DIRECTORS' REPORT GROUP STRUCTURE AS Eesti Ehitus is a construction group whose core business is the construction of buildings and structures in Estonia and Ukraine. The Group acts both as a general contractor and a project manager. In Estonia, the Group also operates as an independent contractor in road construction and maintenance, environmental engineering, and the assembly of reinforced concrete elements and structures and cast-on-site concrete works. The activities of the Group companies are as follows: the parent and AS Linnaehitus are engaged in general contracting and project management. AS ASPI and its subsidiaries build environmental structures and roads and provide road maintenance services. Over two thirds of the revenue of OÜ Mapri Projekt results from concrete works; in addition, the company performs smaller general construction contracts. OÜ Eurocon coordinates the Group's construction and development activities in Ukraine. Its direct subsidiary Eurocon Ukraine LLC is engaged in general contracting and project management and owns interests in companies which develop real estate in and around Kiev and in Lvov. The parent of the Group is AS Eesti Ehitus, a company registered and seated in Tallinn, Estonia. Since 18 May 2006 the company's share has been quoted in the main list of Tallinn Stock Exchange. In the first quarter only one change occurred in the Group's structure. On 13 February 2007 OÜ Eurocon sold an 11% interest in V.I. Center LLC to Continental Investment Holding GmbH, a non-Group company. Considering minority interests in OÜ Eurocon and Eurocon Ukraine LLC, AS Eesti Ehitus' interest in V.I. Center LLC is now 32%. From 2007, the consolidated financial statements include the financial statements of OÜ Kaurits. In the first quarter of 2007 the Group employed, on average, 1,009 people including 82 outside Estonia. The proportion of engineers and technical personnel (ETP) was 39.2%. Labour costs totalled 74.4 million kroons (€4.8 million), a 69% increase on a year ago. The average number of staff has increased by 30.7%. REVENUE AND SEGMENTS Consolidated revenue for the first quarter of 2007 amounted to 559.7 million kroons (€35.8 million), a notable 63.8% improvement on a year ago. In terms of business segments, the Residential and non-residential segment contributed 55% (46.3% up on a year ago) and the Civil engineering segment 45% (159.2% growth). In geographical terms, 85.6% of the Group's revenue was earned in Estonia; Ukraine contributed 14.4% (a year ago the corresponding figures were 95.4% and 4.6%). Compared to a year ago, our revenue structure has become more balanced thanks to strong growth in the Civil engineering segment which resulted mainly from an increase in port construction activities and conditions that favoured road construction. In the Residential and non-residential segment the largest sub-segment is still Commercial buildings, largely on account of strong demand in both our home markets which has rendered Commercial buildings the whole Group's largest sub-segment. Compared to a year ago, the highest growth rate was posted by the Public buildings sub-segment. The largest sub-segment in the Civil engineering segment was Port construction which contributed 57% of segment revenue. Compared to prior periods, the year began well also for Road construction and maintenance whose revenue grew at a slightly lower pace than the Group's overall revenue but still fairly in view of the usual inactivity in the first quarter. At the end of the first quarter of 2007, the Group's order backlog totalled 3.197 billion kroons (€204.3 million) against 1.776 billion kroons (€113.5 million) a year ago. PROFITABILITY AND CASH FLOWS In the first quarter, the Group's year-on-year profitability improved significantly. The gross margin was 11.8% (Q1 2006: 8.8%) and although personnel expenses grew at a somewhat higher pace than revenue (68.1% year-on-year), gross profit was mainly affected by controlled growth in the cost of services, goods and materials purchased (55.1%). The ratio of administrative expenses to revenue was 5.3% (Q1 2006: 6.1%). The improvement in the ratio is attributable to an increase in sales which has improved the Group's ability to cover its fixed costs. Although the overall operating margin for the first quarter was 6.7% (Q1 2006: 8.1%), operating margin excluding gains on sale of property, plant and equipment and real estate was 6.2% against 2.7% a year ago, reflecting a clear improvement in the profitability of the core activity. Unaudited consolidated net profit for the first quarter of 2007 amounted to an exceptional 31.4 million kroons (€2 million) against 17.4 million kroons (€1.1 million) earned a year ago. The profit attributable to equity holders of the parent amounted to 29.5 million kroons (€1.9 million) against 18.2 million kroons (€1.2 million) for the first quarter of 2006. Net operating cash flows for the first quarter were negative to the extent of 5.5 million kroons (€0.35 million) while a year ago they were positive at 51.2 million kroons (€3.3 million). The substantial difference can be explained by major materials purchases for port construction projects in 2007 while a year ago customers made a disproportionately large amount of advance payments. Cash flows from investing activities were balanced resulting in an inflow of 48,000 kroons (€3,100). Proceeds from the divestment of a stake in an associate, settlement of loans given and interest received allowed financing the same proportion of acquisitions of interests (the last instalment payment for shares in OÜ Kaurits), acquisitions of property, plant and equipment and investment in development projects in Ukraine. A year ago cash inflow from investing activities was 7.4 million kroons (€0.47 million), largely thanks to the sale of investment property. Financing activities resulted in an outflow of 17.1 million kroons (€1.1 million) mainly due to payment of finance lease liabilities by AS ASPI and its subsidiaries. A year ago the result was similar: financing cash flows were negative to the extent of 21.2 million kroons (€1.4 million) because of settlement of loan and finance lease liabilities. Gearing or net debt to invested capital (loans plus equity) has increased from 12.3% a year ago to 19.3% due to the developments in operating cash flows which which have reduced the balance of cash and cash equivalents. At the same time invested capital has increased by 62.8% solely on account of growth in equity. This has created an opportunity for involving additional funds through the issuance of debt instruments when cash flows normalise. Andri Hõbemägi AS Eesti Ehitus Tel: (+372) 6400 450 E-mail: eestiehitus@eestiehitus.ee