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Title

Harju Elekter Group financial results, 1-9/2019

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Commentary from the Management
The Group’s indicators for the reporting period are as expected and the Group’s goal to continue increasing the market share in the Nordic countries has shown a positive result. The Lithuanian and Swedish subsidiaries increased their sales turnovers and Finnish subsidiaries that focus on production managed to compensate for some decline in the sale of energy network products with a growth in industrial sector and renewable energy projects. The factory expansion that supports the growth of the Lithuanian subsidiary has multiplied their sales volume. The third quarter and nine months consolidated sales revenue of AS Harju Elekter have reached a record level when compared to the previous periods and are 42.3 million euros and 112.1 million euros, respectively.

In recent years, investments have been made into the development of existing companies and into acquiring new companies but increasing the profitability of the investments still takes time. The profitability was influenced by adapting the administrative capacity of the subsidiaries to the Group’s needs and was also affected by the client’s decisions to spread their investment over a longer period than before. The Groups' operating profit in the third quarter was 1.6 (Q3 2018:0) million euros and for the nine months 3.1 (9m 2018: 1.4) million euros.

This year, the management of subsidiaries has been strengthened. In the nearest quarters, the subsidiaries shall participate in several procurement and projects, the success of which allows us to reinforce our market positions and move on to providing new innovative products and services in the future.
 	 
                         January - September	  July - September   	 Year
(thousand euros)	Change%	2019	2018	Change%	2019	2018	 2018
Sales revenue	          26%	112,150	89,134	44%	42,262	29,298	120,804
Gross profit	          28%	14,249	11,108	81%	5,375	2,963	15,976
EBITDA	                  72%	5,679	3,300	275%	2,446	654	5,001
EBIT	                 118%	3,064	1,406	19,498%	1,561	9	2,413
Profit for the period	 100%	2,313	1,158	12,699%	1,319	18	1,514
incl attributed to Owners
of the Company	         100%	2,384	1,190	12,699%	 1,359	11	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 third quarter of 2019 was 42.3 (Q3 2018: 29.3) million euros, an increase of 44.2% over the comparable period. Consolidated revenue for the nine months increased by 25.8%, reaching 112.2 (9m 2018: 89.1) million euros. This is mainly due to the increase in the sale of electrical equipment, which increased by 11.7 million euros in the reporting quarter and by 25.4 million euros in 9 months compared to the reference periods. Primarily, the volumes of electrical equipment sold to the shipping and industrial sectors, i.e.  produced in Lithuania, have increased.

The consolidated gross profit for the reporting quarter was 5,375 (Q3 2018: 2,963) thousand euros, the gross margin was 12.7% (Q3 2018: 10.1%). Consolidated operating profit (EBIT) for the third quarter was 1,561 (Q3 2018: 9) thousand euros and the consolidated net profit was 1,319 (Q3 2018: 18) thousand euros. Earnings per share (EPS) was 0.08 (Q3 2018: 0.00) in the reporting quarter. The consolidated gross profit for the nine months was 14,249 (9m 2018: 11,108) thousand euros and the gross margin was 12.7% (9m 2018: 12.5%). Consolidated operating profit (EBIT) was earned in 9 months 3,064 (9m 2018: 1,406) thousand euros. The consolidated net profit of the nine months was 2,313 (9m 2018: 1,158) thousand euros, and earnings per share (EPS) was 0.13 (9m 2018: 0.07).

Markets
The Group’s Estonian companies continue to contribute to the home market activities by participating in procurements, selling electrical products for retail and project sales, and offering different industrial rental premises for corporate customers. Sales to the Estonian market grew to 4.7 (Q3 2018: 4.3) million euros in Q3 and to 13.2 (9m 2018: 10.7) million euros in the 9 months and accounting for 11.0% and 11.8% (Q3 2018: 14.7% and 9m 2018: 12.0%) of the consolidated revenue, respectively.

Revenue in Finnish market increased by 1.1 million euros up to 18.6 million euros in the reporting quarter but decreased by 2.3 million euros to 57.0 million euros in 9 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. However, the sales in the other electrical equipment increased. In the reporting quarter, Finnish market accounted for 44.1% (Q3 2018: 60.0%) and in the 9 months, 50.8% (9m 2018: 66.5%) of the Group's consolidated revenue. Although its share is 15.7 percentage points less than in the previous period, it continues to be the largest market in the Group. The decrease in the Finnish market share of the Group's sales revenue was affected by the growth of revenue in both Sweden and Norway.

