HMS Group Investor Presentation, October 2011


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This presentation represents HMS Group's financial results for six months ended on 30 June 2011

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HMS Group Investor Presentation, October 2011

  1. 1. HMS GroupMidyear results 2011 Investor Presentation October 2011
  2. 2. DisclaimerThe 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 factorsmay have impacted on the business of HMS Group and the content of this presentation, since itspreparation. In addition all relevant information about HMS Group may not be included in thispresentation. 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 assumptionswhich may prove to be incorrect. Forward looking statements, by the nature, involve risk anduncertainty and HMS Group cautions that actual results may differ materially from those expressed orimplied in such statements. Reference should be made to the most recent Annual Report for adescription of the major risk factors. This presentation should not be relied upon as a recommendationor forecast by HMS Group, which does not undertake an obligation to release any revision to thesestatements.This presentation does not constitute or form part of any advertisement of securities, any offer orinvitation to sell or issue or any solicitation of any offer to purchase or subscribe for, any shares in HMSGroup, nor shall it or any part of it nor the fact of its presentation or distribution form the basis of, orbe relied on in connection with, any contract or investment decision. 2
  3. 3. Agenda WHO WE ARE 4 HMS at a Glance 5 HMS Group Core Industries 6 Development of Business Model 7 INVESTMENT HIGHLIGHTS 8 Attractive Industry Fundamentals 9 The Leading Provider of Flow Control Solutions 10 Advanced R&D Capabilities 11 Main Shareholders Run the Business 12 Healthy Debt Position 13 Hedging & Risk Management 14 FINANCIAL PERFORMANCE 15 Financial Highlights for 1H 2011 16 EBITDA Development in 1H 2011 17 Revenue & EBITDA Contribution by Segments 18 Capex & Working Capital as of 30 June 2011 19 2011 & 2012 BUSINESS UPDATE & OUTLOOK 20 HMS Group Recent Acquisitions 21 Significant Upside from Aftermarket 22 Backlog 23 Order Intake 24 HMS Group Recent Selected Contracts 25 Selected End-market Prospects for Mid-term 26 CONTACTS 27 APPENDIX 28 3
  4. 4. WHO WE ARE 4
  5. 5. HMS at a GlanceKey investment highlights Key financial indicators for 2005-1H’11 Growing markets in Russia and the CIS:  oil & gas 23,070 22.6%  power generation  water 16.5% 14,772 14,046 15.3% 13,857 13,399 Leader in flow control solutions on these markets 12.3% 11.7% 12.8% 10.6% Best team in Russia: 6,724  management 4,498 3,519  sales 3,133 1,423 1,644 1,890 744 830  research & development 2005 2006 2007 2008 2009 2010 1H2011 Resilient financial growth and healthy debt position Revenue, Rub mn EBITDA, Rub mn EBITDA margin, % Source: Company data1H’11 key financials contribution by business segments1H’11 total revenue Rub 13,857 mn EBITDA adj. Rub 3,133 mn profit for the period Rub 2,082 mnPumps* Oil & gas equipment EPCRevenue Rub 8,518 mn Revenue Rub 2,320 mn Revenue Rub 2,798 mnEBITDA adj. Rub 2,574 mn EBITDA adj. Rub 127 mn EBITDA adj. Rub 356 mn New photoPump station of Baltic pipeline system, Transneft Oilfield Pump Station 2, Vankor oilfield, Rosneft Oil Pump Station “Tayezhnaya”, TransneftNotes: Hereinafter “EBITDA” read as “EBITDA adjusted”, “EBITDA margin” read as “EBITDA adjusted margin” and “Net Income” read as “Profit for the period/year” 5Pumps read as Industrial pumps
  6. 6. HMS Group Core IndustriesRevenue contribution by industries Oil ~70%Oil upstream Oil refining Oil transportation Water utilities~50% ~2% ~18% ~12%Thermal power generation Nuclear power generation Metallurgy & Mining Others~8% ~1% ~1% ~8% Power generation ~9%Source: Management accounts 6Note: “Others” include general industry pumps and other axillary equipment
