Market announcement

Title

Financial report for the fourth quarter and twelve months ended 31 December 2011 (unaudited)

Message

Nordecon publishes unaudited financial report for the fourth quarter and twelve
months ended 31 December 2011 

Tallinn, Estonia, 2012-02-08 15:45 CET (GLOBE NEWSWIRE) --
Announcement includes Nordecon AS’ consolidated financial statements for 2011
IV quarter and 12 months, 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
OMX Tallinn and Nordecon’s web page
(http://www.nordecon.com/root/en/for-investor/financial-reports/interim-reports)
. 

Period’s investor report and fact sheet are attached to the announcement and
are also published on Nordecon’s web page
(http://www.nordecon.com/root/en/for-investor/investor-presentations). 



Condensed consolidated interim statement of financial position

EUR`000                                              31 December     31 December
                                                            2011            2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                  9,908           5,818
Trade and other receivables                               34,645          31,266
Prepayments                                                2,616           1,060
Inventories                                               23,811          24,982
Non-current assets held for sale                             332             321
Total current assets                                      71,312          63,447
Non-current assets                                                              
Investments in equity-accounted investees                    182              99
Other investments                                             26              26
Trade and other receivables                                2,504           2,215
Investment property                                        4,929           4,930
Property, plant and equipment                              7,437           9,038
Intangible assets                                         15,385          15,486
Total non-current assets                                  30,463          31,794
TOTAL ASSETS                                             101,775          95,241
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                      17,149          19,231
Trade payables                                            27,360          17,429
Other payables                                             4,963           3,446
Deferred income                                           10,277           4,425
Provisions                                                   492           1,160
Total current liabilities                                 60,241          45,691
Non-current liabilities                                                         
Loans and borrowings                                      11,494          15,377
Trade payables                                               199             215
Other payables                                                96              96
Provisions                                                   833             423
Total non-current liabilities                             12,622          16,111
TOTAL LIABILITIES                                         72,863          61,802
EQUITY                                                                          
Share capital                                             19,657          19,657
Statutory capital reserve                                  2,554           2,558
Translation reserve                                         -459            -233
Retained earnings                                          5,068          10,257
Total equity attributable to equity holders of            26,820          32,240
 the parent                                                                     
Non-controlling interest                                   2,092           1,199
TOTAL EQUITY                                              28,912          33,439
TOTAL LIABILITIES AND EQUITY                             101,775          95,241



Condensed consolidated interim statement of comprehensive income

EUR`000                                     Q4 2011  Q4 2010  12M 2011  12M 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                                      46,362   24,253   149,622    99,312
Cost of sales                               -45,450  -24,228  -149,427  -100,012
Gross profit/loss                               912       25       195      -700
                                                                                
Distribution expenses                           -79     -117      -317      -401
Administrative expenses                      -1,357   -1,518    -4,641    -4,887
Other operating income                           60      412       796       820
Other operating expenses                        -13   -3,077      -154    -3,807
Operating loss                                 -477   -4,275    -4,121    -8,975
                                                                                
Finance income                                  177      234       671     3,059
Finance expenses                               -194   -1,950    -1,078    -6,338
Net finance expense                             -17   -1,716      -407    -3,279
                                                                                
Share of profit/loss of equity-accounted        -22     -238        82      -517
 investees                                                                      
                                                                                
Loss before income tax                         -516   -6,229    -4,446   -12,771
Income tax expense/income                        -2      -42       -18        33
Loss for the period                            -518   -6,271    -4,464   -12,738
                                                                                
Other comprehensive expense:                                                    
Exchange differences on translating            -213       -4       -58       -28
 foreign operations                                                             
Total other comprehensive expense for the      -213       -4       -58       -28
 period                                                                         
TOTAL COMPREHENSIVE EXPENSE FOR THE PERIOD     -731   -6,275    -4,522   -12,766
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                         -641   -5 938    -4 798   -11,811
- Non-controlling interests                     123     -333       334      -927
Loss for the period                            -518   -6,271    -4,464   -12,738
                                                                                
Total comprehensive income/expense                                              
 attributable to:                                                               
- Owners of the parent                        -1356   -5 942    -5 415   -11,839
- Non-controlling interests                     625     -333       893      -927
Total comprehensive expense                    -731   -6,275    -4,522   -12,766
                                                                                
Earnings per share attributable to owners                                       
 of the parent:                                                                 
Basic earnings per share (EUR)                -0.02    -0.19     -0.16     -0.38
Diluted earnings per share (EUR)              -0.02    -0.19     -0.16     -0.38



Condensed consolidated interim statement of cash flows

EUR`000                                                       12M 2011  12M 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers                                   185,147   120,719
Cash paid to suppliers                                        -160,805  -105,501
VAT paid                                                        -2,384    -3,910
Cash paid to and for employees                                 -13,476   -14,953
Income tax recovered/paid                                           41       -88
Net cash from/used in operating activities                       8,523    -3,733
                                                                                
