PJSC Evropeyskaya Elektrotekhnica's operating results for Q3 2019

PJSC Evropeyskaya Elektrotekhnica's operating results for Q3 2019

October 31, 2019. Moscow — PJSC Evropeyskaya Elektrotekhnica (hereinafter the "Company") publishes its operating results for the third quarter of 2019.

The Company would like to present its results and business development prospects in its key fields:

• Engineering Systems,
• Process Systems.

The Company's business model was presented in its 2018 Annual Report (see pages 26–27).

PJSC Evropeyskaya Elektrotekhnica's current key performance indicators:

Statement from Management

Ilya Kalenkov, General Director of PJSC Evropeyskaya Elektrotekhnica, commented on the published results:

"The Engineering Systems field demonstrates steady growth. We are increasing the number of projects being implemented. We are talking about all the most significant areas of the real Russian economy, including export-oriented industries. They are feeling confident because of the favorable price situation in world markets. They are continuing to actively implement their investment programs.

For example, the volume of the investment programs of ten major companies in the Oil&Gas sector in Russia in 2019 is estimated at RUB 4.3 trillion, and this figure is not inferior to that of the last year. Excluding Gazprom data (investments reduced by 19.3% this year in comparison to 2018), the volume of investment programs of major companies in this sector will grow by 13.8% to RUB 3.0 trillion in 2019.

In the domestic electric power sector (electric power generation, power grids), the volume of investment programs of 14 major companies has been raised this year to RUB 663.2 billion (+14.2% by 2018).

Against this backdrop, demand for engineering and manufacturing equipment in Russia is growing. Customers are making ever higher demands on the standards of equipment and the quality of materials, and this is fully in line with our approach to our work on the market — we supply high-quality equipment and services, and also ensure quality engineering and tried and true project management competencies.

We can see that the process of project implementation is becoming more "complicated" and formalized. On the one hand, this slows progress on projects (for example, deep and substantive certification procedures can be necessary). However, at the same time, the market is being cleansed from incompetent players (dumping; supply of equipment that does not meet customers' requirements).

In the reporting quarter, the Company opened another engineering center in the city of Quito, the capital of the Republic of Ecuador (South America). The new center will specialize in the provision of services in the Process Systems field, and it will also participate in the development of the country's oil industry and the introduction of environmentally friendly technologies. Cooperation with customers from Ecuador and neighboring countries has major potential for our business. We are also planning to enter the Colombian market in the near future.

Partnership with customers from Ecuador is an example of how we have expanded the geography of our export deliveries in the reporting quarter. Currently, three units are being installed and undergoing commissioning and testing at local CHHPs. They will allow operators to save 10–15% of the volume of fuel oil combusted. In addition, the more complete combustion of fuel oil that our equipment is used to emulsify will significantly improve the ecological situation in CHPP operation zones.

As part of such projects, we not only provide services in the field of Process Systems using our own equipment, but also prepare industrial sites, which requires our expertise in the field of Engineering Systems.

Overall, very significant domestic investment potential has formed to date in Russia (see the next section of this release). This potential will translate into investment demand, and Russian companies will continue their development on the domestic market and increase export deliveries.

The ongoing legislative initiative to protect and promote investment will contribute to the confidence of investors and entrepreneurs. Those who invest in Russian business will be provided with legal guarantees of the stability of the fiscal framework, which is a predominant influence on business in the country. This should ensure the stable growth of investment. The "regulatory guillotine," which will abolish a number of outdated regulations and reduce the administrative burden on business, is another positive measure.[1]

We are continuing to actively develop both segments within the framework of the Process Systems field:

 - Innovative units:

In the second half of November we expect to complete the installation, commissioning, and testing of blocks of fuel oil treatment at three CHPPs in Ecuador. Our partners from both the public and private sectors are very interested in cooperating with us with regard to this equipment, as the use of our units at industrial facilities has obvious advantages. The actual level of fuel conservation is in the 12–16% range, depending on the operating modes of the boilers (chambers). Over the next three years, the overall demand for these units is high. We estimate the total demand is around 300 units. Currently, we are in negotiations regarding the supply of this equipment to partners from several regions in Russia, as well as with representatives of Saudi Arabia, Egypt, Mozambique, Nigeria and Colombia.

