Merko Ehitus
Half Year financial report

2011 6 months and II quarter consolidated unaudited interim report

Tallinn, Estonia, 2011-08-17 15:30 CEST --

MANAGEMENT REPORT

General information

AS Merko Ehitus operates in Estonia, Latvia and Lithuania as a construction group offering complete solutions in the construction field. The largest companies belonging to the group are SIA Merks (100%), UAB Merko Statyba (100%), Tallinna Teede AS (100%), AS Gustaf (85%), OÜ Gustaf Tallinn (80%), AS Merko Tartu (66%), AS Merko Infra (100%) and AS Tartu Maja Betoontooted (25%).

Operating results

In 2011 6 months, the revenue of the construction group was EUR 75.0 million. Estonia contributed 78.8%, Latvia 18.0% and Lithuania 3.2% to the group’s revenue. As compared to 2010 6 months, the group’s revenue increased by 5.9%, including +26.6% in Estonia, +59.4% in Lithuania and -40.3% in Latvia.

Group’s revenue for Q2 2011 was EUR 48.9 million, which constitutes an annual increase of EUR 10.0 million (+25.8%).

As of 30 June 2011, the group’s portfolio on unfinished construction contracts totalled EUR 219 million. The contract portfolio does not include residential development projects developed by the Company and the works related to construction of investment properties.

In 2011 6 months, the group sold 24 apartments for EUR 2.2 million, (exclusive of VAT). As of 30.06.2011, the inventories included 38 unsold apartments with a total cost of EUR 2.8 million and 597 apartments in the stage of construction with a total cost of EUR 26.7 million as of the balance sheet date. Of the finished buildings 32 apartments are located in Tartu and 6 in Riga. At the moment the group is building an apartment building with 93 apartments at Tartu road 50 in Tallinn (completion time Q4 2011), an apartment building with 15 apartments at Kristiina 12, Tallinn (completion time Q4 2011), two apartment buildings (21 apartments in each) at Hane Street in Tallinn (completion time summer 2012) and two apartment buildings with 115 and 133 apartments at Skanstese street in Riga (completion time July 2011 and December 2012 respectively).

In 2011, the share of infrastructure facilities has grown, which has significantly increased the impact of seasonality on the group’s quarterly performance (EUR 26.2 million revenue in Q1 2011 compared to EUR 48.9 million in Q2). The impact of the cyclical nature of development projects on Q2 results and the results of the first 6 months was insignificant.

The consolidated revenue of the group’s largest entities:

Marketing and general administrative expenditures of the group decreased by 2.1% with the first six months of 2011. Work on cutting the marketing and general administrative expenditures continues and the management has set the goal to take the proportion of the respective costs under 5.5% of revenue by the end of 2011.

The group ended the first half of 2011 at a loss. The group’s EBIT loss for the first six months was EUR 7.5 million, and net loss was EUR 7.6 million – by comparison, for the first six months of 2010, the group reported an EBIT profit of EUR 3.9 million and net profit of EUR 3.3 million. The loss was caused by the rapid increase in construction prices in 2009/2010, which exceeded considerably the estimated input prices that were used to calculate the cost of the tenders submitted in 2009/2010. As of 30.06.2011, the group had drawn appropriations to cover the costs necessary for terminating non-profitable projects in the total amount of EUR 4.3 million. The management believes that the second half of 2011 will be better than the first, but the group will still not make a profit for the year in total.

In 2011 6 months, the change in short-term investments, and cash and cash equivalents of Merko Ehitus group was EUR -7.2 million and as of 30 June 2011, the cash and cash equivalents in the bank accounts and term deposits of the group were in the amount of EUR 4.5 million. The cash flows from operating activities totalled EUR -16.2 million, cash flows from investing activities totalled EUR -1.3 million and cash flows from financing activities totalled EUR +9.5 million. The cash flows from operating activities in the reporting period were mostly affected by the change in trade and other receivables related to operating activities of EUR -18.6 million, change in trade and other payables related to operating activities of EUR +13.0 million and operating loss EUR -7.2 million. Of the cash flows from investing activities, purchase of investment property totalled EUR -5.1 million, the balance of issued and repaid loans totalled EUR +3.0 million and investments in property, plant and equipment totalled EUR -0.7 million. Of the cash flows from financing activities the balance of gained and repaid loans totalled EUR +10.0 million and EUR -0.6 million was spent on finance lease principal payments.