Cash flows from investing activities                                            
Acquisition of property, plant and equipment                       -58      -195
Proceeds from sale of property, plant and equipment and            340       850
 intangible assets                                                              
Proceeds from sale of investment property                            0       709
Acquisition of subsidiaries, net of cash acquired                    0         1
Disposal of subsidiaries, net of cash transferred                    0      -615
Acquisition of associates                                            0        -2
Loans granted                                                     -213      -549
Repayment of loans granted                                       1,745       177
Dividends received                                                   4         4
Interest received                                                  204       258
Net cash from investing activities                               2,022       638
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                     1,925     6,642
Repayment of loans received                                     -4,907    -8,617
Payment of finance lease liabilities                            -1,921    -2,379
Interest paid                                                   -1,089    -1,122
Other payments made                                                 -4       -15
Net cash used in financing activities                           -5,996    -5,491
                                                                                
Net cash flow                                                    4,549    -8,586
                                                                                
Cash and cash equivalents at beginning of period                 5,818    14,392
Effect of exchange rate fluctuations                              -459        12
Increase/decrease  in cash and cash equivalents                  4,549    -8,586
Cash and cash equivalents at end of period                       9,908     5,818



Preliminary financial results for 2011

Margins

Nordecon Group ended 2011 with a gross profit of 194 thousand euros (2010,
audited: gross loss of 700 thousand euros). Formation of annual gross profit
was strongly influenced by the losses incurred in the first and second quarters
due respectively to seasonal factors and re-estimation of the outcomes of some
loss-making contracts signed in 2009 and 2010. In the third and fourth
quarters, the Group earned an operating profit. 

The main factor that affected gross profit for the period was re-estimation of
the outcomes of the Group’s loss-generating projects, a step taken in the
second quarter due to changes in the operating environment. Additional losses
were recognised because of a rise in the prices of construction inputs and,
partly, due to some unforeseen project performance costs. A major share of the
additional loss was attributable to a few contracts secured in 2009 and 2010
for which losses had also been recognised earlier. The Group’s estimates of
losses expected to be incurred until delivery are based on its current best
knowledge. 

As regards loss-generating contracts, the strongest impact was exerted by the
exhibition building of the Estonian Maritime Museum, built in the historical
seaplane hangars near Tallinn Bay, which reached significant completion and was
delivered to the customer in 2011. It is a unique renovation project where the
exceptionally poor condition of the building and the true complexity of the
work were discovered only in the course of the project. As allowed by the
contract, we asked the customer for an extension of the delivery term and
additional compensation for costs incurred due to circumstances that could not
be foreseen at the time of the public procurement tender, or in connection with
additional work requested by the customer. However, by the date of release of
this report, only part of the problems, which have emerged, have found
contractual solutions and many of our justified claims have still no cover. 

Leaving aside a few loss-making projects secured during the downswing of the
market, the average profit margins of our contracts improved compared with the
previous year. Recognition of contract profits depends on the stage of
completion of contract activity. Therefore, the better margins of contracts
secured in the reporting period will have an impact in subsequent quarters,
when work is performed. Above all, profitability has improved thanks to the
following factors: 

  -- a clear focus on improving profitability, rather than increasing the size
     of the contracts portfolio, introduced as a target in 2010;
  -- enforcement of stringent austerity measures imposed in previous periods;
     and
  -- ongoing streamlining of internal processes and operations, including
     mergers of other Group entities with Nordecon AS at the beginning of the
     reporting period.

According to the Group’s assessment, in 2011 competition in some segments of
the construction market (e.g. road construction and construction of water and
wastewater networks) weakened considerably. This may be attributed to some
construction companies going bankrupt or deciding to exit the market as well as
the fact that in recent years all companies have had reduce their personnel and
support structures, which, in turn, has undermined some players’ bidding
capabilities. Furthermore, many companies are held back by tougher financial
conditions imposed by customers and the limited availability of guarantee
facilities. However, there is still no indication that competitive pricing
pressure would decrease in buildings construction, where the main problem is
insufficient market volume, caused by a lack of private sector customers. 

Most construction companies have become aware that long-term construction
contracts entail the risk of growth in input prices. In general, this is
exerting positive influence on the profitability of new construction contracts.
Although the Group’s margins do not yet meet the target, management believes
that the Group is moving in the right direction in restoring the profitability
of its operating activities. 

Administrative expenses for 2011 totalled 4,641 thousand euros. Compared with
2010, administrative expenses have decreased by 5%, reaching relative stability
in relation to current operating volumes. The ratio of administrative expenses
to revenue was 3.1% (2010, audited: 4.9%). We are pleased to report that our
cost-saving measures yielded strong results and that the Group was able to
maintain administrative expenses below the target ceiling, i.e. 5% of revenue. 

