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Harju Elekter Group financial results, 1-6/2019

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Commentary from Management
The first half of the year has been successful for the Group's Lithuanian, Finnish and Swedish companies that have experienced strong sales growth. At the same time, the year has been much more modest for the Estonian companies, mainly due to the slowing down of the Finnish electricity network renovation plan which has kept orders from the Finnish distribution network substations lower than originally planned. The consolidated sales revenue of AS Harju Elekter in Q2 was 40.6 million euros and its 6 month sales revenue amounted to 69.9 million euros. The operating profit in Q2 was 1.2 million euros and in the first half of the year, 1.5 million euros. Profitability was significantly affected by two legal disputes that were reflected in the reporting quarter, totalling 0.4 million euros; actual gains/losses will become apparent at the end of the process. 

	        Change January - June	Change	April - June	Year
(thousand euros)H1/H1 	2019	2018	Q2/Q2	2019	2018	2018
Sales revenue 	16.8%	69,889	59,837	20.0%	40,606	33,851	120,804
Gross profit 	8.9%	8,875	8,146	5.9%	5,087	4,802	15,976
EBITDA 	        22.1%	3,232	2,647	14.9%	2,065	1,797	5,001
EBIT 	         7.4%	1,502	1,398	2.5%	1,195	1,166	2,413
Profit for the 
period	       -12.8%	994	1,140	-20.1%	829	1,038	1,514
incl attributed to Owners of 
the Company 	-13.1%	1,025	1,180	-19.5%	843	1,047	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 from the rental of industrial property and electricity works in the shipbuilding sector. The consolidated unaudited revenue for the second quarter of 2019 was 40.6 (Q2 2018: 33.9) million euros, an increase of 20.0% over the comparable period. This is mainly due to the increase in the sale of electrical equipment, which increased by 7.9 million euros in the reporting quarter and by 13.7 million euros in 6 months and accounted the sale of electrical equipment for 88.0 % of the Group's sales revenue. Consolidated revenue for the first half-year increased by 16.8%, reaching 69.9 (6m 2018: 59.8) million euros.

The consolidated gross profit for the reporting quarter was 5,087 (Q2 2018: 4,802) thousand euros, the gross margin was 12.5% (Q2 2018: 14.2%). Consolidated operating profit (EBIT) for the second quarter was 1,195 (Q2 2018: 1,166) thousand euros and the consolidated net profit was 829 (Q2 2018: 1,038) thousand euros. Earnings per share (EPS) was 0.05 (Q2 2018: 0.06) in the reporting quarter. The consolidated gross profit for the first half-year was 8,875 (6m 2018: 8,146) thousand euros and the gross margin was 12.7% (6m 2018: 13.6%). Consolidated operating profit (EBIT) was earned in 6 months 1,502 (6m 2018: 1,398) thousand euros. The consolidated net profit of the first half-year 2019 was 994 (6m 2018: 1,140) thousand euros. And earnings per share (EPS) was 0.06 (6m 2018: 0.07).

Markets 
Sales to the Estonian market grew up to 5.0 (Q2 2018: 3.5) million euros in Q2 and to 8.6 (6m 2018: 6.4) million euros in 6 months and accounting for 12.3% (Q2 and 6m 2018: 10.5%) of the consolidated sales revenue of both reporting period. 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.

Sales on the Group’s largest market, Finland, have decreased insignificantly compared to the reference period. Revenue in the reporting quarter decreased by 1.5 million euros to 22.2 million euros and by 3.3 million euros to 38.3 million euros in 6 months and was mainly affected by the adjustment of the renovation plan of Finnish power and network construction projects  to a smaller volume than originally planned. In the reporting quarter, Finland accounted for 54.7% (Q2 2018: 70.0%) and in the first half of the year, 54.8% (6m 2018:  69.6 %) of the Group's products and services. The decrease in the Finnish market share of the Group's sales revenue was affected by the growth of sales revenue in both Sweden and Norway.

In the reporting quarter, sales in Sweden were 5.6 million euros and in the first half of the year 9.4 million euros, increasing by 2.7 million euros and 4.4 million euros, respectively. The share of the Swedish market in the consolidated sales revenue continues rose, reaching 13.9% (Q2 2018: 8.8%) in the reporting quarter and 13.4% (6m 2018: 8.3%) in the 6 months. The growth was due to the added sales revenue of the Swedish subsidiaries 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 distribution network company E.ON Energidistribution AB, as well as several new major projects with orders starting from the second quarter.  

Sales to the Norwegian market increased the most, having quadrupled to 5.5 (Q2 2018: 1.2) million euros compared to the same period last year and accounting for 13.5% (Q2 2018: 3.7%) of the consolidated revenue in the reporting quarter. Within 6 months, 9.5 million euros has been sold to the Norwegian market. 