The share of the Swedish market in the consolidated sales revenue continues rose, reaching 12.7% (Q3 2018: 11.7%) in the reporting quarter and 13.1% (9m 2018: 9.4%) in the 9 months. In the reporting quarter, sales in Sweden were 5.4 million euros and in the 9 months 14.7 million euros, increasing by 2.0 million euros and 6.4 million euros, respectively. The growth was ensured by an increase in the sales of substations in Sweden and adding the bigger projects to the Swedish subsidiary, acquired in 2018.

As a result of the successful sales and marketing of the Lithuanian subsidiary, sales to the Norwegian market have increased the most, reaching the second position among the Group's markets. Sales to the Norwegian market accounted for 19.7% (Q3 2018: 7.9%) of the consolidated revenue in the reporting quarter and for 15.9% (9m 2018: 6.3%) in the 9 months. In quarterly comparisons, sales to the Norwegian market increased by 6.0 million euros to 8.3 million euros and in the first nine months by 12.1 million euros to 17.8 million euros.

From the second half of 2018, the Group started deliveries and supplies to the Netherlands, where we have managed to retain a stable revenue growth. In quarterly comparison, sales to the Netherland market increased by 2.9 million euros and in the first nine months by 7.0 million euros. The Netherlands made up 9.7% (Q3 2018: 4.0%) of the consolidated revenue in the reporting quarter and 6.7% (9m 2018: 0.6%) in the 9 months and was 4.1 and 7.6 million euros, respectively.

Business segments
The sales revenue in the Production segment increased by 11.7 million euros, to 36.6 million euros in the reporting quarter and by 25.0 to 98.2 million euros in the nine months. The revenue increase of the Production segment is caused by an increase in the sales of electrical equipment, which contributes to the main part (99%) of the total revenue of the Production segment. The Lithuanian company has mostly contributed to the increase in the revenue of the Production segment, the production capacity of which has increased significantly thanks to the opening of a new production building while the revenues have tripled. The growth pace of the sales revenue from the Real estate segment is similar to the growth of revenue in previous quarters. With year-on-year comparison, the revenue has increased from 0.2 million euros to 0.8 million euros. During the nine months, Real Estate segment sales totalled 2.5 million euros, accounting for 1.8% (9m 2018: 2.0%) of the Group's nine-month 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 revenue of Other activities has increased by 1.1 million euros, to 4.9 million euros year-on-year and has declined by 2.7 million euros to 11.5 million euros for the nine-month comparison. Comparing with the comparable period, the reduction is caused by large-volume electrical works projects in the shipbuilding sector in the first half of 2018.

Operating expenses
Operating expenses of the reporting quarter were 40.7 (Q3 2018: 29.3) million euros and of the 9 months were 109.0 (9m 2018: 87.8) million euros in total. The principal part of the cost increase is attributable to the higher expenses on cost of sales: 10.5 million euros in the quarterly and 19.9 million euros in the yearly comparison, out-pacing the growth rate of sales revenue and increasing the gross profit margin in relation to the comparable period by 2.6 and 0.2 percentage points. Focusing on increasing export has also increased the marketing costs. The Group’s companies have participated in several professional fairs and they actively search for possibilities to increase business volumes. Distribution costs have increased by 0.5 million compared to the comparable quarter and 0.6 million euros in the 9 months. The rate of distribution cost to revenue has remained at the same level (3.6%) quarter on quarter comparison but decreased to 3.7% (9m 2018: 4.1%) in the 9 months comparison.

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 6.4%, to 6.2 million euros year-on-year and by 7.9% to 19.4 million euros in the 9 months. Labor costs rate decreased in both, quarterly and 9 months comparisons, accounting for 14.6% (Q3 2018: 19.9%) and 17.3% (Q9 2018: 20.2%), respectively.

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 0.7 million euros to 2.6 million euros in the 9-month comparison.