The Group ended 2011 with an operating loss of 4,121 thousand euros (2010,
audited: operating loss of 8,975 thousand euros). EBITDA for the period was
negative at 1,773 thousand euros (2010, audited: negative at 5,375 thousand
euros). 

The Group’s net loss was 4,464 thousand euros. The loss attributable to owners
of the parent, Nordecon AS, was 4,798 thousand euros. The year 2010 ended in a
net loss of 12,738 thousand euros, including non-recurring finance income and
expenses on the sale of the Latvian subsidiary and the write-down of loans
granted and receivables. 



Cash flows

In 2011, the Group’s operating activities resulted in a net cash inflow of
8,523 thousand euros (2010, audited: outflow of 3,733 thousand euros).
Operating cash flow continued to be strongly influenced by cyclical
fluctuations in project-related cash flows (differences between the settlement
terms agreed with customers and subcontractors) and performance of some
loss-making projects. Positive cash flow was supported by factoring implemented
to reduce the cyclical nature of cash flows and the proceeds (including advance
payments) of new large contracts. The negative cash flow of unprofitable
projects realises as the work is performed although the book loss has already
been recognised in previous periods. 

Investing activities generated a net inflow of 2,022 thousand euros (2010,
audited: inflow of 638 thousand euros) that consisted mostly of repayments of
loans granted, which totalled 1,745 thousand euros. 

Financing activities resulted in a net cash outflow of 5,996 thousand euros
(2010, audited: outflow of 5,491 thousand euros). The structure of financing
cash flows has remained more or less stable in the past couple of years. The
Group is settling its loan obligations faster than it is raising new debt. On
the other hand, repayments have decreased somewhat in relation to the previous
year thanks to agreements reached with the banks. Renegotiation of settlement
terms has not caused significant changes in the Group’s interest rates. 

At 31 December 2011, the Group’s cash and cash equivalents totalled 9,908
thousand euros (31 December 2010: 5,818 thousand euros). For information on
liquidity risks, see the chapter Description of the main risks. 



Key financial figures and ratios

Figure/ratio                                    12M 2011    12M 2010    12M 2009
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue (EUR’000)                                149,622      99,312     154,595
Revenue growth/decrease, %                           51%        -36%        -37%
Net loss (EUR’000)                                -4,464     -12,738      -5,717
Loss attributable to owners of the parent         -4,798     -11,810      -2,923
 (EUR’000)                                                                      
Weighted average number of shares             30,756,728  30,756,728  30,756,728
Earnings per share (EUR)                           -0.16       -0.38       -0.10
Average number of employees                          731         774       1,128
Revenue per employee (EUR’000)                       205         128         137
Personnel expenses to revenue, %                    9.5%       14.6%       15.0%
Administrative expenses to revenue, %               3.1%        4.9%        5.2%
EBITDA1 (EUR’000)                                 -1,773      -5,375         275
EBITDA margin, %                                   -1.2%       -5.4%        0.2%
Gross margin, %                                     0.1%       -0.7%        5.6%
Operating margin, %                                -2.8%       -9.0%       -5.2%
Operating margin excluding gains on asset          -3.1%       -9.4%       -5.4%
 sales, %                                                                       
Net margin, %                                      -3.0%      -12.8%       -3.7%
Return on invested capital, %                      -5.4%      -15.8%       -4.1%
Return on assets, %                                -4.2%       -8.3%       -6.0%
Return on equity, %                               -14.3%      -32.6%      -11.4%
Equity ratio, %                                    28.4%       35.1%       37.1%
Gearing, %                                         32.6%       42.3%       26.4%
Current ratio                                       1.18        1.39        1.47
As at 31 December                                   2011        2010        2009
--------------------------------------------------------------------------------
Order book (EUR’000)                             134,043      85,607      97,827
--------------------------------------------------------------------------------

1 For the purpose of calculating EBITDA, non-cash items include not only
depreciation and amortisation but also impairment losses on goodwill 

