This announcement includes Nordecon AS’s consolidated financial statements for
the second quarter and six months of 2017 (unaudited), overview of the key
events influencing the period’s financial result, outlook for the market and
description of the main risks.
Interim report is attached to the announcement and is also published on NASDAQ
Tallinn and Nordecon’s web page
(http://www.nordecon.com/for-investor/financial-reports/interim-reports).
Period’s investor presentation are attached to the announcement and are also
published on Nordecon’s web page
(http://www.nordecon.com/for-investor/investor-presentations).
Condensed consolidated interim statement of financial position
EUR ‘000 30 June 2017 31 December 2016
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ASSETS
Current assets
Cash and cash equivalents 8,101 9,786
Trade and other receivables 37,946 21,055
Prepayments 1,837 1,644
Inventories 29,300 22,992
Total current assets 77,184 55,477
Non-current assets
Investments in equity-accounted investees 1,686 1,640
Other investments 26 26
Trade and other receivables 11,041 10,816
Investment property 4,929 4,929
Property plant and equipment 12,221 11,111
Intangible assets 14,644 14,623
Total non-current assets 44,547 43,145
TOTAL ASSETS 121,731 98,622
LIABILITIES
Current liabilities
Borrowings 19,329 6,297
Trade payables 43,151 29,811
Other payables 5,838 5,389
Deferred income 6,767 4,128
Provisions 589 753
Total current liabilities 75,674 46,378
Non-current liabilities
Borrowings 9,626 13,102
Trade payables 96 98
Other payables 119 117
Provisions 948 881
Total non-current liabilities 10,789 14,198
TOTAL LIABILITIES 86,463 60,576
EQUITY
Share capital 19,720 19,720
Own (treasury) shares -1,550 -1,550
Share premium 564 564
Statutory capital reserve 2,554 2,554
Translation reserve 1,675 1,549
Retained earnings 10,817 13,091
Total equity attributable to owners of the 33,780 35,928
parent
Non-controlling interests 1,488 2,118
TOTAL EQUITY 35,268 38,046
TOTAL LIABILITIES AND EQUITY 121,731 98,622
Condensed consolidated interim statement of comprehensive income
EUR ‘000 H1 2017 Q2 2017 H1 2016 Q2 2016 2016
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Revenue 103,501 61,897 73,829 46,098 183,329
Cost of sales -100,362 -59,382 -69,676 -43,098 -172,350
Gross profit 3,139 2,515 4,153 3,000 10,979
Marketing and distribution -334 -221 -218 -115 -413
expenses
Administrative expenses -3,078 -1,621 -2,782 -1,490 -6,106
Other operating income 54 12 97 56 362
Other operating expenses -107 -19 -460 -448 -614
Operating loss/profit -326 666 790 1,003 4,208
Finance income 204 101 235 111 463
Finance costs -428 -259 -466 -27 -1,088
Net finance costs/income -224 -158 -231 84 -625
Share of profit of 193 146 484 365 609
equity-accounted investees
Loss/profit before income tax -357 654 1,043 1,452 4,192
Income tax expense -540 -465 -245 -245 -259
Loss/profit for the period -897 189 798 1,207 3,933
Other comprehensive income
Items that may be reclassified
subsequently to profit or loss
Exchange differences on 126 75 112 -176 191
translating foreign operations
Total other comprehensive 126 75 112 -176 191
income/expense
TOTAL COMPREHENSIVE -771 264 910 1,031 4,124
EXPENSE/INCOME
Loss/profit attributable to:
- Owners of the parent -890 197 426 996 3,044
- Non-controlling interests -7 -8 372 211 889
Loss/profit for the period -897 189 798 1,207 3,933
Total comprehensive
expense/income attributable to:
- Owners of the parent -764 272 538 820 3,235
- Non-controlling interests -7 -8 372 211 889
Total comprehensive -771 264 910 1,031 4,124
expense/income for the period
Earnings per share attributable
to owners of the parent:
Basic earnings per share (EUR) -0.03 0.01 0.01 0.03 0.10
Diluted earnings per share (EUR) -0.03 0.01 0.01 0.03 0.10
Condensed consolidated interim statement of cash flows
EUR ‘000 H1 2017 H1 2016
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Cash flows from operating activities
