On October 8, 2020, HMS Group, the leading manufacturer of pumping, oil and gas equipment, compressors and flow control solutions, and related systems in Russia and the C.I.S., announced its financial results for the six months ending June 30, 2020.

Financial highlights for first six months of 2020

• Turnover: 19.5 billion rubles (minus 17 percent against previous year);

• EBITDA: 2.1 billion rubles (plus eight percent against previous year), EBITDA margin at 10.8 percent;

• Operating profit: 524 million rubles (minus 13 percent);

• Loss for the period: 314 million rubles;

• Total debt: 22.8 billion rubles (plus 14 percent against previous year);

• Net debt: 16.2 billion rubles (plus 4.0 percent against previous year);

• Net debt to EBITDA LTM (most recently completed 12-month period): 3.25x.

Operational highlights

• Backlog: 55.0 billion rubles (plus 27 percent against previous year);

• Order intake: 30.4 billion rubles (plus 24 percent against previous year).

FY2020 guidance

• Revenues: 50-55 billion rubles;

• EBITDA: 4.7-5 billion rubles;

• Current operating results do not imply net income for the financial year 2020;

• HMS is unlikely to pay dividends for fiscal year 2020, taking into account expected annual results and macroeconomic risks.

Order intake rose from 11.2 billion rubles in the reporting period to 30.4 billion rubles (24.5 billion rubles for the six months of 2019) due to a major order for compressors.

The backlog also grew to 55.0 billion rubles, up 27 percent from 43.4 billion rubles last year. All major business segments recorded growth, especially compressors. Both recurring business and major new orders increased against the figure from the first six months of 2019.

Revenue decreased by 17 percent to 19.5 billion rubles compared to 23.4 billion rubles in the six months of 2019, mainly due to a decrease in the compressors business segment.

EBITDA increased to 2.1 billion rubles, an increase of eight percent from 2.0 billion rubles in the previous year, reflecting the recovery of oil and gas assets and projects in the business segment.

Recurring revenues decreased nine percent year-on-year, while revenues from major projects decreased by 34 percent year-on-year. EBITDA from recurring operations increased by 39 percent year-over-year. EBITDA from major projects decreased by 18 percent year-over-year.

The EBITDA margin increased to 10.8 percent, compared to 8.3 percent for the six months of 2019.

The loss for the first six months of 2020 amounted to 314 million rubles, which was higher compared to the loss for the first six months of 2019 in the amount of 178 million rubles.

As a result of the cost optimization program, free cash outflow was 1.5 billion rubles compared to the outflow of 1.9 billion rubles for the first six months of 2019, despite lower revenue.

Costs and operating profit

The cost of sales decreased by 18 percent to 15.5 billion rubles compared to 19.0 billion rubles in the first six months of 2019 due to materials and components (a decrease of 28 percent), which correlated with lower earnings and a lower share of major orders during the reporting period.

Gross profit decreased to 4.0 billion rubles, a decrease of 11 percent compared to 4.4 billion rubles in the same period last year.

Sales and transport costs decreased by five percent compared to the previous year. In relation to revenue, distribution and transport costs were 4.6 percent, which is a larger percentage compared with 4.1 percent last year.

General and administrative expenses decreased by 13 percent from 2.8 billion rubles in the previous year to 2.4 billion rubles, mainly due to lower labor costs and related social taxes (a decrease of 16 percent).

The share of general and administrative expenses in sales rose to 12.3 percent from 11.8 percent in the six months of 2019.

Selling, general, and administrative expenses decreased by 11 percent year-on-year thanks to the cost optimization program implemented. They accounted for 17.0 percent of revenue, compared with 15.8 percent in the six months of 2019.

Operating profit decreased to 524 million rubles, compared with 602 million rubles in operating profit for the first six months of 2019.

Financing costs amounted to 941 million rubles, compared to 838 million rubles for the six months of 2019 due to the increase in interest expenses (an increase of 13 percent on the previous year) due to the higher total debt (an increase of 14 percent). The average rate fell to 8.21 percent per annum (p.a.), compared with 8.78 percent p.a. last year.

Business segment results

Industrial pump order intake decreased by 24 percent year-on-year to 8.0 billion rubles, compared with 10.6 billion rubles for the first six months of 2019. In the reporting period, fewer orders were signed due to the COVID-related postponement of some tenders until the second half of 2020.

As a result of recurring business, the backlog grew slightly by one percent to 19.7 billion rubles, compared with 19.4 billion rubles for the first six months of 2019.

Revenue amounted to 8.3 billion rubles, an increase of four percent compared to 8.0 billion rubles in the six months of 2019. The growth was boosted by recurring business, as well as large orders.