Employees and remuneration
As of the end of the reporting period, the Group had 799 employees, being 71 employees more than a year ago. Largest change of the employees (109 people) was due to the significantly increased production volumes in the Lithuanian subsidiary. During the nine months, the Group employed an average of 779 people, which was an average of 70 employees more than in the comparable period. In the reporting quarter, 5.0 (Q3 2018: 4.8) and during the 9 months 15.6 (9m 2018: 14.0) million euros were paid to the employees in salaries and remuneration. Average wages per Group employee was 2,230 euros, an increase of 1.2% 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 4.4 million euros in non-current assets, incl. 0.7 million euros in investment properties, 3.4 million euros in property, plant and equipment and 0.3 million euros in intangible assets. The vast majority of the investments 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 sale office and the central warehouse of the Estonian subsidiary, and into the development projects of the Group’s companies and industrial parks. In the comparable period, a total of 7.5 million euros were invested into non-current assets, of which 1.0 million euros was acquired through business combinations. The remaining amount was used for the subsidiary’s Finn-Power production line, construction of the Allika industrial park and Haapsalu solar power plant.

Main events in the third quarter
In September, Lithuanian subsidiary opened festively a new production hall in Panevežys. During nearly a year expansion works, the subsidiary’s office and production spaces increased from 2,500 sq.m. to 9,000 sq.m. In addition, 1.9 hectares of land adjacent to the already existing properties were purchased in Lithuania this year to ensure the possibility of future expansion. The total volume of investments was 3.5 million euros. Investments in the expansion of the production facility and upgrade of technology add notable production capacity to secure supplies for the customers of the subsidiary in the segments of ship-building and industry.

In Q3, Telesilta Oy completed several big projects. In August, the working vessel Hydrograf-17 was completed, built for the Poland Gdynia Maritime Administration at the UTV Uusikaupunki shipyard, where Telesilta Oy was the main contractor for the electric works. In September, the UTV shipyard delivered to their client the first hybrid ferry Elvy, manufactured in Finland, the electrical and navigation system turnkey solution of which was completed at Telesilta Oy. The ferry will start operating on the River Göta in Sweden.

On 30.08.2019,  a purchase-sale agreement was signed in which Satmatic Oy, a subsidiary of Harju Elekter AS, bought the real estate company Kinnteistö Oy Ulvila Sammontie 9, owned by the Municipality of Ulvila. Transaction price was 2.0 million euros. In the course of the transaction, Satmatic Oy acquired an immovable of 0.86 ha with production surfaces on the property of 4,330 sq.m. The transaction was the conclusion of the contract signed on 17.11.2008 by Satmatic Oy, a subsidiary of Harju Elekter AS, and the Municipality of Ulvila, according to which Satmatic Oy was entitled to acquire Sammontie 9, Ulvila's property with a production building built there after a 10-year lease. The activity follows the principle according to which the production areas used by the Group companies belong to the Group's ownership.

The daily business activities and production organisation of the Group’s company are based on an international standard of the relevant quality and environment policy. The valid ISO 9001 quality standard has been implemented in most of the group’s production companies. Telesilta Oy started the preparation for the implementation of ISO 9001 in 2018. In September this year, Bureau Veritas acknowledged the company’s business and production management compliant with the international quality standard ISO 9001 and issued a relevant certificate.

Finland’s economic newspaper Kauppalehti awarded Finnkumu Oy the Menestyjät 2019 title based on their economic results from June 2018 to May 2019. Such acknowledgement is given to companies with a well-established economic activity, stable growth, good results and profitability, strong financial structure, and liquidity to ensure sustainable activity.

Through co-operation of the Group’s subsidiaries – electrical goods project and retail seller Energo Veritas OÜ and metal factory AS Harju Elekter Teletehnika – four external fibre optic cabinet models were developed for Elektrilevi’s fast internet network project (Last Mile). Cabinet deliveries started in September. In the next 5 years, Elektrilevi plans to invest about 100 million euros into the project, of which the materials form about a fifth.

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 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. There was also a change in the management of Telesilta Oy, where the current member of the board and project manager Joonas Puustelli was appointed as the CEO as of 1 October 2019.  The long-time Managing Director of Telesilta Oy, Kari Laulajainen, will continue at least to the end of the year 2020, supporting company operations in project management and sales. As of 1.1.2020, a new CEO has also been appointed for Swedish subsidiaries SEBAB AB and Grytek AB. Mikael Schwartz Jonsson will start working with the Harju Elekter Group on 1 October 2019, and will work in close cooperation with the current CEO during the three-month transition period. The long-term CEO of SEBAB AB and Grytek AB, Thomas Andersson, will take the position of Sales and Marketing Director in Sweden from 1st of January 2020.

