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Title

Harju Elekter Group financial results, 1-3/2019

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Commentary from Management
AS Harju Elekter finished the first quarter with 29.3 million euros of sales revenue and 0.3 million euros of operating profit. The low profitability was influenced by an increase in production input prices and wages and a lower than expected order volume of Finnish electricity networks. Usually, seasonality has a certain effect in the first quarter. 

	                                Change % January - March  Year
(thousand euros)		                  2019	 2018	2018
Sales revenue 	                         12.7%	29,283	25,986	120,804
Gross profit 	                         13.3%	3,788	3,344	15,976
EBITDA 	                                 37.5%	1,167	849	5,001
EBIT 	                                 33.0%	307	231	2,413
Profit for the period	                 61.7%	165	102	1,514
incl attributed to Owners of the Company 37.2%	182	133	1,546

Revenue and profit
The Group manufactures and sells electrical, control and power automation devices and various metal products. In addition, sales revenue is also earnt on the rental of investment property and electricity works in the shipbuilding sector. The sales revenue of the Group in the reporting quarter was 29.3 (2018 Q1: 26.0) million euros, having increased by 12.7% in relation to the comparable period. The sale of electrical equipment grew by 5.7 million euros, to 25.6 million euros in the first quarter, which was also the main reason for the increased sales revenue of the reporting quarter.

The consolidated gross profit for the reporting quarter was 3.8 (Q1 2018: 3.3) million euros, the gross profit margin remained at the same level of the comparable period, i.e 12.9%. Consolidated operating profit (EBIT) for the first quarter was 0.3 (Q1 2018: 0.2) million euros. The consolidated net profit for the reporting quarter was 0.2 (Q1 2018: 0.1) million euros, of which the share of the owners of the Company was 0.2 (2018 Q1: 0.1) million euros. EPS was 0.01 (2018 Q1: 0.01) in the first quarter.

Markets
Sales to the Estonian market grew by 24.7%, to 3.5 million euros and made up 12.0% (Q1 2018: 10.9%) of the consolidated sales revenue of the reporting quarter. Competition on the home market is tight and winning a procurement is difficult. The Group's Estonian companies make a significant contribution to increasing our market share in the Estonian market, both in potential procurements and in offering rental premises to corporate customers.

The share of the Group’s products and services sold to the Group’s largest market, Finland, comprised 55.1% in the reporting quarter (Q1 2018: 69.1%). The year-on-year decrease to the Finnish market was by 1.8 million euros, to 16.1 million euros. The decrease in sales revenue was influenced most by the postponed electricity and grid projects in Finland to the second half of the year, shifting the works planned for the beginning of the year to the second and third quarter.

Sales to the Swedish market increased the most, growing by 1.7 million euros, to 3.7 million euros in the first quarter, in relation to the comparable period. The share of the Swedish market in the consolidated sales revenue rose to 12.7% in the reporting quarter (Q1 2018: 7.7%). The growth was due to the added sales revenue of the Swedish subsidiaries, acquired in 2018, as well as the goal-orientated work of other subsidiaries towards Sweden. We expect Swedish sales volumes to increase further in the coming quarters, as indicated by the continued growth of orders from Sweden's largest grid company E.ON Energidistribution AB, as well as several new major projects with orders starting from the second quarter. In early May, the Group's subsidiaries will participate in the Scandinavian largest electricity fair Elfack, in Gothenburg. 

The sales to Norwegian market doubled to 4 million euros in comparison to the reporting quarters, making up 13.7% (Q1 2018: 8.0%) of the consolidated sales revenue of the reporting quarter. Also continued deliveries and supplies to the Netherlands, where the Group has managed to retain a stable sales revenue for the third quarter in a row. The Netherlands made up 5.4% of the consolidated sales revenue in the reporting quarter.

Business segments
The sales revenue in the Production segment increased by 5.0 million euros, to 25.6 million euros, comprising 87.3% of the consolidated sales revenue in the reporting quarter (Q1 2018: 79.2%). Main share of the sales revenue (99%) in the Production segment comes from the sale of electrical equipment. The sales revenue of Real Estate segment grew by 0.2 million euros, to 0.9 million euros, remaining at the same level compared to the last quarter of the previous year. Rental income is earnt on new rental premises in the Allika Industrial Park and from the tenants in the territory of Keila and Haapsalu industrial parks. The sales revenue of Unallocated activities has declined by 1.9 million euros, to 2.8 million euros year-on-year and is mainly related to decreased volumes of electrical works in the Finnish shipbuilding sector.

Operating expenses
Operating expenses of the reporting quarter were 28.9 (Q1 2018: 25.7) million euros in total. The operating expenses grew by 12.3%, i.e 3.2 million euros, year-on-year, the principal part of which comprised the increase in the cost of sales in the amount of 2.9 million euros. The cost of sales increased at the same pace as sales revenue, leaving the gross margin at the same level as the comparable period (12.9%). The Group’s distribution costs comprised 1.2 million euros in the reporting quarter and the distribution cost rate decreased by 0.4 percentage points, to 4.1% year-on-year. The share of administrative expenses in the sales revenues of the reporting quarter comprised 7.5% (Q1 2018: 7.4%).
Demand for local labour and the relating salary pressure, but also the increased share of employees in Finland and Sweden where the salary level is notably higher than in other Group companies, has raised the labour costs of the reporting period. Labour costs increased by 12.9%, to 6.4 million euros year-on-year. The labour cost rate accounted for 21.8% of the sales revenue in the reporting quarter (Q1 2018: 21.7%).