Cash receipts from customers1 111,059 74,740
Cash paid to suppliers2 -102,900 -66,264
VAT paid -2,029 -2,480
Cash paid to and for employees -10,997 -9,831
Income tax paid -200 -170
Net cash used in operating activities -5,067 -4,005
Cash flows from investing activities
Paid on acquisition of property, plant and equipment -147 -103
Paid on acquisition of intangible assets -3 -18
Proceeds from sale of property, plant and 0 28
equipment
Disposal of a subsidiary 0 6
Loans provided -34 -35
Repayment of loans provided 20 31
Dividends received 147 153
Interest received 27 0
Net cash from investing activities 10 62
Cash flows from financing activities
Proceeds from loans received 7,399 5,703
Repayment of loans received -496 -470
Finance lease principal paid -1,149 -894
Interest paid -376 -321
Dividends paid -2,007 -1,068
Net cash from financing activities 3,371 2,950
Net cash flow -1,686 -993
Cash and cash equivalents at beginning of period 9,786 6,332
Effect of movements in foreign exchange rates 1 -3
Decrease in cash and cash equivalents -1,686 -993
Cash and cash equivalents at end of period 8,101 5,336
1 Line item Cash receipts from customers includes VAT paid by customers.
2 Line item Cash paid to suppliers includes VAT paid.
Financial review
Financial performance
Nordecon Group ended the first half of 2017 with a gross profit of 3,139
thousand euros (H1 2016: 4,153 thousand euros) and a gross margin of 3% (H1
2016: 5.6%). The gross margin weakened year on year, mostly due to growth in
the input prices for materials and labour. Our performance is increasingly
influenced by the insufficient availability of skilled labour and the resulting
shortage of subcontractors in the building construction segment where activity
(the number of buildings under construction) is currently high for the Estonian
market. This allows subcontractors to raise their prices, which puts pressure
on general contractors’ profit margins. We have drawn attention to the fact
that market changes are undermining profitability since the second half of 2016
already. We earned the period’s gross profit from building construction even
though the gross margin of our Buildings segment dropped to 4.2% (H1 2016:
9.2%). The segment’s margin decrease is partly attributable to the loss of the
Swedish subsidiary, which incurred some costs in the final stage of its first
building construction contract which could not be foreseen on entering the new
market. Although the performance of our Infrastructure segment improved, its
gross margin rising from -5.3% for the comparative period to 0.1% for the
reporting period, it cannot be considered satisfactory.
Administrative expenses for the first half of 2017 totalled 3,078 thousand
euros. Compared with a year earlier, administrative expenses grew somewhat (H1
2016: 2,782 thousand euros). Despite structural streamlining and sustained
investment in foreign markets, which inevitably increase administrative
expenses in the start-up phase, our cost-control measures continued to produce
good results and we were able to keep administrative expenses below the target
ceiling of 4% of revenue. The ratio of administrative expenses to revenue (12
months rolling) was 3.0% (H1 2016: 3.7%).
Operating loss for the first half of 2017 amounted to 326 thousand euros (H1
2016: operating profit of 790 thousand euros). EBITDA was positive at 664
thousand euros (H1 2016: positive at 1,714 thousand euros).
The Group’s exchange losses from adverse movements in the euro/Ukrainian
hryvnia exchange rate were similar to a year earlier. In the first half of
2017, the Ukrainian currency weakened against the euro by around 4.6%, which
meant that Group entities whose functional currency is the hryvnia had to
restate their euro-denominated liabilities. Exchange losses reported in finance
costs totalled 121 thousand euros (H1 2016: 115 thousand euros). The same
movements in the exchange rate increased the translation reserve in equity by
126 thousand euros (H1 2016: 112 thousand euros) and the net effect of exchange
differences on the Group’s net assets was a gain of 5 thousand euros (H1 2016:
a loss of 3 thousand euros).
The Group’s net loss amounted to 897 thousand euros (H1 2016: a net profit of
798 thousand euros), of which net loss attributable to owners of the parent,
Nordecon AS, was 890 thousand euros (H1 2016: net profit attributable to owners
of the parent amounted to 462 thousand euros).
Cash flows
In the first half of 2017, operating activities produced a net cash outflow of
5,067 thousand euros (H1 2016: a net outflow of 4,005 thousand euros). Although
cash receipts from customers exceeded cash paid to suppliers, operating cash
flow proved negative, mostly due to VAT paid and payments to and for employees.
Negative operating cash flow is typical of the first half-year and stems from
the cyclical nature of the construction business. Operating cash flow is also
strongly affected by the fact that neither public nor private sector customers
are required to make advance payments while the Group has to make prepayments
to subcontractors, materials suppliers, etc. In addition, cash inflow is
reduced by retentions which extend from 5 to 10% of the contract price and are
released by customers at the end of the construction period only.
Investing activities produced a net cash inflow of 10 thousand euros (H1 2016:
an inflow of 62 thousand euros). The largest items were payments made for
property, plant and equipment of 147 thousand euros (H1 2016: 103 thousand
euros) and dividends received of 147 thousand euros (H1 2016: 153 thousand
euros).
Financing activities generated a net cash inflow of 3,371 thousand euros (H1
2016: an inflow of 2,950 thousand euros). Our financing cash flow is strongly
influenced by loan and finance lease transactions. Proceeds from loans received
amounted to 7,399 thousand euros, consisting of the use of overdraft facilities
and development loans (H1 2016: 5,703 thousand euros). Loan repayments totalled
496 thousand euros (H1 2016: 470 thousand euros) consisting of scheduled
repayments of long-term investment and development loans.
Compared with a year earlier, there was slight growth in finance lease payments
which totalled 1,149 thousand euros (H1 2016: 894 thousand euros). The rise in
finance lease payments is attributable to large-scale investments in road
construction equipment (including the acquisition of a new asphalt concrete
plant) made in the second quarter of 2016. Dividends paid amounted to 2,007
thousand euros (H1 2016: 1,068 thousand euros).
At 30 June 2017, the Group’s cash and cash equivalents totalled 8,102 thousand
euros (30 June 2016: 5,336 thousand euros). Management’s commentary on
liquidity risks is presented in the chapter Description of the main risks.
