ANNUAL REPORT
2014
CONTENT
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CONTENT
OVERVIEW
HMS Group is a major pump and compressor equipment producer
and provider of flow control solutions and related services for oil and
gas, nuclear and thermal power generation, utilities and water supply
in Russia and the CIS countries as well as one of the leading
manufacturers of skid mounted modular oilfield equipment. We are a
dynamic engineering company with successful practice in design,
installation and construction and the commissioning of complex oil
and gas production and water facilities.
MARKETS IN 2014
The year 2014 was marked by four key developments that have
significantly contributed to the up-to-date performance of the global
economy and will be shaping the global outlook for 2015-2016.
Who we are
Highlights
Chairman’s and CEO statements
Map of operations
Investment theses
Strategy
History
Business model
2014 in context
Macroeconomic development
Market trends:
Oil industry
Power generation and
water utilities
PERFORMANCE IN 2014
Backlog increased by 23% yoy to Rub 27.5 billion vs. Rub 22.3 billion,
while order intake stayed almost flat year-on-year at Rub 34.7 billion,
driven by a steady demand despite downturn and economic
uncertainty.
Operating performance
Financial performance
HMS key projects
R&D development
Corporate social responsibility
GOVERNANCE
HMS Group’s corporate governance practices are designed to ensure
that the interests of all its stakeholders are given due consideration.
BoD and its committees
Risk management and internal control
HMS GDRs
ADDITIONAL INFORMATION
Shareholder’s info and
Disclaimer
04
06
08
10
12
14
16
18
20
22
24
26
28
34
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42
46
50
52
02 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 03
OVERVIEW
WHO WE ARE
Who we are
Highlights
Chairman’s and CEO
statements
Map of operations
Investment
theses
Strategy
History
Business
model
2014 in context
HMS Group is a major pump and compressor equipment producer and provider
of flow control solutions and related services for oil and gas, nuclear and thermal
power generation, utilities and water supply in Russia and the CIS countries as
well as one of the leading manufacturers of skid mounted modular oilfield
equipment.
We are a dynamic engineering company with successful practice in design, installation and construction and
the commissioning of complex oil and gas production and water facilities. HMS Group is a vertically integrated
holding with a modern corporate management system in which the functions of the manufacturing companies’
shareholders and that of business administration are traditionally separated. Our parent holding company is HMS
HYDRAULIC MACHINES & SYSTEMS GROUP PLC (the Republic of Cyprus), which issued securities in the form of
Global Depositary Receipts at the London Stock Exchange in February 2011. The company operates through four
divisions which employ over 15,500 people in Russia, Ukraine, Belarus and overseas.
INDUSTRIAL PUMPS
OIL & GAS EQUIPMENT
COMPRESSORS
ENGINEERING, PROCUREMENT AND
CONSTRUCTION (EPC)
RUB 16,270 MN Revenue
19% EBITDA margin
9.1 thousand employees
RUB 10,220 MN Revenue
19% EBITDA margin
1.9 thousand employees
RUB 2,474 MN Revenue
-10% EBITDA margin
2.5 thousand employees
RUB 3,355 MN Revenue
15% EBITDA margin
1.8 thousand employees
Description
The industrial pumps business segment is our oldest division. It
designs, engineers, manufactures and supplies a diverse range of
pumps and pump-based integrated solutions to customers in oil and
gas, power generation and water utilities sectors in Russia, the CIS
and internationally. It also provides aftermarket maintenance, repair
services and other support for its products.
Description
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 used primarily for oil extraction and
transportation.
Core products and services:
– Water injection;
– Trunk pipelines;
– Oil refineries;
– Nuclear and Thermal power;
– Water utilities;
– General industrial pumps.
Core products and services:
– Oil pumping stations and pump stations for water injection;
– Oil & gas and water processing units;
– High-precision and automated metering units;
– Tanks, reservoirs and vessels;
– Oil development equipment.
Description
The compressor business segment was established after the
acquisition of leading Russian compressor producer
Kazankompressormash (KKM) in July 2012. In 2013, it was bolstered
by the acquisition of NIITK, a research & design institute providing
compressor technologies. The division designs, engineers,
manufactures and supplies a diverse range of compressors and
compressor-based solutions to customers in oil and gas, metals and
mining and other core industries in Russia.
Description
The engineering, procurement and construction (EPC) business
segment provides design and engineering services, project
management and construction work for projects for customers in oil
upstream and midstream, gas upstream and water utilities sectors.
Core products and services:
– Oil and gas projects focused on design and planning;
– Oilfield surface infrastructure and pipeline construction.
Core products and services:
– Oil and gas production;
– Oil and gas transportation;
– Gas processing;
– Oil refineries;
– Oil and gas chemistry;
– Refrigeration applications for various industries.
04 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 05
OVERVIEW
HIGHLIGHTS
HMS Group is a dynamically growing diverse corporation that combines leading
manufacturing (рumps, compressors, oil & gas equipment), engineering and
construction companies. Our markets are oil & gas, nuclear and thermal power
generation, water supply & utilities, metallurgy, etc.
Name
Backlog
Order intake
Revenue
EBITDA, adj.
Net debt
EPS
Dividend per share
ROCE
UNIT
Rub mn
Rub mn
Rub mn
Rub mn
Rub mn
Rub
Rub
%
2013 FY 2014 FY Change yoy
22,333
34,814
32,358
5,238
11,103
8.99
3.4
13.9%
27,510
34,705
32,351
5,272
12,432
-13.83
-
11%
23%
0%
0%
+1%
+12%
-
-
-
Who we are
Highlights
Chairman’s and CEO
statements
Map of operations
Investment
theses
Strategy
History
Business
model
2014 in context
Revenue
EBITDA
32,358
32,351
28,960
6,149
5,238
5,272
32,351
RUB mn
5,272
RUB mn
2012 2013 2014
2012 2013 2014
Backlog
Order intake
Net debt
Total debt
27,510
22,333
33,086
34,814
34,705
12,064
11,103
12,432
13,410
12,687
16,967
27,510
RUB mn
18,963
34,705
RUB mn
12,432
RUB mn
16,967
RUB mn
2012 2013 2014
2012 2013 2014
2012 2013 2014
2012 2013 2014
06 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 07
OVERVIEW
Who we are
Highlights
Chairman’s and CEO
statements
Map of operations
Investment
theses
Strategy
History
Business
model
2014 in context
CHAIRMAN’S STATEMENT
CEO STATEMENT
Building a more focused,
efficient and stronger
company.
Сhairman
Nikolay Yamburenko
Chief Executive Officer
Artem Molchanov
Dear Shareholders,
2014 proved to be a distinguishing year for HMS Group. It was a
year of funding constraints, sanctions, low oil prices and a weak
ruble.
Downward trends in the Russian economy as well as the
slowing-down of investment activities in the Group’s core markets
due to imposed sanctions and limited access to capital led to delays
in customer tenders for new large infrastructure projects, which we
have historically considered priorities for our strategic development.
Nevertheless, this year we signed 2 large-size contracts to deliver
oil & gas equipment.
HMS Group pursued an active M&A strategy over the previous few
years. The key reasons for this strategy were to intensify our
presence in existing markets, enter new markets, and add new
products to our product portfolio. The acquired companies
contributed positively to the Group’s overall development. HMS
Group focused on organic development in 2014.
HMS Group has delivered creditable results, which illustrate the
intrinsic resilience of our Company. We completed large scale
projects in the industrial pumps segment in 2014, and supplemented
them with oil and gas equipment contracts. All our business
segments, excluding compressors, showed results in line with
our expectations. The lower-than-expected performance in our
compressor business was a direct consequence of the deteriorating
market conditions in Russia and postponed large tenders.
Meanwhile, our reorganized and restructured EPC business
segment delivered solid results, and we see opportunities for its
further improvement and development.
In my opinion, the theme of this annual report, Expertise Stability
Innovation, accurately demonstrates our business model. Over 20
years, we have transformed a small trading company into a leading
industrial Group, which offers a full range of products and services
for flow control solutions.
Now it is time to optimise the Group’s structure, completely integrate
our acquired assets, and rearrange them with increased efficiency
in order to benefit from synergies and interaction across all business
segments.
Our priority is to improve business performance by unlocking
productivity improvements and leveraging our expertise throughout
our operations.
Business optimization also means an improvement in the quality
of our backlog through greater project selectivity, an emphasis on
operational performance to drive earnings, an improvement in our
capital structure and further diversification of our existing
end-markets and clients.
Internal focus is also concerned with providing a safe and healthy
work environment. Our target is to have zero work-related
accidents. Our people continue to be HMS Group’s main and the
most valuable resource.
Outlook for 2015
We expect 2015 to continue to present challenges for us. The
outlook for the Russian economy remains unchanged, so there are
still high uncertainties regarding the long-term trends. Nevertheless,
we remain confident about the future prospects of our business.
Building on our leading market positions and strategic priorities,
HMS Group is well-positioned for long-term success and profitable
growth. We believe that our markets still offer a lot of potential and
our optimisation programme, which is already underway, will make
us even better positioned to take advantage of our anticipated
opportunities.
Yours faithfully,
Nikolay Yamburenko
08 HMS GROUP || Annual report 2014
Dear Stakeholders and Partners of HMS Group,
The slowdown in the Russian economy began in 2013, and HMS
Group faced problems with its construction sub-segment, which
generated losses. The management fixed them by selling one of our
loss-making construction companies, Sibkomplektmontazhnaladka,
and significantly restructuring along with cost cutting program
another construction asset Tomskgazstroy. As a result, EPC segment
returned to positive territory in 2014 and showed impressive growth
in profitability.
Challenging market conditions in 2014 were further complicated by
international sanctions, affecting the accessibility to credit resources
and their borrowing costs, the depreciated ruble and the more than
the threefold raise of the key rate. And last year the management
faced another difficulty related to the compressors segment and
caused by periodic volatility of Kazankompressormash’s orders
portfolio, but the recent growth of backlog assumes that the
problem has been remedied.
However, against all the odds, I am pleased to report on HMS’
sustainable operating highlights in 2014 – stable revenue with a
higher EBITDA and EBITDA margin, an increased backlog and a
solid order intake.
Herein, it is critical to emphasize our ability to counter crises,
emerge from them and strengthen our company’s resistance. In
general, HMS Group’s entire history from 1993 to today can be
described as a life in constant crisis and tough competition. The
nineties and the first half of the 2000s were a period of high interest
rates, low customer demand and lack of access to credit
resources. Despite the above factors, by 2007 we were the largest
pump producer in Russia.
Then came the crisis of 2008. In the next few years we boosted the
Group’s revenue and EBITDA twofold.
Today we are experiencing another crisis. Whatever
macroeconomical factors we have and environment we operate –
within the former USSR, on almost 1/6 of the Earth’s habitable land,
HMS Group, perhaps, is the best in the design, production and sales
of pumping and compressor equipment … and I’m assured of that
because thanks to our team we will get through this crisis
successfully.
In 2014, we replaced the large-scale ambitious ESPO project by two
new large projects, in total worth over 12 billion rubles. The first
contract was to deliver an integrated oil and gas equipment solution
for a major Siberian gas field and the second - to deliver equipment
for the extraction, transportation and processing of liquid
hydrocarbons.
If speaking about standard equipment, in 2014, the influx of small
and mid-size orders was comparable to 2013, proving the
reliability of our business model. Also, while working on the Iraq
market, we expanded our export portfolio up to several tens of
millions US dollars.
During the banking crisis in December 2014, we accumulated 2
billion rubles of own cash to be used against near debts repayment.
As a result, even in this difficult economic environment, our Net
debt/EBITDA ratio stood at a healthy level of 2.36.
We are working on enhancing HMS’ resilience to crisis phenomena
and boosting the company’s development. In the whole, the
company put in great efforts on diversification by:
– clients where Gazprom became one of the largest customers;
– segments and markets with entrance into a new market of gas
projects;
– geographical with export portfolio exceeding 30% of total pumps
backlog.
Though the markets remain highly volatile and current
developments are further impacting visibility, I believe that HMS
Group will demonstrate better performance in the upcoming period.
Yours faithfully,
Artem Molchanov
Annual report 2014 || HMS GROUP 09
OVERVIEW
Who we are
Highlights
Chairman’s and CEO
statements
Map of operations
Investment
theses
Strategy
History
Business
model
2014 in context
MAP OF OPERATIONS
Hydromashservice
4
VNIIAEN
Founded in 1993.
Description: the associated trading company of the HMS Group
Products: pumps and units, compressors and units, oilfield,
measuring and oil&gas equipment
Services: commissions, installation supervising, repair, service
maintenance and equipment upgrade
Website: http://www.hms.biz
Location: Moscow, Russia
HMS Headquarters
HMS Group Management Company
Founded in 1993.
Description: managing company of all HMS Group’s assets.
Website: http://www.grouphms.com
Location: Moscow, Russia
INDUSTRIAL PUMPS
1
Apollo Goessnitz GmbH
Founded in 1863.
A member of HMS Group since 2012.
Products: process and standard pumps and systems, system
engineering - projecting, design and manufacture of plants for liquid
fuels, process plants, plants for water supply, automation systems
and electrical.
Apollo is certified according to ISO 9001 by Lloyd’s Register Quality
Assurance.
Website: http://www.apollo-goessnitz.de
Location: Goessnitz, Germany
2
Promburvod
Founded in 1927.
A member of HMS Group since 2007.
Products: electric driven submersible pumps for water supply,
utilities and environment.
Website: http://www.promburvod.com
Location: Minsk, Belarus
3
Bobruisk Machine Building Plant
Founded in 1898.
A member of HMS Group since 2011.
Products: pumps for oil refining, petrochemical, steel and mining,
power, pulp and paper, construction, as well as for water and water
waste and sewage in municipal, agricultural and industrial water
supply systems.
Website: http://www.bmbpump.by
Location: Bobruisk, Belarus
4
Nasosenergomash (NEM)
Founded in 1946 .
A member of HMS Group since 2004.
Products: pumps for oil and gas: midstream, upstream; thermal and
nuclear power, water supply and utilities
Website: http://www.nempump.com/en
Location: Sumy, Ukraine
Founded in 1951.
Associate of HMS Group (47%) since 2007.
Description: development of pumping equipment for large
complexes of atomic and thermal power engineering; on projects of
oil, chemical, sugar and food industries, oil pipeline transportation
and maintenance of pressure in oil pools, water supply and
irrigation; at civil engineering and mining works, in underground
systems, agglomerate-and-ironmaking and steel industries,
sewerage system and cattle-breeding complexes, municipal and
public utilities etc.
