Market announcement

Title

2012 II quarter and 6 months consolidated interim report (unaudited)

Message

Nordecon AS announces its 2012 II quarter and 6 months consolidated interim
report (unaudited). 

Tallinn, Estonia, 2012-08-09 15:35 CEST (GLOBE NEWSWIRE) --
Announcement includes Nordecon AS’ consolidated financial statements for 2012
II quarter and 6 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 presentation 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                                                30 June      31 December
                                                           2012             2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                 5,332            9,908
Trade and other receivables                              47,177           34,645
Prepayments                                               2,883            2,610
Inventories                                              25,142           24,120
Non-current assets held for sale                              0              242
Total current assets                                     80,534           71,525
Non-current assets                                                              
Investments in equity-accounted investees                   248              199
Other investments                                            26               26
Trade and other receivables                               2,370            2,504
Investment property                                       4,930            4,930
Property, plant and equipment                             8,269            7,437
Intangible assets                                        14,907           14,960
Total non-current assets                                 30,750           30,056
TOTAL ASSETS                                            111,284          101,581
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                     30,754           19,130
Trade payables                                           33,302           27,403
Other payables                                            5,135            4,930
Deferred income                                           6,915           10,587
Provisions                                                  300              485
Total current liabilities                                76,406           62,535
Non-current liabilities                                                         
Loans and borrowings                                      5,790            9,513
Trade payables                                              199              199
Other payables                                               96               96
Provisions                                                  918              841
Total non-current liabilities                             7,003           10,649
TOTAL LIABILITIES                                        83,409           73,184
                                                                                
EQUITY                                                                          
Share capital                                            19,657           19,657
Statutory capital reserve                                 2,554            2,554
Translation reserve                                        -516             -463
Retained earnings                                         4,072            4,563
Total equity attributable to equity holders of the       25,767           26,311
 parent                                                                         
Non-controlling interest                                  2,108            2,086
TOTAL EQUITY                                             27,875           28,397
TOTAL LIABILITIES AND EQUITY                            111,284          101,581


Condensed consolidated interim statement of comprehensive income

EUR '000                            Q2 2012  Q2 2011  6M 2012  6M 2011      2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                              40,445   36,706   62,920   54,429   147,802
Cost of sales                       -38,293  -38,061  -60,732  -55,857  -147,608
Gross profit/loss                     2,152   -1,355    2,188   -1,428       194
                                                                                
Distribution expenses                  -114      -68     -190     -164      -317
Administrative expenses              -1,274   -1,057   -2,504   -2,124    -4,641
Other operating income                  253      153      366      379       806
Other operating expenses                 31      -58      -57     -164      -672
Operating profit/loss                 1,048   -2,385     -197   -3,501    -4,630
                                                                                
Finance income                          196      167      341      350       938
Finance expenses                       -255     -306     -539     -611    -1,086
Net finance expense                     -59     -139     -198     -261      -148
                                                                                
Share of profit of                       73       47       49       47       100
 equity-accounted investees                                                     
                                                                                
Profit/loss before income tax         1,062   -2,477     -346   -3,715    -4,678
Income tax expense                      -44       -5      -44       -1       -30
Profit/loss for the period            1,018   -2,482     -390   -3,716    -4,708
                                                                                
Other comprehensive                                                             
 income/expense:                                                                
Exchange differences on                -114      101      -53      216      -329
 translating foreign operations                                                 
Total other comprehensive              -114      101      -53      216      -329
 income/expense for the period                                                  
TOTAL COMPREHENSIVE INCOME/EXPENSE      904   -2,381     -443   -3,500    -5,037
 FOR THE PERIOD                                                                 
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                  873   -2,475     -491   -3,652    -5,304
- Non-controlling interests             145       -7      101      -64       596
Profit/loss for the period            1,018   -2,482     -390   -3,716    -4,708
                                                                                
Total comprehensive income/expense                                              
 attributable to:                                                               
- Owners of the parent                  759   -2,420     -544   -3,510    -5,924
- Non-controlling interests             145       39      101       10       887
Total comprehensive income/expense      904   -2,381     -443   -3,500    -5,037
                                                                                
Earnings per share attributable to                                              
 owners of the parent:                                                          
Basic earnings per share (EUR)         0.03    -0.10    -0.02    -0.12     -0.17
Diluted earnings per share (EUR)       0.03    -0.10    -0.02    -0.12     -0.17