Key financial figures and ratios
Figure/ratio for the period H1 2017 H1 2016 H1 2015 2016
--------------------------------------------------------------------------------
Revenue (EUR ‘000) 103,501 73,829 69,211 183,329
Revenue change 40% 7% 3% 26.0%
Net loss/profit (EUR ‘000) -897 798 243 3,933
Net loss/profit attributable to -890 426 397 3,044
owners of the parent (EUR ‘000)
Weighted average number of 30,756,728 30,756,728 30,756,728 30,756,728
shares
Earnings per share (EUR) -0.03 0.01 0.01 0.10
Administrative expenses to 3.0% 3.8% 3.2% 3.3%
revenue
Administrative expenses to 3.0% 3.7% 3.3% 3.3%
revenue (rolling)
EBITDA (EUR ‘000) 664 1,714 1,732 6,017
EBITDA margin 0.6% 2.3% 2.5% 3.3%
Gross margin 3.0% 5.6% 4.4% 6.0%
Operating margin -0.3% 1.1% 1.2% 2.3%
Operating margin excluding gain -0.3% 1.0% 0.8% 2.2%
on asset sales
Net margin -0.9% 1.1% 0.4% 2.1%
Return on invested capital -0.1% 2.3% 1.3% 8.5%
Return on equity -2.4% 2.2% 0.7% 10.6%
Equity ratio 29.0% 34.5% 33.8% 38.6%
Return on assets -0.8% 0.8% 0.2% 4.2%
Gearing 32.5% 33.2% 39.6% 16.7%
Current ratio 1.02 1.05 1.03 1.20
As at 30 June 30 June 30 June 31 Dec
2017 2016 2015 2015
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Order book (EUR ‘000) 130,601 131,363 70,837 131,335
--------------------------------------------------------------------------------
Revenue change = (revenue for the Operating margin excluding gain on asset
reporting period / revenue for the sales = ((operating profit or loss – gain
previous period) – 1 * 100 on sales of non-current assets – gain on
Earnings per share (EPS) = net sales of real estate) / revenue) * 100
profit or loss attributable to Net margin = (net profit or loss for the
owners of the parent / weighted period / revenue) * 100
average number of shares Return on invested capital = ((profit or
outstanding loss before tax + interest expense) / the
Administrative expenses to revenue period’s average (interest-bearing
= (administrative expenses / liabilities + equity)) * 100
revenue) * 100 Return on equity = (net profit or loss for
Administrative expenses to revenue the period / the period’s average total
(rolling) = (past four quarters’ equity) * 100
administrative expenses / past Equity ratio = (total equity / total
four quarters’ revenue) * 100 liabilities and equity) * 100
EBITDA = operating profit or loss + Return on assets = (net profit or loss for
depreciation and amortisation + the period / the period’s average total
impairment losses on goodwill assets) * 100
EBITDA margin = (EBITDA / revenue) Gearing = ((interest-bearing liabilities –
* 100 cash and cash equivalents) /
Gross margin = (gross profit or (interest-bearing liabilities + equity)) *
loss / revenue) * 100 100
Operating margin = (operating Current ratio = total current assets /
profit or loss / revenue) * 100 total current liabilities
--------------------------------------------------------------------------------
Performance by geographical market
In the first half of 2017, Nordecon earned around 7% of its revenue outside
Estonia, the figure remaining stable compared with the same period last year.
In terms of foreign markets, the strongest revenue contributor was Sweden where
we completed two apartment buildings and continued the design and construction
of a third, an 8-floor apartment building in Stockholm. The share of our
Ukrainian revenues decreased year on year because our business volumes in the
Ukrainian market decreased somewhat: in the first half-year we worked mainly on
one large building construction project. Our Finnish revenues resulted from
concrete works in the building construction segment.
H1 2017 H1 2016 H1 2015 2016
----------------------------------------
----------------------------------------
Estonia 93% 93% 96% 93%
Sweden 4% 4% 0% 4%
Finland 2% 1% 1% 1%
Ukraine 1% 2% 3% 4%
Geographical diversification of the revenue base is a consciously deployed
strategy by which we mitigate the risks resulting from excessive reliance on
one market. However, conditions in some of our selected foreign markets are
also volatile and have a strong impact on our current results. Increasing the
contribution of foreign markets is one of Nordecon’s strategic targets. Our
vision of the Group’s foreign operations is described in the chapter Outlooks
of the Group’s geographical markets.
Performance by business line
Segment revenues
We strive to maintain the revenues of our operating segments (Buildings and
Infrastructure) in balance as this helps disperse risks and provides better
opportunities for continuing construction operations in more challenging
circumstances when the operating volumes of a sub-segment fall sharply.
Nordecon’s revenue for the first half of 2017 amounted to 103,501 thousand
euros, a roughly 40% increase on the 73,829 thousand euros generated in the
first half of 2016. Although revenue increased in both the Buildings and the
Infrastructure segment, the main growth driver was the Buildings segment where
growth was underpinned by a rise in contracts secured from the private sector.
The downturn in infrastructure construction, which is affecting the whole
Estonian construction market (and the Group’s chosen strategy) has also left
its mark on our revenue structure. In the first half of 2017, our Buildings
segment and Infrastructure segment generated revenue of 84,582 thousand euros
and 17,860 thousand euros respectively. The corresponding figures for the first
half of 2016 were 58,317 thousand euros and 14,269 thousand euros (see note 8).