Revenue growth/decrease =        Operating margin excluding gains on asset sales
 (revenue for the reporting       = ((operating profit -  gains on sale of      
 period/ revenue for the          property, plant and equipment - gains on sale 
 previous period) – 1*100         of investment properties and real estate held 
Earnings per share (EPS) = net    for sale)/revenue) *100                       
 profit attributable to equity   Net margin = (net profit for the               
 holders of the parent /          period/revenue)*100                           
 weighted average number of      Return on invested capital = ((profit before   
 shares outstanding               tax + interest expense)/ the period’s average 
Revenue per employee =            (interest-bearing liabilities + equity))*100  
 revenue/average number of       Return on assets = (operating profit/the       
 employees                        period’s average total assets)*100            
Personnel expenses to revenue =  Return on equity = (net profit for the period/ 
 (personnel expenses/revenue)     the period’s average total equity)*100        
 *100                            Equity ratio = (total equity/ total equity and 
Administrative expenses to        liabilities)*100                              
 revenue = (administrative       Gearing = ((interest-bearing liabilities – cash
 expenses/ revenue)*100           and cash equivalents)/ (interest bearing      
EBITDA = operating profit +       liabilities + equity))*100                    
 depreciation and amortisation   Current ratio = total current assets/ total    
 + impairment losses on           current liabilities                           
 goodwill                                                                       
EBITDA margin =                                                                 
 (EBITDA/revenue)*100                                                           
Gross margin = (gross                                                           
 profit/revenue)*100                                                            
Operating margin = (operating                                                   
 profit/revenue)*100                                                            
--------------------------------------------------------------------------------



Performance by geographical market

In 2011, roughly 4% of the Group’s revenue was generated outside Estonia. In
2010, foreign operations accounted for 6% of the Group’s revenue. 

         12M 2011  12M 2010  12M 2009
-------------------------------------
-------------------------------------
Estonia       96%       94%       86%
Ukraine        0%        2%        3%
Latvia         0%        0%       11%
Belarus        2%        3%        0%
Finland        2%        1%        0%

Half of the Group’s foreign revenue resulted from project-based construction
activity in Belarus where works have been significantly completed and delivered
to the customer. In the first quarter of 2012 only rectification work will be
performed there. Management has decided that the Group will not seek any new
projects in Belarus (see also the chapter Changes in the Group’s business
operations in the reporting period). The other half of foreign revenue was
earned on concrete works performed in Finland. 

Revenue distribution between different geographical segments is a consciously
deployed strategy by which the Group avoids excessive reliance on a single
market. Although in the long term our strategy foresees increasing foreign
operations, in the short term the Group will focus on the Estonian market and
seizing opportunities in an environment that it knows best and that entails
comparatively fewer known market risks. The Group’s vision of the future of its
foreign operations is described in the chapter Outlooks of the Group’s
geographical markets. 



Performance by business line

The core business of Nordecon Group is general contracting and project
management in the field of buildings and infrastructure construction. The Group
is involved, among other things, in the construction of commercial and
industrial buildings and facilities, road construction and maintenance,
environmental engineering, concrete works and development of residential real
estate. 

The Group’s revenue for 2011 was 149,622 thousand euros, 51% up on the 99,312
thousand euros generated in 2010. Last year, the downturn that had ravaged the
Estonian construction market for almost three years bottomed out. The Group’s
revenue growth is attributable to a decline in competition in certain market
segments, successful bidding for projects in various infrastructure
sub-segments, and slight growth in the buildings construction market. 

The Group aims to maintain the revenues of its business segments (Buildings and
Infrastructure) in balance as this helps disperse risks and provides a more
solid foundation under stressed circumstances when one segment experiences
shrinkage. In view of estimated demand for apartments, in forthcoming years the
proportion of revenue from construction of apartment buildings will remain
modest, i.e. significantly below the strategic 20% ceiling. 

Segment revenue

In 2011, the revenues of our two main business segments were practically equal.
Buildings and Infrastructure ended the year with revenue of 71,946 thousand
euros and 71,267 thousand euros respectively. The corresponding figures for
2010 were 50,271 thousand euros and 47,082 thousand euros. 

For a long time, the majority of tenders in the construction market have been
related to infrastructure (mainly projects financed with the support of the
state and the EU structural funds) and the majority (80% at the reporting date)
of contracts in the Group’s order book belong to the Infrastructure segment.
Despite this, the segments’ revenues have been practically equal because our
active buildings construction contracts have a shorter term than those of
infrastructure construction. Infrastructure contracts have a longer term (e.g.
road maintenance contracts) and their contribution to realised revenue is
therefore comparatively smaller. 

Revenue distribution between segments*

Business segments  12M 2011  12M 2010  12M 2009
-----------------------------------------------
-----------------------------------------------
Buildings               49%       48%       45%
Infrastructure          51%       52%       55%

* In connection with the entry into force of IFRS 8 Operating Segments, the
Group has changed segment reporting in its financial statements. In Directors’
report the Ukrainian and Belarusian buildings segment and the EU buildings
segment, which are disclosed separately in the financial statements, are
presented as a single segment. In addition, the segment information presented
in Directors’ report does not include the disclosures on “other segments” that
are presented in the financial statements. 