The ratios and methodology for calculating the financial ratios describing the group’s main operations

Net profit margin: Net profit* / Revenue
Profit before taxes margin: Profit before taxes / Revenue
Operating profit margin: Operating profit / Revenue
Gross profit margin: Gross profit / Revenue
EBITDA margin: (Operating profit + Depreciation and impairment charge) / Revenue
Return on equity: Net profit x 2* / Avg equity during the period*
Return on assets: Net profit x 2* / Avg assets during the period
Equity ratio: Owners equity* / Total assets
Current ratio: Current assets / Current liabilities
Quick ratio: (Current assets – Inventories) / Current liabilities
General expense ratio: General expenses / Revenue
Gross remuneration ratio: Gross remuneration / Revenue
Debt to assets: Interest-bearing liabilities / Total assets
Accounts receivable turnover: Trade receivables / Revenue x 365/2
Accounts payable turnover: Payables to supplies / Cost of goods sold x 365/2
Revenue per employee: Revenue / Average number of full-time employees

* attributable to equity owners of the parent


Employees and remuneration

Due to the growth of the contract portfolio and the increase in the share of facilities in the structure of contracts, the number of group’s employees increased by 170 (+20,1%) employees and as of 30.06.2011, the group had 1017 employees. The gross remuneration paid to employees in 2011 6 months amounted to EUR 8.06 million an increase of 4.0% compared to previous year. The group’s labour costs have increased due to the employment of new personnel. Salaries accounted for 83.9% of the gross remuneration, and performance-related pay accounted for 16.1%.

Members of the Supervisory and Management Board of AS Merko Ehitus

Supervisory Board

The general meeting of shareholders elects the Company’s Supervisory Board. The Supervisory Board plans the Company’s activities and arranges its management as well as performs supervision over the Management Board. The general meeting of shareholders, held on 28 June 2011, elected an additional member (Mr Toomas Annus) to the current Supervisory Board of AS Merko Ehitus. Thus, the Supervisory Board of AS Merko Ehitus now has 5 members.

Toomas Annus - Born at 5 October 1960. Finished Tallinn Technical School of Building and Mechanics and graduated from Tallinn University of Technology, majoring in industrial and civil engineering. Since 1987 the chairman of the Management Board of EKE MRK, the predecessor of Merko Ehitus, since 1991 the chairman of the Management Board of AS Merko Ehitus. In the years 1997-2008 and again from June 2011 the chairman of the Supervisory Board of AS Merko Ehitus.

Tõnu Toomik – Born at 8 March 1961. Finished Raatuse Gymnasium in Tartu (former Tartu Secondary School no. 3) and graduated from Tallinn University of Technology, majoring in industrial and civil engineering. From 1993, started to work as a project manager at AS Merko Ehitus. Between 1997-2008, was a member of the Management Board of AS Merko Ehitus, being responsible for the management and development of the Company. From August 2008, is the member of the Supervisory Board of AS Merko Ehitus.

Teet Roopalu – Born at 30 August 1949. Finished Tallinn Secondary School no. 10 (current Nõmme Gymnasium) and graduated from the Faculty of Economics of Tallinn University of Technology, majoring in construction economics and organisation. Has worked at construction companies, including as a director of finance, managed the economic activities in EKE (Estonian Collective Farm Construction) system as a chief economist, as a bank director and has also been involved in design work. Since November 2002, works at AS Merko Ehitus and is responsible for the Company’s financial and legal areas. Is a member of the Supervisory Board of AS Riverito and those of several subsidiaries and associates of AS Merko Ehitus.

Indrek Neivelt – Born at 17 March 1967. Finished a mathematics and physics - biased class at Tallinna Secondary School no. 1 (current Gustav Adolf Gymnasium), graduated from Tallinn University of technology, majoring in civil engineering economics and management, and received his MBA in banking and finance from Stockholm University. Between 1991-2005, worked in various positions at Hansapank, over the last six years as the general director of the group and chairman of the Management Board. From 2005, is a Chairman of the Supervisory Board of Bank Saint Petersburg and is a member of supervisory boards of several entities. From October 2008, is member of the Supervisory Board of AS Merko Ehitus.

Olari Taal – Born at 7 August 1953. In 1971, finished Varstu Secondary School and in 1976, graduated as a civil engineer from Tallinn University of Technology. Has managed Tartu Elamuehituskombinaat (Tartu Housing Plant; Tartu Maja) and Eesti Hoiupank (Estonian Savings Bank). Has served the Republic of Estonia as the Minister of Construction, Minister of Economic Affairs, Minister of Internal Affairs and as a member of the 10^th Riigikogu (Parliament of Estonia). From October 2008, Olari Taal is a member of the Supervisory Board of AS Merko Ehitus.

Management Board

The Management Board is the Company’s governing body, which represents and manages the Company. The Management Board shall adhere to the lawful regulations of the Supervisory Board. The Management Board is under the obligation to act in most economically purposeful manner. As of 21.12.2010, the Management Board of AS Merko Ehitus has 6 members.

Tiit Roben – Born at 5 January 1966. Finished Mustamäe Gymnasium (former name: Tallinn Secondary School no. 44) in Tallinn and graduated from Tallinn University of Technology, majoring in industrial and civil engineering. Worked as a project manager at AS Merko Ehitus between 1998-2002. Between 2002-2008, worked at AS Riverito’s entity E.L.L.Kinnisvara AS, from 2005, is a member of the Company’s Management Board. From August 2008, is the Chairman of the Management Board of AS Merko Ehitus, being responsible for the management and development of the Company.