Our order book has a similar structure: at the end of the first half-year 72%
of contracts secured but not yet performed was attributable to the Buildings
segment (H1 2016: 71%).
Operating segments* H1 2017 H1 2016 H1 2015 2016
----------------------------------------------------
----------------------------------------------------
Buildings 81% 79% 68% 73%
Infrastructure 19% 21% 32% 27%
* In the Directors’ report, projects have been allocated to operating segments
based on their nature (i.e., building or infrastructure construction). In the
segment reporting presented in the financial statements, allocation is based on
the subsidiaries’ main field of activity (as required by IFRS 8 Operating
Segments). In the financial statements, the results of a subsidiary that is
primarily engaged in infrastructure construction are presented in the
Infrastructure segment. In the Directors’ report, the revenues of such a
subsidiary are presented based on their nature. The differences between the two
reports are not significant because in general Group entities specialise in
specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in
both building and infrastructure construction. The figures for the parent
company are allocated in both parts of the interim report based on the nature
of the work.
Sub-segment revenues
In the Buildings segment, the strongest revenue contributors were the apartment
buildings and the public buildings sub-segments where the Group earned most of
its revenue as a general contractor. In Estonia, a substantial share of our
apartment building projects is located in Tallinn. In the first half-year, the
largest projects included the Meerhof 2.0 apartment building complex at Pirita
tee 20a and apartment buildings at Kopli 4a, Kopli 6 and Virbi 10. The
contribution of foreign markets also sustained growth. In Ukraine, we continued
to build a residential quarter in the city of Brovary in the Kiev region. In
Sweden, we completed two apartment buildings and continued the design and
construction of a third, an 8-floor apartment building in Stockholm.
We continue to build our own housing development projects (reported in the
apartment buildings sub-segment) in Tartu and Tallinn. In the Tammelinn project
in Tartu, we completed phase 5, which consists of a four-floor building with 24
apartments, and continued work on phase 6 (www.tammelinn.ee). We also completed
the fifth and last terraced house in our Magasini 29 development project in
Tallinn (www.magasini.ee). In the Hane street project in Tallinn, we continued
the construction of two apartment buildings with a total of 30 apartments and
the preliminary sale of the apartments. The period’s revenue from development
operations amounted to 1,102 thousand euros (H1 2016: 1,882 thousand euros). In
view of the projects’ completion schedule we expect a rise in development
revenue in the second half-year, although this remains dependent on the overall
market situation. In carrying out our development activities, we monitor
closely potential risks in the housing development market which stem from rapid
growth in the supply of new housing as well as growth in input prices.
The key factor which has influenced the results of the public buildings
sub-segment is growth in the state’s investment in national defence. During the
period, we completed and delivered to the customers the Lintsi warehouse
complex, a depot at the Tapa military base, and Ugala Theatre in Viljandi. We
continued the construction of infrastructure for armoured vehicles, a canteen
and a barracks at the Tapa military base.
The revenues of the commercial buildings sub-segment grew considerably compared
with the first half of 2016. We completed the renovation of the machinery hall
of the historical Luther furniture factory into a modern office building and
continued to build the office and commercial complex Viimsi Äritare and an
office building at Lõõtsa 12 in Ülemiste City. Based on our order book, we
expect the commercial buildings sub-segment to post year-on-year revenue
growth.
The revenues of the industrial and warehouse facilities sub-segment decreased
year on year. The period’s largest projects were the construction of Harmet’s
production and warehouse facilities at Kumna, near Tallinn, a co-generation
plant at Kehra, and the Metsä Wood plywood factory in Pärnu, and the
reconstruction of phase 3 (fourth floor) of the pig fattening unit of Rakvere
Farmid AS (EKSEKO).
Revenue breakdown in the Buildings segment H1 2017 H1 2016 H1 2015 2016
---------------------------------------------------------------------------
Apartment buildings 31% 31% 18% 34%
Public buildings 26% 35% 13% 30%
Commercial buildings 25% 15% 59% 16%
Industrial and warehouse facilities 18% 19% 10% 20%
For a long time, the main revenue source in the Infrastructure segment has been
road construction and in the first half of 2017 its revenue contribution grew
even further. We expect road construction to remain the most important
sub-segment in the Infrastructure segment also in 2017. In contrast to two
previous years, when most of the sub-segment’s revenues resulted from small or
medium-sized reconstruction or rehabilitation projects, this year we have three
large contracts: the construction of a 2+1 road (a road with passing lanes) on
the Ääsmäe-Kohatu section of the Tallinn-Pärnu-Ikla road which was secured at
the end of 2016, the reconstruction of the Haabersti intersection in Tallinn
and the construction of a 2+1 road on the Valmaotsa–Kärevere section of the
Tallinn–Tartu–Võru–Luhamaa road which were secured in 2017. We continued to
render road maintenance services in Järva and Hiiu counties and the Keila and
Kose maintenance areas in Harju county. A substantial share of the period’s
revenues also resulted from forest road improvement services provided to the
State Forest Management Centre.
The contracts secured by the environmental engineering and other engineering
(utility network construction) sub-segments are small and growth of the
sub-segments’ revenues is unlikely. At the date of release of this report,
there is no sign of any major hydraulic engineering projects to be announced
and demand for other complex engineering work also tends to be irregular.