In Directors’ report, projects have been aggregated and allocated to business
segments based on their nature (i.e. buildings or infrastructure construction).
In the segment reporting presented in the financial statements, aggregation and
allocation are based on Group entities’ main field of activity (as required by
IFRS 8 Operating Segments). In the financial statements the results of an
entity that is primarily engaged in infrastructure construction are presented
in the Infrastructure segment. In Directors’ report, the revenues of such an
entity are presented based on their nature. The differences between the two
reports are not significant because in general Group entities specialize in
specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in
both buildings and infrastructure construction. 

Revenue distribution within segments

In the Buildings segment, most of the revenue resulted from construction of
public buildings and industrial facilities. In the public buildings
sub-segment, the largest contracts comprised construction of buildings for
Koidula border station, an academic building for the Social Sciences Faculty of
the University of Tartu, buildings for Ämari Air Base, and a new exhibition
building for the Estonian Maritime Museum. In the industrial and warehouse
facilities sub-segment, most of the revenue was earned on construction of
agricultural buildings, and a food production facility built in Belarus.
Compared with prior periods, the contribution of the commercial buildings
sub-segment decreased considerably. Private sector investment remained
depressed. Apartment buildings were built for non-Group customers, the Group
acting as a general contractor, not a developer. 



Revenue distribution within the Buildings segment  12M 2011  12M 2010  12M 2009
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Commercial buildings                                    12%       19%       66%
Industrial and warehouse facilities                     42%       36%       10%
Public buildings                                        44%       35%       18%
Apartment buildings                                      2%       10%        6%



As anticipated, in the Infrastructure segment most of the revenue was generated
by road construction and maintenance. The contribution of construction of water
and wastewater networks (other engineering), where the Group won and started
several new contracts in 2011, was expectedly large as well. Thanks to EU
support, this is one of the best-funded areas in Estonia. The European Union
also supports performance of various environmental engineering projects where
the Group is quite well represented. The contribution of specialist engineering
increased, as expected, through construction of facilities for Sillamäe port. 

Revenue distribution within the Infrastructure      12M 2011  12M 2010  12M 2009
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                        47%       64%       49%
Specialist engineering (including hydraulic              10%        1%       12%
 engineering)                                                                   
Other engineering                                        35%       26%       31%
Environmental engineering                                 8%        9%        8%

Order book

At 31 December 2011, the Group’s order book stood at 134,043 thousand euros,
being significantly larger than at 31 December 2010 when the figure was 85,607
thousand euros. In addition to an increase attributable to general growth of
the Estonian construction market compared with the slump of 2010, the figure
includes the remaining value of the design and build of the Aruvalla-Kose
section of the E263 Tallinn-Tartu highway, a project with a major individual
impact (total value on conclusion approx. 39.3 million euros). 

                                   12M 2011  12M 2010  12M 2009
---------------------------------------------------------------
Order book, in thousands of euros   134,043    85,607    97,827

At 80% the Infrastructure segment continues to account for a major proportion
of the Group’s total order book (31 December 2010: 74%). 

In a situation where the decrease in input prices has been replaced by a rise
in all areas of the construction sector, the Group’s management continues to
focus on improving the profitability of the contract portfolio. 

Between the reporting date (31 December 2011) and the date of release of this
report, Group companies have been awarded additional construction contracts of
approximately 2,464 thousand euros. 



People

Staff and personnel expenses

In 2011, the Group (including the parent and the subsidiaries) employed, on
average, 731 people including 351 engineers and technical personnel (ETP). In
the past year, downsizing has notably decelerated. The main changes in
headcount resulted from seasonal fluctuations in the second and third quarters.
Compared with 2010, the number of employees decreased primarily at the parent
company. Reorganization, undertaken after the parent’s merger with two
subsidiary entities (see the chapter Changes in the Group’s business operations
in the reporting period), allowed streamlining both the support and operating
functions. 

Average number of the Group’s employees (including the parent and its
subsidiaries): 

               12M 2011  12M 2010  12M 2009
-------------------------------------------
-------------------------------------------
ETP                 351       362       467
Workers             380       412       661
Total average       731       774     1,128

The Group’s personnel expenses for 2011 including all associated taxes totalled
14,225 thousand euros, a figure similar to the 14,494 thousand euros incurred
in 2010. 

In 2011, the remuneration of the members of the council of Nordecon AS
including associated social security charges amounted to 92 thousand euros. The
corresponding figure for 2010 was also 92 thousand euros. The remuneration and
bonus benefits of the members of the board of Nordecon AS including social
security charges totalled 316 thousand euros compared with 199 thousand euros
for 2010. The remuneration provided to the board has increased because in the
comparative period the board had two members while the current number is four.
The composition of the board changed in connection with the merger of two
subsidiaries and the Group’s parent at the end of 2010. 