Website: vniiaen.sumy.ua/en
Location: Sumy, Ukraine
5
HMS Livgidromash
(before 07.07.2014 HMS pumps, before 26.08.2010
Livgidromash)
Founded in 1947.
A member of HMS Group since 2003.
Products: pumps for oil processing, petrochemical,
shipbuilding, power generation, water, utilities and
environment, agriculture.
Website: http://www.hms-pumps.com
Location: Livny, Orel region, Russia
1
Germany
5 Livnynasos
Founded in 1970.
A member of HMS Group since 2006.
Products: submersible centrifugal ECV-type pumps for municipal,
industrial, rural and household water supply as well as for irrigation
and groundwater control.
Website: http://www.livnasos.ru
Location: Livny, Orel region, Russia
6
Dimitrovgradkhimmash (DGHM)
Founded in 1931.
A member of HMS Group since 2011.
Products: pumps for chemical processing and oil and gas, vessel
equipment, chemical equipment, spare parts for gas pumping
stations.
Website: http://www.himmash.net
Location: Dimitrovgrad, Ulyanovsk region, Russia
COMPRESSORS
NIITurbokompressor N.A. V.B. SHNEPPA (NIITK)
(before 26.08.1985 – ICBS – Special Design Bureau compressor
engineering)
Founded in 1957.
A member of HMS Group since 2013.
Description: a major scientific and research and production center in
Russia to develop centrifugal, screw, rotary and scroll compressors.
Website: http://www.niitk-kazan.ru
Location: Kazan, Russia
Russia
6
2
Belarus
2
3
5
4
Ukraine
1
Kazankompressormash (KKM)
Founded in 1932.
A member of HMS Group since 2012.
Products: centrifugal, screw compressors and systems for air and
various gases; compressor stations; refrigerators.
Website: http://www.compressormash.ru
Location: Kazan, Russia
EPC
1
Institute Rostovsky Vodokanaproekt
Founded in 1932.
A member of HMS Group since 2009.
Description: institute with focus on water supply and waste water
and sewage systems and related hydro-technical facilities design.
Website: http://rvkp.ru
Location: Rostov-on-Don, Rostov region, Russia
2
Tomskgazstroy (TGS)
Founded in 1968.
A member of HMS Group since 2007.
Products: linear objects construction, reconstruction and overhaul
such as oil pipelines, gas pipelines, product pipelines, water
pipelines, condensate pipelines and power transmission lines.
Website: http://www.tgs.tomsk.ru
Location: Tomsk, Tomsk region, Russia
Giprotymenneftegaz (GTNG)
Founded in 1964.
A member of HMS Group since 2010.
Description: the leading Russian R&D center with integrated oilfield
designing for oil and gas.
Website: http://www.gtng.ru/en
Location: Tyumen, Russia
OIL&GAS EQUIPMENT
Nizhnevartovskremservis (NRS)
Founded in 1998.
A member of HMS Group since 2006.
Services: pumping, drilling and other oilfield equipment repair,
maintenance and upgrade.
Website: http://www.nv-rs.ru
Location: Nizhnevartovsk, Khantymansiysk aut. district, Russia
HMS Neftemash
Founded in 1965.
A member of HMS Group since 2005.
Products: oil&gas equipment for oil and gas, including cluster
pumping stations and equipment for water injection systems; group
automatic measuring units for oil well gauging metering; stations for
hydraulic drives of submersible well pumps and underground oil
extraction equipment; oil pumping stations etc.
Website: http://www.hms-neftemash.ru/en
Location: Tyumen, Russia
Sibneftemash
Founded in 1976.
A member of HMS Group since 2011.
Description: special oilfield equipment development, design and
manufacture for oil exploration intensification and efficiency; current
and work over repairs, isolation works and fracturing.
Website: http://www.sibneftemash.ru/en
Location: Tyumen, Russia
Sibnefteavtomatika (SIBNA)
Founded in 1986.
A member of HMS Group since 2008.
Products: controlling devices and systems development and
manufacture for oil and gas, power generation, water, heat and gas
supply.
Website: http://sibna.ru/eng/main
Location: Tyumen, Russia
10 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 11
OVERVIEW
Who we are
Highlights
Chairman’s and CEO
statements
Map of operations
Investment
theses
Strategy
History
Business
model
2014 in context
INVESTMENT THESES
3
HISTORY OF RESILIENT FINANCIAL
GROWTH
Founded in 1993 as a pump trading and servicing
company, HMS has grown organically and by pursuing an
active M&A policy that has seen the successful
completion of over 20 acquisitions aimed at either adding
products to the portfolio, or expanding into adjacent
business areas. As part of this strategy, HMS Group has
consolidated a number of leading pumps and equipment
manufacturers in the former Soviet Union since 2003, and
has formed a leading industrial group with revenue of 32.3
billion rubles in 2014.
4
WELL-ESTABLISHED CUSTOMER
BASE AND STRONG RELATIONS
WITH RUSSIAN OIL & GAS MAJORS
AND POWER COMPANIES
We have a well-diversified client base of more than 6,000
customers, including numerous subsidiaries of Russia’s
largest oil and gas and energy companies.
5
DEDICATED MANAGEMENT TEAM
COMPRISED OF FOUNDERS AND
SHAREHOLDERS
HMS Group’s growth is driven by a strong management
team with a proven track record that has demonstrated its
ability to deliver organic growth and make value-added
acquisitions. The management team includes the
founders of the Group, with HMS being a core business
for its largest shareholders.
1
LEADING MARKET POSITIONS IN
ALMOST ALL SEGMENTS WHERE
WE ARE PRESENTED
The largest installed base in Russia supports a stable and
resilient flow of orders for the replacement, upgrading,
modernisation and maintenance of operating equipment,
while advanced R&D capabilities allow us to offer
customers high value-added integrated solutions, which
are associated with higher margin, large contracts and
offer aftermarket opportunities.
2
UNIQUE R&D BASE GIVES US THE
ABILITY TO PROVIDE HIGH-
MARGIN INTEGRATED SOLUTIONS
One of our core strengths is a strong focus on R&D, which
allows us to provide complex integrated solutions. HMS
Group combines leading pump R&D centers, including
design centers and research institutes at production
facilities, independent research and development centers
at our HQ, and in the production regions of Russia and the
CIS, as well as a center for innovative technologies
complying with API standards in Germany.
12 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 13
OVERVIEW
STRATEGY
Who we are
Highlights
Chairman’s and CEO
statements
Map of operations
Investment
theses
Strategy
History
Business
model
2014 in context
STRATEGY
OBJECTIVE
OPTIMISATION
&
SYNERGIES
FOUR PILLARS OF OUR STRATEGY
Collaboration
We work closely with our
customers and suppliers
across all business segments.
These partnerships allow us to
better understand our existing
markets and to meet the
current needs of our clients as
well as anticipate those of the
future.
Operational excellence
We constantly seek to improve
the equipment we manufacture
and solutions we offer as well
as to develop our sales and
marketing effectiveness. A
commitment to
self-improvement leads to
higher margins and returns.
Innovation
We develop new products
and technologies to provide
our clients with competitive
engineering solutions. Our
commitment to innovation
promotes our market
leadership and enables us to
enter adjacent markets.
Corporate responsibility
We strictly comply with safety
standards, follow a code of
ethics in respect to all
stakeholders and target a
lowering of the environmental
impact of our operations.
Creating long-term value for our shareholders by
achieving sustainable, profitable growth in our key
strategic markets.
HMS Group operates and targets the further strengthening
of its position in three key markets that have encouraging
outlooks and positive fundamentals — industrial pumps, oil
and gas equipment and compressors. We intend to benefit
from anticipated growing demand for our core equipment
in the oil and gas, water utilities and power generation
industries. Through the effective supply of standard and
customised products and integrated solutions, HMS aims
to achieve the status of preferred partner for its clients.
The Group seeks to deliver sustainable organic growth
supplemented by selective acquisitions. The successful
integration of acquired assets will allow HMS Group to
capture synergistic opportunities and realise expected
benefits. While continuing to improve operational
performance, the Group will seek to develop new
customer-oriented value-added products and services.
14 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 15
OVERVIEW
HISTORY
1995
HMS Group launched a pump skid
assembly business in Russia and CIS
countries. Hydromashservice became one
of the leading enterprises specializing in
the delivery of pumping equipment for
oil and gas complexes, power and water
industry and housing utilities.
2005
HMS Group became a leading
manufacturer of high capacity customized
pumps through the acquisition of
Nasosenergomash (NEM, located in
Ukraine), one of the major companies in
the nuclear and thermal power generation
industries and trunk oil pipelines in the CIS.
2007
HMS Group entered the EPC market
through the acquisition of
Sibkomplektmontazhnaladka (SKMN), a
provider of integrated EPC services for the
development and construction of oilfield
infrastructure. The Company also acquired
a minority stake in Dimitrovgradhimmash
(DGHM), a manufacturer of pumps and
vessel equipment, with an option to
purchase a controlling stake in 2012, and
increased its R&D capabilities through the
acquisition of a 49% stake in VNIIAEN, an
R&D centre and the only one of its kind
in the CIS which specializes in pumping
equipment for the nuclear power
generation and oil transportation industries.
Who we are
Highlights
Chairman’s and CEO
statements
Map of operations
Investment
theses
Strategy
History
Business
model
2014 in context
2009
HMS Group continued to enhance its
position in the water utility, power
generation and oil and gas sectors through
the acquisition of Sibnefteavtomatika
(SibNA), a manufacturer of high-precision
measuring equipment for the oil and gas,
power generation and water utility sectors.
The Company participated in the flagship
project of the Vankor oilfield development
and the Baltic Pipeline System construction
project.
2011
HMS Group went public in February 2011,
placing 37.2% of its stock on the London
Stock Exchange via GDRs. As a key
consolidator in the domestic pumping
industry, HMS completed 3 acquisitions
(Sibneftemash, Bobruisk Machine Building
Plant and exercised the option to acquire
its next stake in Dimitrovgradkhimmash
(DGHM)), seeking opportunities to increase
its presence in existing and adjacent
markets.
2013-2014
HMS Group made a disposal of SKMN to
make the Group’s business model more
effective, release resources, involved in the
EPC business, and use them for the active
development of the core business.
1993
2003-2004
2006
2008
2010
2012
1995
2005
2007
2009
2011
2013-2014
1993
German Tsoy, Artem Molchanov and Kirill
Molchanov founded the original pump
trading and servicing company. The
Company expanded its operations and
client base to become a leading distributor
of pumps and pumping equipment in Russia
and the CIS.
2003-2004
HMS Group began to manufacture pumps
after the acquisition of Livgidromash
(currently — HMS Livgidromash), one of the
largest manufacturers of industrial pumps
in the CIS. HMS Group enhanced its oil and
gas equipment offerings through the
acquisition of Neftemash (Tyumen), one of
the largest Russian producers of modular
flow control equipment for surface oilfield
sites.
2006
HMS Group became a leading manufacturer
of submersible borehole pumps for water
through the acquisition of Livnynasos, one
of the largest producers of submersible
electric water pumps in the CIS. The
Company also acquired operational control
over Tomskgazstroy (TGS), a provider of
construction services for oil and gas
pipelines. The Company expanded its
maintenance and repair business through
the acquisition of Nizhnevartovskremservis
(NRS).
2008
HMS Group increased its presence in the
water utility, power generation and modular
equipment sectors through the acquisitions
of Promburvod, the largest producer of
electric submersible water pumps in
Belarus, and NPO Hydromash, a
manufacturer of pumps for the thermal
power generation and oil and gas
industries that has subsequently been
joined to NEM and Rostov
Vodokanalproekt (RVKP), a leading project
and design facility for the water utility
sector.
2010
HMS Group enhanced its design and R&D
capabilities and its position in the EPC
market through the acquisition of 51% of
the voting shares of Gyprotumenneftegas
(GTNG), a leading independent Russian
R&D centre focused on the design of the
surface infrastructure of oil and gas fields.
The Group participated in the ESPO-1
pipeline expansion project and the
construction of the ESPO-2 pipeline. The
Company commenced a large-scale
production of pumps for use in nuclear
power generation.
2012
HMS Group entered the promising new gas
projects market with the acquisition of the
leading Russian industrial compressor
producer KKM. Pursuing the enhancement
of its pumps product portfolio, the Group
completed the acquisition of the German
manufacturer of high-end specialized
pumps, Apollo Goessnitz GmbH (Apollo),
which strengthened its market position in
industries with a need for
technologically-demanding integrated
solutions.
16 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 17
OVERVIEW
Who we are
Highlights
Chairman’s and CEO
statements
Map of operations
Investment
theses
Strategy
History
Business
model
2014 in context
BUSINESS MODEL
HMS Group focuses on customers, and all our businesses – from product
development to after-sales services – are tailored to solve their goals. The deep
understanding of our customers’ needs and markets, the ability to engineer
products to meet clients’ specific requirements and our strong expertise in
manufacturing helps us to secure mutually beneficial partnerships.
RESEARCH & DEVELOPMENT
Continuous research and development plays an essential role in the
sustained success of HMS Group. We view R&D as the cornerstone
for achieving technological leadership in the markets where we
operate. Turning the technical requirements of our customers into
innovatively engineered products strengthens our competitive
position and helps to increase our commercial success.
HMS operates a wide corporate R&D network. It includes: 5 leading
R&D centres in Russia and the CIS; 3 leading project and design
institutes dedicated to strengthening our core competencies in
oilfield design (GTNG), water facilities (RVKP) and compressor
equipment (NIITK); and one foreign innovative technology
centre - complying with offshore and oil refinery API standards
(Apollo). The Group coordinates the whole innovation cycle through
its headquarters in Moscow.
Our research and development activities are primarily directed at
improving existing products and services, the design of products to
meet specific customer needs and the development of new
products, solutions and services.
Our highly qualified and experienced R&D team, combined with
sophisticated computer technologies, enables us to create reliable,
energy-effective, efficient pumping and compressor equipment
which conforms to the requirements of Russian and foreign
customers within tight schedules.
MARKETING AND SALES
AFTER-SALES SERVICES
In the majority of cases, the Group is awarded contracts following
participation in tenders. The Group builds and maintains customer
relationships at the board level, senior manager level and local
level. The negotiation of large-scale projects typically involves the
Group’s directors, senior managers, senior R&D personnel, technical
specialists, and their counterparts at the customer’s head office.
R&D personnel support the sales process by providing input at each
stage.