The Group continued deliveries and supplies to the Netherlands, where we have managed to retain a stable sales revenue for the fourth quarter in a row. The Netherlands made up 4.6% (2018 Q2: 1.2%) of the consolidated sales revenue in the reporting quarter and 4.9% (2018 6m: 0.9%) in the first half of the year and sales revenue earned there were 1.9 million euros and 3.5 million euros respectively. 

Business segments
The sales revenue in the Production segment increased by 8.4 million euros, to 35.9 million euros in the reporting quarter and by 13.3 to 61.5 million euros in the first half of the year. Main share of the sales revenue (99%) in the Production segment comes from the sale of electrical equipment. Sales growth in the Real Estate segment is similar to the first quarter, with quarterly sales increasing from 0.2 million euros to 0.8 million euros. In the first half of the year, Real Estate segment sales totalled 1.7 million euros, accounting for 2.4% of the Group's six-month sales revenue. 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 1.8 million euros, to 3.8 million year-on year and by 3.8 million euros to 6.7 million euros for the first half of the year. The decline is mainly related to decreased volumes of electrical works in the ship-building sector.

Operating expenses
Operating expenses of the reporting quarter were 39.4 (Q2 2018: 32.8) million euros and of the 6-months period were 68,3 (6m 2018: 58.4) million euros in total. The principal part of the cost increase is attributable to the higher ex-penses on cost of sales: 6.5 million euros in the quarterly and 9.3 million euros in the yearly comparison, out-pacing the growth rate of sales revenues and reducing the gross profit margin in relation to the comparable period by 1.7 and 0.9 percentage points. The Group’s distribution costs comprised 1.5 million euros in the reporting quarter, increasing only marginally (3%). At the same time, both the share of distribution cost and administrative cost decreased by 0.6 percentage points to 3.6 % and by 0.5 percentage points to 6.0% year-on-year and by 0.5 percentage points to 3.8 % and 0.3 percentage points to 6.6% half-year comparison, respectively.

The addition of new employees to expand operations in the Lithuanian subsidiary, the wage pressure resulting from the demand for local skilled labour, as well as the increased number of employees in Finland and Sweden where salary levels are significantly higher than in the other Group companies, have increased labour costs in the reporting period. Labour costs increased by 5.0%, to 6.9 million euros year-on-year and by 8.6% to 13.2 million euros in the 6 months. The labour cost rate accounted for 16.9% (Q2 2018: 19.3%) of the sales revenue in the reporting quarter and 19.0% (Q2 2018: 20.4%) of the first 6-months period sales revenue.

The innovative production line and buildings that were taken into use increased the depreciation of non-current assets by 0.2 million euros, to 0.9 million euros year-on-year and by 0.5 million euros to 1.7 million euros in the 6 months.

Employees and remuneration
As at the end of the reporting period, the Group had 848 employees, being 96 employees more than a year ago. Most of the employees (75 people) were hired to handle the significantly increased production volumes in the Lithuanian subsidiary. In the second quarter, the Group employed an average of 779 people, which was an average of 66 employees more than in the comparable period. In the reporting quarter, 5.5 (Q2 2018: 4.9) and during the 6 months 10.6 (6m 2018: 9.3) million euros were paid to the employees in salaries and remuneration. Average wages per Group employee was 2,335 euros, an increase of 5.1% 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 reporting period, the Group invested a total of 3.0 million euros in non-current assets, incl. 0.2 million euros in investment properties, 2.6 million euros in property, plant and equipment and 0.2 million euros in intangible assets. The vast majority of the investments, i.e. 1.8 million euros, was aimed at the expansion of the production facilities of the Lithuanian subsidiary. The rest of the investments were placed into integration of the new flagship store of the Estonian subsidiary and the central warehouse, and into the development projects of the Group’s companies and industrial parks. In the comparable period, a total of 4.6 million euros were invested in non-current assets, of which 1.0 million was acquired through business combinations.