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market in
2012 

  -- The Group does not expect the construction market to grow significantly in
     2012. Infrastructure procurement will dominate. However, buildings
     construction, where recovery has been the slowest, should offer somewhat
     better opportunities for growth, assuming that private sector customers
     (including foreign investors) that abandoned the market in previous periods
     will return. In the development of new residential real estate, the success
     of a project will depend on the developer’s ability to either offer a low
     cost or exploit a new niche. Consumer behaviour will remain highly volatile
     while banks will impose more stringent borrowing conditions.
  -- Total demand in the construction market will remain disproportionately
     reliant on public procurement and projects performed with the support of
     the EU. The success of such projects is directly related to the
     administrative and public procurement capabilities of the central and local
     governments. Patchy procurement quality may cause hold-ups and disruptions
     both during the procurement proceedings and the construction process.
  -- Players will continue consolidating, particularly as regards general
     contractors in the segment of buildings construction, where competition is
     still overly aggressive. Tenders arranged in 2011 indicate that pricing
     pressure in the segment remains strong. In addition to competition, the
     number and operating volumes of market participants will be influenced by
     the players’ ability to participate in the bidding process and meet the
     tender or procurement conditions. In the performance phase, the decisive
     factors will be financial management (including relations with banks) and
     the ability to ensure sufficient liquidity, particularly when
     loss-generating contracts need to be performed.
  -- Companies may continue challenging the results of poorly prepared public
     procurement tenders but mostly on account of fundamental technical issues.
     Some public procurement tenders will be cancelled because customers have
     prepared their budgets based on the construction prices of 2009-2010, which
     in the current situation are regrettably no longer realistic and the bids
     made by construction companies exceed them by tens of percents. The time
     and finance costs of the proceedings will be high for all involved.
  -- The contracts signed with public sector customers will continue to impose
     rigorous conditions on construction companies, including greater
     obligations for the builder, tough sanctions, different financial
     guarantees, extremely long settlement terms, etc. In a situation where the
     public procurement process is based on underbidding, this increases the
     risks of all market players.
  -- Growth in input prices will decelerate compared with the previous year,
     remaining within the range of a few percent (on a quarterly basis)
     throughout 2012. On the other hand, there are areas where price
     fluctuations are unpredictable and thus may be notably greater and hard or
     impossible to influence (petroleum and metal products, some other
     materials).
  -- The situation in the labour market has stabilised to a certain extent and
     labour outflow to the Scandinavian countries will not increase
     significantly. Companies have adapted to the situation but when volumes
     recover the availability of qualified labour will again be an issue. On the
     whole, in 2012 the base wages paid by construction companies that have to
     maintain tight cost control are not expected to increase.
  -- In 2012 the construction market will be seriously and unfortunately
     somewhat unpredictably impacted by massive funds raised from the sale of
     carbon dioxide emission quotas, which will be allocated within an
     exceptionally short period for improving the energy efficiency of
     buildings. This has already triggered demand hikes in some specialized
     construction segments (joint filling, facade and roof works, heating
     systems, etc) and unreasonable rises in respective prices, which will cause
     temporary problems for the entire sector.
  -- The volume of investments made in the construction sector will depend on
     the rate of economic growth and forecasts made on the basis of that figure.
     At present, the sentiment of both investors and banks remains relatively
     cautious but this may change quickly in either direction in the light of
     Estonia’s and the EU’s actual economic indicators.

Latvia and Lithuania

According to the Group’s assessment, the Latvian construction market will
continue adjusting to the post-recession environment also in 2011. The Group
does not exclude the possibility that in the next few years it will undertake
some projects in Latvia through its Estonian entities, involving partners where
necessary. Continuation of project-based business assumes that the projects can
be performed profitably. The decision does not change the Group’s strategic
objectives in Latvia, i.e. the objective of operating in the Latvian
construction market through local subsidiaries. 

For the time being, the Group has suspended the operations of its Lithuanian
subsidiary, Nordecon Statyba UAB. We are monitoring market developments and do
not rule out the possibility that in the next few years the Group will resume
its Lithuanian operations on a project basis. Temporary suspension of
operations does not cause any major costs for the Group. It does not change the
Group’s strategic objectives in Lithuania, i.e. the objective of operating in
the Lithuanian construction market through local subsidiaries. 

Ukraine

The Group operates in Ukraine as a general contractor and project manager in
the segment of commercial buildings and production facilities, offering its
services primarily to foreign private sector customers. In the past three
years, there were practically no private customers in that segment. We do not
expect the situation to improve significantly in 2012. Maintaining minimal
readiness at the current cost base, the Group has decided to continue its
business in Ukraine. We review the sustainability of our Ukrainian operations
on a regular basis and are prepared to restructure them significantly, if
necessary. 