Condensed consolidated interim statement of cash flows

EUR '000                                                        6M 2012  6M 2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers*                                    65,346   58,164
Cash paid to suppliers**                                        -62,528  -49,220
VAT paid                                                         -2,079   -1,246
Cash paid to and for employees                                   -7,809   -5,851
Income tax paid                                                     -11       -1
Net cash used in/from operating activities                       -7,081    1,846
                                                                                
Cash flows from investing activities                                            
Acquisition of property, plant and equipment                       -836      -13
Proceeds from sale of property, plant and equipment and             363      280
 intangible assets                                                              
Loans granted                                                      -376      -87
Repayment of loans granted                                           19    1,631
Dividends received                                                    0        4
Interest received                                                     0      181
Net cash used in/from investing activities                         -830    1,996
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                      6,334      892
Repayment of loans received                                      -1,322   -2,408
Payment of finance lease liabilities                             -1,090     -931
Interest paid                                                      -587     -545
Other payments                                                        0       -2
Net cash from/used in financing activities                        3,335   -2,994
                                                                                
Net cash flow                                                    -4,576      848
                                                                                
Cash and cash equivalents at beginning of period                  9,908    5,818
Effect of exchange rate fluctuations                                  0     -323
Decrease/increase  in cash and cash equivalents                  -4,576      848
Cash and cash equivalents at end of period                        5,332    6,343

* Line item Cash receipts from customers includes VAT paid by customers.

** Line item Cash paid to suppliers includes VAT paid to suppliers.



Financial review

Financial performance

Nordecon Group ended the first six months of 2012 with a gross profit of 2,188
thousand euros (HY1 2011: a gross loss of 1,428 thousand euros). Most of the
profit was earned in the second quarter that was not undermined by adverse
weather conditions and the fixed costs of a technological standstill, which
impacted the first quarter. Moreover, compared with 2011 there were no losses
from contracts secured in 2009-2010. 

The main factors that helped restore operational profitability were Group-wide
austerity measures enforced in 2010 due to market slump, internal
restructuring, and streamlining of processes and operations. Although volume
growth, which emerged in 2011, has clearly improved the situation in the
Estonian construction market, we will have to continue working hard to maintain
and enhance the results achieved and to counteract threats to profitability.
Margins are still below target but we believe that we are moving in the right
direction to improve operational profitability compared with 2011. Current
estimates of the outcomes of contracts included in the Group’s order book
support that view. It should also be kept in mind that the profits of
construction contracts are recognised based on the stage of completion of
contract activity, which means that the profits of long-term contracts are
recorded gradually over the contract term. 

The rise in profitability has also been underpinned by changes in the
competitive environment. According to our assessment, in 2011 competition in
certain 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 leaving the
market as well as the fact that in recent years all companies have had to
reduce their personnel and support structures, which has undermined some
players’ bidding capabilities. In addition, many companies were held back by
tougher financial conditions imposed by customers and the financing
institutions’ reluctance to provide guarantees. Most construction companies
have become aware that long-term construction contracts entail the risk of
growth in input prices. However, there is still no indication of a decrease in
competitive pricing pressure in building construction, where lack of private
sector customers has rendered the market too small for all general contractors.
Altogether, this means that companies are weighing the risks involved in
price-setting more carefully than during the period of rapid downturn but risks
to profitability still persist. 

Administrative expenses for the first half of 2012 totalled 2,504 thousand
euros including non-recurring consulting fees incurred to adjust the Group’s
strategy to the changing environment. The ratio of administrative expenses to
revenue was 4.0% (HY1 2011: 3.9%). The Group’s cost-control measures are
yielding strong results and we believe that on a whole-year basis we can
maintain administrative expenses below the target ceiling, i.e. 5% of revenue.
An indicator of effective cost management is the fact that despite growing
volumes the 12-month rolling average ratio of administrative expenses to
revenue was 3.2% (HY1 2011: 4.1%). 

The Group’s operating loss for the first half-year was 197  thousand euros (HY1
2011: 3,501 thousand euros). EBITDA was positive at 925 thousand euros (HY1
2011: negative at 2,278 thousand euros). 

The Group ended the first half of 2012 with net loss of 390 thousand euros. The
loss attributable to owners of the parent, Nordecon AS, was 491 thousand euros.
The first half of 2011 ended in a net loss of 3,716 thousand euros and the loss
attributable to owners of the parent was 3,652 thousand euros. 