We are providing services using this equipment under contracts already concluded, and also developing operational statistics. We are continuing our R&D activities related to fuel oil desulfurization units. We are expanding production to increase the number of functioning units.

- Conventional Oil&Gas equipment: we are delivering equipment to both long-term and new customers, and continuing our marketing work in Russia and target countries around the world.

In the field of corporate communications, our Company has, for the first time, prepared an interactive version of its annual report (based on 2018 results; RUS at https://ar2018.euroetpao.ru/ru, ENG at https://ar2018.euroetpao.ru/en), in addition to the usual PDF format. The Company has increased the depth of the information released in the annual report, and has also improved the quality of presentation using modern infographics."

Macroeconomic dynamics and investment demand: Russia

Characteristics of the Russian economy's investment potential

RUB 9,111.0 billion (+18.0%)[19] for January–July 2019 — the balanced financial result (revenue minus loss) of Russian companies. The same indicator for 2018 comprised RUB 13,797.2 billion (+46.6%). The data is given in current prices and does not include small business enterprises, banks, insurance companies, or state (municipal) institutions.

RUB 30 trillion [20] — the financial resources of Russian companies as of October 2019 (about 29% of GDP 2019[21]). It is more difficult to estimate the volume of resources under the control of domestic businesses in offshore jurisdictions.  Entrepreneurs will begin to invest these resources in Russian business projects as the perception of the prospects of the Russian and world economies improves.

There were 110 dollar billionaires in Russia at the end of H1 2019 (+36 people over the six-month period), according to the Credit Suisse Research Institute. There were also 246 thousand dollar millionaires in mid-2019 (+72 thousand people over the six-month period).[22]

RUB 400–500 billion per year — the Russian Ministry of Finance proposes to begin investing funds into the National Wealth Fund (NWF), where additional government revenue from the sale of oil is sent. It can begin in 2020.[23] As of October 1, 2019, the volume of the Fund amounted to RUB 7,927.7 billion[24], or 7.3% of GDP. NWF funds can also be directed towards Russian projects that generate additional investment demand in the private sector.

USD 21.8 billion[25] for January–September 2019 — direct foreign investment in Russia (other sectors, excluding banks). Reference: 2008 — USD 64.9 billion, 2013 — USD 60.1 billion. This indicator can hardly fall any further. Increase in this factor will also contribute to the recovery of investment activity in Russia.

Large-scale sources of demand for engineering in Russia:

According to Gazprombank, the implementation of national projects will add 1.6 percentage points to the growth of the Russian GDP in aggregate for 2019–2021. The effect will begin to appear in 2020 when the constructed facilities are put into use.[26]

• The Russian government will implement 13 national projects with a total cost of about RUB 26 trillion (by 2024). In 2019, about RUB 1.8 trillion were allocated to finance national projects; meanwhile, as of October 1, only 52% of these funds had been spent (according to the Accounts Chamber of Russia). The federal budget proposal for 2020 provides RUB 1.98 trillion for national projects. In 2021, it is planned to allocate RUB 2.22 trillion, and RUB 2.69 trillion in 2022.[27]

• The investment cycle restart in the Russian electric power sector — a new program to upgrade thermal power plants in Russia (CDA-2) with RUB 1.9 trillion of investment,

o   during the first selection of projects for 2022–2024 (bids for 8.61 GW passed the tender by price, and an additional 1.78 GW were selected by the governmental commission), projects amounting to RUB 125 billion were approved.

o   The tender for 2025 ended with the selection of projects with investments of RUB 32.9 billion, i.e. these projects will be 20% more expensive, on average, for the energy market than those of previous selections. If the volume of the projects selected for 2025 in manual mode by the governmental commission's quota increases by 2.5 GW, investment may amount to RUB 70–80 billion.[28]

• Petroleum chemistry and gas chemistry projects with a total declared investment of more than USD 40 billion,

• Large projects with co-financing by major corporations from "Belousov's list": 981 applications made by Russian businesses with a total investment volume of about RUB 81 trillion,

• Infrastructure development for liquefied natural gas (LNG) deliveries with a total capacity of no less than 13.7 million tons per year.

