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CEO Statement

Artem Molchanov

"Our human resources potential is a basis for sustainable growth and, in support of this, we have invested strongly in HR development over the years. I would like to thank all HMS Group employees for enabling our achievements of the last year and for their commitment to our values. It’s a particular pleasure for me to recognize our progress and achievements as we approach the important milestone of our 20th anniversary."

Artem Molchanov
Chief Executive Officer

Dear Stakeholders and Partners of HMS Group

We are all looking back on a very successful year. It was successful from both financial and strategic standpoints. We have given a good account of ourselves, particularly in executing sophisticated and complex projects; last year we successfully completed deliveries and commissioning of pumping stations under construction for the second part of the East-Siberia — Pacific Ocean pipeline (ESPO), which was launched in December, 2012. Owing to the good job we’ve done and strong references under the ESPO project, we were successful in winning a tender and signed a new follow-up contract valued at Rub 4.6 bn in April 2012 for the delivery of three unique pumping stations under the ESPO — 1 capacity extension project.

In addition to this, we managed to sign and successfully execute complex equipment deliveries under a series of contracts, valued at more than Rub 3 bln, for integrated solutions under the second stage of development of the Vankor oilfield. This is also the result of a previous job well-done — in 2010 we participated in the first stage of the oilfield development.

However, our target markets are not limited to just the oil and gas sector. For example, in 2012, our contract in Turkmenistan for deliveries of three customized water pumping stations for irrigation serves as good evidence of our strategy of focusing on technologically demanding and complex solutions. We also signed this contract largely thanks to our previous execution of a similar pilot project in the region in 2011. This year was also memorable for a win in the international competitive bid for deliveries of pump equipment to the Tianwan Nuclear Power Plant in China. Positive references on our pumps, installed in already operating power units of the plant, were among the key criteria for our contract success. On top of this, we managed to sign a series of contracts with nuclear power plants under construction and expansion in Russia — Beloyarskaya NPP, Rostov NPP and the Baltic NPP.

Record high order intake Rub 36.1 bn Thanks to a number of material projects and a constant flow of small and mid-size orders from our customers, we managed to reach a record high order intake in 2012, which totaled Rub 36.1 bn.

Thanks in large part to these material projects and a constant flow of small and mid-size orders from our customers, we managed to reach a record high order intake in 2012, which totaled Rub 36.1 bn. Additionally, in the beginning of 2013 we had a well-diversified backlog of orders of Rub 21.5 bn, 22% higher than in 2011.

Last year was also successful from a financial standpoint. Group revenue reached Rub 33.7 bn and we observed growth across all business segments. In the “Industrial pumps” business segment we managed to achieve Rub 17.1 bn of revenue, in the “Oil and Gas equipment” business segment— Rub 7.8 bn, while in the “EPC” business segment — Rub 7.3 bn. In our newly-established “Compressors” business segment, revenue since consolidation amounted to Rub 1.4 bn.

We established a new business following the acquisition of “Kazankompressormash”, a leading industrial compressors producer in Russia. I believe this acquisition will help us to redefine our business and achieve a new level of development, given the compressor market potential and prospects. Already in 2012 we managed to materially increase order intake, having secured new orders for delivery of complex technological solutions for compressor stations. Going forward, we will leverage all of our expertise and intend to expand the compressor business dramatically, as we have demonstrated already with other assets acquired by the Group.

We also acquired a German pumps manufacturer, Apollo Goessnitz GmbH (Apollo), which focuses on specialized pumps for oil refineries, on-shore and offshore production, thermal power generation and the water utilities sectors. Apollo’s production complies with API (American Petroleum Institute) and DIN (German Industrial Standards) and enables us to significantly strengthen our portfolio of pumps for these industries. I see particular value in the research and development potential of Apollo, which we’ll be applying as part of other Group projects. I believe the acquisitions completed in 2012 will strengthen the Group’s position and enable HMS Group to open up strong opportunities in new markets.

Due to the acquisitions of these new assets, the Group’s total debt grew to Rub 13.4 bln, while net debt to EBITDA ratio was 1.94. Despite this debt level growth, we managed to keep the ratio within an internal limit of 2.5.

Owing to our participation in large technologically demanding infrastructure projects, we managed to demonstrate solid business profitability for the companies operating in the flow-control market. EBITDA of the Group amounted to Rub 6.2 bn, up 13% in comparison with the previous year, while net profit was Rub 2.3 bn.

All these results wouldn’t be possible without the excellent and well-organized work of the management team, our production employees and research & development team. Our human resources potential is a basis for sustainable growth and, in support of this, we have invested strongly in HR development over the years. I would like to thank all HMS Group employees for enabling our achievements of the last year and for their commitment to our values. It’s a particular pleasure for me to recognize our progress and achievements as we approach the important milestone of our 20th anniversary.

Over 20 years we’ve always needed to work hard to achieve the best results, as we have set more and more ambitious goals for the company. Competition for business in our market niche is especially fierce in the challenging economic environment, and 2013 is not expected to be an easy year. We have set a clear and understandable goal for this year: to maintain the revenue growth, outpacing the inflation rate. The current share of material projects in our order book will allow us to expect moderate single-digit growth of EBITDA in 2013, while the main task for the year is to build up a backlog of orders for complex integrated solutions to be implemented in 2014. I wish good luck to all of us.

Your faithfully,
Artem Molchanov

Artem Molchanov

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