The main risks in the Ukrainian market stem from the low administrative
efficiency of the central and local government and the judicial system.
Ukraine’s recovery from the economic crisis of 2008-2009 and changes in the
political landscape have had a sluggish effect on the construction sector.
Demand is mainly undermined by private customers’ inability to raise financing
for commencing construction. Stabilisation of the political situation has not
occurred at the expected pace and private sector customers have not started
investing in projects where the Group has a competitive advantage. 

Still, the construction market of a country with a population of around 46
million has strong business potential. Our key success factor is relatively
little competition among project management companies offering flexible
construction management in combination with European practices and
competencies. We are confident that the present slump in the Ukrainian
construction market and economy as a whole will transform local understanding
and expectations of general contracting and project management in the
construction business and, in the long term, the new thinking will improve the
Group’s position. 

Finland

In the Finnish market the Group focuses solely on offering subcontracting
services in the field of concrete works. This is an area where Estonian
companies continue to have a certain edge over local entities because their
personnel expenses are lower. The Finnish concrete works (sub)contracting
market allows us to compete for selected projects (the main criteria are the
location and the customer’s low risk level). We expect demand for concrete
works to remain stable in 2012. Nevertheless, the Group will maintain a
rational approach and will avoid taking excessive risks in Finland. The Group
is currently not planning to penetrate other segments of the Finnish
construction market (general contracting, project management, etc). 



Description of the main risks

Business risks

Management believes that in the near future the main business risk will be
stiff competition that induces companies to bid unreasonably low prices in a
situation where input prices have started rising and may cause an exponential
slide in profitability. In the construction market, the situation is aggravated
by the fact that the need for winning contracts that would cover fixed costs
and overheads at a level ensuring normal operating capacities is increasing.
The Group’s management expects to mitigate the risks by tight cost control and
effective austerity measures as well as attention to detail and thorough
analysis of new projects. 

To mitigate the risks arising from the seasonal nature of the construction
business (primarily weather conditions during the winter months), the Group has
acquired road maintenance contracts that generate year-round business. In
addition, Group companies are constantly seeking new technical solutions that
would allow working more efficiently under changeable weather conditions. 

To manage their daily construction risks, Group companies purchase contractors’
all risks insurance. Depending on the nature of the project, both general frame
agreements and special project-specific contracts are used. In addition, as a
rule, subcontractors are required to secure performance of their obligations
with a bank guarantee issued for the benefit of a Group company. To remedy
builder-caused deficiencies, which may be detected during the warranty period,
Group companies create warranties provisions. At 31 December 2011, the
provisions (including current and non-current ones) totalled 1,213 thousand
euros. At 31 December 2010, the corresponding figure was 1,329 thousand euros. 

Institution of criminal proceedings against Nordecon AS and a member of its
board 

The Estonian Road Administration published a notice of the public procurement
tender for the design and build of the E263 Aruvalla-Kose road section on 25
September 2008. Nordecon AS (at that date the Group’s subsidiary Nordecon Infra
AS) and Ramboll Eesti AS participated in the tender with a joint bid of 506.2
million kroons (32.4 million euros). 

The tender gave rise to numerous disputes and challenges between 2008 and 2010.
Owing to the challenges, the Road Administration endeavoured to cancel the
procurement tender but the public procurement dispute review committee declared
the Road Administration’s resolution for cancellation invalid. The tender
reached the stage where the joint bid of Nordecon AS and Ramboll Eesti AS was
selected as the successful one and only the contract needed to be signed.
However, on 26 October 2010 the financial control department of the ministry of
finance, exercising state supervision, adopted a resolution that declared the
public procurement tender invalid on the basis that during the procurement
proceedings the Road Administration had repeatedly and seriously violated the
Public Procurement Act. 

Nordecon AS and Ramboll Eesti AS challenged the resolution of the financial
control department of the ministry of finance in the administrative court and
applied for preliminary legal protection that would have allowed moving on with
the public procurement proceedings. The court did not apply preliminary legal
protection although it found that the challenge had potential. 

The security police board instituted criminal proceedings for investigation of
circumstances surrounding the public procurement tender for the design and
build of the Aruvalla-Kose road section. Member of the management board of
Nordecon AS Erkki Suurorg and Nordecon AS (at the time Nordecon Infra AS) were
charged with suspicion of attempting to conclude an agreement for distorting
competition. Suspicion charges were also brought against the director general
of the Road Administration and the chancellor of the ministry of economics.
Nordecon AS and Erkki Suurorg have given their testimony to the security police
board and have affirmed that the charges against them are baseless. By the date
of release of this report, no criminal charges have been filed against any of
the suspects. 

If criminal charges are brought and a conviction takes effect, then under
section 400 of the Penal Code the maximum pecuniary punishment for Nordecon AS
may extend to 10% of turnover and for a time the company may not be allowed to
participate in public procurement tenders. 

