European Electrotechnics' earnings up 2% in 2019 against 2018 levels

One of the leaders of the Russian engineering market, PJSC "European Electrical Engineering" increased its profit by 2% to 298.9 million rubles in 2019 compared to the 2018 results. Profit margin increased to 9.1%, from the level of 8.9% a year earlier. The relevant data was published on the official website of the company in accordance with IFRS (International Financial Reporting Standards).

"The volume of consolidated revenue decreased insignificantly in the reporting period to 3,268.8 million rubles, which is 0.5% lower than the figure for 2018. Profit increased by 2.0% to RUB 298.9 million. EBITDA* reached RUB 431.3 million (+12.8% YoY), its profitability increased to 13.2% (+1.6 p.p.)," the company said in its financial statements.

According to Sergei Dubenk, Chairman of the Board of Directors of European Electrotechnics, the positive financial results for 2019 reflect the strategic decision made earlier to focus on high-margin activities that contribute to the company's profit growth.

"At the levels of about 200 million rubles for the second year, we also hold the indicator of economic value added (EVA). This indicator reflects more adequately - as compared to the accounting profit - the financial efficiency of the business. EVA demonstrates the company's real ability to generate profit per total capital invested in the business," Dubenok added.

The 2019 results show progressive growth in the company's two key businesses, Engineering Systems and Technology Systems. Diversification of the company's revenues is increasing. Thus, the contribution of "Engineering Systems" (activities of engineering centers in the electrical market) to the consolidated revenue of the company in 2019 was 77%, the share of the "Technological Systems" direction (equipment for oil and gas, petrochemical and gas chemical industries and energy) increased by 16 pp. and reached the level of 23%. At the end of 2019, the profitability of Technological Systems exceeds the performance of the Engineering Systems business area, which is in line with the initial plans of the company's management.

"As a significant event for our business since the reporting date, I must note the impact of the coronavirus pandemic. Despite the global nature of this event, we do not see a winding down of the large and medium-sized investment projects in which we are involved. However, we do see the possibility of an increase in the timing of payments on ongoing projects, as well as an increase in the overall timing of their implementation. This puts higher demands on our risk management system and requires regular monitoring of our customers and partners," Dubenok concluded.

Sectors of supply

Over the past three years, customers from the oil and gas industry have accounted for the largest share of European Electrotechnics' contracts - 41% in 2019 (37% in 2017). The chemical and food industry was in second place, with a 29 % share, almost twice as high as in 2017. Civil construction was the third block of the company's contract share last year and gained 12 %. It is noteworthy that this sector entered the company's ranking for the first time since 2016. 11% of European Electrical Engineering's total share of all contracts is in precision engineering (18% in 2017) and 7% in other sectors (8% in 2017).

Key drivers of changes in consolidated revenue

According to the management of European Electrotechnics, one of the factors that had a restraining effect on revenue in 2019 was the effect of deferred revenue. In May last year, a new project for the lease of innovative oil refining and energy plants was launched, in which relevant investments and costs were already in place, and no meaningful revenues have yet been generated in the reporting period.

At the same time, almost two-thirds (65.7%) of the company's consolidated revenue in 2019 was the share of contracts with TOP-10 customers, 9% - revenues from the supply of engineering and technological products for export to Uzbekistan, Ecuador, Azerbaijan.

Cost of sales and gross profit

The cost of sales of European Electrotechnics by the end of 2019 amounted to 2,330.4 million rubles. Reduction of the cost of sales by 6.4% by 2018 was achieved due to the implementation of scientific developments, which allow to produce more technologically advanced equipment. Gross profit increased to RUB 938.4 million (+17.8% compared to 2018). The Company's gross profit margin increased to 28.7% (+4.5 p.p.).

Free cash flow

European Electrotechnics' free cash flow was negative in 2019. Among the main reasons for the negative free cash flow was an increase in accounts receivable to 1,148.5 million rubles. (+75.8% YoY). At the same time it is not problematic (overdue). Also the company continued implementation of its investment program.

Note:

* EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization - analytical indicator equal to the amount of profit before interest, taxes, depreciation and amortization accrued.