Cash flows

In the first half of 2012 operating activities resulted in a net cash outflow
of 7,081 thousand euros (HY1 2011: a net inflow of 1,846 thousand euros).
Although cash receipts from customers exceeded cash paid to suppliers, net cash
flow was rendered negative by VAT and labour tax payments, which increased
substantially compared with the prior year. In the first half of 2012, a
significant amount of construction services was purchased from abroad without
the possibility of recovering input VAT but on the resale of the services in
Estonia VAT had to be paid. In the previous year, operating activities gave
rise to prepaid VAT, which was used to offset labour tax liabilities. In the
first half of this year we did not have similar offsetting opportunities.
Operating cash flows continued to be influenced by cyclical fluctuations in
project-related cash flows. The settlement terms granted to customers are long
and in the case of public procurement generally extend from 45 to 100 days
while suppliers generally have to be paid within 21 to 45 days. The Group
counteracted cyclical fluctuations with factoring and overdraft facilities for
working capital. The effect of difference in settlement terms should become
positive in the second half-year when construction volumes (cash outlays)
decrease and the Group starts receiving cash for work done during the earlier
active construction months (May to June). 

Cash flows from investing activities resulted in a net outflow of 830 thousand
euros (HY1 2011: a net inflow of 1,996  thousand euros). The main reasons for
the net outflow were loans granted to associates and payments made for
property, plant and equipment (including prepayments for a new asphalt plant).
In the comparative period, net cash flow from investing activities was positive
on account of settlement of loans granted. 

Financing activities resulted in a net cash inflow of 3,335  thousand euros
(HY1 2011: a net outflow of 2,994 thousand euros). A major proportion of cash
flows from financing activities resulted from use of overdraft facilities for
raising sufficient working capital. The Group’s cash outflows from financing
activities have stabilised thanks to agreements reached with the banks
regarding repayment holidays and extension of loan agreements. The amendment of
agreements did not cause any major change in the Group’s interest rates. 

At 30 June 2012, the Group’s cash and cash equivalents totalled 5,332 thousand
euros (30 June 2011: 6,343 thousand euros).  Management’s comments on potential
liquidity risk are presented in the chapter Description of the main risks. 



Key financial figures and ratios

Figure/ratio                         6M 2012     6M 2011     6M 2010        2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue (EUR’000)                     62,920      54,429      37,401     147,802
Revenue growth/decrease, %               16%         46%        -52%         49%
Net loss (EUR’000)                      -390      -3,716      -4,175      -4,708
Loss attributable to owners of          -491      -3,652      -3,788      -5,304
 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)               -0.02       -0.12       -0.12       -0.17
                                                                                
Administrative expenses to              4.0%        3.9%        6.1%        3.1%
 revenue, %                                                                     
Administrative expenses to              3.2%        4.1%        5.4%        3.1%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR’000)                         925      -2,278      -3,718      -1,819
EBITDA margin, %                        1.5%       -4.2%       -9.9%       -1.2%
Gross margin, %                         3.5%       -2.6%       -7.7%        0.1%
Operating margin, %                    -0.3%       -6.4%      -14.6%       -3.1%
Operating margin excluding gains       -0.7%       -6.8%      -14.6%       -3.5%
 on asset sales, %                                                              
Net margin, %                          -0.6%       -6.8%      -11.2%       -3.2%
Return on invested capital, %           0.3%       -5.0%       -5.0%       -5.9%
Return on equity, %                    -1.4%      -11.7%       -9.6%      -15.2%
Equity ratio, %                        25.0%       26.8%       38.2%       28.0%
Gearing, %                             48.5%       40.8%       25.2%       32.8%
Current ratio                           1.05        1.19        1.53        1.14
                                                                                
                                     30 June     30 June     30 June      31 Dec
                                        2012        2011        2010        2011
--------------------------------------------------------------------------------
Order book (EUR’000)                 166,367     140,234      89,440     134,043
--------------------------------------------------------------------------------