Customised and modular equipment is sold directly to the
customers. Contract terms vary depending on a number of factors,
including client industry, size of the order and the scope of types of
equipment.
Standard pumps are sold mainly through an extensive trading
network of dealers and distributors accounting for over 100 partner
companies across Russia. The central sales office,
Hydromashservice, is located in Moscow. There are also 11 branches
and representatives offices in Russia and the CIS and 3 outside of
the CIS — in Milan, Dubai and Baghdad.
Equipment sales are made by professionals with strong practical
knowledge and the ambition to offer the best solution for the
customer’s specific application.
We have a well-diversified client base of around 6,000 names. A
significant share of the Group’s revenue comes from “Blue-chip”
clients, which include the largest O&G and energy companies in
Russia. A stable revenue growth comes from small-to-medium-sized
clients with annual purchases below 200 million rubles.
The improvement of our sales process and further extension of the
effective distribution system are the priorities for HMS Group.
When customers enter into a partnership with HMS Group, their
experience is not limited to the mere procurement of industrial
equipment. We also provide a wide range of after-sales services,
which include:
– energy audit and optimization of energy efficiency of pumping and
compressing systems;
– warranty and post-warranty maintenance;
– supply of spare parts, equipment repairs and upgrades;
– consulting and training.
We run over 20 service centres in Russia and the CIS and are
seeking to further extend this network.
In addition to carrying out the energy efficiency optimisation of
pumping / compressing systems, our team of product managers and
engineers selects tailored pumps and compressors for every type of
hydro / gas technical system. Our team works in close collaboration
with the client and provides necessary consulting services in order
to identify and prioritize all the factors which influence equipment
selection and secure the most efficient operations of pumping and
compressor system.
HMS Group provides further training programmes and technical
consulting services for the client’s operating personnel to enable
the correct, failure-free and energy-efficient use of supplied
equipment and to increase the professional qualifications of
personnel.
We are currently developing a programme to expand our
maintenance services to cover all types of supplied equipment.
HMS Group is anticipating a growing demand for after-market
services in the oil and gas, energy and utilities sectors in Russia and
the CIS in line with global long-term industry trends.
MANUFACTURING
Manufacturing is the core activity of HMS Group. We have built our
leading industrial group through a number of acquisitions of the
best producers of pumps, compressors and oil and gas equipment
in Russia and the CIS. At present 16 plants operate under the HMS
brand, most of which are considered flagship enterprises in their
regions.
We continuously update our production facilities and technological
processes to offer modern and competitive equipment for our
clients. In our manufacturing process, we primarily focus on the
energy efficiency, robustness, reliability and cost of our products.
HMS Group manufactures both standard and customised
equipment. We purposefully target the segment of high margin
products tailored for specific customer needs and based on our
in-house R&D design, which secures our future sales growth. Our
commitment to high quality, our solid track record and our strong
expertise make HMS the partner of choice for participating in
complex and challenging projects in the oil and gas, energy and
water utilities markets.
18 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 19
OVERVIEW
Who we are
Highlights
Chairman’s and CEO
statements
Map of operations
Investment
theses
Strategy
History
Business
model
2014 in context
2014 IN CONTEXT
JANUARY
AUGUST
LUKOIL Neftohim Burgas AD (Bulgaria) commissioned a compressor
unit made by KKM, intended for flare gas utilization at the oil
processing plant.
FEBRUARY
Apollo signed a contract to deliver eight BB5-type API610-compliant
pumps, which are the critical parts for a new oil processing plant in
Russia, currently under construction, having won in cutthroat
competition with leading foreign pump producers.
After successful testing, Apollo supplied for the Permas Field Project
Malaysia (MURPHY Oil) a TGD-50B/10 high-pressure and high-speed
BB5 pump for offshore application, in line with the API-610 standard.
MARCH
HMS Neftemash produced and delivered a mobile non-separation
measuring unit based on the Roxar MPFM 2600 multiphase flow
meter.
HMS Neftemash completed successful field tests of the “Mera-MP”
metering unit based on a multiphase flow meter “NetOil&Gas” at a
client’s plot. That was the first test of the equipment for
high-viscosity (up to 500 cSt) oil fluid property evaluation on
sub-zero oil.
APRIL
HMS Group signed a 981 million rubles credit agreement with
Raiffeisenbank to finance its capital needs.
MAY
HMS Group and Gazprom Neft signed a 5-year strategic
cooperation agreement in the field of delivery of oil & gas and
pumping equipment for modernization and development projects of
Gazprom Neft’s companies. The document also contains regulations
regarding the information exchange on present and upcoming
products and solution of HMS and the estimated demand of
Gazprom Neft for equipment, technologies and integrated solutions.
HMS Neftemash completed successful tests of a pre-production
model of a centrifugal water-purifying machine.
JUNE
Apollo signed a contract with one of the leading international
engineering companies - Alstom Power for production and delivery
of a large quantity of pumping equipment for the Koeln Niel power
plant construction project (Germany).
According to the contract, the customer will receive two main VS6
condensate pumps with a flow rate of 760 cubic meters per hour
and head of 97.8 meters, two main OH2 boiler feed water pumps
with a flow rate of 285.6 cubic meters per hour and head of 130
meters, as well as four heating circulation and forwarding pumps. All
of the pumping units will be produced according to API-610
standards and equipped with automation and control systems.
Complete systems based on three vertically split centrifugal
compressor units made by KKM for the Prirazlomnaya offshore
ice-resistant oil-producing platform (Gazprom), designed for
development of the Prirazlomnoe field in the Pechora Sea shelf,
successfully passed acceptance tests. The first compressor unit is
intended to compress associated petroleum gas and deliver it as
fuel gas to the gas turbine unit for energy production, the second
unit – to compress and deliver a stripper with absorbing
(hydrocarbon) gas for hydrogen sulfide stripping on the sea platform,
and the third – a reserve unit – is utilized to supply gas turbine units
with fuel gas.
HMS Group Shareholders Annual General Meeting was held on
June 24, 2014. The shareholders approved the Company’s annual
report for 2013 and the consolidated and stand-alone financial
statements of the Group for 2013, the new composition of the Board
of Directors, voted for the payment of dividends in the amount of
3.41 rubles per GDR, and appointed Deloitte Limited, Cyprus as the
Group’s auditors, while the Group’s Directors had been authorized
to agree on the auditor’s remuneration.
HMS Group signed a credit agreement with Unicredit Bank for 800
million rubles, used for the refinancing of bank indebtedness.
JULY
KKM delivered compressor units to the Plesetsk launch site.
Multi-shaft centrifugal compressors, 250 cubic meters per minute,
outlet pressure 9 and 16 Mpa, impress and deliver air providing
support for a thermostatic system of a launching site at the
prelaunch period.
KKM completed delivery of equipment to the compressor stations of
Gazprom’s South Stream: Ekaterinovka, Bubnovka and Pisarevka.
NIITurbokompressor developed and KKM produced the first
refrigerating multiplicatory-type compressor unit for propane
compression in Russia.
KKM and NPO “Iskra” signed a strategic cooperation agreement in
the field of production of gas transportation equipment.
Nizhnevartovskremservis completed modernization of a testing
stand for CNSg pumps to commission new products.
SEPTEMBER
HMS Group made a partial redemption of its Ruble bonds series 02
for 900 million rubles, excluding accumulated coupon interest. The
company purchased 900,000 bonds at 100% par value. 3 billion
ruble bonds with a 10.75% coupon rate were issued in February
2012 and mature in February 2015. Raiffeisenbank both financed the
deal and acted as purchase agent.
Apollo delivered pumping equipment to a gas and steam turbine
power plant Lausward (Duesseldorf) ordered by Siemens. The
customer received two main condensate pumps with a flow rate of
750 cubic meters per hour and head of 291 meters and two
condensate polishing pumps in vertical can design that will be
operated with frequency converter.
Apollo signed an agreement to deliver API-610-complaint pumping
equipment to Kraken FPSO vessel in the North Sea, one of the
largest FPSO vessels in the world, that is a continuation of offshore
equipment project & design development.
KKM was recognized as the best domestic producer of pump and
compressor equipment in 2014 according to a survey, hold by the
State Duma Energy Committee among oil & gas companies in
Russia.
KKM and KMPO signed a strategic cooperation agreement in the
field of development and production of equipment for gas
transportation units (GPU) and compressor stations.
Bobruisk Machine Building Plant completed modernization of its
machine workshop to increase the quality and quantity of products
and decrease production costs. There were four multi-function
machining centers installed: HNK VTC-12/16 3-Axis vertical turning
lathe (Dynamic International, South Korea) with multiple machining
capability, a turning lathe machining center (Germany), DMU 65
monoBLOCK 5-axis milling with a redefined swivel rotary table (DMG
MORI, Germany) and a HRM-15 portal machining center (South Korea).
OCTOBER
HMS Neftemash completed successful field tests of a metering unit
“Mera-MP” based on a multiphase flow meter “NetOil&Gas” at a
client’s plot. That was the first test of the equipment for
high-viscosity (up to 1,000 cPs) oil fluid property evaluation on cold
oil without the use of an inline heater.
KKM delivered a centrifugal compressor with the lubrication system
for Stavrolen (LUKoil) under a signed contract to produce and deliver
a gas booster station (GBS) consisting of a complete GPU with
capacity 25 MW and 2.2 bn ncm/year and pressure ratio 3.85. GBS
is intended to deliver dry stripped gas (DSG) produced from
associated petroleum gas (APG) from oil & gas fields of the North
Caspian to a gas transportation system (GTS) of Gazprom.
NOVEMBER
Lukoil – Permneftegazpererabotka (Lukoil-PNGP) successfully
brought into production three turbine-driven GTUs made by KKM.
These gas transportation units, based on 4GC-70/17-62 GTU
centrifugal compressors with turbine drives of 6 MW capacity and
made by JSC “Aviadvigatel”, are intended to compress dry stripped
gas and deliver into a main gas pipeline of Gazprom and to a
power generating unit of Lukoil-PNGP. Centrifugal compressors for
GTUs were designed by NIITurbokompressor , made single-casing
and two-section, without industrial cooling, and provide
compression ratio 3.6.
Livnynasos completed modernization of its machine production.
DECEMBER
HMS Neftemash completed the largest multiphase metrological test
flow facility in Russia to verify and assess the up-to-date multiphase
metering units as per the Russian state verification schedule.
Sibnefteavtomatika (Sibna) designed, produced and delivered an
aircraft fuel systems testing bed. It is a part of an integrated test
facility, which is capable of simulating the entire range of flight loads
and operating data (pressure, temperature, roll and pitch, G force,
etc.) that impact on the aircraft fuel system while the aircraft is in
flight.
HMS Group withdrew Standard & Poor’s credit rating.
NEM completed the delivery of electrically driven pumps to
Rostovskaya NPP and Leningradskaya NPP-2.
Apollo completed the engineering, manufacturing and testing of a
lube oil supply system for pumps, motors, turbo gears, turbo
coupling and turbines according to the API-614 standard. Based on
the development Apollo delivered seven complete oil supply
systems to NEM for the water injection pump package for the
LUKOIL Overseas, West Qurna 2 project.
20 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 21
MARKETS IN 2014
Macroeconomic development
Market trends
Oil industry
Power generation
and Water utilities
MACROECONOMIC DEVELOPMENT
For Russia, the year 2014 turned out to be one of the most
challenging years of the past decade and a half. The
investment climate and overall macroeconomic
environment have drastically worsened due to the
coincidence of several factors:
– A drop in oil prices by ~50% (while oil, gas and oil
products still contribute to more than 70% of Russian
exports);
– The crisis in Ukraine and international sanctions on
Russian financial and oil production and military
machinery industries with a reciprocal embargo on food
imports from the EU and USA;
– The strengthening of economic stagnation due to the
exhaustion of growth potential of the previous economic
model of 2000-2013 (which was based on the continuous
growth of oil products and low cost of energy, raw
materials and labour, the availability of sources of
relatively cheap financing and initially low saturation level
on consumer markets).
The Russian economy has been stagnating and
demonstrated just 0.6% of growth in 2014 (1.3% in the
previous year). Throughout the year the economy has
been slowing down and quarter-by-quarter growth in Q1,
Q2, Q3 and Q4 amounted to 0.0%, 0.1%, 0.0% and -0.4%
correspondingly.
Slowdown in the real sector has been reflected on the
Russian stock market, where the RTS index (based on
market capitalization in US$) has been decreasing
throughout the year from 1,370 points in January to just
740 points in December (drop by 46%). At the same time,
the MICEX index (based on market capitalization in rubles)
has decreased from 1,500 points in January to 1,400
points in December (a 7% decline).
Real domestic consumption in Russia has slowed down its
growth rate from 3.9% in 2013 to 1.5% in 2014. Investment
in fixed assets has decreased by 2.5% and constituted
19.0% of GDP.
Russia experienced 1.7% of growth in industrial output in
2014 (0.4% in 2013). Growth was driven by manufacturing
and raw materials extraction sectors, growing at 2.1% and
1.4% respectively. The three best-performing industries
were the production of transportation vehicles (growth of
8.5%), rubber and plastic (7.5%) and oil products (5.7%). At
the same time energy, gas and water production and
transportation stagnated at -0.1%. The profitability of the
absolute majority of producers of industrial products has
significantly decreased across all industrial segments.
Due to the devaluation of the ruble and a Russian
embargo on the import of food products from the EU,
inflation (Consumer Price Index) in Russia has drastically
increased from a previously stable level of 6.5% (in 2012
and 2013) up to 11.4% in 2014. At the same time, the
Industrial Goods Producers Price Index has increased
only by 5.9%, reflecting the downfall in global prices for oil
and oil products and decreasing domestic demand for the
investment goods.
Real wages in Russia have grown on average by just 1.3%,
while the real disposed income of population has
decreased by 0.8%. The unemployment rate remained
stable at the low level of previous years and amounted to
just 5.5%.
The drop in oil prices has resulted in slight-to-moderate
depreciation of all the currencies of the oil-producing
developing countries. However, the Russian ruble has
shown the worst performance among them, plummeting
by 42% to US$ and by 34% to EUR (RUB/US$: from 32.66
to 56.26; RUB/EUR: from 45.06 to 68.34). The devaluation
of the ruble was caused by the stagnation of the
economy, further deterioration of the investment climate
and the drastic weakening of the national Balance of
payments, which has changed from -US$11.3 billion in
2013 to -US$110.9 billion in 2014. This drop in the Balance
of payments was mainly due to the huge increase of
capital outflow from Russia, which has increased by 250%,
from US$61 billion in 2013 up to US$152 billion in 2014. At
the same time the balance of the trade of goods and
services remained positive and amounted to +US$131
billion for 2014. In this environment, the Central Bank of
Russia has changed its previous policy of currency band
in order to slower the diminishing of national FX reserves.
