1,011
311372295
2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
Source: Frost & Sullivan report 2009, Media sources 1 Figures have been taken from various media sources; they are not final and may change in the
future
2 The “Clean Water” program is a nationwide large investment plan aimed at improving drinking water quality.
Capex in water projects, RUB bn (2007–2015)
Source: Frost & Sullivan report 2009
Large-scale State Programs Total Capex 2010-
2015 (RUB bn) Capex period
Federal Program "Zhilische" (public housing)
620 2011-2015
Regional programs "Clean Water“2 (unconfirmed budget)
520 2011-2017
Water Strategy of Russian Federation until 2020 (excl. "Clean Water")
351 2009-2020
Reconstruction of Grozny utilities 105 2010-2011
St. Petersburg Water Utilities Development Program
103 2010-2025
JSC RKS JSC Evraziysky JSC Rosvodokanal
169.196.203
170.70.67
147.193.150
69.114.167
65.152.175
200.193.188
227.24.52
207.213.225
137.165.78
New Milestone Projects Water Utilities
Central Asia
Recently undertook turnkey construction of pumping stations in Turkmenistan and Uzbekistan
Presence in water markets of Tajikistan and Kyrgyzstan
Offices in Ashkhabad (Turkmenistan) and Tashkent (Uzbekistan)
South
Moscow
Kaliningrad
St. Petersburg
Volgograd Kazan
N.Novgorod
Yaroslavl
Ekaterinburg
Sochi
Samara
FIFA World Cup 2018 Investment 2010-2018: RUB 1.6 trn1
Olympic Games in Sochi in 2014 Investment 2010-2014: RUB 930 bn1
Asia-Pacific Economic Cooperation Summit in Vladivostok in 2012 Investment 2010-2012: RUB 660 bn1
Vladivostok
Export markets
Leading integrated water utilities
30
169.196.203
170.70.67
147.193.150
69.114.167
65.152.175
200.193.188
227.24.52
207.213.225
137.165.78
Significant Upside from Aftermarket
Water injection pumps
HMS supplies 87%
Other 13%
Total number of pumps: 4,500
Oil trunk pipeline pumps1
HMS supplies 98%
Other 2%
Total number of pumps: 1,044
Note: In red are highlighted the pump’s components that suffer the greatest degree of deterioration during operation of the pump and which can be replaced in order to extend the pump’s operation life
Source: Company data, Frost & Sullivan report 2009
Very large installed base requires repair and maintenance services
Large portion of installed base is outdated, creating opportunity for upgrades as well as replacement
Energy represents 80% of operating cost for a typical pump
Trend for modernization of equipment to increase energy efficiency
Most repair and maintenance historically largely in-house
HMS has contracts with companies including
– TNK-BP (full outsourcing of maintenance of water injection pumps at the Samotlor field)
Exceptional
installed base
Energy efficiency
Outsourcing trend
Source: Frost & Sullivan report 2009, Company data 1 In Transneft’s pipeline system
Key drivers for aftermarket services growth Installed base
Example of pump servicing
31
Advanced R&D Capabilities
Very strong in-house R&D and significant experience in
pump development
– 5 in-house R&D facilities in Russia and the CIS,
centralized research coordination
Unique testing facility (one of the largest in the former
Soviet Union and globally) for all types of large
specialized pumps for nuclear power plants and oil
transportation
– Current facility allows to test pumps up to 8MW in
power; new facility for pumps up to 14MW under
construction
Deep integration with clients’ R&D
– HMS’ R&D works closely with clients’ R&D divisions in
developing pre-tender documentation and helps clients
adopt new design solutions and technical regulations
– Increases the likelihood of the use of HMS equipment
in projects
Giprotyumenneftegaz (GTNG) is the leading Russian R&D
centre specializing in design of on-surface (as opposed to
sub-surface) facilities for oil and gas fields, e.g. it
designed over 200 fields in Russia including many of the
largest (e.g. Samotlor, Mamontovskoye, Priobskoye)
Significant R&D resources for design of water utilities
projects (RVKP)
Pumps Project design
Pre-tender project preparation
(up to 24 months)