  7. 7. Development of Business ModelWhy integrated solutions ESPO-I pipeline is an example of integrated solutionsType of project / Standard pumps Integrated solutionsService & customized pumpsSource Array of small-size Large-scale projects contractsResearch & development Normal CriticalTechnical entry-barriers Average HighCapex requirements High AverageCompetition type Price R&D and referencesCompetition High LimitedRevenue growth potential Limited UnlimitedEBITDA margin 10-15% 25-30%Revenue downside Limited Limited, nearest 1.5ypotential 1. Trunk pump 8. JointsFrequency High n/a 2. Motor 9. Friction oil pipelines 3. Coupling 10. Air cooling unitAftermarket demand Average High 4. Oil coolers 11. Antifreeze feed pipes for oil coolers 5. Adsorptive dryers 12. Antifreeze feed pipes for motor coolers 6. Air collectors 13. Antifreeze air cooling unit 7. CompressorsIntegrated solutions’ revenue contribution Producers Products / Services  HMS and other suppliers  Design, production and testing of pumps including Siemens 95% 94% 75% 60%  Design of integrated pumping solution  Overall project management  Procurement for supply of engines,  HMS cooling sleeves, valves and other 5% 6% 25% 40% equipment  Turn-key commissioning 2008 2009 2010 1H 2011 Revenue from integrated solutions Revenue from standard equpmentSource: Company data 7
  9. 9. Attractive Industry FundamentalsMix of growing markets Russian selected pumps market revenues, Russian energy & utilities infrastructure Russian oil sector investments, Rub bn investments, Rub bn Rub bn CAGR 18.0% CAGR 16.2% CAGR 11.8% 2,576 58.1 3,340 Oil refining & petrochemicals Power generation Municipal water 9.8 540 Oil pipelines Municipal water 1,011 Thermal power Nuclear power Oil exploration & extraction Oil & Gas, surface 810 CAGR 16.1% 30.4 1,320 25.4 1,586 271 1,359 5.2 392 337 12.2 1,226 610 7.7 17.9 712 1.1 743 4.2 8.0 357 2.4 2002 2010 2015E 2010 2015E 2010 2015E CAGR 2002-10 ‘10-15E CAGR 2010-15E CAGR 2010-15E Power generation 21.4% 13.5% Municipal water 17.1% Oil refining & petrochemicals 12.2% Municipal water 14.3% 20.0% Thermal power 17.3% Oil pipelines 15.7% Oil & Gas, surface 16.2% 17.5% Nuclear power 13.0% Oil exploration & extraction 9.5%Source: Frost & Sullivan 2010 9
  10. 10. The Leading Provider of Flow Control SolutionsLeading market share on key markets…Oil industry1 Water utilities2 Power generation3 Market growth +24% Market growth +32% Market growth +36% 575,7 135,2 81,8 465,7 102,7 243.9 61.4 60,2 +41% 32.9 173.1 +43% 42.9 +15% 28.6 292.6 331.8 73.8 48.9 59.8 31.6 2009 2010 2009 2010 2009 2010 HMS Group revenue, US$ mln HMS Group revenue, US$ mln HMS Group revenue, US$ mln Other Other OtherKey conclusions HMS Group has leading positions in all key markets of presence with ~ 40% share on pumps market. HMS Group managed to expand its market share in the most key segments of business In the oil industry and water utilities the company’s share outperformed overall market growth Decrease in power generation pumps is attributable to the nuclear industry’s specifics expressed in long-term only contracts. Revenue from signed in 2009 contracts will be recognized during 2011/2012Notes:1 includes pumps and oil and gas equipment2,3 includes pumps 10
  11. 11. Advanced R&D CapabilitiesPumps Project design Very strong in-house R&D and significant experience in pump  Giprotyumenneftegaz (GTNG) is the leading Russian R&D development centre specializing in design of on-surface (as opposed to Unique testing facility (one of the largest in the former Soviet sub-surface) facilities for oil and gas fields, e.g. it Union and globally) for all types of large specialized pumps designed over 200 fields in Russia including many of the for nuclear power plants and oil transportation largest (e.g. Samotlor, Mamontovskoye, Priobskoye) Deep integration with clients’ R&D  Significant R&D resources for design of water utilities projects (RVKP) 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 Tender, Pre-tender pricing and Design and Delivery and project contract production installation After-market preparation negotiation services 1–24 months 1 month up to 24 months 1–3 months 11
  12. 12. Main Shareholders Run the BusinessBoard of Directors Comments 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 German Tsoy Artem Molchanov Kirill Molchanov  HMS is the core business of the largestChairman of the Board Managing Director (CEO) First Deputy CEO (CFO) Shareholder Shareholder Shareholder shareholdersIn company since 1993 In company since 1993 In company since 1993  Long-term commitment to the business from shareholders Shareholders StructureVladimir Lukyanenko Nikolay Yamburenko Yury Skrynnik German Non-executive Director Head of Industrial Pumps Director for Strategic Marketing Tsoy Shareholder Shareholder Shareholder Managers 17%In company since 2005 In company since 2003 In company since 2005 22% Vladimir Lukyanenko 24% Free-float 37% Philippe Delpal Andreas Petrou Gary Yamamoto Source: Company data as of October 6, 2011 Independent Non-executive Independent Chairman Audit Chairman Remuneration Committee Committee  Founders 12