Jaan Mäe – Born at 26 September 1964. Finished Viljandi Secondary School no. 5. and graduated from Tallinn University of Technology, majoring in industrial and civil engineering. From December 1997, works at AS Merko Ehitus, has been project manager, division manager and member of the Management Board. Between 2006-2010, was a member of the Supervisory Board of AS Merko Ehitus and several group entities. From June 2010, is a member of the Management Board of AS Merko Ehitus, being responsible for attainment of goals in the area of development and is the Chairman of the Supervisory Board of Latvian and Lithuanian subsidiaries.

Alar Lagus – Born at 15 February 1969. Finished Rapla Secondary School and graduated from the Faculty of Chemistry of Tallinn University of Technology, majoring in organisation and technology of public catering. After graduation, worked in various positions at Hansapank. From 2004, works as a manager in the finance area and is responsible for the Company’s financial and managerial accounting and investor relations.

Veljo Viitmann – Born at 13 March 1962. Finished Türi Secondary School and graduated from Tallinn University of Technology, majoring in road engineering and bridges. From 1994, works at AS Merko Ehitus and is responsible for preparation of tenders for new projects.

Andres Agukas – Born at 15 July 1965. Finished Pärnu-Jaagupi Secondary School and graduated from Tallinn University of Technology, majoring in road engineering. At 2 February 1998, started to work at AS Merko Ehitus as the first employee in the area of civil engineering. From October 2005, as a member of the Management Board is responsible for the whole area of the construction service.

Viktor Mõisja – Born at 6 January 1951. Graduated as a civil engineer from Tallinn University of Technology. Viktor Mõisja has worked at AS Merko Ehitus since the foundation of the Company and most of the time as a manager of the department of concrete works. From 21 December 2010, is a member of the Company’s Management Board and his area of responsibility are quality management and supervision.

Construction market

Improvement of the overall economic climate has given the Baltic construction market a positive boost. In Lithuania and Estonia, construction volumes with own forces have increased in the last year: in Lithuania, along with a +6.1% GDP growth*, there has been a 21.8% growth in construction volumes**, compared to Q2 2010 (+17.7% respectively in Q1 2011); and in Estonia the construction market** grew 31.4% in Q1 2011 compared to the same period last year (construction market results for Q2 2011 will be published on 29 August 2011). The situation is most difficult in Latvia where, despite a +5.3% GDP* growth, construction volumes** are still down from last year by
-2.7% (-23.0% respectively in Q1 2011). However, it is hoped that the Latvian construction market bottomed out in 2010, and that construction volumes will increase by the end of 2011.
* in constant prices
** in current prices

High global demand has brought about the rise in the construction sector input prices. There has been an especially marked increase in the prices of materials containing petroleum products and metals. High demand in the construction sectors of Central Europe and Scandinavia offers a considerable alternative for the local labour to sell their labour force to foreign countries; this keeps the labour force prices high. More expensive inputs and orientation of several sub-contracting companies towards external markets has resulted in remarkable increase in construction service prices. Compared towards the bottom of the construction market in 2009, the construction prices as of today have increased by 30-40%. High volatility of prices makes budgeting of new projects and execution of projects according to planned expenditures complicated and brings about an additional risk upon executing contracts with fixed prices.

The rapid rise in input prices, the additional requirements set by clients and the postponement of works have all caused many contractors to have difficulties with the performance of the contracts. Contracting entities cancel tender invitations more and more often since the offers made do not comply with the budgets drawn in 2009/2010 and financial means for executing the project are insufficient.

Confidence of private contractors towards the future is still low, so there is no interest in constructing new buildings/facilities. Estonia’s transition to Euro has not remarkably enlivened the activity of external investments in the area nor influenced the construction market positively as hoped. Still most of the new contracts originate from the public sector and are funded with the help of EU Structural Funds.

For the construction companies, the year of 2011 shall be the most challenging since. Guarantees and payment terms dictated by the contracting entities turn constantly more and more unfavourable for the construction companies, load over the circulating capital of companies increases and cash-flow management as well as liquidity becomes more and more determining.

Share and shareholders

The shares of Merko Ehitus are listed in the main list of NASDAQ OMX Tallinn Stock Exchange. In 2011 6 months 1990 transactions with the shares of Merko Ehitus were performed in the course of which 0.5 million shares were traded and the total monetary value of transactions was EUR 4.23 million. The lowest share price was EUR 7.05 and the highest price was EUR 10.65 per share. The closing share price as of 30.06.2011 was EUR 7.85. AS Merko Ehitus market value as of 30.06.2011 was EUR 139 million.

The main shareholders of AS Merko Ehitus as of 30.06.2011

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited, in thousand euros

Alar Lagus
Member of Management Board
+372 6 805 109
alar.lagus@merko.ee