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