Revenue breakdown in the Infrastructure segment H1 2017 H1 2016 H1 2015 2016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance 84% 82% 82% 86%
Other engineering 12% 14% 10% 9%
Environmental engineering 4% 4% 7% 5%
Specialist engineering (including hydraulic 0% 0% 1% 0%
engineering)
Order book
At 30 June 2017, the Group’s order book (backlog of contracts signed but not
yet performed) stood at 130,601 thousand euros, roughly at the same level as a
year ago. In the second quarter, we secured new contracts of 50,010 thousand
euros.
As at 30 June 2017 30 June 2016 30 June 2015 31 Dec 2016
----------------------------------------------------------------------------
Order book (EUR ‘000) 130,601 131,363 70,837 131,335
At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 72% and 28% of the Group’s order book
respectively, the proportions remaining stable compared with a year earlier (30
June 2016: 71% and 29% respectively).
Compared with the first half of 2016, the order book of the Buildings segment
has grown by around 2%. The order books of the commercial buildings and the
industrial and warehouse facilities sub-segments have increased substantially,
the first one primarily through contracts for the construction of multi-storey
car parks at Sepise 8 and Lõõtsa 11 in Ülemiste City in Tallinn and the Martens
house in Pärnu, and the design and construction of a 14-floor commercial and
residential building at Mustamäe tee 3 in the WoHo quarter in Tallinn. In the
first quarter of 2017, we secured a contract for building a plywood factory for
Metsä Wood in Pärnu, which increased the order book of the industrial and
warehouse facilities sub-segment. Orders placed by the agricultural sector have
increased as well. The order books of the public buildings and the apartment
buildings sub-segments have decreased but the order book of the apartment
buildings sub-segment is still the second-largest after that of the commercial
buildings sub-segment. The order book of the apartment buildings sub-segment is
influenced by large contracts secured in 2016, including those for the
construction of the Meerhof 2.0 apartment building complex at Pirita tee 20a,
and apartment buildings at Virbi 10 and Sõjakooli 12 in Tallinn, and five
apartment buildings in the city of Brovary in the Kiev region in Ukraine. At
the beginning of 2017, we also secured a contract for building an eight-floor
apartment building (Väsby Terrass) in Sweden. The largest contracts in the
order book of the public buildings sub-segment are those for the construction
of infrastructure for armoured vehicles, a canteen and a barracks for the Tapa
military base.
Compared with a year ago, the order book of the Infrastructure segment has
decreased by around 6%. 83% of the segment’s order book is made up of work
awarded to the road construction and maintenance sub-segment whose order book
has also decreased slightly compared with a year earlier. The largest projects
in the road construction order book are the contracts signed in 2017 for the
reconstruction of the Haabersti intersection in Tallinn and the construction of
a 2+1 road (a road with passing lanes) on the Valmaotsa–Kärevere section of the
Tallinn–Tartu–Võru–Luhamaa road. We continue to provide road maintenance
services in four road maintenance areas: Keila, Järva, Hiiu, and Kose. The
order book of the environmental engineering sub-segment has been supplemented
with a contract for the construction of a water treatment plant in Kiev,
Ukraine. According to our projections, in 2017 the volume of public investment
will not increase substantially compared with 2016. Nevertheless, based on the
order book as at the reporting date as well as the contracts signed after the
reporting period we hope that in 2017 revenue generated by the Infrastructure
segment will grow slightly compared to 2016 (for further information, see the
Business risks section of the chapter Description of the main risks).
Based on the size of the Group’s order book and known developments in our
selected markets, we forecast year-on-year revenue growth for 2017. In an
environment of exceptionally stiff competition, we try to avoid taking
unjustified risks whose realisation in the contract performance phase would
have an adverse impact on the Group’s results. Despite this, where suitable
opportunities arise, we strive to combat market-triggered margin compression
with certain portfolio growth. Our preferred policy is to keep fixed costs
under control and monitor closely market developments.
Between the reporting date (30 June 2017) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 31,466 thousand euros.
People
Employees and personnel expenses
In the first half of 2017, the Group (the parent and the subsidiaries)
employed, on average, 737 people including 423 engineers and technical
personnel (ETP). The number of employees, particularly the ETP staff, has
increased year on year by around 10% in connection with growth in the Group’s
business operations.
Average number of the Group’s employees (at the parent and the subsidiaries)
H1 2017 H1 2016 H1 2015 2016
----------------------------------------------
----------------------------------------------
ETP 423 365 351 381
Workers 314 305 342 303
Total average 737 670 693 684
Our personnel expenses for the first half of 2017 including all taxes totalled
9,945 thousand euros (H1 2016: 9,631 thousand euros), a roughly 3% increase
year on year. The growth in personnel expenses is mainly attributable to a
larger headcount.
The service fees of the members of the council of Nordecon AS for the first
half of 2017 amounted to 73 thousand euros and associated social security
charges totalled 24 thousand euros (H1 2016: 69 thousand euros and 23 thousand
euros respectively).
The service fees of the members of the board of Nordecon AS amounted to 199
thousand euros and associated social security charges totalled 66 thousand
euros (H1 2016: 178 thousand euros and 59 thousand euros respectively).