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 
Administrative expenses to        (interest-bearing liabilities + equity))*100  
 revenue = (administrative       Return on equity = (net profit for the period/ 
 expenses/ revenue)*100           the period’s average total equity)*100        
Administrative expenses to       Equity ratio = (total equity/ total liabilities
 revenue (rolling) = (past four   and equity)*100                               
 quarters’ administrative        Gearing = ((interest-bearing liabilities – cash
 expenses/past four quarters’     and cash equivalents)/ (interest-bearing      
 revenue)*100                     liabilities + equity))*100                    
EBITDA = operating profit +      Current ratio = total current assets/ total    
 depreciation and amortisation    current liabilities                           
 + impairment losses on                                                         
 goodwill                                                                       
EBITDA margin =                                                                 
 (EBITDA/revenue)*100                                                           
Gross margin = (gross                                                           
 profit/revenue)*100                                                            
Operating margin = (operating                                                   
 profit/revenue)*100                                                            
--------------------------------------------------------------------------------



Performance by geographical market

In the first half of 2012, roughly 1% of the Group’s revenue was generated
outside Estonia. In the first half of 2011, foreign operations accounted for 4%
of the Group’s revenue. 

         6M 2012  6M 2011  6M 2010  2011
----------------------------------------
----------------------------------------
Estonia      99%      96%      94%   97%
Ukraine       0%       0%       6%    0%
Belarus       0%       3%       0%    1%
Finland       1%       1%       0%    2%

The decline in foreign revenues results from discontinuance of operations in
the Belarusian market (see also the chapter Changes in the Group’s business
operations in the first half of 2012). Finnish revenues comprise revenue from
rendering subcontracting services in the concrete works sector. We expect the
contribution of foreign markets to remain at a similar level for the rest of
the year. 

Geographical diversification of the revenue base has been a consciously
deployed strategy by which the Group mitigates the risks resulting from
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 which entails 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 building and infrastructure construction. The Group
is involved in the construction of commercial and industrial buildings and
facilities, road construction and maintenance, environmental engineering,
concrete works and real estate development. 

The Group’s revenue for the first half of 2012 was 62,920 thousand euros, 16%
up on the 54,429 thousand euros generated in the first half of 2011. The
foundation for revenue growth was laid in 2011 when the Estonian construction
market began recovering and the Group secured significantly more new contracts
than in 2010. Revenue should continue growing on a year over year basis also in
the following quarters, although at a somewhat slower pace. 

The Group aims to maintain the revenues of its operating segments (Buildings
and Infrastructure) in balance as this helps disperse risks and provides better
opportunities for continuing operations under stressed circumstances when one
segment experiences shrinkage. The Group has set an internal ceiling for
revenue from the construction of apartment buildings, which has to remain below
20% of the Group’s total sales. 

Segment revenue

In the first half of 2012, the revenues of our two main operating segments were
practically equal. The contribution of the Infrastructure segment was slightly
larger and should remain so also the second half of the year. The Buildings
segment ended the first half of 2012 with revenue of 28,508 thousand euros and
the Infrastructure segment with revenue of 32,766 thousand euros. The
corresponding figures for the comparative period were 25,704 thousand euros and
27,402 thousand euros (see note 8). 

For a long time, the bulk of the work in the construction market has been
related to infrastructure assets (mostly projects financed with the support of
the state and the EU structural funds) and the majority (69%) of contracts in
the Group’s order book belong to the Infrastructure segment. Despite this, the
segments’ revenues have been more or less equal because the present building
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*

Operating segments  6M 2012  6M 2011  6M 2010  2011
---------------------------------------------------
---------------------------------------------------
Buildings               46%      46%      46%   48%
Infrastructure          54%      54%      54%   52%

* 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 operating
segments based on their nature (i.e. building or infrastructure construction).
In the segment reporting presented in the financial statements, aggregation and
allocation are 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 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 have been allocated in both parts of the interim report
based on the nature of the work. 

Revenue distribution within segments

In the Buildings segment, most of the revenue resulted from the construction of
public buildings financed by the public sector. Compared with a year ago, the
relative importance of public buildings decreased because the contributions of
other sub-segments (primarily commercial buildings) increased. The segment’s
largest project was the construction of the Ämari Air Base, which to date has
been substantially completed. 

In 2011 the economic environment improved, triggering certain recovery in the
commercial buildings and industrial and warehouse facilities sub-segments,
where private sector investments increased. Growth was particularly visible in
the commercial buildings sub-segment, where the Group started the construction
of four new buildings. A major share of the revenue of the industrial and
warehouse facilities sub-segment resulted from buildings constructed for the
agricultural sector. However, compared with a year ago, their proportion
decreased and despite growth in private sector investments the sub-segment’s
volumes declined. Apartment buildings were built for non-Group customers, the
Group acting as a general contractor, not a developer. 