The newly adopted policy presumes high volatility on the
FX market and minimum and unpredictable interventions
by the Central Bank of Russia.
Simultaneously, the Central Bank of Russia has raised
the key interest rate, which is used to provide liquidity in
rubles to all commercial Russian banks and via them to
other sectors of the economy. The interest rate was raised
several times and has ultimately increased from 5.5% in
December 2013 up to 17.0% in December 2014. This
measure has contributed to the slowing of the
devaluation of the ruble but simultaneously resulted in
the sharp increase of the cost of financing for all Russian
companies and private individuals. Nevertheless, the total
sum of credits issued by banks to corporate lenders has
increased by 11% in comparison to 2013, from 210 trillion
rubles to 232 trillion rubles. This has resulted in the 19%
increase of the national corporate debt load, from 22.5
trillion rubles in December 2013 to 26.8 trillion rubles in
December 2014.
The year 2014 was marked by four key developments that
have significantly contributed to the up-to-date
performance of the global economy and will be shaping
the global outlook for 2015-2016:
– Oil prices have plummeted from ~US$108/barrel to
~US$55/barrel. The decline was caused by unexpected
demand weakness in emerging market economies
(especially China), steady rise in unconventional oil
production in USA, and an OPEC decision to maintain
current production levels;
– The U.S. dollar has strengthened its position by 12%
to the currencies of other developed economies (e.g.,
the euro and yen). This rise was supported by the strong
recovery of the US economy (growth of 2.4% in 2014)
and tapering of US Federal Reserve quantitative easing
measures;
– Currencies of many emerging markets have weakened,
particularly those of commodity exporters;
– Interest rates and risk spreads have risen in many
emerging market economies, notably commodity
exporters, while long-term government bond yields have
declined further in major advanced economies, reflecting
the effect of safe havens.
Global economic growth in 2014 remained at the level of
3.3% and remained driven by developing countries,
especially China, India and ASEAN countries, which grew
by 7.4%, 5.8% and 4.5% respectively. Growth in nearly all
advanced economies has accelerated with the EU28 area
growing at 1.3% (and expected to further boost its growth
rate in 2015-2016) and USA and Canada growing at 2.4%
each. The only exception was Japan, where the economy
fell into technical recession, resulting in a growth rate of
just 0.1%.
22 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 23
MARKETS IN 2014
Macroeconomic development
Market trends
Oil industry
Power generation
and Water utilities
MARKET TRENDS (OIL INDUSTRY)
Russia has the largest oil and gas reserves in the world and is the second
largest oil producer with 13% of total global oil output. The oil upstream industry is
a backbone of the economy with an impact on the country’s international
payments, exchange rate and the formation of the economy’s investment
resources.
UPSTREAM
Oil production in Russia, millions of tons
According to the Russian Ministry of
Energy, in 2014, Russian oil output reached
527,000 million tons of oil, which is a 0.6%
rise compared with the previous year. This
increase was supported by the
development of new oil production centres
in East Siberia, and major crude oil exports
to Asia, primarily to the People’s Republic
of China, where demand for Russian oil is
increasing, have started.
Russian producers capitalized on rising oil
prices in the first half of 2014, when they
reached over US$113 per barrel. However,
prices have halved since then. The price of
oil fell from US$108/barrel to below US$60/
barrel and has stabilized at that level. The
drop in prices could have an effect on both
production and demand - downward
pressure on investment into new
production, combined with upward
pressure on demand.
Production in the oil sector hasn’t been
affected by falling oil prices and Western
sanctions yet. The impact on production
will most likely be seen this year.
470.0
480.5
491.3
488.5
494.2
505.1
509.0
517.0
523.3
526.7
+5.6
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Russian well-stock, units
155.2
157.1
152.6
158.4
158.8
159.4
161.2
162.8
165.4
168.3
+2.9
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Production drilling rate, km
13,760
14,602
14,090
16,522
17,844
11,582
9,173
21,657
20,772
19,960
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
MIDSTREAM
With over 50 thousand km of oil pipelines
and more than 400 installed pump stations,
Russia has the largest oil pipeline system in
the world. Over 90% of crude oil produced
in Russia is transported through the existing
trunk pipeline system.
In 2014 crude oil exports via state
monopoly Transneft fell 5 percent to 195.5
million tonnes due to rising domestic
demand and refinery runs.
The existing pipeline system is constantly
expanding through the following projects:
– The construction of the Zapolyarye-Purpe
oil pipeline, with an overall capacity of 45
million tonnes per year, is planned in order
to transport oil from the green fields of the
Yamalo-Nenets Autonomous District and
from the North of the Krasnoyarsk District.
– The overall length of the pipeline is
estimated to be 500 km;
– The construction of the Kuyumba-Taishet
oil pipeline, with an overall capacity of 15
million tonnes per year, began in 2013 to
transport oil to the system of pipelines in
the ESPO-2 project. The overall length of
the pipeline is estimated to be 700 km;
– The ESPO expansion — the
construction of oil pipelines from
Taishet-Skovorodino- Koz’mino;
– The construction of the South diesel
route via southern Russia;
– The construction of the north-western
Sever diesel pipeline.
Total capital expenditure by Transneft in
2014 is estimated as 372.6 billion rubles.
DOWNSTREAM
The Russian refining system is the third
largest in the world, ranked only behind the
U.S. and China, with approximately
275 million tonnes of total capacity. It is
absolutely obvious that Russia’s
downstream segment is continuing to
develop rapidly. Oil product prices and the
current tax environment remain supportive
of development, contributing to increased
refining outputs and a higher level of
investments. If the upgrading of the
domestic refining infrastructure keeps up at
its current pace, the depth of refining in
Russia will rise from 72% to 85% by 2020.
In 2013, the estimated volume of primary
processing hit a record level of 290 million
tonnes, up 4% year-on-year.
According to investment plans announced
by oil companies, capital expenditure in the
sector exceeded 299 billion rubles in 2014.
In the coming years, primary processing
capacities in Russia can add another 12.2
million tonnes (or 5.2 million tonnes,
excluding Taneco’s potential expansion).
Russia’s total processing capacities
(including condensate) may therefore rise
from around 290 million tonnes to 300.2
million tonnes (or even to 307.2 million
tonnes if Taneco’s expansion is
completed). Consequently, the share of
secondary processing may grow from the
current 70% to about 100% (this compares
with 140% in the US).
Industry growth is likely to be driven by
new projects in 2013:
– Rosneft is still developing programmes to
upgrade in the Novokuybyshevsk and
Tuapse refineries: Upgrading Tuapse oil
refining complex by putting into operation
two stations of primary oil refining and
construction of catalytic reforming and
hydrocracking complexes and complex of
low-temperature isomerisation in
Novokuybyshevsk refineries plants;
– Lukoil is continuing to reconstruct its
diesel fuel production unit and modernise
at Volgograd refinery plant;
– Gasprom Neft started installation and
building a combined oil refinery installation
in Omsk.
GAS PIPELINE PROJECTS
The Unified Gas Supply System of Russia,
operated by Gazprom, is the world’s largest
gas transmission system and represents a
unique engineering complex encompassing
gas production, processing, transmission,
storage and distribution facilities. It assures
continuous gas supply from the wellhead
to the end consumer. The system includes
161.7 thousand kilometres of gas trunk lines
and laterals, 215 line compressor stations
with gas compressor units totalling 42
thousand MW in capacity, 6 gas and gas
condensate treatment facilities and 25
underground gas storages locations.
Gazprom has approved an 840 billion ruble
(US$13.5 billion) investment program for
2015.
The bulk of Gazprom’s 2015 investment
will go into research for a new gas pipeline
route to China, most likely from West
Siberia, and the construction of Power of
Siberia gas pipeline.
Power of Siberia will run nearly 4,000
kilometers through five Russian constituent
entities: the Irkutsk Region, the Republic of
Sakha (Yakutia), the Amur Region, the
Jewish Autonomous Region and the
Khabarovsk Territory and will have an
annual capacity of 38 billion cubic metres
of gas.
Refinery capacity in oil production, millions of tons
77
45
70
22
19
15
32
9
Rosneft Lukoil Bashneft SNG Slavneft Gazprom Neft Tatneft Other
24 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 25
MARKETS IN 2014
Macroeconomic development
Market trends
Oil industry
Power generation
and Water utilities
MARKET TRENDS (POWER GENERATION)
MARKET TRENDS (WATER)
Russia remains one of the largest electricity producers in the world, behind only
China, the USA, Japan and India. Strong electricity demand is driven by the
relatively low energy efficiency of national industries.
The water market in Russia shows stable, positive dynamics which are secured
by the steady growth of tariffs and the arrival of private investment to the sector.
Investment prospects are based on the guaranteed demand for services and the
good potential for cost saving.
There are interruptions in water supply in
more than half of the 24,000 municipalities
in Russia; on average, a mere 71% of water
samples in the country comply with sanitary
standards. The Pure Water Federal Target
Programme for 2011-2017, signed in
December 2010, aims to increase the
coverage of water and wastewater services
in Russian regions with the goal of reaching
95% for safe water supply coverage and
84% of wastewater collection and
treatment by 2017. The construction and
rehabilitation of infrastructure are expected
to create new opportunities for equipment
suppliers and engineering firms as well as
construction companies. Emerging interest
in advanced solutions, such as membrane
systems, ultraviolet and ozone treatment
creates good development prospects for
the market’s participants.
A large number of water supply systems
require rehabilitation as the low capacity of
centralized water supply systems impedes
the development of localities.
The deterioration of pipes in some cities is
above 60%.
Capital expenditure on water and
wastewater infrastructure is forecasted to
nearly double from US$1.4 billion in 2011 to
US$2.7 billion in 2018.
Today the issue of water supply and
wastewater treatment is addressed within
the framework of the Housing
Special-Purpose Federal Programme,
special-purpose federal programmes for
territorial development, programmes for
development of the republics in the south
of Russia, Far East, Trans-Baikal, and
Kaliningrad Oblast. The programmes
provide for a set of activities to construct
and rehabilitate water supply facilities,
sanitation systems, and wastewater
treatment plants.
This strong demand consequently
challenges the limited and ageing energy
producing capacity and explains the
permanent tariff growth and the reason
why this is one of the sources for high
investment programs by the power
generating companies.
In 2014, the electricity output in Russia
increased by 0.5% year–on-year and
reached 1,062 billion KW/h. Russia’s power
complex includes approx. 600 power
plants, each with an individual capacity of
over 5 MW. In 2014, the total capacity of
Russian power plants amounted to 249.4
GW, exceeding the 2013 level by 7.7 GW.
Growth was driven by the construction of
new power facilities and the modernisation
of existing infrastructure.
The power industry has the following
components of generation: thermal plants
(68%), hydraulic (21%), nuclear (approx. 11%).
The long-term outlook of the Russian
power industry is influenced by the
“General scheme of energy development
for the period till 2020”.
THERMAL POWER
PLANTS
The main thermal power stations in Russia
use organic fuels such as gas or coal and
essentially consist of steam-turbine power
stations.
In 2014, Russia’s overall thermal power
plant installed capacity was 169.6 GW, up
2% compared to the previous year.
The infrastructure in the thermal power
sector is quite outdated — almost 55% of
the installed capacities are over 30 years
old.
As such, Russian plants have an efficiency
ratio of 37%, which is lower than the 41%
level for developed economies. This
discrepancy dictates the necessity for
equipment upgrades by all the major
power generating companies.
This is also the reason why the technical
modernisation and reconstruction of the
existing power stations is a primary
development goal of the Russian thermal
power sector, in addition to the start-up of
new modern generating capacities.
The sector’s investment grew by 4%
year-on-year in 2014 and reached 380
billion rubles.
NUCLEAR POWER
PLANTS (NPP)
Russia has full-cycle technology for the
nuclear industry — from the extraction of
uranium ore to electric power generation.
Currently, 33 nuclear power units, with an
overall installed capacity of 25.2 GW, are
operated at 10 sites by Rosenergoatom.
They account for 16% of domestic electricity
generation. The share of nuclear
generation in the European part of Russia
reaches 30%, and, in the North-West part of
Russia, 37%.
Currently, there is an ongoing process of
large-scale NPP construction in Russia. The
following construction projects are
underway: Novovoronezhskaya NPP Phase
II, Leningradskaya NPP Phase II, Baltic NPP,
and the world’s first floating nuclear
co-generation plant, Akademik Lomonosov.
Production drilling rate, km
1100
1050
1000
950
900
850
Another nuclear power unit — the fourth
reactor of Beloyarsk NPP — is close to
completion. In addition to construction in
Russia, nuclear power plants are being
built abroad, including Kudankulam (India),
Bushehr (Iran), Akkuyu (Turkey), Ostrovets
(Belarus), Ninh Thuan NPP -1 (Vietnam),
Jordan NPP, Armenian NPP and Tianwan
Second Stage (China).
Most of the 33 nuclear operating reactors
in Russia are ageing; 80% of capacity has a
maturity of 20-40 years. This has led to the
development of a large-scale investment
programme by the state operator Rosatom,
under which several initial steps have
already been taken.
In 2014, electricity output grew by 4.5%
year on year and reached 180.5 billion
KW/h. The estimated investments in the
sector increased 7% year-on-year in 2014
and reached 320 billion rubles.
300
250
200
150
100
50
0
-50
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total capacity of power plants in Russia GW
Power generation in Russia bn kW/h
Change in generation capacities in Russia GW
26 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 27
PERFORMANCE IN 2014
Operating performance
Financial performance
HMS key projects
R&D development
Corporate social responsibility
OPERATING PERFOMANCE
Order intake4 in 2014 equaled 34.7 billion rubles and remained almost the same as in 2013. The decrease in consolidated orders for
compressors and project and design (EP) was compensated for by growth of orders in all other business segments.