  13. 13. Healthy Debt PositionModerate leverage… …with comfortable repayment schedule… 4,539 4,297 2,965 4,105 3,455 2.4 2,090 2.0 1,255 1,218 1.2 490 488 0.7 2008 2009 2010 1H 2011 2011E 2012E 2013E 2014E 2015E Net Debt, Rub mn Net Debt to EBITDA LTM Repayments, Rub mn Undrawn credit line, Rub mn Source: Company data Source: Company data as of 01 September, 2011…and low currency and maturity risks Comments  Low leveraged business profile with Net Debt to Long-term debt Short-term debt S&P corporate EBITDA LTM ratio of only 0.7 77.0% 23.0% credit rating: BB-  Easy access to additional liquidity with more than Outlook: Rub 2.97 bn of undrawn credit facilities (as of 01 Stable September, 2011) Rub Euro Others  Steady debt repayment schedule with negligible 98.4% 1.5% 0.1% currency risk and prudent maturity structure  More than 98% of Rub-nominated debt with fixed interest rate Fixed rate Floating rate  Weighted average interest rate of 8.7%, down from 98.6% 1.4% 11% a year ago, while interest coverage ratio grew to 14.5 Source: Company data as of 01 July, 2011 13
  14. 14. Hedging & Risk ManagementRisk type Coverage Raw materials price fluctuations Sale price adjustments for standard products in line with raw materials costs changes Advances received under the long-term projects are transferred to the suppliers in order to fix raw materials price for the whole project life-cycle Delay of projects execution Day-to-day monitoring and control over of projects implementation Currency risks Revenue, expenses and debt are nominated in Rubles Interest risk 99% of debt with fixed interest rate Short-term oil price drop Limited impact on business based on standard products and solutions High opportunity costs for customers with complicated long- term projects: - HMS solutions are mission critical for the infrastructure projects - Only 1-2% of total project’s CAPEX relates to pumps - HMS solutions are usually implemented on the final stages of project execution Long-term oil price decline – influence on Low risk due to limited competition and large market share, margin and also because of commodities price correlation (steel and oil)– Long-term oil price decline – fallen revenues Not covered 14
  16. 16. Financial Highlights for 1H 2011Significant growth of revenues Revenue performanceRub, mn 1H 2011 1H 2010 chg, yoyRevenue 13,857 9,149 +51.5%Gross profit 4,292 2,182 +96.7%EBITDA 3,133 1,140 +174.8%Operating profit 2,743 1,035 +164.9%Net income (loss) 2,082 388 +436.8% 3,835 5,314 7,009 6,912 7,051 6,806 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Revenue, Rub mn Linear ( Revenue, Rub mn)Total debt 4,599 6,361 (27.7%)Net debt 4,105 4,489 (8.6%) Source: Company dataNet debt to EBITDA LTM ratio 0.7 2.1 EBITDA and EBITDA margin performance 22.5% 22.7%Gross margin 31.0% 23.8% +713bps 18.4%EBITDA margin 22.6% 12.5% +1,015bps 15.8%Operating margin 19.8% 11.3% +847bps 13.4% 11.2%Net income margin 15.0% 4.2% +1,079bps 431 709 1,111 1,268 1,588 1,545 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 EBITDA, Rub mn EBITDA marginSource: Company data Source: Company data 16
  17. 17. EBITDA Development in 1H 2011 20,000EBITDA key drivers, % of revenue 0 1H 2010 1H 2011 operating expenses 11.1bn vs 8.1bn in 1H’11 | +37% yoy revenue in 1H’11 | +51% yoy ebitda in 1H’11 | +175% yoy 69% 76% 11% 3% 13% 2% 11% 20% 12% 23% Revenue Cost of sales SG&A expenses & others Operating profit Depreciation & amortisation EBITDA with other deductionsSource: Company dataNet income components, Rub mn Cost of sales components, Rub mn 2,743 56.5% 58.5% 2,0821,035 20.6% 15.1% 16.6% 388 11.9% 11.8% 9.0% 30 8 37 (14) Materials Labour Cost of goods sold Other costs (207) (167) (497) (499) 1H 2010 1H 2011Operating Finance Finance Share of Income tax Net income profit income costs results of expense associatesSource: Company data 1H 2010 1H 2011 Source: Company data 17
