HMS Group Announces Financial Results for 1H 2011
OREANDA-NEWS. October 6, 2011. HMS Group plc (the “Group”) (LSE: HMSG), the leading pump manufacturer and provider of flow control solutions and related services in Russia and the CIS, today announces its consolidated condensed interim financial information including independent review report by PricewaterhouseCoopers Limited for the six months ended June 30, 2011.
FIRST HALF 2011 HIGHLIGHTS
Revenue up 51% year-on-year to RUB 13,857 million mainly driven by industrial pump segment growth.
EBITDA* up 175% year-on-year to RUB 3,133 million, with an EBITDA margin of 22.6% compared to 12.5% for 6M 2010 mainly driven by industrial pumps and project and design sub-segments growth.
Operating profit grew by solid 165% year-on-year to RUB 2,743 million with margin of 19.8% compared to 11.3% for 6M 2010.
Debt decreased by 28% year-on-year to RUB 4,599 million with 77% share of long term debt while interest expenses declined by 60% to RUB 198 million.
Profit for the period totaled RUB 2,082 million, up 5.4 times as compared to 1H 2010
Artem Molchanov, Managing Director (CEO) of HMS Group, commented:
"I’m pleased to say that over the first half of 2011 the company consecutively hit the goals that we set for the year and continued to strengthen our positions in the most profitable market segments.
We continued working on several large projects in oil upstream and transportation and by now have already managed to build up sound orders backlog for a mid-term perspective, having signed several significant contracts. Over the rest of the year we plan to keep it growing primarily owing to participation in large scale
Implementing our growth strategy, this summer we completed two M&A deals. For attractive multiples we have acquired companies with complementary business profile that would allow us to enhance existing product portfolio in oil equipment, pumps for oil refineries and metals and mining.
All in all it’s worth mentioning that the company demonstrated another half-year of stable growth, consecutively executing development plans that were presented to the investors during IPO process. I hope that the good results that we achieved will help to bolster investor’s confidence in the company notwithstanding volatility in the global economy.”
FINANCIAL SUMMARY (January – June)
|
(RUB million) |
1H 2011 |
1H 2010 |
YoY Change |
|
Revenues |
13,857 |
9,149 |
51% |
|
EBITDA |
3,133 |
1,140 |
175% |
|
Operating profit |
2,743 |
1,035 |
165% |
|
Profit for the period |
2,082 |
388 |
437% |
|
Basic and diluted earnings per share (RUB per share) |
17.44 |
3.62 |
382% |
|
ROCE** |
50.27 |
25.53 |
n/a |
OPERATING REVIEW
Group
The Group’s revenue increased by 51% year-on-year to RUB 13,857 million in the first half of 2011, primarily driven by solid growth in industrial pumps segment as a result of infrastructure projects implementation in oil transportation and oil fields development. Revenue received from Giprotyumenneftegaz (GTNG), the largest independent R&D institute, which has been acquired in June 2010, made additional contribution to the revenue growth in the reporting period.
Overall order intake1 during the first half of 2011 amounted to RUB 7,870 million as compared to RUB 6,236 million (excluding RUB 12,404 million of ESPO orders) in the corresponding period of the last year, up by 26% year-on-year. Orders in the oil and gas equipment segment demonstrated robust growth of 56% year-on-year from RUB 1,609 million to 2,504. Order intake in the high-margin project and design sub-segment hiked 46 times to RUB 1,258 million mainly due to acquisition of GTNG with its unique capacities to manage the most complicated projects with high R&D share. On the contrary, order intake in low-margin construction sub-segment were intentionally reduced by 47% year-on-year from RUB 976 million in the first half of 2010 to RUB 520 million for the reporting period. In the industrial pumps business order intake grew by 18% year-on-year (excluding RUB 12,404 million orders related to ESPO projects). Thus by the end of the reporting period orders backlog1 became less concentrated as compared with the first half of 2010 with 29.7% coming from oil transportation following by 11.4% in nuclear pumps and 11.1% in EPC segment. Due to seasonality the amount of bookings is stronger in the second half of the year. Given the amount of new orders received in the summer period and existing tender pipeline, the Group is on track to achieve the key indicators budgeted for the year and create stockpile going forward.
Revenue growth of 51% coupled with strict cost management resulted in cost of sales increase of 37% year-on-year to RUB 9,565 million in the first half of 2011. As a result cost of sales declined from 76.2% in the first half 2010 to 69.0% of total revenues in the reporting period.
