CEO statement

NIKOLAY YAMBURENKO
I am proud to announce that the year 2015 has been a successful one for HMS Group in terms of revenue and EBITDA, despite a decrease in Russia’s GDP, volatility of the ruble, international sanctions, low oil prices, high interest rates, and other negative factors affecting business in Russia.

CEO of HMS Group, Artem Molchanov

Dear Stakeholders and Partners of HMS Group,

I am proud to announce that the year 2015 has been a successful one for HMS Group in terms of revenue and EBITDA, despite a decrease in Russia’s GDP, volatility of the ruble, international sanctions, low oil prices, high interest rates, and other negative factors affecting business in Russia.

We demonstrated a stable increase in standard production as well as in new large projects.

I am particularly pleased to point out that the efforts we have put into developing relationships with Russian major gas companies in the last few years have started to pay off. We have reinforced our presence in the markets for gas production, transportation and refinery. Two out of three major contracts successfully carried out in 2015 were with gas companies, making a significant contribution to the company’s financial results. We intend to continue our efforts in this direction.

In particular I would like to draw your attention to the export activity of HMS Group. In 2015 foreign currency revenue accounted for 10% of the total ruble revenue, which was not due to the depreciation of the ruble, but largely the result of the Group’s long-term efforts over the years, that made the development of exports one of its top priorities.

Despite the challenging conditions in the financial markets, we successfully refinanced our loans, as well as received new limits with Sberbank, VTB Bank, and UniCredit Bank, in addition we decreased the net debt-to-EBITDA down to 1.66x. We succeeded in keeping the net debt in absolute terms at the level of the previous year of 12.4 billion rubles.

In the Orel region, the HMS Group is continuing to develop a so-called "The Localization Project" intended to domestically produce high-capacity oil refining and transport pumps, nuclear pumps, worth 2.6 billion rubles. We are thankful to the Ministry of Industry and Trade of the Russian Federation for supporting this project in the form of a five-year loan worth 500 million rubles, from the Fund of Industry Development of the Russian Federation, at a 5 percent interest rate.

Yet the year 2016 promises to be a tougher year than 2015. The total value of large contracts this year has been less than last year. In 2015, we managed to keep the weighted average interest rate at 10.4 percent, but we expect it to increase in 2016 due to new more expensive loans. In 2015, we almost avoided raising wages, but this year we will have to raise them. It is our understanding that this year we will not receive any additional revenue from the import substitution process.

The Company plans to continue its revenue growth from both large-scale projects and standard products. However, increasing competition amidst economic uncertainty, low oil prices, decreases or postponements of key customers’ capital investments may lead to a decrease in profitability of the Group’s major projects, and might increase the risk of a slight decline in EBITDA. Yet at the same time, based on our current portfolio of large-scale projects to be developed in the near future, we feel optimistic about the years to come in 2017-2018.

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Yours faithfully,
Artem Molchanov

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