  18. 18. Revenue & EBITDA Contribution by SegmentsHighlights by core business segments, Rub mn Comments Pumps Pumps:  Revenue increased by 133% yoy and amounted to Rub 8,518 mn 8,518 30.2% revenue  EBITDA margin grew to 30.2% +133% 19.3%  Execution of the project in the oil transportation segment as well as stable order intake in other market segments resulted in 3,656 healthy EBITDA and EBITDA margin growth 2,574 ebitda  Revenue from pumps excluding integrated solutions grew by 8% 706 +265% with EBITDA margin of 20% due to growth of demand and effective cost control 1H 2010 1H 2011 Revenue, Rub mn EBITDA, Rub mn EBITDA margin, % Oil & gas equipment Oil & gas equipment: 10.9%  Revenue contracted by 12% yoy 2,623 revenue 2,320  EBITDA margin decreased to 5.5% -12%  Absence of orders for integrated solutions in 1H affected margin 5.5% performance ebitda  Standard equipment margin declined after crisis as a result of 285 -56% the competition growth in this segment 127  Situation is expected to brighten in 2H owing to the contracts for 1H 2010 1H 2011 integrated solutions to be signed in 2H 2011 and entrance into new market segments, e.g. associate gas processing Revenue, Rub mn EBITDA, Rub mn EBITDA margin, % EPC EPC: 2,857 2,798 12.7% revenue  Revenue down 2% to Rub 2,798 mn -2%  Construction revenue declined to Rub 1,637 mn due to intentional rejection of low-margin contracts 4.6%  Project & design revenue up to Rub 1,170 mn, mainly ebitda due to GTNG acquisition 356 +171%  Healthy margin in construction sub-segment and superior margin 131 in project & design (5.3% and 23.1% respectively) resulted in 1H 2010 1H 2011 12.7% of EBITDA margin in EPC segment Revenue, Rub mn EBITDA, Rub mn EBITDA margin, %  Despite recent signature of several large contracts, the Group sticks to conservative projections on construction development 18Source: Company data
  19. 19. CAPEX & Working Capital as of 30 June 2011 Cash flow performance in 1H 2011, Rub mn Capital expenditures in 1H 2011 vs 1H 2010 IPO proceeds 3,373 Rub mn 2,932 Sibneftemash acquisition 438 (3,848) (1,280) Rub mn 2.1x 1.9x + + 300 351 494 (1,423) 226 + (507) = 3,303 146 WC changes (3,650) Rub mn (1,726)Cash as of Operating WC Income tax Net cash Net cash Net cash Cash as of 1H 2010 1H 2011Jan 1, 2011 cash flow changes & interest used in used in from Jul 1, 2011 Organic capex, Rub mn Depreciation, Rub mn Capex to Deprecation ratio, x before WC &others paid operating investing financing changes activities activities activities Source: Company data Source: Company data Comments Working capital as of 30 June 2011, Rub mn HMS Group generated Rub 2,932 bn of operating cash flow before 23% changes in working capital Substantial working capital increase in 1H 2011 led to the negative 23% operating cash-flow due to ongoing execution of the large infrastructure oil transportation contract with significant advance 13% 23% payments received last year Working capital is expected to fit target range of 10-15% of revenue 13% with positive operating cash flow in 1H 2012 as a result of: 13% 93  Next payment of about Rub 2 bn under the contract  Prepayments on contracts signed in 2H’11, and contracts in ( 1,178 ) 5,220 process of signing 1H 2010 1H 2011 2,263 6,398 Investing cash flow consisted of: WC to Revenue LTM -  Organic capex of Rub 438 mn, in line with target level of 1H 2010 Working capital Inventories Receivables 2011 Payables 1H Working capital 1H 2010 change change change 1H 2011 1.5-2.5 times depreciation WC to Revenue LTM 1H 2010 1H 2011  Acquisition of Sibneftemash – Rub 1,280 mn WC to Revenue LTM Financing cash flow was supported by IPO proceeds of Rub 3,373 mn Source: Company data 19
  20. 20. 2011 & 2012 BUSINESS UPDATE & OUTLOOK 20
  21. 21. HMS Group Recent AcquisitionsBobruisk Machine Building Plant acquisition Sibneftemash acquisitionKey financials, BAS Key financials, RAS1H’11 Revenue Rub 222 mn 1H’11 Revenue Rub 485 mn1H’11 EBITDA Rub 30 mn 1H’11 EBITDA Rub 79 mn1H’11 EBITDA margin 13% 1H’11 EBITDA margin 16%Deal details: Deal details:US$ 9.7 mn for 57% of the company (primary stock) Rub 1,292 mn for 98.6% of the company Acquisition rationale  Broadening of HMS Group product portfolio with complementary equipment  Potential growth of revenue and EBITDA margin:  Sales power and R&D capability of HMS Group  Well-known brands and/ or technical equipment base of acquired companies  Attractive multiplesProducts portfolio Products portfolio Pumps for oil refining and metallurgy & mining  Tanks and vessels for oil and oilfield services applications companies 21Source: Bloomberg FX rate