FINANCIAL SUMMARY
Order intake, Rub mn
2013 FY
2014 FY
Change yoy
– Backlog increased by 23% yoy to 27.5 billion rubles vs. 22.3 billion rubles, while order intake stayed almost flat year-on-year at 34.7 billion rubles,
driven by a steady demand despite downturn and economic uncertainty
– Revenue of 32.4 billion rubles stayed unchanged in comparison with 2013
– EBITDA1 totaled 5.3 billion rubles, up 1% yoy; EBITDA margin was 16.3% compared to 16.2% in 2013
– Operating profit dropped by 80% yoy to 0.9 billion rubles with operating margin at 2.6% versus 12.9% last year
– Operating profit adj., if exclude all non-monetary adjustments2, was flat at 3.8 billion rubles and operating margin decreased to 11.6% versus 11.8%
last year;
– Profit for the year was negative 1.6 billion rubles, down from positive 1.2 billion rubles
– Profit for the year adj., if exclude write-offs, grew by 55% yoy to 1.2 billion rubles from 0.8 billion rubles last year
– Total debt grew by 34% yoy to 17.0 billion rubles from 12.7 billion rubles
– Net debt increased by 12% yoy to 12.4 billion rubles resulting in Net debt-to-EBITDA ratio of 2.36x compared to 2.12x last year
– Return on capital employed (ROCE) adj.3 was 11.1% versus 13.9% in the previous year. If taken without any adjustments, then ROCE dropped to
3.1% compared to 15.8% in 2013
OPERATING PERFORMANCE
Backlog and order intake
Industrial pumps
Oil & Gas equipment
Compressors
EPC
Construction
Engineering
Total
13,935
11,809
3,947
5,123
1,316
3,807
15,592
13,963
2,168
2,983
1,559
1,424
34,814
34,705
12%
18%
-45%
-42%
18%
-63%
0%
As of December 31, 2014, the Group built its backlog at 27,510 million rubles, up 23% yoy on the back of growth in pumps and oil & gas
equipment which demonstrated positive dynamics in the reporting period.
GROUP PERFORMANCE
In the pump business segment, the backlog grew by 25% yoy to 11,076 million rubles mainly because of increased inflow of standard
equipment orders, where backlog of pumps for export outside Russia grew to 3,641 million rubles.
Backlog grew by 47% yoy in the oil & gas equipment business segment both in large contracts and standard equipment, and achieved
11,610 million rubles as of 31 December 2014.
The compressors dropped by 7% yoy to 2,131 million rubles mainly due to postponements of several large projects to 2015. But in accordance
with the methodology backlog by segments is composed without intersegment sales to exclude duplications. Therefore, when considering
the compressors business segment as a stand-alone, it should be increased by intragroup sales by more than 1.0 billion rubles so it totals
more than 3.1 billion rubles, supporting substantial increase of KKM’s revenue and EBITDA in 2015.
The EPC segment’s backlog showed negative dynamics with decline by 18% yoy to 2,693 million rubles as a result of delay of some new
projects in the project and design (EP) sub-segment due to uncertainties in the economy. At the same time, the backlog of the construction (C)
sub-segment grew by 37% yoy.
Backlog, Rub mn
2013 FY
2014 FY
Change yoy
Industrial pumps
Oil & Gas equipment
Compressors
EPC
Construction
Engineering
Total
8,867
7,873
2,289
3,304
1,218
2,086
11,076
11,610
2,131
2,693
1,671
1,022
25%
47%
-7%
-18%
37%
-51%
22,333
27,510
+23%
HMS’ revenue amounted to 32,351 million rubles, almost the same as in 2013. EBITDA grew by 1% yoy to 5,272 million rubles. As a result,
EBITDA margin for 12 months 2014 stayed almost unchanged at 16.3% versus 16.2% last year.
Financial highlights, Rub mn
2013 FY
2014 FY
Change yoy
Revenue
EBITDA
EBITDA margin
32,358
5,238
16.2%
32,351
5,272
16.3%
0%
1%
The Group’s cost of sales, which traditionally accounts for about 70-73% of total revenue, grew by 1% yoy from 23,373 million rubles to 23,511
million rubles, driven mainly by growth of supplies and raw materials and labor costs. Combined contribution to the cost of sales from its key
components - supplies and raw materials and cost of goods sold – accounted for 41% share of revenue in 2014, the same as in 2013.
Cost of sales, Rub mn
2013 FY % of revenue 2014 FY % of revenue Change yoy
Total cost of sales
Supplies and raw materials
Labour costs
Cost of goods sold
Other expenses
23,373
10,567
5,489
2,799
4,518
72%
33%
17%
9%
14%
23,511
11,238
5,677
2,162
4,434
73%
35%
18%
7%
14%
1%
6%
3%
-23%
-2%
1 EBITDA is defined as operating profit/loss from continuing operations adjusted for other operating income/expenses, depreciation and amortisation, impairment of assets, excess of fair value of net assets acquired over
the cost of acquisition, defined benefits scheme expense and provisions (including provision for obsolete inventory, provision for impairment of accounts receivable, unused vacation allowance, warranty provision,
provision for legal claims, tax provision and other provisions). This measurement basis, therefore, excludes the effects of a number of non-recurring income and expenses on the results of the operating segments.
2 Non-monetary adjustments are derived as significant one-off non-cash items including impairment of goodwill, impairment of assets, excess of fair value of net assets acquired over the cost of acquisition, and foreign
exchange loss from borrowings.
3 ROCE adj. is calculated as EBIT divided by (average total debt + average equity), and ROCE is calculated as Operating profit from Consolidated statement of Profit or Loss, divided by (average total debt + average
equity).
28 HMS GROUP || Annual report 2014
Labour costs grew by 3% yoy to 5,677 million rubles from 5,489 million rubles.
4 Under management accounts
Annual report 2014 || HMS GROUP 29
PERFORMANCE IN 2014
Operating performance
Financial performance
HMS key projects
R&D development
Corporate social responsibility
OPERATING PERFOMANCE
Net income reconciliation, Rub mn
2013 FY
Operating expenses, Rub mn
2013 FY % of revenue 2014 FY % of revenue Change yoy
Distribution and transportation
General and administrative
Other operating expenses
Finance costs
1,352
3,860
110
1,741
4%
12%
1,237
4,340
0.3%
222
5%
2,148
4%
13%
0.7%
7%
-9%
12%
102%
23%
Excess of fair value of net assets
acquired over the cost of acquisition
Impairment of assets on construction
business, other than goodwill
Foreign exchange loss from borrowings,
net of 20% income tax
1,156
-955
422
17
128
768
2014 FY
-1,575
0
0
2,186
576
1,187
Change yoy
-236%
55%
Distribution and transportation expenses in absolute terms were down by 9% yoy to 1,237 million rubles in 2014. As a percentage of
revenue, they comprised 4% in both periods.
Impairment of goodwill in 2014
General and administrative expenses totaled 4,340 million rubles for 2014, up 12% yoy, mainly because of 5% yoy growth in labour costs
and change in provision for accounts receivable.
Operating profit dropped 80% yoy and totaled 855 million rubles versus 4,179 million rubles in 2013. Operating margin stood at 2.6%. In 2013,
the Group posted 439 million rubles impairment of the construction business and 955 million rubles extra gain from the bargain M&A, which
contributed 516 million rubles to HMS’ operating profit. On the contrary, in 2014 the Group recognized 2,186 million rubles impairment of
goodwill, which reflected geopolitical risks and worsened economic conditions in Russia.
If adjusted, the Group’s operating profit stayed almost flat at 3,761 million rubles with operating margin adjusted sliding to 11.6% from 11.8%.
Operating profit reconciliation, Rub mn
2013 FY
2014 FY
Change yoy
Excess of fair value of net assets
acquired over the cost of acquisition
Impairment of assets on construction
business, other than goodwill
Foreign exchange loss from
borrowings, net (from Finance costs)
4,179
-955
422
17
160
3,823
855
0
0
2,186
720
3,761
-80%
-2%
The main factor of finance costs 23% yoy growth was a foreign exchange loss, that increased by 351% yoy from 160 million rubles to 720
million rubles for 12 months 2014 primarily due to Euro 26 million loan of HMS Neftemash, attracted for acquisition of Apollo Goessnitz GmbH
(Apollo), and an intragroup loan nominated in rubles but transferred in UAH – which together generated 93% of this loss.
Interest expenses decreased by 7% yoy to 1,413 million rubles compared to 1,522 million rubles in 2013 and comprised 4.4% share of total
revenue versus 4.7% in the previous year.
Profit for the year adjusted increased by 55% yoy to 1,187 million rubles from 768 million rubles. But if reconciled by one-off non-monetary
impairment of goodwill and the effect of foreign exchange loss from borrowings, then loss for the period reached 1,575 million rubles versus
profit for the period of 1,156 million rubles last year.
On Dec 31, 2014, the Group performed impairment test of goodwill and concluded that of goodwill of KKM, GTNG and IRVKP had to
be impaired:
– Kazankompressormash (KKM) – The impairment of 1,003 million rubles resulted primarily from adjustment in discount rate, reflecting recent
changes in Russian economic environment
– Giprotyumenneftegaz (GTNG) – The impairment of 1,111 million rubles resulted primarily from changes in the future growth and profitability
assumptions in order to bring them in line with expected market developments, past performance of the business and from adjustment in
discount rate, reflecting recent changes in Russian economy
– Institute Rostovsky Vodokanalproekt (IRVKP) – The full impairment of goodwill of 73 million rubles due to changes of the future growth and
profitability assumptions and adjustment in discount rate
SEGMENT PERFORMANCE
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 customized pumps and integrated solution as well as pumps built to standard specifications; it also
provides aftermarket maintenance and repair services and other support for its products.
Industrial pumps, Rub mn
2013 FY
2014 FY
Change yoy
Revenue
EBITDA
EBITDA margin
18,386
3,801
20.7%
16,289
3,137
19.3%
-12%
-17%
The industrial pumps business segment’s revenue declined by 12% yoy to 16,270 million rubles from 18,386 million rubles in 2013, while
EBITDA dropped by 17% yoy to 3,137 million rubles. EBITDA margin stayed at 19.3% which is higher than average though lower than 20.7%
last year.
Stable inflow of small and mid-size orders for standard pumps generated comparable revenue and EBITDA, and large projects earned
less revenue and EBITDA in 2014 than in 2013.
30 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 31
PERFORMANCE IN 2014
Operating performance
Financial performance
HMS key projects
R&D development
Corporate social responsibility
OPERATING PERFOMANCE
Oil & Gas equipment Business Segment
The oil & 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 core 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.
OG equipment, Rub mn
Revenue
EBITDA
EBITDA margin
2013 FY
6,972
929
13.3%
2014 FY
Change yoy
10,220
1,908
18.7%
47%
105%
Revenue in the oil & gas equipment business segment demonstrated the 1.5 times sharp growth to 10,220 million rubles and EBITDA
grew twofold to 1,908 million rubles despite later than expected start of large-scale projects execution and less orders for standard
equipment.
Revenue and EBITDA from standard orders decreased in comparison with the previous year because HMS Neftemash, the main
production facility in the oil & gas business segment, reduced its activity in standard production to utilize capacities for large projects
execution.
As a result of increased share of integrated solutions, EBITDA margin reached 18.7% versus 13.3% last year.
Compressors business segment
The compressors business segment designs, engineers, manufactures and supplies a diverse range of compressors and compressor-based
solutions, including compressor units and compressor stations, to customers in the oil and gas, metals and mining and other basic industries in
Russia. The business segment’s principal products include customized compressors, series-produced compressors built to standard
specifications, and compressor-based integrated solutions.
Compressors, Rub mn
2013 FY
2014 FY
Change yoy
Revenue
EBITDA
EBITDA margin
4,207
572
13.6%
2,474
-255
-10.3%
-41%
n/a
Revenue dropped by 41% yoy to 2,474 million rubles and EBITDA turned negative 255 million rubles in comparison to positive 572 million
rubles in 2013. The poor results of the compressors business segment are explained by the postponements of some targeted large
tenders and the adjusted schedule of one large project coordinated with a customer due to delay by the client’s another subcontractor,
located in Donetsk, Ukraine, caused by objective reasons, resulted in insufficient revenue to compensate a constant level of fixed costs.
However, the postponement of this large contract will have positive influence on 2015 results.
The company launched the operational efficiency improvement program to partly compensate the abovementioned delays, and we expect to
have more visible results in 2015.
HMS Group expects the compressors business segment to generate better results in 2015, based on the strong already built backlog with a
larger share of integrated solutions in orders portfolio.
Engineering, procurement and construction (EPC) business segment
The engineering, procurement and construction (EPC) business segment provides design and engineering services, project management and
construction works for projects for customers in the oil upstream and midstream, gas upstream and water utilities sectors.
EPC, Rub mn
Revenue EPC
Project and Design
Construction
EBITDA EPC
Project and Design
Construction
EBITDA margin EPC
Project and Design
Construction
2013 FY
2014 FY
Change yoy
2,788
2,189
599
-235
230
-465
-8.4%
10.5%
-77.6%
3,355
2,266
1,089
490
279
211
14.6%
12.3%
19.3%
20%
4%
82%
-309%
22%
n/a
The EPC business segment delivered better results in 2014 compared to 2013 with revenue growing by 20% yoy to 3,355 million rubles
and EBITDA turning positive to 490 million rubles after business restructuring and cost cutting program implementation in 2013-2014.
Both the project and design sub-segment and the construction sub-segment experienced a growth in profitability in the reporting period, but
the latter demonstrated more impressive financial performance in comparison to the previous year.
As a result, the EPC segment’s EBITDA margin turned positive and reached 14.6%, versus -8.4% in 2013.
32 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 33
PERFORMANCE IN 2014
Operating performance
Financial performance
HMS key projects
R&D development
Corporate social responsibility
By the end of 2014, HMS Group increased its total debt by 34% yoy to 16,967 million rubles from 12,687 million rubles as of the end of 2013.
The increase in debt was mainly a result of required working capital growth incidental to execution of large projects and a drawdown of
available credit lines so as to have sufficient “liquidity cushion” for redemption of the Group’s ruble bonds with maturity in February 2015. At
the same time, net debt increased only by 12% yoy to 12,432 million rubles.
As a result, the Net debt-to-EBITDA ratio amounted to 2.36x, and under a net debt-to-EBITDA bank maintenance covenant with a
4.50x threshold is implying an ample headroom for the next 12 months.
As of 1 January 2015, despite limited access to capital markets and thus sharp increase in rates thanks to managerial efforts the weighted
average interest rate was 10.1% for all loans, including FX-denominated. A solid liquidity position with 4.5 billion rubles in cash covered
HMS’s short-term debt of 3.4 billion rubles.
FINANCIAL MANAGEMENT
In September 2014, HMS Group made a partial redemption of its Ruble bonds for 900 million rubles excluding accumulated coupon interest.
