Group revenue was up by 11 percent yoy and reached a new high of Rub 41,582 million, growing for the third year in a row.
In terms of revenue mix, this growth was supported the most by recurring products. In 2016, recurring business increased by 15 percent and as a share of revenue amounted to 75 percent vs. 73 percent last year. Here, machine-building recurring products1 grew by 18 percent yoy. Revenue from large contracts also grew, but at a slower pace, by only 3 percent yoy.
In terms of segments, the compressors business segment was the driver of the revenue increase because of large contracts.
|Financial highlights, Rub mn||2016 FY||2015 FY||Change yoy|
EBITDA margin decreased to 15.3 percent from 20.0 percent in the comparative period due to two main factors:
EBITDA declined by 14 percent yoy to Rub 6,369 million mainly because of the decline in the pumps business segment due to smaller share of large contracts, especially in 1Q 2016. The pumps’ EBITDA was almost completely generated by recurring business. In the oil & gas business segment, EBITDA generated by large contracts declined, and recurring business, in contrast, grew significantly, due to a higher profitability of innovative projects, among other things. Also, there was a high basis of comparison for the oil & gas equipment segment last year. The compressors segment increased its share in the company’s EBITDA as well as in the large contracts’ portfolio.
Cost of sales increased by 19 percent yoy to Rub 30,799 million compared with Rub 25,783 million. This growth outpaced revenue (+11% yoy) and was driven by materials and components (+22% yoy). The main reason was a change in the prevailing type of contracts, which became more material-intensive in particular because of a specific nature of KKM’s contracts. Labour costs stayed unchanged, and as a share of revenue even decreased to 11 percent from 12 percent.
|Cost of sales, Rub mn||2016 FY||2015 FY||Change yoy||Share of
revenue 2016 FY
revenue 2015 FY
|Cost of sales||30,799||25,783||19%||74.1%||69.1%|
|Supplies and raw materials||20,172||16,520||22%||48.5%||44.3%|
|Construction & design and engineering|
services of subcontractors
|Depreciation and amortization||1,340||1,281||5%||3.2%||3.4%|
Operating expenses excl. Cost of sales grew by 3 percent yoy to Rub 6,771 million, whilst as a percentage of revenue decreased to 16.3 percent.
|Expenses other than|
Cost of sales, Rub mn
|2016 FY||2015 FY||Change yoy||Share of
revenue 2016 FY
revenue 2015 FY
|Distribution and transportation||1,700||1,378||23%||4.1%||3.7%|
|General and administrative||4,523||4,603||-2%||10.9%||12.3%|
|Other operating expenses||548||624||-12%||1.3%||1.7%|
|Operating expenses ex. Cost of sales||6,771||6,605||3%||16.3%||17.7%|
Distribution and transportation expenses increased by 23 percent yoy and amounted to Rub 1,700 million. As a percentage of revenue, they also grew, to 4.1 percent from 3.7 percent. Major contribution to the increase was made by transportation expenses and other expenses related to contracts’ execution. Here, transportation expenses grew due to a growth of the number of heavy and oversized products dispatched as well as more deliveries to remote northern regions of Russia.
General and administrative expenses declined by 2 percent to Rub 4,523 million.
SG&A expenses2 grew by 4 percent yoy to Rub 6,223 million, with lower share in revenue (15% in 2016 vs 16% in 2015). The growth of SG&A expenses was mainly because of an increase in transportation costs.
Operating profit declined by 20 percent to Rub 3,624 million compared with Rub 4,525 million because of the lower EBITDA. Operating margin decreased to 8.7 percent (2015: 12.1%).
Finance costs declined by 9 percent yoy to Rub 1,905 million. Foreign exchange revaluation gain more than compensated for the growth of interest expenses of 11 percent yoy.
As of January 1, 2017, average interest rate grew to 12.2 percent (01.01.2016: 11.4 percent), where Ruble-denominated only, in contrast, decreased to 12.4 percent (01.01.2016: 12.5 percent). Within a year, interest rate increased during the first 9 months. The reasons for the growth were the same as in the previous reporting period: a Euro-denominated loan was refinanced with a Ruble-denominated one, “old” before-the-crisis loans at low interest rates were replaced with more expensive ones. But since 4Q 2016, the average interest rate began to decrease.
Profit for the year decreased by 32 percent yoy to Rub 1,198 million from Rub 1,764 million, due to the lower operating profit. And profit for the year adj. equaled to Rub 1,587 million, down 26 percent from Rub 2,148 million.
The reportable operating segments derive their revenue primarily from the manufacture and sale of industrial pumps, oil and gas equipment, compressors, oil and gas construction and other products and services. From 2015 onwards, HMS Group reports a total segment’s revenue, which includes external revenue and intersegment revenue, for more consistent demonstration of the performance of each segment.
The industrial pumps business segment’s revenue declined by 7 percent yoy to Rub 16,724 million. EBITDA decreased by 33 percent yoy to Rub 2,755 million. As a result, EBITDA margin decreased to 16.5 percent.
The main reason for the lower financials was a decline in the share of large high-margin contracts in revenue and EBITDA. Here, EBITDA was almost completely generated by recurring business with lower margin.
|Industrial pumps, Rub mn||2016 FY||2015 FY||Change yoy|
Revenue stayed almost flat at Rub 15,144 million and EBITDA was down by 7 percent yoy to Rub 3,032 million. From the perspective of recurring business, the oil & gas equipment segment continued to deliver strong results.
There was a twofold decrease in revenue from large contracts in the oil & gas business segment, but recurring business almost substituted them. EBITDA generated by large contracts declined. Recurring business, in contrast, showed significant growth in EBITDA terms. Also, the oil & gas equipment segment last year demonstrated a high basis of comparison.