Labour productivity and labour cost efficiency
We measure the efficiency of our operating activities using the following
productivity and efficiency indicators, which are based on the number of
employees and personnel expenses incurred:
H1 2017 H1 2016 H1 2015 2016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling), (EUR 296.5 222.9 225.8 268.0
‘000)
Change against the comparative period 33.0% -1.3% 0.7% 27%
Nominal labour cost efficiency (rolling), 10.2 7.8 8.4 9.0
(EUR)
Change against the comparative period 30.3% -6.8% 5.8% 12.8%
Nominal labour productivity (rolling) = (past four quarters’ revenue) / (past
four quarters’ average number of employees)
Nominal labour cost efficiency (rolling) = (past four quarters’ revenue) / (past
four quarters’ personnel expenses)
--------------------------------------------------------------------------------
The Group’s nominal labour productivity and labour cost efficiency increased
year on year, mainly through revenue growth (see the section Employees and
personnel expenses).
Description of the main risks
Business risks
The main factors which affect the Group’s business volumes and profit margins
are competition in the construction market and changes in the demand for
construction services.
Competition continues to be stiff in all segments of the construction market
and in 2017 public investment is not expected to grow substantially compared
with 2016. Thus, builders’ bid prices are under strong competitive pressure in
a situation where the prices of construction inputs have been trending upwards
moderately but consistently for several quarters. Bidders include not only
well-known general contractors but also former subcontractors. This is mainly
attributable to the state and local governments’ policy to keep the
qualification requirements of public procurement tenders low, which sometimes
results in the sacrifice of quality to the lowest possible price. We
acknowledge the risks inherent in the performance of contracts signed in an
environment of stiff competition and rising input prices. Securing a long-term
construction contract at an unreasonably low price in a situation where input
prices cannot be lowered noticeably and competition is tough is risky because
negative developments in the economy may quickly render the contract onerous.
In setting our prices in such an environment, we focus on ensuring a reasonable
balance of contract performance risks and tight cost control.
Demand for construction services continues to be strongly influenced by the
volume of public investment, which in turn depends on the co-financing received
from the EU structural funds. Total support allocated to Estonia during the
current EU budget period (2014-2020) amounts to 5.9 billion euros. Although the
amount exceeds the figure for the previous financial framework, the amounts
earmarked for construction work are substantially smaller. Projects supported
by the EU began to have some impact on the construction sector in the second
half of 2016 and in the next periods the process is expected to accelerate.
In the light of the above factors, we see some opportunities for achieving
year-on-year business growth in 2017: business growth in Estonia is supported
by positive developments in our selected foreign markets. Our action plan
foresees flexible resource allocation aimed at finding more profitable
contracts and performing them effectively. According to its business model,
Nordecon operates in all segments of the construction market. Therefore, we are
somewhat better positioned than companies that operate in one narrow (and in
the current market situation particularly some infrastructure) segment.
Our business is also influenced by seasonal changes in weather conditions,
which have the strongest impact on infrastructure construction where a lot of
work is done outdoors (road and port construction, earthwork, etc.). To
disperse the risk, we secure road maintenance contracts that generate
year-round business. Our strategy is to counteract the seasonality of
infrastructure operations with building construction that is less exposed to
seasonal fluctuations. Our long-term goal is to be flexible and keep our two
operating segments in relative balance (see also the chapter Performance by
business line). Where possible, our entities implement different technical
solutions that allow working efficiently also in changeable conditions.
Operational risks
To manage their daily construction risks, Group companies purchase contractors’
all risks insurance. Depending on the nature of the project and the requests of
the customer, both general frame agreements and special, project-specific
insurance contracts are used. In addition, as a rule, subcontractors are
required to secure performance of their obligations with a bank guarantee
provided to a Group company or the Group retains part of the amount due until
the contract has been completed. To remedy construction deficiencies which may
be detected during the warranty period, Group companies create warranty
provisions based on their historical experience. At 30 June 2017, the Group’s
warranty provisions (including current and non-current ones) totalled 1,051
thousand euros (30 June 2016: 1,122 thousand euros).
In addition to managing the risks directly related to construction operations,
in recent years we have also sought to mitigate the risks inherent in
preliminary activities. In particular, we have focused on the bidding process,
i.e., compliance with the procurement terms and conditions, and budgeting. The
errors made in the planning stage are usually irreversible and, in a situation
where the price is contractually fixed, may result in a direct financial loss.
Financial risks
Credit risk
During the period, we recognised credit losses of 30 thousand euros. In the
comparative period, credit losses totalled 424 thousand euros comprising
impairment losses on trade receivables of 15 thousand euros and impairment
losses on other receivables of 409 thousand euros. The overall credit risk
exposure of receivables is low because the solvency of prospective customers is
evaluated, the share of public sector customers is large, and customers’
settlement behaviour is consistently monitored. The main indicator of the
realisation of credit risk is settlement default that exceeds 180 days along
with no activity on the part of the debtor that would confirm the intent to
settle.
Liquidity risk
The Group remains exposed to higher than usual liquidity risk. At the reporting
date, the Group’s current assets exceeded its current liabilities 1.02-fold (30
June 2016: 1.05-fold). The key factor which influences the current ratio is the
classification of the Group’s loans to its Ukrainian associates as non-current
assets and the banks’ general policy not to refinance interest-bearing
liabilities (particularly overdrafts) for a period exceeding twelve months.