High depreciation of fixed assets in Russia: data from 2018 has not yet shown improvement

The depreciation of fixed assets in the Russian Federation at the end of 2018 was estimated at 47.4% (according to Rosstat data), which indicates this indicator's lack of progress over the past year. Its value is still close to its lowest recorded value of 49.7% (2014). Further modernization of funds in the Russian manufacturing industry and in the field of infrastructure is still highly relevant.

Export of high-tech products has decreased the impact of the pause in investment demand in Russia on our Company's business

Our Company is already making sales in the markets of Central Asia, the Middle East, the Persian Gulf, North Africa, Latin America, South-East Africa. We are continuing to improve our sales channels and control mechanisms for specific country risks and the acquisition of revenue from local customers.

The majority of our export areas are distinguished by more active macroeconomic dynamics compared with the situation in Russia. Besides, for many areas in which our Company works, the difficult economic situation in various countries is not an obstacle, but rather stimulates sales. For example, our innovative units provide fuel oil savings in the electric power sector and manufacturing industry, and they do not require investment from operators.

Our own production: engineering equipment

In the third quarter of 2019, the Group continued to supply power equipment produced by the Company. Examples of customers for whom projects were implemented:

• sub-stations for FGC UES and IDGK,

• Vnukovo logistics complex,

• Udachny Mining and Processing Division,

• Nestlé enterprises,

• Oryol combined feed plant,

• Sokolnicheskaya line of the Moscow Metro, section from Salarievo station to Stolbovo station.

Our own production: equipment for the Oil&Gas industry

We have completed deliveries of conventional equipment for the following customers — both long-standing and new ones:

• APATIT (new customer),

• Lukoil - Western Siberia (Lukoil Oil Company),

• RITEK (Lukoil Oil Company),

• RussNeft,

• Rosneft Oil Company,

• PJSC Dorogobuzh (PJSC Akron) (new customer),

• SA Group (new customer).

Innovative equipment:

• Implementing of existing contracts for equipment supply,

• Commissioning of fuel oil saving plants at three CHPPs in Ecuador,

• Continuing R&D (fuel oil desulfurization units),

• Expansion of production to increase the number of operating units.

ROG-Engineering Development:

• the Company has successfully passed two technical audits by customers: RN-Snabzhenie LLC and Gazpromneft - Snabzhenie carried out 16 internal audits of subdivisions.

• On September 17–19, the Company took part in the Tyumen Oil and Gas Forum in the delegate participation format.

Engineering center activities

The Company has continued its systematic work with customers throughout Russia, drawing on its federal network of engineering centers.

[1] Source: https://kaliningraddaily.com/money/2019102473141

[2] CPPY — "to the corresponding period of the previous year"

[3] Source: https://secretmag.ru/news/rost-prakticheski-ostanovilsya-rossiya-stala-eshyo-blizhe-k-zastoyu.htm

[4] Source: https://secretmag.ru/news/rost-prakticheski-ostanovilsya-rossiya-stala-eshyo-blizhe-k-zastoyu.htm

[5] Source: https://www.vestifinance.ru/articles/121770

[6] Source: https://www.gks.ru/bgd/free/B04_03/IssWWW.exe/Stg/d04/176.htm

[7] Source: https://www.rbc.ru/newspaper/2019/10/15/5da448199a794741eae1180b

[8] Source: https://fingazeta.ru/finance/budget/456410/

[9] Source: https://www.vedomosti.ru/economics/articles/2019/08/26/809682-minekonomrazvitiya-prognoz

[10] Source: https://www.interfax.ru/business/673237

[11] Calculation procedure: a) 23.2% of [3] — the share of total investments in fixed assets in the Russian Federation (2016), which are attributable to fossil fuel mining, coke and oil production, and chemical production (source: http://www.gks.ru/free_doc/doc_2017/invest.pdf); b) take RUB 150 billion of investment to the coal industry from [a] (source: http://www.finmarket.ru/news/4938385); c) 20% of [b]

[12] Source: Preliminary data as of June 6, 2019

[13] Source: http://www.energyland.info/analitic-show-191702

[14] Source: http://www.energyland.info/analitic-show-191702

[15] Source: https://www.rosbalt.ru/business/2019/10/15/1807806.html

[16] Source: https://www.vedomosti.ru/business/articles/2019/10/15/813828-rzhd-uhudshila-prognoz