Distribution and transportation expenses grew in line with total revenue and as a percentage of it remained flat at 2.8% level. General and administrative and other operating expenses amounted to RUB 1,163 million for the first half of 2011, down from 9.7% of revenue to 8.4% on year-on-year basis mainly thanks to economies of scale.
The Group’s EBITDA hiked 2.7 times year-on-year in the first half of 2011, mainly due to the execution of large high-margin infrastructure contracts in oil transportation, margin growth in other market segments of the industrial pumps market, and the consolidation of GTNG. The robust EBITDA performance was supported by operational management improvements, hedging the costs of raw materials and supplies, the higher-than-average profitability of construction contracts. The Group’s EBITDA margin therefore increased to 22.6% in the first half of 2011, compared to 13.5% in the corresponding period of 2010.
Thus the Group demonstrated solid year-on-year growth of operating profit in the first half of 2011 as a result of factors mentioned above. Operating profit amounted to RUB 2,743 million while operating profit margin increased from 11.3% in the first half of 2010 to 19.8% in the reporting period.
The Group’s interest expenses contracted by 60% year-on-year to RUB 198 million in the first half of 2011, compared to RUB 495 million in the same period of 2010 as a result of the drop in interest expenses coupled with 28% contraction of outstanding debt. Total outstanding debt contracted from Rub 6,361 billion as of June 30, 2010 to 4,599 as of the end of the reporting period. The share of interest expenses in revenue decreased from 5.4% in the first half of 2010 to 1.4% in the reporting period.
The Group reported profit for the period of RUB 2,082 million in the first half, up 5.4 times as compared to the same period of the previous year. The profit for the period growth is attributable to the margin increase, strict control over SG&A expenses and a reduction in finance costs.
Industrial Pumps Business Segment
The industrial pumps business segment designs, engineers, manufactures and supplies a diverse range of pumps and pump-based integrated solutions to customers in the oil and gas, power generation and water utilities sectors in Russia, the CIS and internationally. The business segment’s principal products include bare shaft pumps built to standard specifications, customized pumps and pump equipment and integrated pump systems. It also provides aftermarket maintenance and repair services and other support for its products.
The industrial pumps business segment’s external revenues increased by 133% year-on-year in the first half of 2011 and amounted to RUB 8,518 million, compared to RUB 3,656 million for the same period of the previous year. The increase is primarily attributable to the ongoing execution of large-scale projects for the delivery of integrated pumping systems to major customers in the oil transportation sector, as well as a stable order intake of other contracts. Excluding revenue attributable to the integrated solutions, total revenue from industrial pumps segment increased by 8% while EBITDA grew by 25% with healthy EBITDA margin of 20.1%.
EBITDA attributable to industrial pumps business increased by 265% year-on-year in the first half of 2011 to RUB 2,574 million, compared to RUB 706 million in the corresponding period of 2010, mainly driven by large high-margin contracts in oil transportation and power generation and growing profit margin for other types of pumping equipment. The EBITDA margin demonstrated healthy performance and grew to 30.0% from 19.2% in the first half of 2010.
Oil and Gas equipment Business Segment
The oil and gas equipment business segment manufactures, installs and commissions modular pumping stations, automated metering equipment, oil, gas and water processing and preparation units and other equipment and systems for use primarily in oil extraction and transportation. The segment’s products are equipment packages and systems installed inside a self-contained, free-standing structure which can be transported on trailers and delivered to and installed on the customer’s site as a modular but fully integrated part of the customer’s technological process.
The oil and gas equipment business segment’s external revenues decreased by 12% year-on-year in the first half of 2011 to RUB 2,320 million, compared to RUB 2,623 million in the corresponding period of 2010. Main reason for this decline was impressive results achieved by the Group in the previous year due to the participation in large-scale projects on supplying modular equipment for Vankor oilfield. On the contrary, there were no orders of the same size placed over the first half of 2011 on the market. The segment’s EBITDA declined by 56% year-on-year to RUB 127 million in the reporting period, compared to RUB 285 million in the first half of 2010. The EBITDA margin fell to 5.5%, compared to 10.9% in the first half of 2010.