Main events in the second quarter
•	The Supervisory Board and Management Board of AS Harju Elekter have decided to bring all companies of the Group under the single Harju Elekter trademark. Using a common logo helps to strengthen the Group's competitiveness and creates additional benefits and opportunities for marketing, providing a clear image of the capabilities of Harju Elekter Group. Based on the above, the Lithuanian subsidiary RIFAS UAB was renamed HARJU ELEKTER UAB. The entry was made into the Lithuanian Register of Legal Entities on 2 July 2019.
•	In May, subsidiaries of the Group participated the largest Nordic electricity fair Elfack in Gothenburg and showcased the HECON line system of the MCC, developed for 2500A-4000A solutions, and the HEKA 1VM SS2 prefabricated substation dedicated to the needs of the Swedish market. In the trade fair for electricity and distribution networks, the Verkosto in Tampere, introduced products directed to the energy distribution sector; and in April, the construction fair Eesti Ehitab in Tallinn displayed the product range of the Group’s stores.
•	The expansion works of the production facility of the Lithuanian subsidiary in Panevežys are nearing the end. For today, the new production hall is complete and production in part 1 is already in going. The expanded factory will be open in September, whereupon the subsidiary will have 9,000 sq.m of office and production space, instead of the former 3,500 sq.m. The total volume of investments is 3.5 million euros. Investments in the expansion of the production facility and upgrade of technology enable on to add notable production capacity to secure supplies for the customers of the subsidiary in the segments of ship-building and industry. In addition, 1.9 hectares of land adjacent to the already existing properties were purchased in Lithuanian to ensure the possibility of future expansion.
•	On 2 May 2019, the AGM of shareholders of AS Harju Elekter was held; it approved the 2018 annual report and distribution of profit and decided to pay shareholders a dividend of 0.18 euro per share for 2018, totaling 3.2 million euros. The shareholders registered in the shareholders’ registry on 16 May 2019 as of the end of the business day in the accounting system, entitled to dividend. The dividends paid to the shareholders on 24 May 2019 by a transfer to the bank account of the shareholder. 
•	On 1 April, the subsidiary Energo Veritas OÜ opened a new sales office and central warehouse at 19 Tuisu Street, Tallinn. The assortment of products in the area of electricity and low voltage materials, construction of telecom and power grid expand notably, and the sales capability of products in Estonia increase.The atractive location and larger premises create better possibilities for customer service and quicker issuing of goods. 
•	Energo Veritas OÜ, a project and retailer of electrical installation goods, won the procurement of transformers for the distribution network Elektrilevi worth 1.3 million euros.
•	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 4.12 euros.

Andres Allikmäe
Chairman of the Management Board
+372 674 7400

For more information: Tiit Atso, CFO, +372 674 7400 or Interim report 1-6/2019

AS HARJU ELEKTER				
CONSOLIDATED BALANCE SHEET,30.06.2019				
Unaudited				
				
				
EUR'000				
ASSETS                                                  	30.06.19	31.12.18		
Cash and cash equivalents	1,978	3,142		
Trade receivables and other receivables	29,894	22,218		
Prepayments	1,728	1,173		
Inventories	23,113	17,468		
TOTAL CURRENT ASSETS                    	56,713	44,001		
Deferred income tax asset	97	98		
Other long-term financial investments	10,245	9,587		
Investment property	19,61	19,804		
Property, plant and equipment	20,916	17,403		
Intangible assets	7,214	7,260		
TOTAL NON-CURRENT ASSETS	58,082	54,152		
TOTAL ASSETS                             	114,795	98,153		
LIABILITIES AND OWNERS' EQUITY           				
Interest-bearing loans and borrowings	12,299	6,470		
Advances from customers	2,536	1,740		
Trade payables and other payables	22,738	14,911		
Tax liabilities  	3,259	2,409		
Short-term provision	32	14		
TOTAL CURRENT LIABILITIES                	40,864	25,544		
Interest-bearing loans and borrowings	8,577	5,635		
Other long-term liabilities	66	35		
NON-CURRENT LIABILITIES            	8,643	5,670		
TOTAL LIABILITIES                        	49,507	31,214		
Share capital                            	11,176	11,176		
Share premium	804	804		
Reserves	3,213	2,665		
Retained earnings                        	50,148	52,316		
TOTAL OWNERS' EQUITY                      	65,341	66,961		
Non-controlling interests	-53	-22		
TOTAL EQUITY                      	65,288	66,939		
TOTAL LIABILITIES AND OWNERS' EQUITY     	114,795	98,153		
				
				
CONSOLIDATED INCOME STATEMENT,  1-6/2019				
Unaudited				
				
				
EUR’000	Q2 2019	Q2 2018	6m 2019	6m 2018
				
Revenue	40,606	33,851	69,889	59,837
Cost of sales	-35,519	-29,049	-61,014	-51,691
Gross profit	5,087	4,802	8,875	8,146
Distribution costs	-1,474	-1,431	-2,682	-2,592
Administrative expenses	-2,450	-2,187	-4,634	-4,116
Other income	83	29	131	43
Other expenses	-51	-47	-188	-83
Operating profit	1,195	1,166	1,502	1,398
Finance income	24	342	125	353
Finance costs	-61	-11	-104	-25
Profit before tax	1,158	1,497	1,523	1,726
Income tax expense	-329	-459	-529	-586
Profit for the period, attributable to	829	1,038	994	1,140
   owners of the Company	843	1,047	1,025	1,180
   non-controlling interests	-14	-9	-31	-40
Basic earnings per share  (EUR)	0.05	0.06	0.06	0.07
Diluted earnings per share  (EUR)	0.05	0.06	0.06	0.07

Tiit Atso
CFO
+372 674 7400