HMS purchased 900,000 bonds at 100% par value. Bonds buy-back was financed by an unsecured non-revolving credit line up to 3 years, lent
by Raiffeisenbank at the end of this August. The bank also acted as a purchase agent.
In December 2014, Standard & Poor’s Rating Services lowered the long-term corporate rating of the company from “B” to “B-“ and placed it
on CreditWatch with negative implications. Also, S&P downgraded Rub 5.1 billion notes issued by HMS’ subsidiary CJSC “Hydromashservice”
to “CCC+” and placed them on CreditWatch negative. According to S&P, the downgrade reflects discomfort about the Rub 2.1 billion
unsecured bond repayment in February 2015. At the end of 2014, HMS Group made a decision to withdraw credit ratings of Standard & Poor’s.
In January 2015, the company made a partial redemption of its Rubles bonds for 1.9 billion rubles excluding accumulated coupon interest.
Though HMS Group made a public offer to acquire the outstanding securities for 2.1 billion rubles at 100% par value, it received claims only for
1.9 billion rubles. The buy-back was financed by both HMS’ own funds and credit lines. Raiffeisenbank acted as the purchase agent. As a result
of above actions, only 177 million rubles bonds left to be redeemed on maturity date and they were successfully paid off in February 2015.
FINANCIAL PERFOMANCE
CASH FLOW PERFORMANCE
Cash flow performance, Rub mn
2013 FY
2014 FY
Change yoy
4,523
-2,375
-1,918
2,148
960
-1,077
2,996
-118
-79%
-55%
-256%
-105%
Operating cash flow dropped by 79% yoy from 4,523 million rubles to 960 million rubles mainly due to changes in working capital that grew
both in absolute figures and as a share of total revenue.
Working capital increased by 32% yoy to 6,836 million rubles and comprised a 21% share of total revenue versus 16% for the previous period.
The key factor behind the working capital increase was the growth in receivables and inventories (2.8 billion rubles in total) related to two large
oil & gas equipment contracts under execution.
Absence of M&A deals substantially decreased outflow from investing activities, which equaled -1,077 million rubles (-55% yoy).
Due to current economic downturn, capital expenditures were reduced by 21% yoy and amounted to 1,223 million rubles in comparison with
1,553 million rubles last year. But still HMS Group is realizing large projects for KKM’s modernization and development of manufacture
competences for high capacity oil transport pumps and nuclear pumps in Russia.
2,996 million rubles of net cash inflow from financing activities was a result of borrowings. This amount of money was attracted as a part
of preparation for rubles bond redemption in February 2015.
That said, negative free cash flow accounted for only 118 million rubles for 12 months 2014.
Depreciation and amortization went up by 11% yoy primarily due to a 72% yoy increase in amortization expenses on patents and project
documentation, related to NIITurbokompressor acquired in 2013, and a 7% yoy growth of depreciation expenses on plant and
equipment caused by a complete modernization of HMS Livgidromash’s foundry, which in the whole gave 95% of total D&A raise.
DEBT AND LIQUIDITY POSITION
Debt & Liquidity, Rub mn
2013 FY
2014 FY
Change yoy
Total debt
Long-term debt
Short-term debt
Cash and cash equivalents
Net Debt
Net Debt/EBITDA LTM
12,687
11,522
1,165
1,584
11,103
2.12
16,967
13,235
3,732
4,535
12,432
2.36
34%
15%
220%
186%
12%
34 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 35
PERFORMANCE IN 2014
Operating performance
Financial performance
HMS key projects
R&D development
Corporate social responsibility
HMS KEY PROJECTS
PROJECTS ON TRACK
The reconstruction included the “turn-key” construction of
new pumping stations, and replacing the old ones, in an
area with high seismicity of up to 8.0 by MSK-64. There
were 12 main pumping units, each of 3.5 cubic meters per
second capacity, and auxiliary pumping units, all specially
designed-and-produced-by-HMS with a nominal power
rate of 40 MW and capacity over 515 thousand cubic
meters per hour in total. Blueprint design, production and
delivery of unique pump-based integrated solutions were
entirely executed by HMS Group.
In December 2013, the company signed 5.7 billion rubles
in contract to supply an integrated solution for a major
Siberian gas field. According to the contract, HMS will
design, manufacture, deliver, supervise and test the
complex technological facility, including compressors,
pumps, tanks and vessels, filters, coolers and other
components. The project’s implementation time is two
years.
In 2014, Transneft put into use three oil processing
stations with 12 trunk pumps and auxiliary equipment, fully
made by HMS Group, under the ESPO-1 extension
project. Also, the Group delivered 8 trunk pipeline pump
units for the Zapolyarye – Purpe oil pipeline. The project
was designed to bring crude oil, produced in the northern
areas of the Yamalo-Nenetsk and Krasnoyarsk regions, to
markets through the ESPO pipeline.
HMS Group completed full reconstruction of three water-
pumping stations of the irrigation channel
“Zakhmet-Turkmenkala” under the order of the Ministry of
Water Resources of Turkmenistan. These pumping
stations will transmit water to the Murgap River for
improving water supplies to agricultural lands to the south
of the Kara-Kum River (31,000 hectares in total).
Also, in 2014 the company completed delivery of
pumping equipment for the water treatment facility of
Qarmat-Ali that will provide a reliable supply of water for
injection systems at Rumaila oilfield (BP Iraq NV). The
scope of works included a project audit, manufacturing
and supply of the main and auxiliary equipment, repair
and retrofit of operated equipment, installation
supervision and commissioning, acceptance tests in
compliance with corporate and project standards of BP.
NEW PROJECTS
In June 2014, HMS Group signed a contract with one of
the leading international companies, Alstom Power, for
production and delivery of a large amount of pumping
equipment for the Koeln Niel power plant construction
project in Germany. According to the contract, the
customer will receive two main VS6 condensate pumps
with a flow rate of 760 m3/h and head of 97.8 m, two main
OH2 boiler feed water pumps with a flow rate of 285.6
m3/h and head of 130 m, as well as four heating
circulation and forwarding pumps. All of the pumping units
will be produced according to the API-610 standard and
equipped with automation and control systems.
In the 1st half of 2014, HMS Group signed a contract for
more than 6 billion rubles with one of the Russian oil &
gas majors to deliver oil & gas equipment as part of a
large-scale project, the so-called “Liquid Hydrocarbon
Project”, which is planned to be fulfilled by the end of
2015.
36 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 37
PERFORMANCE IN 2014
Operating performance
Financial performance
HMS key projects
R&D development
Corporate social responsibility
Last year, NIITK developed the first refrigerating
multiplicatory-type GCM3-250/0.9-15.8 UHL4 compressor
unit in Russia intended for propane compression, as part
of cooling unit in oil & gas refining plants. The casing of
the integral gear is made with a vertical split, due to high
propane parking pressure and the gear pairing has a
blade speed of 169 meters per second.catory-type
GCM3-250/0.9-15.8 UHL4 compressor unit in Russia
intended for propane compression, as part of cooling unit
in oil & gas refining plants. The casing of the integral gear
is made with a vertical split, due to high propane parking
pressure and the gear pairing has a blade speed of 169
meters per second.
NIITK has also engineered its first complete Gas
Compressor Package on the basis of the 25MW
5GC2-287/15-57 GTU compressor unit, manufactured by
KKM. This unit is designed to compress dry stripped
hydrocarbon gas for Stavrolen (LUKOIL). The compressor
and gas turbine drive gas compressor package also
comprises an exhaust-heat boiler, which generates
super-heated high-pressure steam.
HMS Group’s current operating portfolio of almost 270
patents, and over 40 registered trademarks, reflects our
commitment to research & development. In 2014, HMS
Group filed 29 new patents, primarily focused on
measuring equipment, including units to measure the oil
production rate, etc.
RESEARCH AND DEVELOPMENT
A new high-pressure and high-speed BB5 pump for
offshore application according to API-610 standard was
successfully tested as a complete skid (approx. 18,000 kg)
with 4,620 rpm at the Apollo test stand. The pump is
intended for deaerated seawater injection and has a
complete new set of patterns for hydraulic parts like
impellers, diffusers and barrels.
In the heavy oil pumps segment, new unique NGPN-M
1250-160 and NGPN-M 2500-160 pumps were produced
and delivered in 2014. These NGPN-M pumps (BB1 pumps
according to API-610 standard) - horizontal single-stage
between-bearing double-suction centrifugal axially split
pumps with inducers – have excellent NPSHR
characteristics in a wide capacity range, in comparison
with the high head one-stage pumps. For example,
NGPN-M 1250-160 pump has 2 meters NPSHR, and
NGPN-M 2500-160 has 2.5 meters NPSHR.
Following an increasing customer demand for multiphase
flow metering units and in order to enhance the expertise
in the development of this type of equipment, HMS Group
has completed the construction of the largest multiphase
metrological test flow facility in Russia, which will allow the
testing and metrological calibration of up-to-date
multiphase metering units.
Multiphase metrological test flow facility
In 2014, HMS Group designed, produced and delivered
an aircraft fuel systems test bed, which is a part of an
integrated test facility, capable of simulating a whole
range of flight loads and operating data (pressure,
temperature, roll and pitch, G force, etc.) which impact on
the aircraft fuel system while in flight.
BB5 pump for offshore applications delivered to the Permas Field
HMS Group is continuously strengthening its research and
development capabilities and the Company`s strategy is
aimed at establishing the best Research & Development
in Russia and the CIS. Our investments are dedicated to
strengthening our core competencies in industrial pumps,
oil & gas equipment and compressor technologies, and
in developing solutions for the oil and gas industry and
water utilities.
Last year, HMS started the process of the localization of
heavy pumps and pumping equipment manufacturing at
HMS Livgidromash and Nizhnevartovskremservis, in close
cooperation with Nasosenergomash (Ukraine); the
company plans to complete this by the end of 2015.
Within the framework of the project, the company plans to
construct a new production unit and a new transformer
substation as well as to build a test stand. The new test
complex will become the only one of its kind in Russia,
enabling the testing of the pumping units installed in the
oil pipelines of Transneft and Rosatom’s nuclear power
plants. It will consist of all necessary main and support
systems to conduct operational testing of the heavy
centrifugal pumping units.
HMS Group continues to strengthen its expertise in
equipment designed according to international standards.
In 2014, our engineers introduced a new lube oil supply
system according to API-614, Apollo type series ACS,
intended for pumps, motors, turbo gears, turbo coupling
and turbines. The new lube oil system has been
engineered as an integral part of the skid, to lubricate the
pump and motor bearings. The system design ensures
the easy dismantling of the lube oil system from the skid
base plate for the further removal of the pump’s internal
cartridge.
Gas compressor package on the basis of the 25MW 5GC2-
287/15-57 GTU compressor
Until now, domestic aviation companies could test fuel
systems only during flight trials, having acquired additional
considerable operational costs. Now, testing data will
allow aviation companies to optimize aircraft fuel systems
at the development stage and to set up new
constructions on the ground.
The standard for the Russian oil & gas field development
scheme of water treatment comprises bulky tanks and
vessels with high maintenance costs, a complicated
assembly and, in general, a lackluster effectiveness. And
if the surface of the onshore fields permits the use of such
large systems, it becomes a major challenge for offshore
projects. Based on innovative practices, HMS Group
has developed a new technological solution – a water
treatment unit with an improved fine filter and a centrifugal
water-cleaning machine – it’s distinct in its compactness
and incurs less operating costs.
Last year HMS Group conducted several trial tests of a
new well testing mobile unit, MERA-MR, to develop new
competences in heavy oil reservoirs and oil wells with
high viscosity fluids. Debits measuring tests were
successfully performed at the East – Messoyakha and
Russkoye fields with high–viscosity oils (up to 1.000 cSt).
In addition, HMS Group successfully completed a
CFD–analysis of an original vortex centrifugal oil field gas
separator, which was fully developed and designed by
the Engineering Center of HMS Neftemash in Tyumen and
where CFD – analysis was performed by the
super–computer “Mendeleev” in the Tyumen State
University.
This year, the company plans to manufacture the
separator and use it in oil field trial operations at the
FWKO facility “Evgen’evskaya” in the Samara region
(Samaraneftegaz, Rosneft). This equipment is intended to
be used in different gas treatment blocks, produced by
HMS.
38 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 39
PERFORMANCE IN 2014
Operating performance
Financial performance
HMS key projects
R&D development
Corporate social responsibility
SOCIAL RESPONSIBILITY
HMS Group fully recognizes the responsibility to all of its stakeholders and
communicates with them on a regular basis. The Group contributes to the social
development and improvement of the quality of life across local communities in
the regions where it operates.
The group’s entities held routine
periodic medical check-ups for
employees working in hazardous
production areas.
Encouraging a healthy lifestyle is
one of the Group’s employee
engagement priorities and sport is
one its core values. In 2014, HMS
Group held a number of family and
sporting competitions and other
events that over the years have
become traditions in the corporate
life of HMS Group subsidiaries.
PEOPLE AND THEIR
WORKPLACE
Employees are one of the core
assets of HMS Group and we are
committed to attracting and retaining
the best people, encouraging and
developing them to achieve their full
potential. In 2014, the main
directions of staff training and
education included development
of managerial competences of the
company’s officers both on a
case-to-case basis (EMBA programs)
and in the form of corporate training,
English language teaching and
functional education, including
in-company training sessions entitled
“Know Your Company’s Product
Portfolio”. More than 170 trainings
and courses were held in Moscow
alone, including over 190 trainees.
Our HR policy is aimed at
maintaining a healthy and diverse
environment where employees feel
valued and respected. The Group
promotes cooperation between
experts within production units as
well as between subsidiaries. In
2014, HMS Group continued planned
recruitment to open positions and as
of 31 December 2014, the company
employed more than 15.5 thousand
people, less than in 2013 due to the
attrition and disposal of SKMN.
HMS Group improves its health and
safety standards on a regular basis.
Several courses and trainings on
behavioral safety, fire and
environment were held at all the
production sites and zero accident
frequency rates were reported at
each of the subsidiaries that make
up HMS Group.
Average headcount as of December 31, 2014
Rub mn 2007 2008 2009 2010 2011 2012 2013 2014
Industrial pumps
8,480
8,395
7,344
7,201
8,530
8,950
8,826
9,136
Oil & gas equipment
2,148
2,135
2,126
2,132
2,482
2,463
2,395
1,862
Compressors
0
0
0
0
0
2,373
2,273
2,509
EPC
Other
Total
2,070
2,410
3,157
3,523
3,415
3,946
3,013
1,769
188
188
215
241
247
295
303
295
12,886
13,128
12,842
13,097
14,673
18,027
16,809
15,571
Throughout the past year, HMS
Group companies helped to host
local events, such as the City day in
Livny and Tyumen.