Revenue distribution within the Buildings segment is influenced by the scarcity
of projects on offer, which forces companies to compete in all market segments
as the number of contracts awarded is small compared to bids made. The
situation does not allow concentrating on a specific area and during the year
revenue distribution within the segment may change significantly. 

Revenue distribution within the Buildings        6M 2012  6M 2011  6M 2010  2011
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Commercial buildings                                 19%       6%      26%   12%
Industrial and warehouse facilities                  28%      38%      21%   40%
Public buildings                                     49%      54%      38%   45%
Apartment buildings                                   4%       2%      15%    3%

As expected, by the end of the first half-year the main revenue contributor in
the Infrastructure segment was road construction and maintenance. In the second
half-year, its relative importance should increase even further in connection
with the construction of the Tartu western bypass and eastern ring road, which
were secured in the reporting period. Similarly to preceding periods, a major
share of the revenue of the Infrastructure segment resulted from the
construction of water and wastewater networks financed with the support of the
EU structural funds (other engineering). The contribution of other engineering
should remain stable in the second half-year. In specialist engineering, growth
was underpinned by the construction of facilities for Sillamäe port, which
commenced in the second half of 2011. The contribution of environmental
engineering has decreased because there is currently no contract comparable to
the construction of the bio-filter for the wastewater treatment plant of
Tallinn, which was in progress in the first half of 2011. 

Revenue distribution within the Infrastructure   6M 2012  6M 2011  6M 2010  2011
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    40%      46%      65%   47%
Specialist engineering (including hydraulic          16%       1%       1%   10%
 engineering)                                                                   
Other engineering                                    38%      37%      26%   35%
Environmental engineering                             6%      16%       8%    8%



Order book

At 30 June 2012, our order book stood at 166,367 thousand euros, being 19%
larger than a year ago. Order book has increased thanks to general growth in
the construction market and successful bidding, which has led to the award of
several major contracts (such as the Aruvalla-Kose road section, Sillamäe port
facilities, Luige intersection, Tartu western bypass and eastern ring road,
etc) since the second quarter of 2011. 

                      30 June 2012  30 June 2011  30 June 2010     2011
-----------------------------------------------------------------------
Order book (EUR’000)       166,367       140,234        89,440  134,043

At 69% the Infrastructure segment continues to account for a major share of the
total order book (30 June 2011: 72%). 

Between the reporting date (30 June 2012) and the date of release of this
report, Group companies have been awarded construction contracts of
approximately 15,569 thousand euros. 



People

Staff and personnel expenses

In the first half of 2012, the Group (the parent and the subsidiaries)
employed, on average, 771 people including 371 engineers and technical
personnel (ETP). In connection with growth in the Group’s operating volumes in
2012, both the number ETP and the number of workers have increased year over
year. Due to the seasonal nature of construction activity, at the reporting
date the number of staff was expectedly larger than at the end of the previous
financial year. 

Average number of the Group’s employees (comprising all Group entities)

               6M 2012  6M 2011  6M 2010  2011
----------------------------------------------
----------------------------------------------
ETP                371      352      362   351
Workers            400      379      435   380
Total average      771      731      797   731

The Group’s personnel expenses for the first half of 2012 including all taxes
totalled 7,143 thousand euros, 8% up on the first half of 2011 when personnel
expenses were 6,602 thousand euros. The growth in personnel expenses is mainly
attributable to growth in the number of staff. 

The remuneration of the members of the council of Nordecon AS for the first
half of 2012, including associated social security charges, amounted to 94
thousand euros. The corresponding figure for the first half of 2011 was 50
thousand euros. The amount has increased in connection with the decision of
Nordecon AS’s annual general meeting to increase the remuneration of the
council as from 2012. The remuneration of the members of the board of Nordecon
AS, including social security charges, totalled 196 thousand euros. The figure
for the comparative period was 143 thousand euros. The figure increased due to
the termination benefits paid to the member of the board who was recalled in
May 2012. 

Labour productivity and labour cost efficiency

In connection with rapid revenue growth, both the Group’s labour productivity
and labour cost efficiency have improved year over year. Labour productivity
and labour cost efficiency have improved also compared with the end of 2011. 

