PJSC Evropeyskaya Elektrotekhnica announces interim consolidated financial results as per International Financial Reporting Standards (IFRS) for H1 2018

PJSC Evropeyskaya Elektrotekhnica announces interim consolidated financial results as per International Financial Reporting Standards (IFRS) for H1 2018

Key indicators:

Source: Interim Consolidated Financial Statement of PJSC Evropeyskaya Elektrotekhnica for six months ending June 30, 2018.

Notes:

[1] Non IFRS indicators, the calculation procedure is given below

[2] Non IFRS indicators

[3] As of December 31, 2017

Statement from Management

Sergey Dubenok, Head of the Board of Directors of PJSC Evropeyskaya Elektrotekhnica, commented on the published results: “We are consistently implementing the development strategy announced in 2017, at the stage of raising share capital via IPO on the Moscow Exchange.

We are exploring new areas of activity, implementing an investment program with the launch of new production facilities, and expanding our product range. In the reporting six months, we launched production of block equipment for the Oil&Gas and petrochemical industries in the Republic of Bashkortostan, located at the facilities of subsidiary company ROG-Engineering in the city of Ufa. Serial production and sales of electric heating systems have also been successfully launched. The implementation of these strategic priorities is reflected in the published positive financial results.

Our Group has managed to achieve two goals at the same time by increasing consolidated revenue at a double-digit rate while increasing the business margin. Last year, we deliberately abandoned a number of low-margin activities. According to the results of 2017, this led to a decrease in consolidated revenue by 18 % (while the volume of profit for 2017 increased 3.2 times). However, the interim results for the current year are proof that the decision made was the right one, as it led to growth in revenue resulting from the Group's high-margin activities.

It is also important to note that the Group managed to finance its current portfolio of development projects from internal financial resources without resorting to loan financing. We believe that attracting external loans will be appropriate and justified at the next stage of the Group's development, when it comes to implementing much larger projects. At the same time, we are ready to use external debt financing and have preliminary approval for credit resources from a number of Russian banks. Decisions on borrowing funds, most likely in the format of project financing, will be made as new business projects are ready to be launched.

A significant contribution to the Group's revenue in the next few years will come from our subsidiary ROG-Engineering, which develops, designs and manufactures equipment for the Oil&Gas and petrochemical industries. In 2018, the Company's contribution to the Group's revenue will be limited and much more significant in 2019. At full production capacity from 2020 onwards, ROG-Engineering will begin to make a significant contribution to consolidated financial indicators of Evropeyskaya Elektrotekhnica Group of Companies. The successful expansion of the contract base with customer companies from Russia and neighboring countries is evidence that local customers are more and more willing to use domestic technological solutions, and the preconceived notion that foreign technologies should be given unconditional priority is changing among decision makers. The Company has a substantial scientific and technological background. For example, a service is now being successfully launched for long-term lease of oil processing plants and produced formation water discharge plants for Oil&Gas companies.

Russia's increased political authority in the Middle East, Persian Gulf and Central Asia in recent years has created favorable conditions for starting new business with local companies operating in the Oil&Gas and petrochemical industries. Companies in this macro region face challenges with regard to modernizing and upgrading the oil processing equipment supplied from Western countries in the 1980s. We are seeing demand for the technologies we offer and are ready to provide them to foreign customers as part of our technological complexes, without mixing business and politics or any other artificial restrictions. Our already developed solutions allow customers to launch production even on a small scale, and also allow them, for example, to increase the octane rating of gasoline and process fuel oil into gasoline and diesel fuel, without the fear of not having access to the supplier company's technical support or to deliveries of critical components and consumables in the future.

Based on the results so far in 2018, we expect consolidated revenue to increase at a rate of at least +40 % compared to 2017, retaining the business profitability indicators. The revenue of the first half of the year is usually about 40 % of the annual value. In Q3 2018, we expect to exceed the result of the previous year in terms of revenue.”

Dynamics of the Group's Core Markets

Market for engineering equipment and services

·         Since Q2 2018 and the end of the presidential elections in the Russian Federation, there has been a noticeable increase in general demand for engineering equipment.

·         After the 2018 World Cup, due attention is being paid to engineering projects in the Russian manufacturing industry and infrastructure, an area in which the Group specializes. The focus had previously shifted to sports and related facilities during the preparation period for the championship in Russia.