Employees and remuneration
As at the end of the reporting period, the Group had 744 employees, being 45 employees more than a year ago. In the first quarter of 2019, the Group employed an average of 733 people, which is an average of 54 employees more than in the comparable period. In the reporting quarter, 5.1 (Q1 2018: 4.4) million euros were paid to the employees in salaries and remuneration. Average wages per Group employee was 2,368 euros, an increase of 10.3% to the comparable period. The cost of wages was affected by the hiring of new workers in Sweden, but also by the decision of the Republic of Lithuania to calculate part of the social tax as the gross salary of the employee. The last amendment did not have a significant impact on the labour costs of the Group.

Investments
In the accounting quarter, several important developments of the Group were completed, incl. the completion of the expansion of the production facility of the Lithuanian subsidiary RIFAS UAB and start of production in new premises, and the opening of a new sales office and the central warehouse of the Estonian subsidiary Energo Veritas OÜ at 19 Tuisu Str, Tallinn. In Q1, the Group invested a total of 1.9 million euros in non-current assets, incl. 0.1 million euros in investment properties, 1.7 million euros in property, plant and equipment and 0.1 million euros in intangible assets. The vast majority of the investments, i.e 1.4 million euros, was aimed at the expansion of the production facilities of the Lithuanian subsidiary. In the comparable period, a total of 2.3 million euros were invested in non-current assets, of which 1.0 million was acquired through business combinations. 

Main events
•	The expansion works of the production facility of the Lithuanian subsidiary, RIFAS UAB, in Panevežys are nearing the end and new production premises are being taken into use phase by phase. The expansion work will end in the second quarter, whereupon the subsidiary will have 9,000 sq.m of office and production space, instead of the former 3,500 sq.m. Investments in the expansion of the production facility and upgrade of technology enable to add notable production capacity to secure supplies for the customers of the subsidiary in the segments of ship-building and industry. The total volume of investments is 3.5 million euros. In addition, 1.9 ha of land adjacent to existing properties was acquired in the first quarter to ensure the possibility of new extensions in the future. 
•	The subsidiary AS Harju Elekter Elektrotehnika received an order for 54 special-purpose prefabricated substations to be supplied to Konecranes during a period of one year. Supplies are sent to the United Arab Emirates.
•	On 1 April, the subsidiary Energo Veritas OÜ opened a new sales office and central warehouse at 19 Tuisu Str, Tallinn. The good location and larger premises create better possibilities for customer service and quicker issuing of goods. Also, the assortment of products in the area of electricity and weak current materials, construction of telecom and power grid will expand notably, and the sales capability of products in Estonia will increase. 
•	In connection with the restructuring of the activities of Harju Elekter Group in Finland and consolidation of Satmatic Oy and Finnkumu Oy under one common management, the Group appointed Jan Osa, the former manager of AS Harju Elekter Elektrotehnika, as the new CEO of Satmatic Oy and Finnkumu Oy, who started in this position at Satmatic Oy from 1 April 2019 and at Finnkumu Oy from 1 July 2019. The former head of the sales department Indrek Ulmas was appointed as the managing director of AS Harju Elekter Elektrotehnika starting from 1 April 2019. 

The share
The company's share price on the last trading day of the reporting quarter on the Nasdaq Tallinn Stock Exchange closed at 4.90 euros.

Andres Allikmäe
Chairman of the Management Board
+372 674 7400

For more information: Tiit Atso, CFO, +372 674 7400 or Interim report 1-3/2019

AS HARJU ELEKTER		
CONSOLIDATED BALANCE SHEET,31.03.2019		
Unaudited		
		
		
EUR'000		
ASSETS                                                  	31.03.19	31.12.18
Cash and cash equivalents	4,168	3,142
Short-term financial investments	0	0
Trade receivables and other receivables	24,355	22,218
Prepayments	1,654	1,173
Inventories	21,752	17,468
TOTAL CURRENT ASSETS                    	51,929	44,001
Deferred income tax asset	97	98
Other long-term financial investments	10,026	9,587
Investment property	19,762	19,804
Property, plant and equipment	20,620	17,403
Intangible assets	7,245	7,260
TOTAL NON-CURRENT ASSETS	57,750	54,152
TOTAL ASSETS                             	109,679	98,153
LIABILITIES AND OWNERS' EQUITY           		
Interest-bearing loans and borrowings	9,022	6,470
Advances from customers	1,324	1,740
Trade payables and other payables	21,416	14,911
Tax liabilities  	2,551	2,409
Short-term provision	17	14
TOTAL CURRENT LIABILITIES                	34,330	25,544
Interest-bearing loans and borrowings	7,762	5,635
Other long-term liabilities	34	35
NON-CURRENT LIABILITIES            	7,796	5,670
TOTAL LIABILITIES                        	42,126	31,214
Share capital                            	11,176	11,176
Share premium	804	804
Reserves	3,114	2,568
Retained earnings                        	52,498	52,412
TOTAL OWNERS' EQUITY                      	67,592	66,960
Non-controlling interests	-39	-21
TOTAL EQUITY                      	67,553	66,939
TOTAL LIABILITIES AND OWNERS' EQUITY     	109,679	98,153
		
		
CONSOLIDATED INCOME STATEMENT,  1-3/2019		
Unaudited		
		
		
EUR’000	Q1 2019	Q1 2018
		
Revenue	29,283	25,986
Cost of sales	-25,495	-22,642
Gross profit	3,788	3,344
Distribution costs	-1,208	-1,161
Administrative expenses	-2,183	-1,930
Other income	48	14
Other expenses	-138	-36
Operating profit	307	231
Finance income	101	102
Finance costs	-43	-104
Profit before tax	365	229
Income tax expense	-200	-127
Profit for the period, attributable to	165	102
   owners of the Company	182	133
   non-controlling interests	-17	-31
Basic earnings per share  (EUR)	0.01	0.01
Diluted earnings per share  (EUR)	0.01	0.01

Tiit Atso
CFO
+372 674 7400