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Good day, and welcome to the HMS Group Q1 2020 IFRS Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulyana Egorova. Please go ahead.
Good afternoon, ladies and gentlemen. Thank you for joining us for HMS Group webcast devoted to IFRS financial results for 3 months of 2021.Before I start, the company would like to take your attention to the responsibility limitation for the forward-looking statements, which will be made during the call according to the disclaimer. Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding the company's future plans and expected performance, are forward-looking statements that are based on assumptions the company believes are reasonable but are subject to a range of uncertainties and risks. Many external and internal factors could cause the actual results to differ materially from those contained in the company's projections or forward-looking statements. Now let me represent the speakers: Mr. Kirill Molchanov, First Deputy Chief Executive Officer and Chief Financial Officer; Alexander Rybin, Head of Capital Markets; and Inna Kelekhsaeva, Deputy Head of Capital Markets. Now I'm handing over the call to Ms. Kelekhsaeva. Dear Inna, please go ahead.
Thank you, Ulyana, and good afternoon, ladies and gentlemen, and thank you for joining HMS conference call. Herein, we would like to underline that the first 3 months of last year were the last [indiscernible] this quarter. The pandemic started at the end of March, so the financial results of the comparable period were not affected due to the very short period of time between the start of downturn and the end of the 3 months 2020. During those 3 months, HMS ran its business as usual. And let us turn to our current results. HMS revenue grew a 23% year-over-year to RUB 11.2 billion compared with RUB 9.1 billion for the comparable period, thanks to the oil and gas equipment and compressor business segments. EBITDA grew and reached RUB 1.3 billion, implying EBITDA margin of 11.7%. Our revenue generated by large contracts almost tripled compared with the 3 months 2020. But this increase was partly offset by less revenue generated by recurring business. EBITDA from large contracts was up by 206% year-over-year. And in contrast, EBITDA from recurring business was down by 71%. Gross profit was up by 5% and operating profit grew more than twofold to RUB 566 million. Profit for the year was RUB 52 million compared with a loss for the period of RUB 153 million for the 3 months 2020. Total debt increased by 3% to RUB 22.2 billion compared with RUB 21.5 billion at the end of the 3 months 2020. Net debt was up by 7% to RUB 13.1 billion compared with RUB 12.2 billion last year. Net debt-to-EBITDA LTM ratio stood at 2.52. Let's go to the next slide, segment overview. Pumps revenue was down about 2% to RUB 3.6 billion and its EBITDA was down to RUB 339 million. Shipments of a number of large contracts were postponed to the second and the third quarter of 2021. And that was the main reason of decline in the segment's financial results. EBITDA margin was down to 9.4%. The oil and gas equipment business segment recovered in the reporting period. Revenue grew by 43% to RUB 4.4 billion. EBITDA was up by 29% to almost RUB 0.5 billion. The compression segment also demonstrated good results. Revenue was up by 51% and reached RUB 3.3 billion. EBITDA almost reached RUB 0.5 billion, thanks to large contracts under execution. EBITDA margin reduced to 14.7%. And in construction business segment, revenue and EBITDA were down as expected. Next slide, please. Cost of sales was up 28%, mainly due to a hike in materials and components. Materials and components outpaced the growth in cost of sales due to a higher share of material-intensive large contracts under execution in the reported period. Distribution and transportation expenses went down by 34%, thanks to transportation expenses, insurance and advertising. As a share of revenue, distribution and transportation expenses were down to 2.9% compared with 5.4% for the 3 months 2020. General and administrative expenses were down by minus 1%. And as a share of revenue, they stood at 10.7% compared with 13.3% for the 3 months 2020. Let's go to the next slide. Free cash outflow stood at RUB 1.2 billion compared with RUB 2.1 billion free cash inflow with the 3 months 2020 due to working capital requirements. Working capital grew by [ 16% ] to RUB 8.2 billion. And as a share of revenue LTM, it stood at 16.9%. Depreciation and amortization stood almost unchanged. Maintenance CapEx grew 32% and reached RUB 440 million. Next slide, please. At the end of the 3 months 2021, net debt stood at RUB 13.1 billion. That was 7% higher than RUB 12.2 billion of net debt at the end of the 3 months 2020. Net debt-to-EBITDA LTM ratio was up to 2.52. This year, HMS Group has only RUB 800 million to be repaid. Currently, we work with banks on refinancing of next redemption. And we'll return to you as soon as we accomplish it. The company continues to follow its policy of 0 short-term debt. And as of today, our total debt equals to RUB 22.1 billion and average interest rate is at 7.98%. VTB Bank is our largest creditor. Slide 9, please. Backlog was up 25% to RUB 59 billion. The growth was based on all business segments except comps. Backlog for standard equipment grew by 6% year-over-year and backlog for large projects grew by 50%. Order intake grew 50% year-over-year to RUB 19.4 billion, mainly due to the oil and gas equipment segment. The value of large contracts increased almost sixfold due to RUB 7.5 billion contracts to deliver oil and gas equipment that was signed in the reporting period. In the nearer future, HMS plans to participate in a number of large tenders. And the final slide, please. In the reporting period, Gazprom became our largest client. The RUB 7.5 billion oil and gas equipment contract generated 20% of HMS revenue in the 3 months of 2021. In terms of product structure, HMS revenue was supported by large contracts. With regards to the full year guidance, we expect revenue to be RUB 60 billion and EBITDA at RUB 6.5 billion, implying EBITDA margin around 10.8%. Thank you for listening to the call. And we are ready to start the Q&A session. Mr. Kirill Molchanov and Mr. Alexander Rybin are ready to answer your questions. Operator, please open it up for Q&A.
[Operator Instructions] We'll take our first question from Vladimir Bespalov with VTB Capital.