  22. 22. Significant Upside from AftermarketComments HMS Group has a very large installed base HMS has two contracts signed:  Water injection pumps  Oil trunk pipeline pumps, Transneft – TNK-BP 1-year contract worth Rub 117 mn*, which implicates full maintenance of water injection pumps at the Samotlor field Other 13% Other 2% – 1-year contract worth Rub 484 mn* for maintenance and overhaul services on an Eastern- Siberian oilfield with a very high level of probability for 2-more-year prolongation, that can generate about Rub 1 bn additionally HMS supplies HMS supplies Contracts’ details: 87% 98% Source: Frost & Sullivan 2010 – HMS Group employs the contractors’ personnel, takes a lease of the contractors’ repair facilities Aftermarket input in total revenue vs peers and processing equipment, reducing capex and staff recruitment costsCase study: Pump modernization at the Samotlor oilfield In red are highlighted the pump’s components which can 5% 41% 43% be replaced in order to extend the pump’s operation life HMS Group Flowserve Sulzer Aftermarket Original equipment Source: Companies’ websites, latest published data used Aftermarket trend in HMS Revenue, Rub mn 484 657 Samotlor 61 New aftermarket contract, Sept 2011 596 Spare parts & services 1H 2011Note: * excluding VAT Source: Company data 22
  23. 23. BacklogBacklog structure performance Revenue recognition depends on production period for various type of equipment and the 1 nature of the project As of June 30, 2011 backlog became more diversified with approximate ESPO contribution of 2 1/3 versus 2/3 last year, that resulted in higher backlog turnover Production period Rub mn 1H 2011 1H 2010 chg, YoY /Annual revenue Products & services on demand, short production cycle - - - Rub 4-5 bn Oil transportation pumps 4,914 11,506 (57%) 12-36 months Construction component of EPC 1,492 2,796 (47%) 6-18 months Other equipment 7,323 5,093 +44% 2-8 months Total backlog 13,728 19,396 (29%)Source: Company data, Management accounts 23
  24. 24. Order IntakeComments Total order intake  Order intake growth in 1H was driven by regular orders (Rub 5-300 18,640 mn) across all business segments except construction and oil transportation 12,404  Order intake in oil transportation contracted due to the fact, that potential contracts are in a pre-tender stage  Order intake in construction segment contracted as the company intentionally rejected low-margin contracts 6,236 10,678 7,870  Seasonally, 2H is stronger than 1H in terms of new orders 1H 2010 2H 2010 1H 2011  Growing number of Rub 1-3 bn orders (ESPO and Vankor ESPO project, Rub mn expansion, new oilfields and nuclear plants) are expected to become the core driver of HMS Group’s revenue going forward Total order intake excluding ESPO, Rub mn Source: Company data, Management accountsOil transportation pumps Construction segment of EPC Other equipment 11,627 6,037 777 11,627 994 134 976 1,661 520 5,260 8,023 7,216 1H 2010 2H 2010 1H 2011 1H 2010 2H 2010 1H 2011 1H 2010 2H 2010 1H 2011 Order intake for construction, Rub mn ESPO project, Rub mn ESPO project, Rub mn Order intake for other equipment, Rub mn Order intake for oil transportation pumps, Rub mnSource: Company data, Management accounts Source: Company data, Management accounts Source: Company data, Management accounts 24
  25. 25. HMS Group Recent Selected ContractsHMS Group successfully works on its order book and future growth HMS Group passed the pre-qualification audit by ENI (07 July, 2011) Rub 500 mn : HMS Group to produce modular equipment to an oilfield in Eastern Siberia (08 July, 2011) Rub 300 mn : HMS Group to carry out design works for a Western Siberia gas condensate field (11 July, 2011) Rub 1 bn : HMS Group signed a new contract on construction for a gas field in Western Siberia (01 September, 2011) Rub 484 mn : HMS Group signed a new aftermarket contract for an oilfield in Eastern Siberia (29 September, 2011) 25
  26. 26. Selected End-market Projects for Mid-term Financial and number of highlights Increased Operational HMS end-market projects 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 won a number of tenders Yurubcheno-Tokhomsk oilfield Feasibility study under preparation, depends on tax concessions by 2014 Planned production 20mt Associated gas utilization program Achievement of 95% level of associated gas utilization HMS participated in previous stages (Komsomolskoe, Priobskoe oilfields) Lukoil & Bashneft JV Joint development of the fields, in stage of project development. HMS has good references for previous Trebs and Titov fields by 2013 Capex US$5-6 bn Reserves 141 mt projects Transneft 9 oil-pumping stations to be constructed to deliver oil to ESPO expansion 9 OPS by 2015 HMS participated in previous stages Khabarovsk and Komsomolsk refineries by 2015 Oil transportation from YANAO