In Q3, subsidiaries of the Group participated the Alihankinta fair in Tampere, where the cost-efficient contractual production model, vehicle charging solutions, and the sales of strongly growing components were introduced by Satmatic Oy as well as the high-quality data network products by AS Harju Elekter Teletehnika.

The share
The company's share price on the last trading day of the reporting quarter on the Nasdaq Tallinn Stock Exchange closed at 4.10 euros.

Andres Allikmäe
Chairman of the Management Board
+372 674 7400

For more information: Tiit Atso, CFO, +372 674 7400 or Interim report 1-9/2019

AS HARJU ELEKTER	 	 	 	 
CONSOLIDATED BALANCE SHEET,30.09.2019	 	 	 	 
Unaudited	 	 	 	 
 	 	 	 	 
 	 	 	 	 
EUR'000	 	 	 	 
ASSETS                                           30.09.19  31.12.18	 	 
Cash and cash equivalents	                 3,883	3,142	 	 
Trade receivables and other receivables	         29,974	22,218	 	 
Prepayments	                                  1,942	1,173	 	 
Inventories	                                 19,059	17,468	 	 
TOTAL CURRENT ASSETS                    	54,858	44,001	 	 
Deferred income tax asset	                     96	98	 	 
Other long-term financial investments	          9,828	9,587	 	 
Investment property	                         19,912	19,804	 	 
Property, plant and equipment	                 21,148	17,403	 	 
Intangible assets	                          7,181	7,260	 	 
TOTAL NON-CURRENT ASSETS	                 58,165	54,152	 	 
TOTAL ASSETS                             	113,023	98,153	 	 
LIABILITIES AND OWNERS' EQUITY           	 	 	 	 
Interest-bearing loans and borrowings	         10,824	6,656	 	 
Advances from customers	                          3,254	1,740	 	 
Trade payables and other payables	         20,075	14,911	 	 
Tax liabilities  	                          2,975	2,409	 	 
Short-term provision	                            25	14	 	 
TOTAL CURRENT LIABILITIES                	37,153	25,730	 	 
Interest-bearing loans and borrowings	         9,016	5,449	 	 
Other long-term liabilities	                    64	35	 	 
NON-CURRENT LIABILITIES            	         9,080	5,484	 	 
TOTAL LIABILITIES                        	46,233	31,214	 	 
Share capital                            	11,176	11,176	 	 
Share premium	                                   804	804	 	 
Reserves	                                 3,396	2,665	 	 
Retained earnings                        	51,507	52,316	 	 
TOTAL OWNERS' EQUITY                      	66,883	66,961	 	 
Non-controlling interests	                   -93	-22	 	 
TOTAL EQUITY                      	         66,790	66,939	 	 
TOTAL LIABILITIES AND OWNERS' EQUITY     	113,023	98,153	 	 
 	 	 	 	 
 	 	 	 	 
CONSOLIDATED INCOME STATEMENT,  1-9/2019	 	 	 	 
Unaudited	 	 	 	 
 	 	 	 	 
EUR’000	Q3 2019	Q3 2018	9m 2019	9m 2018
Revenue	42,262	29,298	112,150	89,134
Cost of sales	-36,887	-26,335	-97,901	-78,026
Gross profit	5,375	2,963	14,249	11,108
Distribution costs	-1,516	-1,052	-4,198	-3,644
Administrative expenses	-2,296	-1,882	-6,929	-5,998
Other income	39	17	171	60
Other expenses	-41	-37	-229	-120
Operating profit	1,561	9	3,064	1,406
Finance income	25	171	147	523
Finance costs	-77	-15	-179	-38
Profit before tax	1,509	165	3,032	1,891
Income tax expense	-190	-147	-719	-734
Profit for the period, attributable to	1	18	2,313	1,157
   owners of the Company	1,359	11	2,384	1,190
   non-controlling interests	-40	7	-71	-33
Basic earnings per share  (EUR)	0.08	0.00	0.13	0.07
Diluted earnings per share  (EUR)	0.08	0.00	0.13	0.07

Tiit Atso
CFO
+372 674 7400