CHARITY
HMS Group has a long-standing
tradition of investing in the future by
developing projects in local
communities. On a broader scale,
HMS Group seeks to support charity
initiatives, create jobs and business
opportunities that strengthen local
economies and support community
development projects.
Throughout 2014, HMS Group
sponsored projects supporting
Children and Youth healthy lifestyles
and education, culture and arts.
In Kazan (Russia), HMS Group
sponsored the Federation of
Ice-Hockey and the Federation of
Judo in the field of youth sports
development, and in Sumi (Ukraine)
HMS Group donated for the needs
of local hospitals and funds to
promote sporting activities among
young people.
The main charitable focus is children
from low-income and vulnerable
families, orphanages and health care
institutions. As a part of this
commitment, HMS Group supports
a number of schools, kindergartens
and orphanages in Livny (Russia),
and continues to be a dedicated
sponsor of boarding school #66 in
Tyumen (Russia).
In Moscow, HMS Group provides
support for the Preobrazhensk
cadet corps, assists in hosting
“Music quarter” musical festivals for
disabled children. Also the group
donated the foundation “Illustrated
books for little blind children” and
the charity fund “Vympel”.
ENVIRONMENTAL
INITIATIVES
One of HMS Group’s main priorities
is a responsible approach to the
consumption of natural resources.
HMS Group strives to implement
environmental and energy-saving
technologies in the construction and
operation of its production sites.
Regardless of the fact that the
environmental impact of HMS Group
subsidiaries is low, all of the
businesses focus on the efficient
consumption of fuel, paper, water,
electricity and heating. HMS Group
conducts activities on regular basis
to offset the environmental impact,
including waste management,
analysis and control of water quality
on industrial sites, environmental
emission compliance and industrial
environmental monitoring.
40 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 41
GOVERNANCE
BoD and its committees
Risk management and
internal control
HMS GDRs
BOD AND ITS COMMITTEES
Mr. Nikolai N. Yamburenko
Chairman of the Board of Directors,
Non-Executive Director, Chair of the
Strategy and Investments Committee
Mr. Yamburenko was appointed as a
member of the Board of Directors in
October 2010. He has been a non-executive
member of the Board of Directors since
10th July, 2014, when he was appointed
Chairman of the Board of Directors. Mr.
Yamburenko previously held the position of
Head of the Industrial Pumps Business Unit
since 2005. Prior to joining the Group, Mr.
Yamburenko was the CEO of Livgidromash
(HMS Livgidromash), which is now part of
the Group. Mr. Yamburenko has more than
30 years of industry experience. He
graduated from the faculty of radio
electronics of the Moscow Aviation Institute
named after S. Ordzhonikidze, where he
gained a degree in radio electronics.
HMS Group’s corporate governance practices are designed to ensure that the interests of all its stakeholders
are given due consideration. Although the company is not subject to any mandatory corporate governance
code in its home jurisdiction of Cyprus nor required to observe the UK Corporate Governance Code, it has
implemented various corporate governance measures, including the appointment of two independent
non-executive Directors to its Board of Directors and the establishment of an Audit Committee and a
Remuneration Committee. Each of these Committees of the Board of Directors is chaired by an independent,
non-executive Director. HMS Group continues to review its corporate governance policies in line with
international best practice.
Executive Directors.
Non-executive Directors.
Mr. Artem V. Molchanov
Mr. Kirill V. Molchanov
Mr. Yury N. Skrynnik
Mr. Philippe Delpal
Mr. Andreas S. Petrou
Mr. Gary S. Yamamoto
Member of the Board of Directors,
Managing Director (CEO)
Member of the Board of Directors
Member of the Board of Directors
Member of the Board of Directors,
Chair of the Audit Committee
Member of the Board of Directors
As one of the founders of the Group, Mr.
Molchanov has held various executive
positions within HMS Group since its
establishment in 1993. Mr. Molchanov
became the President of HMS Group in
2008. Mr. Molchanov was appointed as an
executive member of the Board of
Directors in October 2010. Mr. Molchanov
has more than 20 years of industry
experience. He graduated from the
Plekhanov Russian Academy of Economics
(currently Plekhanov Russian University of
Economics), where he gained a degree in
industrial economics.
As one of the founders of the Group, Mr.
Molchanov has held various executive
positions within HMS Group since its
establishment in 1993. Mr. Molchanov was
appointed as an executive member of the
Board of Directors in October 2010 and has
served as Vice President of HMS Group
since 2008. Mr. Molchanov has more than
20 years of industry experience. He
graduated from the Bauman Moscow
Higher Technical School (currently the
Bauman Moscow State Technical
University) with a degree in
electromechanical engineering. He
graduated from the Judge Business
School, University of Cambridge, where he
gained an executive MBA degree.
42 HMS GROUP || Annual report 2014
Mr. Skrynnik was appointed as an
executive member of the Board of
Directors in October 2010. He is currently
the Head of the Compressor Business Unit,
a position he has held since its
establishment in 2012. Previously
Mr. Skrynnik held the position of Director
for Strategic Marketing. Prior to joining
HMS Group, he served as the Chief
Representative of OAO Sumy Frunze NPO
(Ukraine) in Russia from 1999 to 2008. Mr.
Skrynnik worked as Director of the
Innovative Technical Subdivision of OOO
Machines, Equipment, Technologies,
Products and Services from 1992 to 1999.
From 1986 to 1988, he served as a scientific
research officer at the Moscow Institute of
Chemical Machinery (currently the Moscow
State University of Engineering Ecology).
Mr. Skrynnik has more than 20 years of
science and management experience. He
graduated from the Sumy branch of the
Kharkiv Polytechnic Institute with a degree
in mechanical engineering in 1983. He was
awarded a PhD in engineering science
from the Moscow Institute of Chemical
Machinery (currently the Moscow State
University of Engineering and Ecology) in
1988. Mr. Skrynnik is the author of more
than 50 scientific publications and 20
inventions.
Mr. Petrou was appointed as a
non-executive member of the Board of
Directors in June 2010. From 1989 to 1998,
Mr. Petrou served as a member of the
Board of The Cyprus Tourism
Development Public Company Ltd,
representing the interests of the
Government of the Republic of Cyprus.
From 1987 to 1990, Mr. Petrou served as the
General Secretary of Cyprus Dairy
Organisation. In 1986, Mr. Petrou
established his own law firm. He is an
honours graduate of the Law School of
Democrious University of Thrace. Mr.
Petrou has been a member of the Cyprus
Bar Association since 1985.
Mr. Delpal was appointed as an
independent non-executive member of the
Board of Directors in December 2010 and
is chair of the Audit Committee. He is an
Operational Partner for Financial Services
in Baring Vostok Capital Partners, one of
the largest private equity firm in CIS. He
deals with Russian and CIS financial
services companies. He also currently
serves as a non-executive director of TCS
Bank (Russia), Orient Express Bank OJSC
(Russia), Europlan Bank, BlackRock
Emerging Europe Plc (London),
Komercijalna Banka (Serbia) and Beta
Epsilon SAS. He has a background both in
Russian private equity and in Banking (as
former CEO of one of the largest consumer
finance player in Russia and CEO of BNP
Paribas in Moscow). He brings to the Board
financial and investment experience. He
graduated from the Telecom Paris
University with a degree in IT, Telecoms
and Economics. He has been living in
Russia since 2004.
Member of the Board of Directors,
Chair of the Remuneration
Committee
Mr. Yamamoto was appointed as an
independent non-executive member of the
Board of Directors and chair of the
Remuneration Committee in December
2010. Prior to joining the Group, he served
as Chief Executive Officer at Borets
International during 2009. Mr. Yamamoto
has served as the President of Yamamoto
Consulting since 2008. He served as a
member of the Board of Directors at Radius
Servis from 2007 until 2008. Prior to this,
Mr. Yamamoto enjoyed a 20-year career
with Schlumberger Limited and, from
2003 to 2008, served as Vice President of
Schlumberger Russia. Mr. Yamamoto has
more than 20 years of management
experience. He graduated from the
University of California, Berkeley, with
degree in engineering in 1988.
Mr. Yamamoto is a member of the Society
of Petroleum Engineers and the
Independent Directors Association.
Annual report 2014 || HMS GROUP 43
GOVERNANCE
BoD and its committees
Risk management and
internal control
HMS GDRs
BOD AND ITS COMMITTEES
GENERAL OVERVIEW
AUDIT COMMITTEE
In accordance with the Company’s Articles of Association,
one third of the Directors shall retire by rotation and seek
re-election at each Annual General Meeting.
During the year ended 31 December 2014 two Directors
were not re-elected. The Board of Directors was reduced
and now consists of seven (7) members, three (3) of whom
are executive Directors. In addition, revised Terms of
Reference of the Board of Directors and Managing
Director (CEO) were approved by the Board of
Directors and a new Chairman of the Board of Directors
was appointed.
PRINCIPAL ACTIVITIES OF THE BOARD
OF DIRECTORS IN 2014
In 2014, the Board of Directors held five ordinary
meetings, all of which occurred in Limassol, Cyprus.
During the course of 2014, the Board of Directors
continued working on the development of the Company’s
mid-term and long-term financial and business strategy,
including investment plans, M&A activities, budgeting and
general corporate development. Throughout the year, the
Board of Directors focused on the improvement of the
Company’s internal control and risk management
systems.
At its meetings, the Board of Directors reviewed other
issues connected with the activities of the Company
within its remit, including the approval of corporate
reports and the Company’s participation in legal
proceedings.
THE BOARD OF DIRECTORS
COMMITTEES
In 2014 the Board of Directors established a Strategy and
Investments Committee. Mr. Nikolay Yamburenko, Mr. Gary
Yamamoto, and Mr. Yury Skrynnik were elected as
members of the Committee and Mr. Nikolay Yamburenko
was appointed as chairman. The Strategy and
Investments Committee is responsible for considering,
amongst other matters: (i) strategic business
combinations, (ii) acquisitions, mergers, dispositions,
divestitures and similar strategic transactions involving the
Company together with (iii) fundamental investments of
the Company.
There are two further Committees of the Board of
Directors: the Audit Committee and the Remuneration
Committee. A brief description of the main activities of
these two Committees in 2014 is set out below.
General Overview
In 2014, the revised Terms of Reference of the Audit
Committee were approved by the Board of Directors. The
Audit Committee is to be made up of at least two
members, one of whom is to be an independent
non-executive Director. The Committee expects to meet
four times each year. Currently, the Audit Committee is
chaired by Philippe Delpal; its other member is
Gary S. Yamamoto.
The Audit Committee is responsible for considering,
amongst other matters: (i) the integrity of the Group’s
financial statements, including its annual and interim
financial statements; (ii) the effectiveness of the Group’s
internal controls and risk management systems; (iii)
auditors’ reports on the Group; and (iv) the terms of
appointment and remuneration of the auditors of the
Group.
The Audit Committee supervises and monitors, and
advises the Board of Directors on, risk management and
control systems and the implementation of codes of
conduct. The Audit Committee also supervises the
submission by the Group of financial information and a
number of other audit-related issues and assesses the
efficiency of work of the Chairman of the Board of
Directors.
Activities in 2014
In 2014, two meetings of the Audit Committee were held.
The main issues the Audit Committee oversaw in 2014
were the preliminary review of IFRS financial statements
(including goodwill impairment at the end of 2014) and
internal control and risk management (including the audit
plan).
The Audit Committee also supervised the internal and
external audit procedures and the annual tax strategy
implementation within the course of the year. The Audit
Committee also made recommendations to the Board of
Directors with regards to internal control efficiency and
the appointment of a new external auditor of Company.
REMUNERATION COMMITTEE
General Overview
The Remuneration Committee comprises three Directors
and expects to meet at least once each year. Currently,
the Remuneration Committee is chaired by
Gary S. Yamamoto; its other members are
Mr. Nikolay Yamburenko and Philippe Delpal. The
Remuneration Committee is responsible for determining
and reviewing, amongst other matters, the Group’s
remuneration policies. The remuneration of independent
Directors is a matter for the Chairman of the Board of
Directors and the Executive Directors. No Director or
manager may be involved in any decisions regarding
his/her own remuneration.
Activities in 2014
In 2014, two meetings of the Remuneration Committee
were held. The main matters reviewed by the
Remuneration Committee were the Group’s Long-Term
Incentive Program, the Financial Performance Targets
used in the setting of 2014 remuneration and Individual
Financial Performance Bonus Targets.
The Remuneration Committee adopted decisions and
made recommendations to the Board of Directors with
regards to the Group’s CEO Compensation Targets, in
accordance with international best practice.
EXTERNAL AUDIT OF FINANCIAL
STATEMENTS
Every year the [Company/Group] appoints an external
auditor who is responsible for the auditing and inspection
of the consolidated financial statements of the [Company/
Group] in compliance with IFRS. The external auditor also
prepares reviews of the consolidated interim condensed
financial information of the [Company/Group] in
compliance with IFRS requirements. The external auditor
of the [Company/Group] is selected from leading audit
firms after a thorough review of their respective
proposals. Following that review, the Audit Committee
gives its recommendations to the Board of Directors
regarding the candidacy of the external auditor and the
amount of the auditor’s compensation, and advises the
Board of Directors on other terms and conditions of the
contract with the auditor. In 2014, based on the
recommendation of the Audit Committee, the Board of
Directors selected Deloitte (Cyprus) to conduct the audit
of the financial statements of the [Company/Group] for the
year ended 31 December 2014.
DIRECTORS COMPENSATION
The total compensation of the independent Directors, as
set out in the Group’s consolidated income statement,
was Euro 195,000 for the year ended 31 December 2014.
LITIGATIONS INVOLVING THE COMPANY
Grigorishin Litigation.
In February 2014, the Company was served in Cyprus with
an interim order of the District Court of Nicosia (the
“Order”). The Order was obtained by Mr. Konstantin
Grigorishin and certain other plaintiffs against a number of
defendants, including the Company, certain of its
shareholders and directors, and Bank of New York
(Nominees) Limited. Among other things, the Order froze
property of most of the defendants, including the
Company, but excluding Bank of New York (Nominees)
Limited and two other defendants, for an amount up to
EUR 400 million.