EBITDA decreased to 1.0 billion rubles from 1.1 billion rubles for the first six months of 2019 due to a high percentage of recurring business in the reporting period. Recurring business is generally less profitable. Deliveries under certain nuclear pump contracts have also been postponed to the second half of 2020 and 2021 due to COVID-19.

The EBITDA margin was 12.3 percent, compared to 13.4 percent for the six months of 2019.

Oil and gas equipment and projects

New orders rose to 6.7 billion rubles, an increase of one percent over the previous year.

The backlog increased by 10 percent to 8.3 billion rubles, compared with 7.6 billion rubles for the initial six months of 2019, as a result of a major contract signed in the second quarter of 2020.

Sales fell to 5.2 billion rubles, down 13 percent compared to 5.9 billion rubles in the six months of 2019. EBITDA rose to 243 million rubles compared to 250 million rubles, and the EBITDA margin was 4.7 percent compared to 4.2 percent for the six months of 2019, which is fully attributable to the recovery of recurring business. Deliveries and the execution of a number of major projects have been postponed to the second half of 2020 and 2021 due to the customers’ and suppliers’ cessation of production associated with COVID-19.

Order intake increased by 115 percent over the previous year to 15.5 billion rubles, compared with 7.2 billion rubles, thanks to a large compressor contract for 10.2 billion rubles signed in the first quarter of 2020.

The backlog increased by 78 percent to 26.4 billion rubles compared to 14.9 billion rubles in the previous year. The growth was supported by recurring business as well as large orders.

Revenue decreased by 35 percent to 5.8 billion rubles compared to 8.9 billion rubles, and EBITDA decreased by 22 percent to 653 million rubles compared to 835 million rubles, all due to lower sales and EBITDA from major orders.

The EBITDA margin increased to 11.3 percent compared to 9.3 percent for the six months of 2019.

Construction

The order intake amounted to 210 million rubles. The backlog amounted to 690 million rubles.

Turnover fell to 406 million rubles, compared with 695 million rubles for the six months of 2019. EBITDA was 39 million rubles, compared with 15 million rubles last year.

Working capital and capital expenditures

Working capital increased to 10.5 billion rubles, up 10 percent from 9.5 billion rubles for the initial six months of 2019, due to quarterly volatility. The share of working capital in revenues increased to 22.1 percent, compared to 17.1 percent for the six months of 2019.

Investments fell to 743 million rubles, or seven percent, compared to 800 million rubles last year.

Debt

Total debt increased to 22.8 billion rubles, up 14 percent compared to 20.0 billion rubles in the six months of 2019. Net debt increased to 16.2 billion rubles, up four percent compared to 15.6 billion rubles in the six months of 2019. The ratio of net debt to EBITDA LTM (most recently completed 12-month period) increased to 3.25x compared to 2.97x for the six months of 2019.

Financial management

In July 2020, HMS Group successfully placed bonds of the joint-stock company Hydromashservice, one of the operating subsidiaries of the company, to the tune of three billion rubles with a coupon of 8.15 percent. On October 2, 2020, the Group placed another exchangeable bond issued by the joint-stock company Hydromashservice in the amount of three billion rubles with a coupon of 7.95 percent. Together with the bond placements, the company extended the 2.1-billion-ruble credit facility from Raiffeisen Bank until 2022.

As a result of these measures, HMS refinanced a total of 7.6 billion rubles and shifted debt payments from 2021-2022 to 2022-2023.

Contracts

HMS announced the signing of two contracts worth a total of one billion rubles for the supply of pumps: one related to petrochemicals, the other to maritime applications.

In August 2020, HMS signed a long-term framework contract to produce mobile compressor units worth 3.8 billion rubles. The agreement was signed in 2019.

In August 2020, the company also announced the signing of a 4.5-billion-ruble contract to develop and manufacture gas compressors to be installed at a customer’s filling station in 2021.

In September 2020, HMS Group announced the signing of a contract worth 1.9 billion rubles for the development and manufacture of gas transport units, which are to be delivered by the end of 2021.

Credit ratings

In July 2020, Fitch Ratings confirmed the Foreign- and Local-Currency Issuer Default Ratings (IDR) of JSC HMS Group of “B+,” with a “Stable” outlook.

The rating reflects a forecast of sustainable operating performance supported by a healthy order backlog, a leading market position, a strong customer base, comfortable liquidity, and a gradual recovery in the oil price expected in the medium term.

Dividends

The final dividend for the 2019 financial year of 3.41 rubles per ordinary share (i.e. 17.05 rubles per depository receipt) was paid to shareholders on June 30, 2020.