Market for technological equipment for the Oil&Gas and petrochemical industries

·         There is increasing demand in the Russian market for technological equipment for discharge of produced formation water. There is also demand for this in the development of new oil fields. The Company's greatest interest in this equipment, however, is for already operating fields that are being upgraded, with replacement of technological equipment that is technically outdated or has exceeded its assigned service life.

·         Obviously, the sanctions imposed on Russia, on domestic companies and on individuals make the business conditions for Russian Oil&Gas and petrochemical companies more difficult. At the same time, Russian companies operating in these sectors are intensifying their import substitution programs amid the declining availability of foreign technological solutions by turning to technologies within the Russian industry. This equipment is needed in order to maintain extraction levels at already exploited fields, as well as to overcome the problem of unprecedentedly high (on a global scale) water encroachment levels within fields. The domestic solutions that were originally developed for use in our harsh climatic conditions to extract Russian brands of hydrocarbon raw materials neither underperform or outperform their foreign counterparts in terms of their characteristics and operation efficiency. Although harmful to the Russian Oil&Gas sector, Western sanctions have opened up a unique window of opportunities for PJSC Evropeyskaya Elektrotekhnica. These include import substitution supply of technological equipment already developed by the Company, which is in demand and certified by a number of large customers, with unique scientific and design know-how and advanced characteristics.

Consolidated Revenue

The Company's consolidated revenue amounted to RUB 1,532.3 million, which is 21.4 % higher than in H1 2017. In the revenue structure, export deliveries account for 12 % (-2 p.p. to H1 2017).

Consolidated revenue structure according to the results of the reporting period:

95.5 % — income from production and activities carried out by engineering centers in the electrotechnical market;

  4.5 % — income from the production of equipment for the Oil&Gas and petrochemical industries.

The largest share of the Group's contracts (in terms of delivery costs) comes from customers of the Oil&Gas complex and chemical industry (around 60 %).

Key factors of consolidated revenue growth:

·         Physical volumes of shipped products increased by 38 % during H1 2018;

·         The Company expanded the network of engineering centers by launching centers in the towns of Tyumen and Lipetsk, and opening a representative office in Azerbaijan. In addition, the capacity of the engineering centers in Moscow, St. Petersburg and Ufa was increased;

·         As of the end of Q2 2018, the Group implemented 539 projects via 12 of its own engineering centers;

·         The number of projects initiated by engineering centers increased in H1 2018 compared to the same period in 2017; by 27 % in terms of the number of projects, and by 43 % in monetary terms;

·         The volume of new contracts concluded amounted to RUB 3,100 million;

·         The Group increased the number of products produced (production of electric heating systems and modular oil and gas equipment was launched).

Cost of Sales and Gross Profit

The cost of sales amounted to RUB 1,176.5 billion in the reporting period. The cost growth rate (+9.4 %) was significantly lower than the revenue growth rate (+21.4 %).

The Company notes sustainable growth in deliveries of products manufactured by foreign vendors, the contracts for which are denominated in Rubles. This helps the Company to minimize currency risks.

Strengthening partnerships with leading domestic and foreign vendors and leaders in the engineering market helps to ensure improved financial conditions for the Group to procure the corresponding solutions and technologies used in ongoing engineering projects.

Gross profit reached RUB 355.8 million in H1 2018, which constitutes an increase of 91.1 % year-on-year. The Group's gross profit margin increased by 8.4 % p.p. to 23.2 % thanks to effective measures taken by the Company to control the cost of sales.

Administrative and Selling Expenses

The increase in transport expenses by 65.1 % to RUB 29.4 million was due to the increase in the share of the Group's projects located in more complex areas, which involve more complex logistics, compared to H1 2017.

Expenses on materials and office supplies increased fourfold to RUB 18.9 million due to the inclusion of expenses associated with testing and certification of the Group's new developments.

Operating Profit

Operating profit increased by 24.0 % to RUB 163.2 million. Operating profit margin increased slightly to 10.6 % (10.4 % in H1 2017).

This operating profit was generated both due to an increase in administrative and selling expenses (by RUB 75.2 million compared to H1 2017), and due to a decrease in other income by RUB 62.8 million.

The decrease in other income was due to the one-time income received in H1 2017 to the amount of RUB 74.2 million from investments in securities.

EBITDA

EBITDA reached RUB 166.3 million (+19.6 % Y-o-Y). The margin of this indicator was 10.9 % in the reporting period, and changed slightly compared to the previous year (11.0 %).

Profit Before Tax

Profit before tax increased by 30.5 % to RUB 158.2 million.