Because the political and economic situation in Ukraine is still complicated,
we believe that the Group’s Ukrainian investment properties cannot be realised
in the short term. Accordingly, as at the reporting date the Group’s loans to
its Ukrainian associates of 8,795 thousand euros are classified as non-current
assets.
For better cash flow management, we use overdraft facilities and factoring by
which we counter the mismatch between the settlement terms agreed with
customers and subcontractors. Under IFRS EU, borrowings have to be classified
into current and non-current based on contract terms in force at the reporting
date. At 30 June 2017, the Group’s short-term borrowings totalled 19,329
thousand. Based on our prior experience with banks, out of the above amount
contracts of 18,603 thousand euros will be extended when their maturity dates
arrive.
At the reporting date, the Group’s cash and cash equivalents totalled 8,101
thousand euros (30 June 2016: 5,336 thousand euros).
Interest rate risk
Our interest-bearing liabilities to banks have both fixed and floating interest
rates. Finance lease liabilities have mainly floating interest rates. The base
rate for most floating-rate contracts is EURIBOR. During the period,
interest-bearing borrowings grew by 3,157 thousand euros year on year. Loan and
factoring liabilities increased whereas finance lease liabilities decreased
slightly (see also the section Liquidity risk). At 30 June 2017,
interest-bearing borrowings totalled 28,955 thousand euros (30 June 2016:
25,798 thousand euros). Interest expense for the first half of 2017 amounted to
304 thousand euros (H1 2016: 314 thousand euros).
The main source of interest rate risk is a possible rise in the variable
component of floating interest rates (EURIBOR, EONIA or the creditor’s own base
rate). In the light of the Group’s relatively heavy loan burden this would
cause a significant rise in interest expense, which would have an adverse
impact on profit. We mitigate the risk by pursuing a policy of entering, where
possible, into fixed-rate contracts when the market interest rates are low. As
regards loan products offered by banks, observance of the policy has proved
difficult and most new contracts have a floating interest rate. We have entered
into a derivative contract to manage the risks resulting from changes in the
interest rates of the finance lease contract for the acquisition of a new
asphalt concrete plant.
Currency risk
As a rule, the prices of construction contracts and subcontracts are fixed in
the currency of the host country, i.e., in euros (EUR), Ukrainian hryvnias
(UAH), and Swedish kronas (SEK).
The exchange rate of the hryvnia has been unstable because the political and
economic environment in Ukraine continues to be complicated due to the conflict
between Ukraine and Russia which broke out at the beginning of 2014 and at the
beginning of 2015 the National Bank of Ukraine decided to discontinue
determination of the national currency’s indicative exchange rate. In the first
half of 2017, the hryvnia weakened against the euro by around 4.6%. For our
Ukrainian subsidiaries, this meant additional foreign exchange losses from the
translation of their euro-denominated loans into the local currency. Relevant
exchange losses totalled 121 thousand euros (H1 2016: 115 thousand euros).
Exchange gains and losses on financial instruments are recognised in Finance
income and Finance costs respectively. Translation of receivables and
liabilities from operating activities did not give rise to any exchange gains
or losses.
The reciprocal receivables and liabilities of our Ukrainian and non-Ukrainian
entities which are related to the construction business and denominated in
hryvnias do not give rise to exchange losses. Nor do the loans provided to the
Ukrainian associates in euros give rise to exchange losses that ought to be
recognised in the Group’s accounts.
Due to movements in the Swedish krona/euro exchange rate in the first half of
2017, translation of operating receivables and payables resulted in an exchange
loss of 1 thousand euros (H1 2016: an exchange loss of 13 thousand euros). The
exchange loss has been recognised in Other operating expenses.
We have not acquired derivatives to hedge currency risk.
Outlooks of the Group’s geographical markets
Estonia
Processes and developments characterising the Estonian construction market
-- In 2017, public investment should grow slightly but the extent to which
relevant projects can be realised is still unclear. Although in the
2014-2020 EU budget period the support allocated to Estonia will increase
to 5.9 billion euros (2007-2013: 4.6 billion euros), the portion that will
influence the construction market will not increase. Instead, compared with
the previous period, there will be a rise in allocations to intangible
areas.
-- In the context of the market as a whole, investments made by the largest
public sector customers (e.g., state-owned real estate company Riigi
Kinnisvara AS and the National Road Administration) which reach signature
of a construction contract in 2017 will not increase substantially. The
Ministry of Defence has been a positive exception for builders as its
activities in carrying out new procurement tenders have made, and hopefully
will continue to make, a significant contribution to market revival. Hence,
the Estonian construction market as a whole (particularly infrastructure
construction segments) will remain in relative stagnation. So far, the
situation has been mitigated by the positive level of private investment in
building construction but the latest developments reflect a certain
slowdown also in the latter.
-- The long and painful process of construction market consolidation will
continue, albeit slowly. In particular, this applies to general contracting
in building construction where the number of medium-sized general
contractors (annual turnover of around 15-40 million euros) is too large.
Based on the experience of the last major crisis it is likely that in an
environment of stiff competition and rising input prices some general
contractors may run into difficulties which will be passed on to several
other market participants.
-- Competition remains stiff across the construction market, intensifying in
different segments in line with market developments. The rise in the
average number of bidders for a contract reflects this. It is clear that in
the new environment of rising input prices which has emerged in the past
year, efficiency is the key to success. Regrettably, the number of
materials producers, suppliers, and subcontractors that are trying to
survive or succeed in a difficult environment by dishonest means, e.g., by
supplying goods with concealed defects or considerably lower quality than
the one recorded in the product certificate, has increased quite rapidly.