and Northern Krasnoyarsk regionZapolyarye – Pur-pe pipeline oilfields 4 OPS by 2015 Capex Rub 120 bn HMS participates in a project design 4 OPSs to be constructed to deliver oil to Primorsk refinery by ESPO expansion 4 OPS by 2017 HMS participated in previous stages 2017 Pur-pe – Samotlor expansion Construction of 2 OPS. Total capex in 2011 Rub 77 bn 2 OPS by 2017 HMS participated in previous stages TNK-BP Giant oilfield in YANAO with specific oil. Project production 20 Russkoe oilfield Capex US$ 4.5 bn HMS participates in a project design mtpa 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 Oilfield located in the Eastern Siberia, Irkutsk region. Development Peak production by Verkhnechonsk oilfield Additional US$3-4 bn HMS participated in previous stages was stimulated by close proximity of ESPO pipeline. 2014 Gazprom The field will become a resource base for Russian pipeline gas and HMS produces units for complex gas Shtokman gas and condensate field liquefied natural gas (LNG) exports to the Atlantic Basin markets preparation Gazprom Neft Priobskoe oilfield Western Siberia. Recoverable reserves ~600 mt HMS participates in a project design Urmanskoe and Shinginskoe oilfields Eastern Siberia Sberbank Capital Dulisma oilfield Irkutsk region. Further development. 3rd resource base for ESPO Total reserves 15 mt HMS participated in previous stages Taas-yuriah oilfield Sakha region. Further development. Total reserves ~130 mt Capex Rub 15-30 bn Iraq HMS already submitted technical Rumaila brownfield Consortium headed by BP Capex US$ 15 bn survey Az Zubair Consortium headed by Eni Capex US$ 20 bn HMS participates in a tender Municipal water HMS has good references from Central Asia Irrigation stations for Uzbekistan and Turkmenia previous projects Contracts signed 26 Source: Public information, Company data
  27. 27. Contacts and HMS Group Key DetailsInvestor Relations Company address:Phone +7 (495) 730-66-01 7 Chayanova Moscow 125047 RussiaTwitter HMSGroup and HSMGroup_RusSergey Klinkov, Head of Investor Relationsklinkov@hms.ruInna Kelekhsaeva, Deputy Head of Investor Relationskelekhsaeva@hms.ruHMS Hydraulic Machines & Systems Group Plc is listed on the London Stock ExchangeIdentifier Number Number of shares outstandingISIN US40425X2099 117,163,427Ticker HMSGBloomberg HMSG LIReuters HMSGq.LCredit RatingStandard & Poor’s BB- (Outlook stable) as of 16 June, 2011 27
  28. 28. APPENDIX 28
  29. 29. CalculationsNotes to the presentation and formulas used for some figures’ calculations 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 adjusted for other operating 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 Distribution & transportation expenses minus General & administrative 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 Total debt minus Cash & cash equivalents at the end of the period 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 29
  30. 30. Statement of Financial PositionRUB,’000 30 June 2011 31 December 2010ASSETSNon-current assets:Property, plant and equipment 6,486,500 5,948,674Other intangible assets 380,488 310,156Goodwill 2,348,255 1,783,915Investments in associates 523,324 507,141Deferred income tax assets 98,618 130,779Other long-term receivables 50,536 27,123Total non-current assets 9,887,721 8,707,788Current assets:Inventories 3,623,361 2,840,745Trade and other receivables and other financial assets 8,681,888 10,399,853Current income tax receivable 51,856 38,086Prepaid expenses 32,448 39,361Cash and cash equivalents 493,999 351,086Restricted cash 5,197 4,978 12,888,749 13,674,109Non-current assets held for sale 53,850 96,095Total current assets 12,942,599 13,770,204TOTAL ASSETS 22,830,320 22,477,992EQUITY AND LIABILITIESEQUITYShare capital 48,329 42,510Share premium 3,523,535 210,862Currency translation reserve (417,946) (234,785)Retained earnings 4,887,224 2,897,296Other reserves 122,852 38,987Equity attributable to the shareholders of the Company 8,163,994 2,954,870Non-controlling interest 1,532,288 1,508,263TOTAL EQUITY 9,696,282 4,463,133LIABILITIESNon-current liabilities:Long-term borrowings 3,528,388 3,864,176Finance lease liability - 9Deferred income tax liability 1,082,918 745,762Pension liability 256,996 262,525Provisions for liabilities and charges 45,607 35,691Total non-current liabilities 4,913,909 4,908,163Current liabilities:Trade and other payables 5,907,622 10,799,358Short-term borrowings 1,068,698 775,242Provisions for liabilities and charges 327,839 312,213Finance lease liability 2,288 8,446Pension liability 14,485 24,736Current income tax payable 18,654 115,340Other taxes payable 880,543 1,071,361Total current liabilities 8,220,129 13,106,696TOTAL LIABILITIES 13,134,038 18,014,859TOTAL EQUITY AND LIABILITIES 22,830,320 22,477,992 30Source: Company data