The reduction in financial expenses by 54.6 % to RUB 10.6 million was due to the restructuring of borrowings carried out during the reporting period and improvement in the conditions of their use, consisting of a reduction in interest rates and simultaneous increase in maturity.

Profit for the Period

In H1 2018, Company profit increased to RUB 143.4 million, which is 18.6 % higher than in H1 2017. The Company's profit margin decreased slightly to 9.4 % from 9.6 % in H1 2017.

Return on equity (ROE) increased considerably to 26.0 % (22.4 % in H1 2017).

Dividends

As a result of the Group's activities in 2017, the Company paid dividends to the amount of RUB 91.9 million.

Free Cash Flow

Negative free cash flow was recorded in the reporting period as a result of investment in the launch of the Group's subsidiary ROG-Engineering, which specializes in development and production of equipment for the Oil&Gas and petrochemical industries. The expenses related to working capital formation of this subsidiary are reflected in the published financial statements. At the same time, fixed assets and revenue from operations will be fully reflected in the consolidated financial statements for 9 months of 2018.

Net Debt

The Company's net debt remains moderate, amounting to RUB 19.5 million as of June 30, 2018. In H1 2018, the net debt increased by RUB 139.8 million, which was almost entirely due to a reduction in cash funds and their equivalents. The key reasons for the reduction were the launch of ROG-Engineering's activities and the continuation of the Group's investment program.

Prospective Activities for Evropeyskaya Elektrotekhnica Group of Companies

Further development of Evropeyskaya Elektrotekhnica Group of Companies is directly related to the following aspects:

·         The presence in the market of sector-specific demand, which is actively stimulated by ongoing programs in Russia for renewal and development of infrastructure, import substitution, and digitalization of the economy;

·         The efficient operation and expansion of the network of engineering centers in Russia (new projects, revenue and margin of the Group's business);

·         The ability of the Group's companies to develop, launch and market innovative solutions in the field of engineering and process equipment (Group's business margin).

An intensive process is occurring both in Russia and other countries engaged in oil and gas production and processing, wherein new large-scale demand is being generated for engineering and technological equipment and related services. Among the major Russian programs in this area, it is important to mention the following ones:

·         The project of a comprehensive plan to develop the main infrastructure in the Russian Federation

o   Cost: RUB 6.8 trillion

o   Implementation period: 2019–2024

o   Coverage: 690 facilities, including:

- Electric power sector — projects amounting to RUB 300 billion

- Air transport (155 projects) — modernization and construction of small regional airports across Russia

- Road infrastructure — 296 projects

o   Ecology project — budget of RUB 1.55 trillion

o   Digital Economy project — budget of around RUB 1 trillion

·         Continuation of the construction of Power of Siberia gas pipeline to China

o   Cost: RUB 1.1 trillion

o   Investments:  RUB 218 billion (2018), RUB 158.8 billion (2017)

o   Design capacity is 38 billion cubic meters per year, length is 2.2 thousand km

o   Plans for 2019: gas pipeline testing, electric power supply system installation, communication and telemechanics installation, and commissioning works

o   Budget for the development of the Chayandinskoye field (a resource base for supplies through the new gas pipeline) — around RUB 450 billion

·         Amur Gas Processing Plant

o   Cost: RUB 950–1,300 billion

o   Implementation period: 2015–2025

o   The largest plant in Russia and second largest in the world for natural gas processing

o   Design capacity will amount to 42 billion cubic meters of gas per year

o   It will consist of six process lines; commissioning of the first two lines is scheduled for 2021

o   It will also include the world's largest helium production area

·         ZapSibNefteKhim

o   Cost: around USD 9.5 billion

o   Commissioning: 2020

o   Under construction: a pyrolysis plant with a capacity of 1.5 million tons of ethylene, around 500,000 tons of propylene and 100,000 tons of butane-butylene fraction (BBF) per year, production plants for various grades of polyethylene and polypropylene with a total capacity of 2 million tons per year

·         Restart of the investment cycle in the Russian electric power sector — a new program to upgrade thermal power plants in Russia

o   Budget: up to RUB 1.5 trillion

o   Implementation period: 2018–2035

o   Coverage: 41 GW of capacity, including projects in the Far East of the Russian Federation

o   Level of equipment localization required to participate in the program: 100 % by 2025

o   Current status: as of August 27, 2018, the program is supported by the Russian President at the meeting of the Presidential Commission for Strategic Development of the Fuel and Energy Sector; conditions and mechanisms are being developed to attract and implement investments

·         Launch of large projects and mega-projects with co-financing by major corporations from so called “Belousov's list” (implemented as PPPs)

This refers to the participation of major Russian businesses in financing four groups of projects (their total amount is preliminary estimated at RUB 0.5 trillion minimum):

o   The companies' own projects that were previously announced but suspended;

o   New corporate projects that meet the criteria of Russian President Vladimir Putin's May decree;

o   Infrastructure projects in the Russian Federation (with a focus on the regions of presence of the companies);

o   Mega-projects.