Group’s bookings are expected to grow by the end of the year driven by current talks with clients and tenders on new high-margin infrastructure projects in
Engineering, Procurement and Construction (EPC) Business Segment
The engineering, procurement and construction (EPC) business segment projects and designs, manages and constructs projects, including on a turn-key basis, for customers in the upstream oil and gas, oil and gas transportation and water utilities sectors.
External revenues of the EPC business remained almost flat with the slight decline of 2.1% year-on-year to RUB 2,798 million for the first half of 2011, compared to RUB 2,857 million in the corresponding period of 2010. The Group intentionally rejected the opportunities driven by low-margin construction contracts. Such approach brought the fruits and EBITDA margin in construction sub-segment (excluding project and design) almost reached pre-crisis level and stood at 5.3%, though at the expense of revenue growth. Revenue from construction sub-segment decreased by 40.7% year on year to RUB 1,637 million. Despite conclusion of several large contracts during August-September 2011 the Group still sticks to conservative projections on construction sub-segment development for the rest of the year.
On the contrary, focus on execution of high-end contracts in project and design with deep R&D contribution allowed the Group to demonstrate robust EBITDA margin of 23.1% in the project and design sub-segment for the first half of 2011 while revenue grew 10.2 times year on year to RUB 1,170 million as a result of GTNG acquisition.
Thus EBITDA growth in EPC segment amounted to 171% year-on-year, up from RUB 131 million for the first half of 2010 to RUB 356 million for the first half of 2011 with average EBITDA margin of 12.7%
FINANCIAL REVIEW
As a result of working capital increase net cash outflow from operating activities amounted to RUB 1,423 million in the first half of 2011, compared to net cash inflow of RUB 2,352 million in the first half of 2010. This difference is explained by significant advances which were received in 2010 for oil transportation contracts under the contracts that have been executing during 2011. Prefinal payments for these contracts are expected in 2012.
Net cash outflow from investing activities totaled RUB 1,726 million in the first half of 2011, compared to RUB 2,614 million in the first half of 2010. Capital expenditures increased by 46% year-on-year to RUB 438 million that is in line with our target range of 1,5-2,5 D&A while the main part of the rest of outflow from investing activities was assigned with M&A deal conducted in the reporting period.
The total debt contracted by 28% year-on-year to RUB 4,599 million in the reporting period, compared to RUB 6,361 million in the first half of 2010 due to significant debt redemptions from the funds attracted during IPO process. However during the second quarter of 2011 total debt expanded by RUB 1,912 million primarily due to acquisition of Sibneftemash for RUB 1,292 million. The rest RUB 620 million of the debt was used for working capital expansion driven by execution of existing projects. By the end of the first half of 2011 77% of total debt was represented by long-term facilities.
The net debt to EBITDA (taken for the last 12 months) ratio amounted to conservative 0.74 assuming the Group’s ability to attract additional funding for business development going forward. The Group’s cash balances stood at RUB 494 million by the end of the first half of 2011, compared to RUB 1,871 million by the end of the first half of 2010. Last year the Group accumulated outstanding cash position due to advances obtained ahead of the large-scale projects implementation in the first half of the previous year which could be considered as one-off. Ability of the Group to meet its debt obligation substantially improved over the reporting period with interest coverage ratio based on last 12M performance of 9.3, up from 2.0 for the first half of 2010.
The Group’s net working capital amounted to 23% of total revenue for the last 12 months, compared to 13% for the first half of 2010. Net working capital is expected to keep rising over the rest of the year as a result of ongoing implementation of the orders contracted in 2010. However increase of working capital offsets by pre-final payments on the oil transportation contracts next year. Together with advance payments for contracts concluded in the second half of 2011 it could maintain our working capital in its target range of 10-15% of total revenue.
M&A Activity
In June, 2011 the Group successfully completed acquisition of Sibneftemash (SNM), an oilfield equipment manufacturer in Tyumen Region, for a total cash consideration of RUB 1,292 million funded from available debt facilities of the Group. In August, 2011 HMS Group acquired 57% as a result of purchase of primary shares of a share capital of Bobruisk Machine Building Plant (BMBP), located in Bobruisk, Belarus – one of the largest manufacturers of specialist centrifugal pumps in the CIS - for a total cash consideration of USD 9.7 million (Rub 271 million). Both deals conducted with attractive multiplies will allow to broaden product line of HMS Group with complimentary equipment manufactured by SNM and BMBP and offer good potential for revenue and margin growth.
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