MANAGEMENT REPORT General information AS Merko Ehitus operates in Estonia, Latvia and Lithuania as a construction group providing integrated construction solutions. Largest companies of the Group are SIA Merks (100%), UAB Merko Statyba (100%), Tallinna Teede AS (100%), AS Gustaf (75%), OÜ Gustaf Tallinn (80%), AS Merko Tartu (66%), OÜ Woody (100%) and AS Tartu Maja Betoontooted (25%). At 3 April 2009, a suspicion was elaborated which was earlier submitted against AS Merko Ehitus in relation to the giving of a bribe to Ivo Parbus. While the suspicion submitted at 17 December 2008 stated that the bribe was given for the purpose of accelerating the proceedings with the plans of seven properties, then according to the elaboration of 3 April, the number of properties decreased to three. Concerning the plans for the remaining four properties, a suspicion on the same bribe object was submitted against OÜ Woody, OÜ Metsailu and OÜ Constancia that are subsidiaries of AS Merko hitus. In addition to Estravel's gift coupon of EEK 25 thousand, the suspected bribe of AS Merko Ehitus also includes book "Eesti Talurahva Arhitektuur" costing EEK 410. The suspicion submitted against the subsidiaries mentions Estravel's gift coupon of EEK 25 thousand, a book costing EEK 410 and Estravel's gift coupon of EEK 15 thousand as the bribe. The suspects consider the suspicions to be unfounded (http://www.nasdaqomxbaltic.com/market/?pg=news&news_id=232461). At its 16 April 2009 session, the Government of the Republic of Estonia approved the tender submitted by Tallinna Teede AS (100% subsidiary of AS Merko Ehitus) as the winning tender in the privatisation auction of the 100% holding in the state-owned company AS Vooremaa Teed. The acquisition of AS Vooremaa Teed will significantly improve the group's presence in the road construction and maintenance sector and will create new opportunities for the further development of the field. Operating results Group's revenue for the 2009 3 months was EEK 609.2 million, which constitutes an annual decrease of 45.6%. 73.5% of the sales originated from Estonia, 23.5% from Latvia and 3.0% from Lithuania. As compared to with the 2008 3 months, company's sales decreased in Lithuania by 91.1%, in Latvia by 52.1% and in Estonia by 27.5%. As at 31 March 2009, the group's backlog of construction contracts in progress amounted to EEK 2886 million. Companies of the Group 3M 2009 consolidated revenue (sales outside the Group) were (in thousand kroons and euros): 3M 2009 3M 2008 EEK EUR EEK EUR Estonian companies AS Merko Ehitus (parent company) 358 256 22 897 458 331 29 293 AS Gustaf (75% partnership) 12 732 814 44 746 2 860 OÜ Gustaf Tallinn (80% partnership) 17 048 1 090 40 188 2 568 AS Merko Tartu (66% partnership) 36 657 2 343 39 940 2 553 Tallinna Teede AS (100% partnership) 19 397 1 240 33 244 2 125 OÜ Woody (100% partnership) 4 096 262 16 805 1 074 Latvian company SIA Merks (100% partnership) 143 192 9 152 287 354 18 365 Lithuanian company UAB Merko Statyba (100% partnership) 17 070 1 091 195 203 12 476 In one year, the Group's cost of goods sold decreased by 40.9% and marketing and general administrative expenses by 23.1%. The economizing measures taken to reduce costs helped to decrease marketing and administrative expenses, with the EEK 4.7 million decrease in labour costs, EEK 2.6 million decrease in consultation and legal aid and EEK 1.4 million decrease in advertising and sponsoring being the most significant factors. Despite the vigorous measures, the group's cost-cutting rate failed to keep up with the fall in revenue - thus, the cost of goods sold in the period increased to 85.8% and marketing and administrative costs to 7.2%. The Group's profit before taxes for 3 months 2009 amounted to EEK 36.9 million, having decreased by EEK 139.2 million compared to 2008 3 months and net profit amounted to EEK 32.7 million, having decreased by EEK 122.2 million or 78.9% correspondingly. The slump in profit was influenced both by the decreased profitability of the construction and development fields and the general fall in construction volumes. The seasonality of the construction business and the cyclic nature of development activities did not have a significant influence on the results of the quarter. In Q1 2009, the Group sold 70 apartments in total cost of EEK 87.4 million (without VAT). As at 31.03.2009 Group held in inventories unsold 344 completed apartments in total cost EEK 422.1 million and 444 apartments in the construction stage, of which construction progress was frozen for 433 apartments until a recovery in demand. Group's revenue from development activities for Q1 2009 amounted to EEK 100.4 million, having decreased by EEK 314.9 million compared to Q1 2008. In 3 months 2009 Group's total cash flows amounted to EEK -261.6 million, of which the cash flows from operating activities totalled EEK +4.5 million, from investment activities EEK -199.5 million and from financing activities EEK -66.6 million. The cash flows from operating activities of the reporting period were mostly affected by change in liabilities and prepayments related to operating activities EEK -170,4 million, change in receivables and prepayments related to operating activities EEK +107.3 million, change in inventories