  31. 31. Statement of Comprehensive Income Six months ended Six months endedRUB,’000 30 June 2011 30 June 2010Revenue 13,857,464 9,149,003Cost of sales (9,564,991) (6,967,040)Gross profit 4,292,473 2,181,963Distribution and transportation expenses (387,385) (260,016)General and administrative expenses (1,019,510) (845,719)Other operating expenses, net (143,071) (40,923)Operating profit 2,742,507 1,035,305Finance income 7,981 30,077Finance costs (206,740) (496,684)Share of results of associates 36,976 (13,914)Profit before income tax 2,580,724 554,784Income tax expense (498,760) (166,971)Profit for the period 2,081,964 387,813Profit attributable to:Shareholders of the Company 1,989,928 371,001Non-controlling interest 92,036 16,812Profit for the period 2,081,964 387,813Currency translation differences (238,951) 43,060Currency translation differences of associates (6,791) 4,839Other comprehensive (loss)/income for the period (245,742) 47,899Total comprehensive income for the period 1,836,222 435,712Total comprehensive income attributable to:Shareholders of the Company 1,806,767 412,211Non-controlling interest 29,455 23,501Total comprehensive income for the period 1,836,222 435,712Basic and diluted earnings per ordinary share forprofit/(loss) attributable to the ordinaryshareholders (expressed in Rub per share) 17.44 3.62Source: Company data 31
  32. 32. Cash Flow Statement Six months ended Six months ended RUB,’000 30 June 2011 30 June 2010 Cash flows from operating activities Profit before income tax 2,580,724 554,784 Adjustments for: Depreciation and amortisation 302,546 154,840 Loss/(gain) from disposal of property, plant and equipment and intangible assets 6,364 (9,322) Finance income (7,981) (29,236) Finance costs 198,756 496,684 Pension expenses 1,102 33,207 Warranty provision (35,738) 9,216 Interest expense related to construction contracts 2,594 3,815 Provision for impairment of accounts receivable (83,795) (16,681) Investments impairment provision 341 (143) Provision for obsolete inventories 26,183 (115,093) Foreign exchange translation differences 7,984 (841) Provision for VAT receivable (11,327) 5,321 Provisions for legal claims (18,313) (12,492) Share of results of associates (36,976) 13,914 Loss from disposal of subsidiary - 4,369 Other non-cash items (468) (1,456) Operating cash flows before working capital changes 2,931,996 1,090,886 Increase in inventories (769,019) (184,578) Decrease/(increase) in trade and other receivables 1,640,600 (5,983,497) (Decrease)/increase in other taxes payable (197,670) 803,368 (Decrease)/increase in accounts payable and accrued liabilities (4,521,724) 7,264,719 Restricted cash 219 360 Cash (used in)/generated from operations (915,598) 2,991,258 Income tax paid (311,625) (127,252) Interest paid (195,798) (511,611) Net cash (used in)/from operating activities (1,423,021) 2,352,395 Cash flows from investing activities Repayment of loans advanced - 3,033 Loans advanced - (2,401) Proceeds from sale of property, plant and equipment and intangible assets 7,683 6,220 Interest received - 4,275 Dividends received 14,002 15,288 Purchase of property, plant and equipment (438,160) (300,496) Cash received from disposal of subsidiary - 7,475 Acquisition of intangible assets (29,888) (8,400) Acquisitions of subsidiaries, net of cash acquired (1,280,000) (2,339,457) Net cash used in investing activities (1,726,363) (2,614,463) Cash flows from financing activities Repayments of borrowings (6,262,415) (5,257,621) Proceeds from borrowings 6,214,859 6,301,637 Payment for finance lease (6,157) (6,918) Acquisition of non-controlling interest in subsidiaries - (33,945) Cash received from additional share issue of subsidiary - 428,420 Proceeds from share issue, net of issue costs 3,372,516 - Dividends paid to non-controlling shareholders of subsidiaries (15,863) (145,937) Cash received from capital contribution - 85,817 Net cash from financing activities 3,302,940 1,371,453 Net increase in cash and cash equivalents 153,556 1,109,385 Effect of exchange rate changes on cash and cash equivalents (10,643) 3,555 Cash and cash equivalents at the beginning of the period 351,086 758,127 Cash and cash equivalents at the end of the period 493,999 1,871,067 32Source: Company data