In April 2014, following prior written and oral submissions
against the Order by the Company and several other
defendants, the District Court of Nicosia discharged the
Order in full, including in respect of the Company and
its shareholders and directors. As far as the Company is
aware, since then the plaintiffs have taken no substantive
steps to proceed with their claim against the Company or
its directors.
The Company strongly rejects the plaintiffs’ claims and
allegations against the Company as groundless. The
Company will continue to defend vigorously its position in
this on-going litigation.
Tsoy Litigation.
In late June 2014, the Company’s shareholder, Mr. German
A. Tsoy, and his holding company, Acura Global Limited
(BVI), launched an action in the District Court of Nicosia
against a number of defendants, including certain other
shareholders and the three directors of the Company,
namely, Messrs. Artem V. Molchanov, Kirill V. Molchanov
and Yury N. Skrynnik. The plaintiffs initiated this litigation
purportedly as a derivative action seeking damages “for
the benefit of” the Company “and/or” its majority
shareholder, H.M.S. Technologies Limited. As such, no
claims have been asserted directly against the Company
by the plaintiffs.
The plaintiffs also applied to the Court for interim
measures including an application for a freezing order
(the “Application”) against the defendants, but not the
Company. The Company and certain of its shareholders
and directors opposed the Application. In late March
2015, following prior written submissions against the
Application, the plaintiffs withdrew the Application, but not
the main action itself.
The Company’s non-defendant directors, namely, Messrs.
Philippe Delpal, Gary S. Yamamoto, Andreas S. Petrou and
Nikolai N. Yamburenko, who make up the majority of the
Company’s Board of Directors, carefully considered the
plaintiffs’ claims and allegations, obtained legal advice
from the Company’s lawyers, and unanimously concluded
that the plaintiffs’ allegations are entirely meritless. The
Company’s non-defendant directors will continue to
defend vigorously the Company’s position in this
on-going litigation.
44 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 45
GOVERNANCE
BoD and its committees
Risk management and
internal control
HMS GDRs
RISK MANAGEMENT AND INTERNAL
CONTROL
OVERVIEW
The Group is exposed to various risks and uncertainties
that may have undesirable financial or reputational
implications. In order to minimize the negative impact of
such risks and to benefit from available opportunities, a
risk management and internal control system has been
integrated into the Group’s operations. The overall
objective of this system is to obtain reasonable assurance
that the Group’s goals and objectives will be achieved.
The main principle in the design and maintenance of such
systems is that the expected benefits should outweigh
the associated costs.
KEY FEATURES OF THE GROUP’S
INTERNAL CONTROL SYSTEM OVER
FINANCIAL REPORTING
The Group uses a formal risk management program
across its companies; there is an ongoing process for
identifying, evaluating and managing the significant risks
faced by the company. Risks are classified according to
their likelihood and significance; different strategies are
used to manage identified risks. This process is regularly
reviewed by the Board in accordance with applicable
guidance.
The Board is responsible for the Group’s system of
internal control and for reviewing its effectiveness. This
system is designed to manage rather than eliminate the
risk of failure to achieve business objectives and can only
provide reasonable and not absolute assurance against
material misstatement or loss.
Internal control and risk management monitoring is
performed through internal and external assurance
providers, which include:
– Financial statement audits performed by external
auditors. Discussion by the Audit Committee of the results
of the audit, including a review of the financial
performance, any changes to disclosure, a subsequent
events review, important accounting matters and other
internal control matters;
– Review and formal approval of the financial results by
the CEO, CFO, Audit Committee and the Board;
– Board and sub-committee approval and monitoring of
operating, financial and other plans;
– Consolidation and verification of correct identification
and proper assessment of critical business risks. The
Audit Committee reviews changes to the risk profiles
together with progress on actions for key risks on a
regular basis;
– Internal audit function.
The Head of Internal Audit functionally reports to the
Audit Committee and administratively to the First Deputy
CEO. The internal audit department performs its activities
in accordance with an audit plan and incorporates review
of material controls, including financial, compliance and
operational controls. The results of each audit are
discussed in detail with the companies and business units
concerned and action plans are agreed upon.
Setting of risk-appetite
Oversight
BOARD
Implementation
and oversight
EXECUITIVE
MANAGEMENT
AUDIT
COMMITTEE
CONTINUOUS IMPROVEMENT
HMS Group’s goal is to continuously improve its governance and risk management sub-systems. We assess the findings
of audits and internal investigations and use them to adjust our internal processes and procedures.
The key features of the risk management process include:
– The gathering and analysis of information related to internal and external factors which can negatively impact the
achievement of the Group’s objectives;
– The identification of the possible level of negative impact of various events on operational and financial results in
accordance with applicable risk-assessment methods;
– Setting appropriate risk-tolerance levels;
– Ranking risks according to their significance and probability;
– Making appropriate decisions to manage identified risks;
– Actively monitoring the steps taken to control the most significant risks.
PRINCIPAL RISKS AND UNCERTAINTIES
The relationship between the main categories of the risks we encounter and how they affect our strategy is shown
in the table below.
Enhancing
margins
Driving
growth
Generating
cash
Maximising
returns
Securing
customers
Securing long-
term suppliers
Risk\Strategy
Global politician and
economic risks
Sales
Project execution
risks
Human Capital
Acquisitions and
disposals
Fraud and
corruption risks
Technology
Legislation and
regulations
Product liability
and litigation
Financial risks
Policy implementation
and identification
of improvements
OPERATIONAL
MANAGEMENT
INTERNAL
AUDIT
Below is a summary of the principal risks facing the Group’s business. The Group also faces other risks both known and
unknown; some of them apply to similar companies operating in both the Russian and international markets.
46 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 47
GOVERNANCE
BoD and its committees
Risk management and
internal control
HMS GDRs
RISK MANAGEMENT AND INTERNAL
CONTROL
Global political and economic risks
Project execution risks
Acquisitions
The Group may be exposed to various political,
economic and other risks not only in the countries where
it has primary production facilities (Russia, Ukraine,
Belarus, Germany) but also in jurisdictions where the
Group has other interests (e.g. EPC projects in the Middle
East and Central Asia). The Group has not to date been
significantly affected by the recent developments in
Ukraine but, in the event of a deterioration of that
country’s situation, the Group’s operations in Ukraine
(including export of production to Russia which is
significant part of the Group’s integrated solutions), as
well as its financial position, could be affected, and the
extent of this impact is difficult to predict.
The introduction of new regulations or the imposition of
trade barriers or international sanctions could disrupt the
Group’s business activities or impact on the Group’s
customers, suppliers or other parties with which it does
business. In some instances, this could have an adverse,
material effect on the Group’s financial position and
prospects.
Sales
The Group’s business depends on the levels of capital
investment and maintenance expenditures by the Group’s
customers, which in turn are affected by numerous
factors, including the state of the Russian economy and
those of other nations, fluctuations in the price of oil,
taxation of the Russian oil and gas industry, availability
and cost of financing, and state investment and other
support for the Group’s customers or in state-sponsored
infrastructure projects.
The Group’s business depends on the award of contracts
and renewals and extensions of existing contracts;
moreover, the Group relies on a limited number of key
customers and contracts and may incur losses due to
unfavourable terms of contracts with certain large
customers.
Since the Group’s contracts are typically on a fixed-price
basis, there are risks associated with cost overruns
(especially in the EPC segment). The Group seeks to
mitigate these risks through its efforts to improve
profitability and cost control, in part relying on volume
growth and an increasing share of high-margin integrated
solutions services.
Human Capital
The ability to achieve the Group’s strategic goals highly
depends on our most important asset — our people. We
develop and remunerate our employees using leading
HR practices. In line with Group’s growth strategy, we aim
to attract talented employees from the market and
continuously improve our recruitment methods.
The success of the Group’s businesses depends heavily
on the continued service of its key senior managers.
These individuals possess industry-specific skills in the
areas of sales and marketing, engineering and
manufacturing that are critical to the growth and operation
of the Group’s businesses. While the Group has entered
into employment contracts with its senior managers, the
retention of their services cannot be guaranteed. The
Group is not insured against damages that may be
incurred in the case of loss or dismissal of its key
specialists or managers. Moreover, the Group may be
unable to attract and retain qualified personnel to
succeed such managers. If the Group suffers an extended
interruption in its services due to the loss of one or more
such managers, its business, financial condition, results
of operations, prospects may be adversely and materially
affected.
The Group cannot be certain that the anticipated cash
flows, synergies and cost savings from acquisitions or
other transactions will materialize or reach expected
levels. Inefficient integration of the newly acquired
businesses poses a risk to the Group’s operations. Any
failure to integrate the operations of the Group’s
companies successfully could adversely affect the
Group’s business and financial condition and the results
of operations.
Since its formation in 1993, the Group has completed a
number of acquisitions involving the purchase of
industrial pumps, modular equipment manufacturing and
EPC services companies and the Group expects to make
additional acquisitions in the future. The integration of
these and future acquisitions into the Group’s operations
poses significant management, administrative and
financial challenges.
The integration process may result in unforeseen
difficulties and could require significant time and attention
from management that would otherwise be directed at
developing the Group’s existing business.
Fraud and corruption risks
Fraud and corruption are pervasive and inherent risks of
all business operations. There is always some potential
for fraud and other dishonest activity at all levels of a
business, from that of a factory worker to senior
management. Efficient operations and optimal use of
resources depends on our ability to prevent occurrences
of fraud and corruption at all levels within the Group.
HMS Group promotes ethical behaviour among its
employees and maintains dedicated violation reporting
channels to raise concerns within the Group through an
ethics hotline available 24/7. The Group’s internal audit
and/or security department perform investigations into
alleged fraud and misconduct cases. If necessary, the
results of such investigations are provided to the CEO, the
Board, the management and Audit Committee, as
necessary.
As the Group operates in a number of jurisdictions around
the world, the Board and senior management also put a
strong emphasis on corporate compliance with applicable
regulation, including anti-bribery and anti-corruption
legislation, such as the UK Bribery Act.
The Group has implemented procedures to ensure that all
employees are aware of the requirements of the Group’s
anticorruption policies, with a particular focus on those
roles most exposed to the risk of breach
Legislation and regulations
Recent Russian government initiatives which are currently
under consideration are likely to include, inter alia,
significant amendments to tax law governing operations
with entities incorporated in offshore jurisdictions. As a
company with a majority of its operating assets located in
Russia, HMS Group recognizes that these developments
may have significant implications for its business and
development plans. HMS Group continues to monitor
these developments.
48 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 49
GOVERNANCE
HMS GDRS
As of December 31, 2014, HMS Hydraulic Machines & Systems Group Plc had an issued share capital of Euro 1,171,634.27
divided into 117,163,427 shares with par value of Euro 0.01 per share.
Price of HMS Group’s GDRs
BoD and its committees
Risk management and
internal control
HMS GDRs
The shares of HMS Group are not traded.
In February 2011, the Company signed a depositary agreement with The Bank of New York Mellon (BNY Mellon), under
which the issue of Global Depositary receipts (GDRs) for HMS Group shares was initiated.
As of December 31, 2014, the total number of GDRs issued in exchange for shares of HMS Group
amounted to 48,004,000 GDRs or approximately 41% of the Company’s issued share capital.
Information on HMS Group Plc GDRs:
HMSG
London Stock Exchange
US40425X2099
US40425X1000
1:1
Feb 11, 2011
CY0104230913
BNY Mellon
3.00
2.50
2.00
1.50
1.00
0.50
-
Rub mn
MIN MAX At the end of the period
2011
2012
2013
2014
1Q 2014
2Q 2014
3Q 2014
4Q 2014
3.98
3.90
2.10
1.37
1.47
1.21
0.26
8.25
5.98
4.23
2.50
1.80
1.65
1.20
4.41
4.22
2.50
1.37
1.65
1.21
0.26
Major shareholders of HMS Group as of December 31, 2014
26.9% Free-float
Vladimir Lukyanenko 27.4%
1.6% Treasures
24.4% Management
German Tsoy 19.8%
50 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 51
ADDITIONAL INFORMATION
Shareholder’s info and Disclaimer
SHAREHOLDER’S INFO & DISCLAMER
INFORMATION
Company Name
HMS Hydraulic Machines & Systems Group Plc
Company Type
Public
Fiscal Year-End
December 31
Disclosure
LSE
Managing Director (CEO)
Artem Molchanov
First Deputy CEO (CFO)
Kirill Molchanov
HMS GROUP PLC GDR DETAILS
HMSG
40425X209
London Stock Exchange
US40425X2099
1:1
BK (Sponsored)
Feb 11, 2011
Not Traded
CY0104230913
Russia
OilEquip.,Serv.&Dist
GENERAL SHAREHOLDER ENQUIRIES
AND INVESTOR RELATIONS CONTACTS
HMS Group
Investor Relations
Address: 7 Chayanova str. 125047 Moscow, Russia,
Tel: +7 495 730 6601
Fax: +7 495 730 6602
Email: ir@hms.ru
GDRS HOLDERS’ CONTACTS
Contacts for inquiries regarding:
– advise of a change of name and/or address;
– report lost/stolen GDR share certificates or the
non-receipt of a dividend check;
– request an election form for the scrip dividend program;
– request forms to transfer GDRs;
– report the death of a registered holder of GDR shares;
– request a duplicate account statement;
– have dividends electronically deposited to your bank
account;
– consolidate similar account registrations;
– request general information about your shareholder
account, etc.
The Bank of New York Mellon
BNY Mellon Shareowner Services
PO Box 358516
Address: Pittsburgh, PA 15252-8516, USA
Tel: +1 888 737 2377 (USA only)
Tel: +1 201 680 6825 (International)
Email: shrrelations@bnymellon.com
Website: www.bnymellon.com
DISCLAIMER
This document contains forward-looking statements that reflect management’s current views with respect to future events. Such statements are
subject to risks and uncertainties that are beyond HMS Group’s ability to control or estimate precisely, such as future market and economic
conditions, the behavior of other market participants, the ability to successfully integrate acquired businesses and achieve anticipated
synergies and the actions of government regulators. If any of these or other risks and uncertainties occur, or if the assumptions underlying any
of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. HMS
Group does not intend or assume any obligation to update any forward-looking statements to reflect events or circumstances after the date of
these materials.
This annual report does not constitute an invitation to invest in HMS Group GDRs. Any decisions you make in reliance on this information are
solely your responsibility. The information is given as of the dates specified, and we undertake no obligation to update it save as required by
applicable law. HMS Group accepts no responsibility for any information on other websites that may be accessed from the company’s website
by hyperlinks.
52 HMS GROUP || Annual report 2014
Annual report 2014 || HMS GROUP 53