EBITDA margin declined to 20.0 percent because of a larger share of recurring business. But, margins for recurring oil & gas equipment are higher than in the previous periods due to a higher level of innovation and added value of new equipment put into operation.
|Oil & Gas equipment, Rub mn||2016 FY||2015 FY||Change yoy|
Revenue grew by 108 percent to Rub 8,700 million, and EBITDA increased to Rub 619 million mainly due to growing portfolio of large contracts. EBITDA margin was almost the same 7.1 percent vs. 7.5 percent in the compared period.
|Compressors, Rub mn||2016 FY||2015 FY||Change yoy|
The EPC business segment continued its negative dynamics. Revenue was down to Rub 2,297 million from Rub 2,617million. EBITDA dropped to minus Rub 75 million from plus Rub 180 million due to poor performance of the both sub-segments: project & design and construction. These weak results are a direct consequence of the shrinking contracts portfolio because of tougher pricing of oil & gas majors and stronger competition in the stagnating market for a small number of orders. As a result, EBITDA margin turned negative 3.2 percent from positive 6.9 percent last year.
|EPC, Rub mn||2016 FY||2015 FY||Change yoy|
|EBITDA margin EPC||-3.2%||6.9%|
Working capital3 increased by 13 percent yoy to Rub 9,962 million because of the continuing execution of large contracts. But as a share of revenue it stayed stable at 24 percent.
|Working capital, Rub mn||2016 FY||2015 FY||Change yoy|
|Working capital / Revenue LTM||24%||24%|
Despite the increase in working capital, HMS Group generated net operating cash inflow of Rub 1,808 million.
HMS’ capex grew 17 percent. This growth affected Net cash used in investing activities, the net outflow of which increased to Rub 1.8 billion (2015: Rub 1.4 billion).
The company continues execution of its Localization project4 where it invested Rub 665 million during 2016 year. Excluding these capital expenditures, HMS raised its maintenance capex by 26 percent yoy to Rub 1.0 billion. In 2014-2015, the company reduced its capital expenditures due to the economic crisis in Russia and imposed sanctions, and today is increasing them to a “normal” level required for further development.
Increased investment activities decreased free cash flow5, which amounted to Rub 20 million.
|Cash flow performance, Rub mn||2016 FY||2015 FY||Change yoy|
|Net cash (used in)/from operating activities||1,808||1,881||-4%|
|Net cash used in investing activities||-1,788||-1,431||25%|
|Free cash flow (FCF)||20||451||-95%|
|Net cash (used in)/from financing activities||-394||-1,594||-75%|
|Cash & cash equivalents||2,990||3,496||-14%|
Cash & cash equivalents were down to Rub 3.0 billion vs. Rub 3.5 billion last year.
Net cash (used in)/from financing activities increased by Rub 1.2 billion.
Total debt increased by 3 percent yoy to Rub 16,336 million. Net debt grew by 8 percent yoy to Rub 13,347 million because financing cash flows (buy back of issued shares, dividends paid and purchase of a stake of Apollo), that totaled almost Rub 1.1 billion, weren’t covered by free cash flow of Rub 20 million. Larger Net debt and lower EBITDA resulted in the higher 2.10x Net debt-to-EBITDA LTM ratio.
In December 2015, the Group exercised its right under the option agreement to acquire the remaining 25% share in Apollo Goessnitz GmbH. Share purchase transaction was legally completed in February 2016, and, as a result of this transaction, the Group increased its ownership interest in Apollo Goessnitz GmbH from 75% to 100%.
|Debt & Liquidity, Rub mn||2016 FY||2015 FY||Change yoy|
|Net debt / EBITDA LTM||2.10||1.66|
Fitch Ratings assigns JSC “HMS Group” (legal entity, the holder of HMS Group’s assets, located in Russia) a first time Foreign and Local Currency Issuer Default Rating (IDR) of “B+”, the outlook “Stable”.
In March 2017, HMS Group signed two large contracts: Rub 3.9 billion for delivery of compressor equipment and Rub 10.2 billion for delivery of oil & gas equipment.
In February 2017, HMS Group successfully placed a Rub 3.0 billion exchange bonds issue of JSC “Hydromashservice”, one of the main operational subsidiary of the Group. The company came back to the public debt capital markets with Rub 3 billion 10.75 per cent coupon bonds with a 3-year put option and 10-year maturity. It was the first HMS Group debt issuance since 2013.
The same month, HMS signed a credit agreement with UniCredit Bank totaling Rub 800 million. The 3-year loan facility with maturity in 2020 was utilized for general corporate needs, including refinancing at lower interest rates its previously signed credit lines.
As of mid-April, 2017, average interest rate of Ruble-denominated loans decreased to 11.2 percent and to 11.0 percent for all loans, including
In April 2017, HMS did the following, among other things:
Due to the change in the internal management and reporting structure effective 1 January 2017, the results of the Group’s subsidiaries Giprotyumenneftegaz PJSC and Institute Rostovskiy Vodokanalproekt OJSC since 1 January 2017 will be presented within “Oil and gas equipment” segment, whereas previously these entities were included in “Engineering, procurement and construction” and “Industrial pumps” segments, respectively. Additionally, starting from 1 January 2017, “Engineering, procurement and construction” segment will be renamed “Construction” segment, and “Oil and gas equipment” segment will be renamed “Oil and gas equipment and projects” segment. Because such changes occurred after the period end, they have not been reflected in the segment information herein, but will be reflected for the first time in the reporting period for 2017.
During the period from December 1, 2016 up to and including April 26, 2017, HMS Group repurchased 37,693 of its global depositary receipts (“GDRs”). The share repurchases are part of the Company’s buy-back program. In total, HMS Group purchased 903,562 GDRs (3.86 percent of its issued share capital).___________________________