[17] Source: http://press.rzd.ru/smi/public/ru?STRUCTURE_ID=2&layer_id=5050&refererLayerId=5049&id=306074

[18] Source: https://www.vestifinance.ru/articles/125056

[19] Sources: https://gks.ru/bgd/free/B04_03/IssWWW.exe/Stg/d04/183.htm, http://www.finmarket.ru/news/4955344

[20] Source: https://www.rbc.ru/economics/11/10/2019/5da089e59a7947b9c09f7638

[21] Source: http://www.rosstat.gov.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/accounts/#

[22] Source: https://russian.rt.com/business/news/679140-rossiya-rost-chislo-milliardery

[23] Source: https://futurerussia.gov.ru/eksperty-vlozenie-sredstv-fnb-v-rossijskie-proekty-podderzit-ekonomiku-n...

[24] Source: https://www.minfin.ru/ru/document/?id_4=27068

[25] Source: http://www.cbr.ru/eng/statistics/macro_itm/svs/

[26] Source: https://www.rbc.ru/economics/08/10/2019/5d9c65e39a7947a673869d55

[27] Source: https://www.rbc.ru/economics/08/10/2019/5d9c65e39a7947a673869d55

[28] Source: https://www.kommersant.ru/doc/4082351

About Evropeyskaya Elektrotekhnica Group of Companies

• Evropeyskaya Elektrotekhnica Group of Companies (MOEX: EELT) offers comprehensive solutions in the field of engineering and technological systems for industrial, construction and infrastructural purposes: low and medium voltage distribution equipment, low current systems, lighting systems, industrial electric heating systems and equipment for the Oil&Gas and petrochemical industries.

• As a Russian joint-stock company with high corporate governance standards and financial sustainability, the Company's Mission is to improve people's quality of life with its entrepreneurial vigour and engineering competencies.

• The Company was founded in 2004 and unites a distribution center, engineering departments, an electrical laboratory and specialized production facilities. The company is one of the largest electrical equipment distributors in the Russian Federation and an industrial partner of leading companies on the international engineering market.

• The Company's logistics capabilities include delivery (including non-standard and oversize load) to customers throughout Russia, including hard-to-reach Northern areas, as well as to Central Asia, North Africa and the Middle East.

• The Company has its own production of the following equipment:

• Complete transformer substations;

• Medium voltage units;

• Low voltage panels of up to 6,300A (including metro solutions);

• Electric lighting systems;

• Industrial electric heating systems;

• Cabling and wiring products.

• Areas of application of the Company's competences:

• Oil&Gas industry;

• Electric power sector;

• Peaceful atom,

• Steel and mining industry;

• Engineering;

• Transport infrastructure, water supply and sanitation.

• Evropeyskaya Elektrotekhnica's customers include major Russian companies: Rosneft, Gazprom, NOVATEK, LUKOIL, Sibur and Nizhnekamskneftekhim. Supplies were successfully implemented for the following projects: Power of Siberia, Yamal LNG, Smolensk NPP, Data Center of Sberbank of Russia, the Domodedovo, Sheremetyevo, and Pulkovo Airports, etc.

• New areas of Company activity starting from 2018 include development and production of the following:

• Modular equipment for the Oil&Gas and petrochemical industries (Company subsidiary ROG-Engineering, Ufa, Republic of Bashkortostan, Russian Federation);

• Industrial specialized solutions for metro substations (currently being consolidated into the Group's structure: Metrotonnel, Moscow, Russian Federation);

• Industrial electric heating systems.

• Key financial indicators of PJSC Evropeyskaya Elektrotekhnica (IFRS):

The personnel headcount is around 350 people. 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 Import Substitution Leader 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 (800) 600-71-18

Mailing address: 1 Lyotchika Babushkina Street, Building 3, Moscow, 129344

For more information, please contact:

Stanislav Martyushev

Director for Corporate Communications and Investor Relations

PJSC Evropeyskaya Elektrotekhnica

Tel. +7 (495) 660-71-18 ext. 164

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