Tender, pricing and contract negotiation
(1–3 months)
Design and production
(1–24 months)
Delivery and installation (1 month)
After-market services
Pre-tender preparation/aftermarket support is crucial for establishing/maintaining strong relationships with clients HMS ability to participate in pre-tender preparation stage creates unique competitive advantage
Oilfields, projected by GTNG
Oilfields, projected by others
Oilfields, projected by GTNG vs others
32
Number of new pumping stations for increasing capacity 21
To supply Komsomolsk and Khabarovsk refineries 9
To supply Primorsk refinery 4
No information at the present time 8
Number of contracted pumping stations 20
Pumping stations under construction by HMS 12
Pumping stations constructed by Sulzer 7
Pumping stations under construction by Turbonasos 2
East Siberia – Pacific Ocean pipeline
Source: Company data, Transneft
169.196.203
170.70.67
147.193.150
69.114.167
65.152.175
200.193.188
227.24.52
207.213.225
137.165.78
North
Krasnoyarsk region
1 2
3 4 5
6 7
8
9
10
11
12 13 14 15
16 17
18
19
20
23 24
25
26 27
28 29 30
31 32 33
34
35
36
37
38
39
40
41
Buryat region
Chita region
RUSSIA
MONGOLIA
Irkutsk Chita
Ust’-Kut
Yakutsk
Skovorodino
Blagoveschensk
Vladivostok
Taishet
Irkutsk region
Khabarovsk region
Sea of Okhotks
CHINA
Total number of pumping stations 41
22 21
33
169.196.203
170.70.67
147.193.150
69.114.167
65.152.175
200.193.188
227.24.52
207.213.225
137.165.78
Zapolyarnoe-Pur-pe pipeline
Projected Zapolyarnoe–Pur-pe pipeline
Inlet pipelines from main perspective oilfields (with production level over 2mln tons in 2020)
New OPS
Maximum level of pumping capacity by 2020, mtpa
Main OPS – main oil-pumping station of the future Zapolyarnoe-Pur-per pipeline
OPS – oil-pumping station
Legend
Inlet pipelines
Inlet point Oilfield License holder Max capacity
in 2020, mt
Main OPS 1 Vostochno-Messoyakhinskoe Slavneft * 10.9
Main OPS 1 Zapadno-Messoyakhinskoe Slvaneft 2.4
Total Main OPS 1 13.3
OPS 2 Russkoe TNK-BP 6.8
OPS 2 Zapolyarnoe Gazprom 2.3
OPS 2 Tazovskoe Gazprom 1.0
OPS 2 Northern Urengoyskoe Gazprom n/a
OPS 2 Salekaptskoe Lukoil 0.3
Total OPS 2 10.9
OPS 3 Urengoyskoe Gazprom 7.4
OPS 3 Pestsovoe Gazprom n/a
OPS 3 En-Yakhinskoe Gazprom n/a
OPS 3 Samburgskoe SeverEnergiya ** 0.2
OPS 3 Yaro-Yakhinskoe SeverEnergiya 0.5
OPS 3 License plot of Western Urengoyskoe TNK-BP 1.1
Total OPS 3 9.7
Total capacity to Pur-pe 34.0-45.0
* TNK-BP and Gazprom Neft have per 50% share ** Gazprom holds 51%; this shareholding should be sold to Novatek
Source: Public sources, Transneft site
Capacity, mtpa up to 45
Total length, km 488
Projected cost, RUB bn 120
Total length of inlet pipelines, km 1,200
Project figures Construction period 2011-2015
1st stage Dec 2013
2nd stage Dec 2014
3rd stage Dec 2015
Implementation
1st stage
2nd stage
3rd stage
34
170.70.67
147.193.150
69.114.167
200.193.188
227.24.52
207.213.225
137.165.78
Source: Company data * Large client - a client that brings revenue more than Rub 200 mln a year
Stable growth of revenue generated by Other
clients received from replacement and
modernization works
Sharp increase in contracts’ quantity from
Transneft, Rosneft and Gazprom Neft played its
role in a substantial revenue growth
New types of contracts include:
– Integrated pump-based solutions (i.e. pumping
stations for Transneft)
– Full-cycle projects (i.e. pumping stations in
Turkmenia)
– Project and design contracts for design of new
oilfields and pipelines
35
Revenue Contribution by Clients
FY2010 Total revenue
Rub 23,070 mln
FY2009 Total revenue
Rub 14,772 mln
7,443 8,772
7,329
14,298
2009 2010
Others Large clients
Revenue structure by clients, Rub mln
NK Dulisma1%
Salym Petroleum
2%
Surgutneftegaz3%
Lukoil1%
Orion Stroy4%
TNK-BP8%
Gazprom Neft4%
Transneft6%
Rosneft21%
Others50%
NK Dulisma1%
Salym Petroleum
1%Hors
Group1%
Surgutneftegaz1%
Lukoil2%
Orion Stroy5%
TNK-BP5%
Gazprom Neft8%
Transneft16%
Rosneft22%
Others38%
Comments Revenue by Clients*, 2009 vs 2010
Selected clients
Turkmenistan