I have a few questions, if I may. My first question will be on margins for recurring contracts in pumps. My assumption was that these are pretty stable. Why the margins were lower in the first quarter of 2021?
Vladimir, thank you for your question. Generally speaking, the margins for the pumps business in Q1 is lower than in 2020. As a result of mix of contracts and the execution, then Q1 is usually not the best one. And I can say that we expect some improvement in the margins across 2021, a bit higher but likely less -- still less than in 2020, maybe somewhere in between. Maybe this is the effect of not very positive business environment. In particular, in previous year, there was positive effect of cost-cutting measures that had influenced margins. So combinations of factors, but still we expect some improvement from the figures reached in Q1.
Okay. Maybe some clarification, when you speak about not that favorable business environment, could you clarify what you mean first? And the second, maybe a follow-up. There is a pretty big increase in your materials and components cost in the first quarter of this year. So in general, could you shift this cost on to consumers. Because I understand that this is probably due to some metal price increases and things like this. So do you have some kind of escalation clauses in your contracts? Or do you have to bear this cost and as a result, you'll see some pressure on margins?
In general, the business is managed the way -- in the way to mitigate the pressure from the raw materials and the components, which are a substantial part of our costs. So if we speak about big contracts, we usually try to fix the prices for the incoming components at more or less the same time, as we said, the contract with the customer with minimal gap. And then when we see the tendency of raw materials, components, metals, their prices are going up for new contracts, we, proportionate to this increase, try to raise our prices. For -- if you speak about 2021, yes, we sure feel some pressure. But usually, this pressure is kind of mitigated by the fact also that we have usually a lot of suppliers of our components for every [ positional use ]. So -- and the price increase, hence, cost to us is not so not so drastic. It's more softer, more [indiscernible] in time. Then manufacturers of regional -- manufacturers of raw materials of metals make it sometime. So we see this risk of raw materials and components price increase and its influence on our costs. We calculate we may -- we have made some kind of very preliminary estimations of its influence. And to some extent, we quantified it's in kind of a discount to now -- to our full year projections and guidance. But there is some reason that there is some uncertainty, I agree with you.
Okay. And one more question, if I may. Could you provide more color on the upcoming tenders -- large tenders in which you are going to participate? How big the impact from these tenders could be on your performance this year. And for example, if we look at the guidance for revenues and EBITDA that you provided, do you see upside risks to those if, for example, you succeed in these upcoming tenders?
Well, we are working on a number of opportunities in oil and gas, both for our oil and gas business unit and compressors and in parts, in particular, on nuclear projects. But as for the large contracts, when are going to be tendered and finalized, possibly Q3, Q4, closer to the year. And hence, they won't likely influence 2021 because that's going to be just the beginning stage of project execution there. Lead time is usually a year and sometimes more. So the uncertainty -- 2021, as for the big contracts that come soon, [indiscernible] and the execution and we see good visibility. We don't expect that there will be a material change in our expectations because of new projects coming or not coming. There is some positive or negative uncertainty. As for the routine business, because here, the production time is shorter, sometimes 3 months, sometimes 6 months. So our progress in getting contracts -- medium contracts, small contracts for the products and services with shorter lead time, if there's some positive or negative uncertainty. But everything is included in our guidance. This is our best guess for now for our annual performance expected to have.
[Operator Instructions] I'm showing we have no questions -- we do have one more question, again from Vladimir Bespalov with VTB Capital.
So I have two more probably to ask. First, maybe you could provide some color on your increased CapEx in the first quarter and the full year outlook for CapEx, maybe you could elaborate a little bit on the projects within this CapEx. And the second one is on the working capital performance. As far as I understand, it was like 1% of revenue, it was lower than usual at the end of last year. Now it's more or less normalized with large contracts in the pipeline. How do you expect this to develop going forward throughout the year?
As for the CapEx, we need to remember that 2019 and 2020 were not very good years for the company. So we cut on CapEx quite strongly. Now as our full year expectations are more or less okay, we are returning to normal level of CapEx that is plus or minus around RUB 2 billion, resuming some programs that were frozen or postponed during previous 2 years. The main focus of this CapEx, apart from some level of maintenance CapEx, is, first, compressor business unit. You know that it's developing -- it's making a very good progress. And to make more compressors, we need to invest in some machining -- some modern machining, CNC machines to support our manufacture capability. And those, to make more complicated, more modern compressors, the manufacturer of which is sensitive to having a state of that machinery. The second direction of investment is the pump business, and in particular pumps for water. I think we have made some good progress with some of updated product lines of water pumps in 2020, in particular. That was one of reasons behind relatively good performance of pumps throughout the year and especially in Q4. But we need to broaden the portfolio of product lines, which we are making to the very latest technical standards. And we have made already a lot of design, R&D job. But again, the same thing as with compressors, to manufacture pumps with better parameters, competitive on the international -- against international competitors and on the international markets, in particular. We need to invest in some machinery. That's basically all about the CapEx. So we're reducing to the normal level, very current to the normal level of CapEx, with focus on compressor and water pumps as product areas to support. And as for the -- your second question about the working capital. Currently, we expect working capital to be around 20%, as a proportion to revenues, maybe a little bit less, a little bit more. Or in terms of absolute numbers, RUB 8 billion to RUB 11 billion. It's difficult to make accurate projections because working capital is measured as of the end of the quarter. So some advanced payments or some big mainly cash movements can affect it in one another direction. So it's a bit volatile, but we expect that it will be somewhere around those figures I have given to you.
That concludes today's question-and-answer session. I would now like to turn the call back over to today's speakers for any additional or closing remarks.
Dear participants, the Q&A session is now over and our conference call is going to be finished. Thank you for your attention, and goodbye.
This concludes today's call. Thank you for your participation. You may now disconnect.