Credit risk

For credit risk management, a potential customer’s settlement behaviour and
creditworthiness are analysed already in the tendering stage. When the contract
has been signed, the customer’s settlement behaviour is monitored on an ongoing
basis from the making of an advance payment to adherence to the contractual
settlement schedule, which usually depends on the documentation of the delivery
of work performed. We believe that the system in place allows us to respond to
customers’ settlement difficulties sufficiently promptly. At the end of 2011,
our customers’ settlement behaviour was relatively good, considering the
economic situation, although there were also a few problem customers. The
proportion of overdue receivables is stable; the figure consists mostly of
items that are not significantly past due and stem from the routines to be
completed between public sector companies and their financing authorities. In
accordance with the Group’s accounting policies, all receivables that are more
than 180 days overdue or in respect of which no additional settlement agreement
has been reached are recognised as an expense. 

In 2011 income from recovery of receivables written down in previous periods
exceeded expenses from write-down of receivables and the Group could recognise
income of 7 thousand euros. In the comparative period, expenses from write-down
of receivables and loans granted totalled 6,131 thousand euros. 

Liquidity risk

Free funds are placed in overnight or fixed-interest term deposits with the
largest banks in the markets where the Group operates. To ensure timely
settlement of liabilities, approximately two weeks’ working capital is kept in
current accounts or overnight deposits. Where necessary, overdraft facilities
are used. At the reporting date, the Group’s current assets exceeded its
current liabilities 1.18-fold (31 December 2010: 1.39-fold) and available cash
funds totalled 9,908 thousand euros (31 December 2010: 5,818 thousand euros). 

The Group remains exposed to higher than average liquidity risk resulting from
a gap between the customers’ long settlement terms (mostly 45 to 56 days) and
the subcontractors’ increasing interest to negotiate shorter settlement terms
(mostly 21 to 45 days). In the reporting period, the liquidity position was
further weakened by the completion of some loss-making projects. Moreover,
business growth is increasing the Group’s need for working capital, the impacts
of which will emerge in subsequent quarters. The Group counteracts the
differences in settlement terms by using factoring where possible. In order to
raise additional working capital, the Group carried out negotiations with banks
based on the Nordecon Group Business Plan and Financing Program 2011-2014,
prepared at the request of Nordecon AS by one of the world’s leading consulting
firms Roland Berger Strategy Consultants GmbH. 

By the date of release of this report, the parties have agreed that settlement
of the Group’s long-term liabilities will be partly suspended through 2012
(with an option to extend the suspension through 2013). In addition, the Group
has been granted additional short-term credit lines of up to 5,300 thousand
euros of which 1,660 thousand euros was in use at the reporting date. 

Interest rate risk

The Group’s interest-bearing liabilities to banks have mainly fixed interest
rates. Finance lease liabilities have floating interest rates and are linked to
EURIBOR. At 31 December 2011, the Group’s interest-bearing loans and borrowings
totalled 28,643 thousand euros, a decrease of 5,966 thousand euros
year-over-year. Interest expense for 2011 amounted to 1,028 thousand euros.
Compared with 2010, interest expense has decreased by 27 thousand euros. The
Group’s interest rate risk is currently influenced by two factors: a rise in
the base rate for floating interest rates (EURIBOR) and a low interest coverage
ratio caused by low operating cash flows. The first factor is mitigated by
fixing, where possible, the interest rates of liabilities during the period of
low market interest rates. The realisation of the interest payment cash flow
risk depends on the success of operating activities. The Group has not acquired
derivatives to hedge its interest rate risk. 

Currency risk

As a rule, construction contracts and subcontractors’ service contracts are
made in the currency of the host country: in euros (EUR), in Ukrainian hryvnas
(UAH) and in Belarusian rubles (BYR). In connection with discontinuance of
operations in Latvia and Lithuania, the currency risks of those countries are
no longer relevant. Services purchased from other countries are mostly priced
in euros, which does not constitute a currency risk for the Group’s Estonian
entities. 

The Group’s foreign exchange gains and losses result mainly from its Ukrainian
and Belarusian operations because the Ukrainian and Belarusian national
currency float against the euro. The Group has not acquired derivatives to
hedge its currency risks. 

The Group’s foreign exchange gains and losses for 2011 resulted in a net
exchange gain of 171 thousand euros. In the comparative period, exchange
differences resulted in a net exchange loss of 400 thousand euros. 



Nordecon 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
and Finland. 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
2010 was 99.3 million euros. Currently Nordecon Group employs nearly 700
people. Since 18 May 2006, the company's shares have been quoted in the main
list of the NASDAQ OMX Tallinn Stock Exchange. 


         Raimo Talviste
         Nordecon AS
         Head of Finance and Investor Relations
         Tel: +372 615 4445
         Email: [email protected]
         www.nordecon.com