  33. 33. HMS Group Business StrategyFocus on integrated  Higher margin than stand-alone products and servicessolutions and other  HMS Group’s largest customers more often prefer to work with manufacturershighly-engineered that can offer integrated and customized solutionsproducts  Creates strong ties with customers, pull-through demand for aftermarket servicesStrengthen position  Take advantage of positive market trends in existing core markets  Organic expansion into attractive market segmentsin core markets  Increase of aftermarket services component to generate higher-margin andincluding regular cash flowsaftermarket and  Core export opportunities: water projects in FSU, Rosatom nuclear contracts,export O&G in Kazakhstan and IraqExpand research  Leverage leading R&D capabilities in order to develop next-generation customizedand development pumps, technological upgrades and integrated pump systemscapabilities  Work closely with customers to develop technical policies and standards  Commitment to integration and optimization of current production assets and commitment to increase synergies between acquired businessesImprove operational  Standardization and continuous improvement of operations and businessefficiency processes (e.g. ERP, budgeting and reporting methodology and software development, etc.)  Our targets are technology and R&D facilitiesPursue selective &  Pursue acquisition opportunities in high-growth sectors where HMS has limitedvalue enhancing presenceacquisitions  Search for cost and revenue synergies 33
  34. 34. HMS Group PositioningFrom pumps to integrated solutions based on excellent R&D base1993–2002 Pump Trading Pump Design and2003 Pump Trading Manufacturing2004–2006 Pump Trading Pump Design and Modular Equipment Design Manufacturing and Manufacturing2007–2008 Pump Trading Pump Design and Modular Equipment Design Construction Manufacturing and Manufacturing2009–Today Pump Trading Pump Design and Modular Equipment Design Integrated Solutions Manufacturing and ManufacturingThe sole domestic engineering company in Russia Eurasia Dresser Baker Industry HMS Integra Weir Flowserve Technip Schlumberger Drilling Rand Hughes Power generation √ √ √ Pumps Oil and Gas √ √ √ Water √ √ √Above Oil and gas equipment √ √ √ √ ME*ground Repair √ √ √ Oil and Gas √ √ √ √ EPC Power generation √ Water √ Seismic research √ √ √ √ ServiceUnder Well service √ √ √ √ground Drilling √ √ √ √ Oil production increase √ √ √ √ Russian Foreign Note: * Modular Equipment (Oil & gas equipment) 34
  35. 35. Financial Performance for 2010Comments Revenue, 2009 vs 2010 EBITDA, 2009 vs 2010 Total revenue up 56% yoy to Rub 15.3% 23,070 mn 12.8% The growth reflects: +56% +86% 23,070 3,519  Significant increase in size of orders for pump-based integrated solutions 14,772  Completion of key projects 1,890  Consolidation of GTNG  Stable growth of revenue from ordinary contracts Organic revenue growth of 47% yoy, 2009 2010 2009 2010 excluding impact from GTNG EBITDA margin Source: Company data Source: Company dataEBIT, 2009 vs 2010 ROCE, 2009 vs 2010 Net income, 2009 vs 2010 +1,825bps +133% 36.2% +2,156% 3,027 1,581 18.0% 1,298 70 2009 2010 2009 2010 2009 2010Source: Company data Source: Company data Source: Company data 35
  36. 36. EBITDA Development in 2010 Comments Cost of sales components comparison, 2009 vs 2010  EBITDA increased by 86% yoy to Rub 3,519 mn due to:  Strong revenue growth in all business units 60% 55%  Focus on innovative high-margin contracts  Effective cost control  Consolidation of GTNG 16% 16% 15% 13%  EBITDA organic growth of 72% yoy 5% 5% 4% 3% 2% 2% 2% 1%  EBITDA margin increased to 15.3% Materials Labour Cost of Construction D&A Utilities Others  SG&A grew less than revenue due to economy of scale goods sold works by and cost optimization strategy sub- contractors 2009 2010 Source: Company data 50,000 EBITDA key drivers, 2009 vs 2010 (% of revenue) 0 operating expenses 20.2bn vs 13.7bn in 2009 |+47.2% yoy 2009 2010 revenue in 2010 +56.2% yoy 75.6% 75.3% 3.3% 2.5% 9.1% 12.4% 0.5% 1.9% 0.7% 15.3% 12.6% 3.1% 12.8% 1.5% 7.3% 2.3% Revenue Revenue Cost of sales sales Cost of Distribution and and General & Distribution SG&A Other expenses Operating profit Other expenses Operating profit Depreciation & & Depreciation Others Others EBITDA* EBITDA transport Administrative transport amortisation amortisationSource: Company data expenses expenses expenses expenses 36