EEK +54.7 million and operating profit EEK +41,2 million. From investment activities cash flows EEK -170.9 million constituted from pecuniary means applied to deposits, EEK -32.9 million from balance of granted/received loans and EEK +6.4 million from received interests. As at 31 March 2009, the Group has EEK 688.1 million of funds on the Group's bank accounts and deposits. The ratios and calculation methods characterizing the operating activities of the Group 2009 3 months 2008 3 months Net profit margin 5,4 % 13,8 % EBT margin 6,1 % 15,7% Operating profit margin 6,8 % 15,9 % Return on equity per annum 6,3 % 29,6 % Return on assets per annum 3,5 % 15,8 % Current ratio 3,1 2,7 Equity ratio 57,7 % 55,5 % General expense ratio 7,2 % 5,1 % Gross remuneration ratio 12,0 % 9,3 % Net profit margin: Net profit* / Revenue EBT margin: Profit before tax / Revenue Operating profit margin: Operating profit / Revenue Return on equity: Net profit x 4* / Average equity during the period* Return on assets: Net profit x 4* / Average assets during the period Current ratio: Current assets / Current liabilities Equity ratio: Owners equity* / Total assets General expense ratio: General expenses / Revenue Gross remuneration ratio: Gross remuneration / Revenue *attributable to equity owners of the parent Employees and remuneration In 31.03.2009, the number of employees in the Group's service was 845, including 822 full-time employees. The Group reduced the number of its personnel by 24.4% or 252 employees in a year. The gross remuneration paid to employees in 3 months 2009 amounted to EEK 72.8 million a decrease of 30,1% compared to previous year. The smaller amount of performance pay, due to the fall in the group's profitability, and the reduced staff levels also contributed to the fall in the group's labour costs. STATEMENT OF COMPREHENSIVE INCOME 3M 2009 consolidated, unaudited, in thousand EEK and EUR EEK EUR 3M 2009 3M 2008 3M 2009 3M 2008 Revenue 609 191 1 119 572 38 934 71 554 Cost of goods sold (522 383) (884 377) (33 386) (56 522) GROSS PROFIT 86 808 235 195 5 548 15 032 Marketing expenses (7 050) (7 888) (451) (504) Administrative and general expenses(37 009) (49 373) (2 365) (3 156) Other operating income 1 910 1 704 122 109 Other operating expenses (3 430) (1 738) (219) (111) OPERATING PROFIT 41 229 177 900 2 635 11 370 Financial income and expenses from stocks of associate comp. and joint ventures (3 323) 2 280 (213) 145 Interest expense (7 839) (5 584) (501) (357) Foreign exchange gain 170 (1 692) 11 (108) Other financial income 7 779 3 240 497 207 Other financial expenses (1 112) (6) (70) (0) Total financial income and expenses (4 325) (1 762) (276) (113) PROFIT BEFORE TAX 36 904 176 138 2 359 11 257 Corporate income tax expense (4 653) (20 138) (297) (1 287) NET PROFIT FOR FINANCIAL YEAR 32 251 156 000 2 062 9 970 incl. equity holders of the parent 32 726 154 881 2 092 9 898 minority interest (475) 1 119 (30) 72 OTHER COMPREHENSIVE INCOME Exchange differences on translating foreign subsidiaries (1 006) (891) (64) (57) COMPREHENSIVE INCOME 31 245 155 109 1 998 9 913 incl. equity holders of the parent 31 720 153 990 2 028 9 841 minority interest (475) 1 119 (30) 72 Earnings per share for profit attributable to the equity holders of the parent (basic and diluted, in EEK and EUR) 1,85 8,75 0,12 0,56 STATEMENT OF FINANCIAL POSITION AS OF 31.03.2009 consolidated, unaudited, in thousand EEK and EUR EEK EUR 31.03.2009 31.12.2008 31.03.2009 31.12.2008 ASSETS Current assets Cash and cash equivalents 254 371 515 191 16 257 32 927 Shortterm financial investments 433 707 262 759 27 719 16 793 Trade and other receivables 727 795 784 540 46 515 50 141 Inventories 1 763 610 1 817 486 112 714 116 158 Assets held for sale - 173 - 11 Total current assets 3 179 483 3 380 149 203 205 216 030 Non-current assets Long-term financial investments 255 857 260 036 16 353 16 619 Investment property 12 581 12 002 804 767 Property, plant and equipment 193 992 197 094 12 398 12 597 Intangible assets 11 820 11 807 755 755 Total non-current assets 474 250 480 939 30 310 30 738 TOTAL ASSETS 3 653 733 3 861 088 233 515 246 768 LIABILITIES AND OWNERS' EQUITY Current liabilities Borrowings 184 458 206 657 11 789 13 208 Trade and other payables 800 700 972 330 51 172 62 144 Short-term provisions 33 058 32 317 2 113 2 065 Total current liabilities 1 018 216 1 211 304 65 074 77 417 Non-current liabilities Long-term borrowings 486 356 531 396 31 084 33 962 Long-term payables to suppliers 11 042 8 824 706 564 Long-term suppliers advance payments 10 - 1 - Total non-current liabilities 497 408 540 220 31 791 34 526 Total liabilities 1 515 624 1 751 524 96 865 111 943 Equity Minority interest 31 458 34 633 2 010 2 213 Equity attributable to equity holders of the parent company Share capital 177 000 177 000 11 312 11 312 Statutory reserve capital 17 700 17 700 1 131 1 131 Currency translation differences(13 556) (12 550) (866) (802) Retained earnings 1 925 507 1 892 781 123 063 120 971 Total equity attributable to equity holders of the parent 2 106 651 2 074 931 134 640 132 612 Total equity 2 138 109 2 109 564 136 650 134 825 TOTAL LIABILITIES AND EQUITY 3 653 733 3 861 088 233 515 246 768 Alar Lagus Member of Board +372 6 805 109 alar.lagus@merko.ee