Financial performance

CASH FLOWS PERFORMANCE

Working capital¹ grew by 29% yoy to Rub 8,813 million from Rub 6,834 million last year, primarily due to realization of large contracts. As a share of revenue, working capital increased to 24% compared to 21% last year, still within a normal range of working capital requirements when executing large and technically sophisticated projects.

Capital expenditures for the FY 2015 grew by 19% yoy to Rub 1,457 million from Rub 1,223 million for the FY 2014. HMS Group is close to completion of the 1st stage of its ambitious project, a so-called “The Localization Project”, to develop manufacture competences for high-capacity oil refining and transport pumps and nuclear pumps in Livny, the Orel region. The largest share of current capital expenditures (c.44%) was channelled to this investment project. Excluding this localization capex, the general maintenance capex decreased by c. 28% yoy compared to the last year.

In December 2015, the company signed a loan agreement with the Fund of Industrial Development (the Ministry of Industry and Trade of the Russian Federation). The Fund provided HMS Group with a 5-year special-purpose loan worth Rub 500 million at an interest rate of 5% to invest in The Localization Project.

Investing cash outflow increased by 29% yoy to Rub 1,431 million because of the growing capital expenditures. Despite this fact, free cashflow turned positive Rub 451 million versus outflow of Rub 153 million last year because of higher margins in 2015.

DEBT AND LIQUIDITY POSITION

Total debt of HMS Group declined by 6% yoy to Rub 15,884 million, and Net debt was almost flat at Rub 12,388 million with a slight decrease in absolute figures. Reduction in total debt was attributable to payments received under both contracts under execution and newly signed contracts at the end of 2015.

Because of EBITDA’s growth along with the constant level of net debt, Net debt-to-EBITDA LTM ratio decreased to 1.66x from 2.36x.

On January 1, 2016, the weighted average interest rate was 11.4% vs. 10.0% on January 1, 2015, for all loans, including FX-denominated, owing to new credit lines obtained at higher rates, though lower than average prevailing interest rates. The weighted average interest rate for Rub-denominated loans only increased to 12.5% from 10.9% as of January 1, 2015.

DIVIDENDS AND HMS GDRS

On December 7, 2015, the Board of Directors approved the payment of interim dividends of Rub 3.25 per ordinary shares, amounting to total dividends of Rub 381 million, as a compensation for lack of dividends for 2014 due to the strong and better than expected financial results for 9 months 2015 and expectations for the full year. The dividends were paid on December 30, 2015.

On June 19, 2015, the Board of Directors approved a buyback program of the company with respect to global depositary receipts. The buyback period was set for 1 year from June 19, 2015, until June 19, 2016. According to the program, the company can repurchase from the market maximum 5% of the subscribed capital of HMS Group, including previously acquired and held at present GDRs (Treasury shares).

Securities should be repurchased at the prevailing market price at the date of such purchase and may not exceed 5% of the average market price for all market trades within 5 days prior to the acquisition. All purchases are carried out by the Company with the assistance of Renaissance Capital. The Buyback program will end as soon as the total amount of acquired securities has reached the maximum amount specified or, if earlier, on June 19, 2016.

As of today, HMS Group repurchased 553,332 GDRs (2.36% of HMS’ subscribed capital) and there are 618,302 GDRs left the company can buy under the program.

SIGNIFICANT EVENTS AFTER THE REPORTING DATE
& FINANCIAL MANAGEMENT

Financial management

On February 2, 2016, HMS Group completed an early full redemption of its Ruble 3bn bonds series 03 with a 10.10% coupon rate with maturity in February 2018. Currently, HMS Group doesn’t have any Ruble corporate bonds outstanding.

Within the full year of 2015, HMS Group refinanced Rub 5.9 billion. In general, throughout the year, HMS Group signed loan agreements to refinance its credit portfolio and to finance its capital needs worth Rub 13.7 billion.

At the beginning of this year, HMS Group increased its uncommitted revolving credit line with VTB Bank from Rub 4.5 billion to Rub 10.0 billion.

Depositary program

In February 2016, the ratio of HMS’ depositary receipts program was changed from 1:1 to 1:5. According to the “new” ratio, 1 depositary receipt became equal to 5 ordinary shares, and on February 8, 2016, HMS Group’s shareholders received 1 “new” GDR for every 5 “old” GDRs. Only whole depositary receipts were distributed and, in effecting this, “old” receipts were rounded down, fractional receipts were sold on the market and the cash proceeds were distributed to the depositary receipts’ holders. The issued number of ordinary shares and their nominal value stayed unchanged.

Also, under a new deposit agreement with BNY Mellon, the annual depositary fee became equal to US$ 0.01 per “new” GDR instead of US$ 0.03 per “old” GDR, implying a 15-fold decrease in such fees.

After the reverse split, issued number of GDRs equals 9,600,800, where 8,728,000 depositary receipts are outstanding and 872,800 - “green-shoe’ ones.

Large contracts

In February 2016, HMS signed a Rub 2.8 billion contract to produce a boosting compressor station, based on 3 centrifugal-type compressor units with gas-turbine engines and intended for compression of low-pressure associated gas. The station will be manufactured by Kazancompressormash and installed at an oil & gas condensate field in West Siberia, by the end of 2016.

In March 2016, HMS Neftemash signed a number of contracts for delivery and installation of technologically integrated solutions for two Siberian gas fields, worth Rub 3.1 billion. These solutions will be intended for pumping of natural gas liquids and pumping of oil, wash-down water and rust preventive chemical. These contracts are a follow-up to another project, recently completed successfully.

Incentive Program

On March 23, 2016, the Board of Directors decided to establish a long-term incentive program for the key executives to align the objectives of the shareholders and the executives, to retain and motivate the key executives in the form of a stock ownership program with GDRs’ vesting linked to HMS’ performance. GDRs for this program will come from GDRs owned and bought by the company, so this program will not dilute ownership of existing shareholders. As the basic scenario, the program’s fund would be equal to 5% of HMS’ share capital in the form of GDRs, subject to 100% of the KPIs (Profit for the year attributable to the shareholders of the company and EBITDA).

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_{[1] Working capital = Inventories + Trade and other receivables (excluding Short-term loans issued, Bank deposits and Promissory notes receivable) + Current income tax receivable - Trade and other payables - Short-term provisions for liabilities and charges - Current income tax payable - Other taxes payable}