If the trend continues, both construction service providers and
end-customers will have to apply strict and thorough quality control
measures to make sure that the outcome meets their expectations. Unfair
competition is putting visible pressure on prices and the quality of the
construction service. Unfortunately, the problem is also underpinned by the
customers’ (including state institutions’ and state-owned companies’)
increasing tendency to lower the bidders’ qualification requirements and
prioritise quality more on paper than in practice.
-- In new housing development, the success of a project depends on the
developer’s ability to control the input prices included in its business
plan and, thus, set sales prices that are affordable for prospective
buyers. Although new apartments are relatively expensive compared to the
standard of living and the banks’ lending terms are strict, the housing
market sustained growth also in the second quarter of 2017, accounting for
a somewhat disproportionately large share of the total construction market
and thereby amplifying associated risks.
-- There is a growing contrast between the stringent terms of public
contracts, which require the builder to agree to extensive obligations,
strict sanctions, various financial guarantees, long settlement terms,
etc., and the modest participation requirements. Lenient qualification
requirements and the precondition of making a low bid have made it
relatively easy for an increasing number of builders to win a contract but
have heightened the risks taken by customers in terms of funding, deadlines
and quality during the contract performance phase and the subsequent
warranty period.
-- The past year has brought a rise in the prices of construction inputs,
particularly in building construction. At first, general contractors tried
to absorb the cost increase by making margin concessions but their capacity
for doing this has been practically exhausted. The construction market
includes an increasing number of areas where changes in the environment
(including materials producers’ rapid and successful entry into foreign
markets) may trigger a sharp price increase. The rise in housing
construction has lengthened the supply terms of various essential materials
and services considerably, making it impossible to carry out all processes
in the former optimistic timeframes. As a result, activities require more
extensive planning or may need to be postponed.
-- The persisting shortage of skilled labour (including project and site
managers) is restricting companies’ performance capacities, affecting
different aspects of the construction process including quality. Labour
migration to the Nordic countries will remain steady and the number of job
seekers who return to the Estonian construction market is not likely to
increase considerably. All of the above sustains pressure for a wage
increase, particularly in the category of the younger and less experienced
workforce whose mobility and willingness to change jobs is naturally
higher.
Ukraine
In Ukraine, we offer general contracting and project management services to
private sector customers in the segment of building construction. Political and
economic instability continues to restrict the adoption of business decisions
but construction activity in Kiev and the surrounding area has not halted. In
2017, we will continue our operations in Ukraine primarily in the Kiev region.
Based on our order book as at the end of 2016, we expect that in 2017 our
operating volumes will remain at a level comparable to 2016. Despite the
military conflict in eastern Ukraine, for Nordecon the market situation in Kiev
has not deteriorated compared with a year or two ago. Hard times have reduced
the number of inefficient local (construction) companies and when the economy
normalises we will have considerably better prospects for increasing our
operations and profitability. The Ukrainian government’s recent crackdown on
cash-in-hand work is definitely a step in the right direction, which in the
long term should also improve our position in the Ukrainian construction
market. We assess the situation in the Ukrainian market regularly and
critically and are ready to restructure our operations as and when necessary.
Should the crisis in eastern Ukraine spread to Kiev (which at the date of
release of this report is highly unlikely), we can suspend our operations
immediately. We continue to seek opportunities for exiting our two real estate
projects which have been put on hold or signing a construction contract with a
prospective new owner.
Finland
In Finland, we have provided mainly subcontracting services in the concrete
segment but, based on experience gained, have started preparations for
expanding into the general contracting market. The local concrete work market
allows competing for projects where the customer wishes to source all concrete
works from one reliable partner. Our policy is to maintain a rational approach
and avoid taking excessive risks.
Sweden
We entered the Swedish market in July 2015, when we acquired a 100% stake in
SWENCN AB, a company registered in the Kingdom of Sweden. In the Swedish market
we intend to offer mainly the construction of residential and non-residential
buildings, particularly in central Sweden. On gaining experience in the new
market, we have prioritised quality and the observance of deadlines and have
therefore accepted lower profitability. As regards our longer-term goals and
the plan to build a viable and strong organisation that would compete
successfully in the Swedish market, we are positive about the developments so
far and see potential for sustaining business growth and operating profitably
in a large market when we have been able to stabilise order book growth at the
desired level.
Nordecon (www.nordecon.com) is a group of construction companies whose core
business is construction project management and general contracting in the
buildings and infrastructures segment. Geographically the Group operates in
Estonia, Ukraine, Finland and Sweden. The parent of the Group is Nordecon AS, a
company registered and located in Tallinn, Estonia. In addition to the parent
company, there are more than 10 subsidiaries in the Group. The consolidated
revenue of the Group in 2016 was 183 million euros. Currently Nordecon Group
employs close to 740 people. Since 18 May 2006 the company's shares have been
quoted in the main list of the NASDAQ Tallinn Stock Exchange.
Andri Hõbemägi
Nordecon AS
Head of Investor Relations
Tel: +372 6272 022
Email: andri.hobemagi@nordecon.com
www.nordecon.com |