·         Development of transport infrastructure and creation of a transport framework for the Moscow agglomeration, for the period from 2011 to 2023

The Moscow government allocates around RUB 360 billion of budget funds each year for the development of the city's transport infrastructure.

o   Development of the underground metro, construction of the Large Circle Line (Bolshaya Koltsevaya Line)

- Scale: 256 km of underground lines, 122 stations

o   Development of the Moscow Central Circle (Moskovskoye Tsentralnoye Koltso)

- Scale: 54 km of lines, 31 stations

o   Development of the above-ground metro, construction of Moscow Central Diameters

- Scale: 446 km of lines, 211 stations

o   Road network development

- Construction of 4 link roads

- Reconstruction of outgoing trunk roads

- Construction of the Central Ring Road (339 km long, situated at 50 km range from the Moscow Ring Road)

Projects for developing underground transport infrastructure are of particular interest for Evropeyskaya Elektrotekhnica Group of Companies. This is due to the scheduled consolidation of Metro-Tunnel company into the Evropeyskaya Elektrotekhnica Group of Companies in Q4 2018.

·         Construction of a terminal for liquefied natural gas (LNG) transshipment in Kamchatka by NOVATEK

o   Budget: up to USD 1.5 billion

o   Implementation period: until 2023

o   Capacity of up to 20 million tons per year of LNG (with potential expansion to up to 40 million tons)

About the Group of Companies PJSC Evropeyskaya Elektrotekhnica

PJSC Evropeyskaya Elektrotekhnica (MOEX: EELT) provides comprehensive services in the sphere of creating energy and electric power supply systems, electric lighting systems, and low current systems at all types of facilities, as well as industrial electric heating systems.

The Company has been working in the electrical engineering market since 2004, and at present has its own engineering and production facilities. The Company is one of the leading distributors of electrical equipment in Russia, offering customers a wide range of products made both in Russia and abroad. Thanks to a well-organized and efficient logistics system, the Company is able to supply products (including oversize loads) all over Russia, including to hard-to-reach areas of the North, as well as Belarus, Kazakhstan, Turkmenistan, Kyrgyzstan and Uzbekistan. The Company established its own production of transformer substations, electric switchboard equipment of any complexity (up to 6300 A), electric lighting systems and electric heating systems.

The Company implements projects in the oil and gas sector, electric power sector, nuclear industry, metal industry, mining industry, and manufacturing industry and at transport infrastructure facilities. Evropeyskaya Elektrotekhnica's customers include companies such as Rosneft, Gazprom, NOVATEK, LUKOIL, and Nizhnekamskneftekhim. The Company's projects include Power of Siberia, Yamal LNG, Smolensk NPP, Data Center of Sberbank of Russia, and the Domodedovo, Sheremetyevo, and Pulkovo airports, etc.

Since 2018, the Group has been producing highly efficient modular process equipment for clients in Oil&Gas and petrochemical markets at the site of its subsidiary ROG-Engineering, a research and production company in Ufa (Republic of Bashkortostan, Russia).

Key financial indicators of PJSC Evropeyskaya Elektrotekhnica (IFRS):

The number of employees is about 400 (as of June 30, 2018). Since September 2017, common shares of PJSC Evropeyskaya Elektrotekhnica are traded on the Moscow Exchange with trading code EELT.

In June 2018, the Company was named "Leader of Import Substitution" at the "Leader of Competitive Sales" annual national awards, in which 450 domestic suppliers from various industries took part.

Contacts:

PJSC Evropeyskaya Elektrotekhnica

Tel .: +7 (495) 640-93-48

Mailing address: Building 3, 1 Lyotchika Babushkina St., Moscow, 129344

Press contact                Contact for investors and analysts

press@euroet.ru           IR@euroet.ru

www.euroet.ru               www.euroetpao.ru

For more information, please contact:

Stanislav Martyushev

Director for Corporate Communications and Investor Relations

PJSC Evropeyskaya Elektrotekhnica

Tel. +7 (495) 640-93-48, ext. 164       

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