In measuring operating efficiency, the Group uses the following productivity
and efficiency indicators, which are based on the number of employees and
personnel expenses paid: 

                                                6M 2012  6M 2011  6M 2010   2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling),            208.6    155.9    124.8  202.3
 (EUR’000)                                                                      
Change against the comparative period, %          33.8%    25.0%   -25.8%  57.7%
                                                                                
Nominal labour cost efficiency (rolling),          10.6      8.2      6.3   10.4
 (EUR’000)                                                                      
Change against the comparative period, %          29.1%    30.9%   -11.7%  51.6%



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)                                             
--------------------------------------------------------------------------------



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market in
2012 

  -- We do not expect the construction market to grow significantly in 2012.
     Infrastructure contracts will dominate but opportunities for certain market
     growth will be better in the buildings segment where recovery has been
     slower, assuming that private sector customers (including foreign ones)
     that abandoned the market in prior years will return. In housing
     development, the success of a project will depend on the developer’s
     ability to either offer a low cost or exploit a new niche. The banks’
     financing terms will remain stringent.
  -- Total demand in the construction market will remain disproportionately
     reliant on public procurement and projects executed with the support of the
     EU structural funds. In the second half of 2012 the volume of new
     procurement contracts will start decreasing because the current EU budget
     period (2013/2014) is coming to an end and co-financing terms require that
     a project should be completed during the budget period. Anticipation of
     shrinkage in public sector investments from 2013 will intensify competition
     and will put pressure on construction companies’ profit expectations.
     Uncertainty about the future is increased by lack of information about the
     investment volumes of the next EU budget period.

  -- Players will continue consolidating, particularly general contractors in
     building construction, where competition is still overaggressive. The
     tenders of 2012 reflect that pricing pressure in the segment is strong.
     Besides competition, the number and business volumes of market participants
     will depend on their ability to participate in the bidding process and to
     meet tendering requirements. In the execution phase, the decisive factors
     are financial management (including relations with banks) and the ability
     to ensure sufficient liquidity.

  -- Companies will continue to challenge the results of poorly prepared public
     procurements but mostly on account of substantive, not technical issues.
     Some procurements will be cancelled because the customers have prepared
     their project budgets based on the construction prices of 2009-2010. The
     latter are no longer realistic and construction companies’ bids exceed them
     by tens of percents.
  -- The contracts signed with public sector customers will impose rigorous
     conditions on construction companies, including extensive obligations,
     strict sanctions, different financial guarantees, long settlement terms,
     etc. In a situation where public procurement 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. However, there are areas where price fluctuations are
     unpredictable and may be notably greater and hard or even impossible to
     influence (petroleum and metal products and some other materials). The rise
     in input prices, which began in 2011, has reached a point where it is
     hindering private customers’ investment decisions.
  -- The situation in the labour market will remain relatively stable. Companies
     have adapted to the situation but when volumes increase the availability of
     qualified labour will again be an issue. In 2012 the base wage paid by
     construction companies, which have to maintain tight cost control, is not
     likely to rise but the pressure for a wage increase remains high. There
     will be no more surges in labour migration to the Nordic countries. As the
     size of the Nordic construction market stabilises, the same will probably
     happen to labour migration.
  -- In 2012 the construction market will continue to be seriously and somewhat
     unpredictably impacted by massive funds raised from the sale of carbon
     dioxide emission quotas, which are allocated within an extremely short
     period for improving the energy efficiency of buildings. It has already
     triggered demand hikes in certain segments of the construction market
     (joint filling, facade and roof works, installation of heating systems,
     etc), causing unreasonable rises in respective prices and hence temporary
     problems for the entire sector. In 2013, when the resources are depleted,
     volumes will plummet and competition will heighten, particularly among
     small and medium-sized players in the segments involved.
  -- The volume of private investments in the construction sector will depend on
     the economic growth rate, the export markets and related forecasts.
     According to economic statistics on 2011, in recent years all parties
     (companies, investors and banks) have made decisions that have reduced
     private sector investments. In the first half of 2012, slightly more
     investment decisions were made but recovery is slow and cautious because
     consumer confidence remains low and the European debt crisis has not been
     resolved. Still, we expect to see a few large investments in certain
     sub-segments of building and infrastructure construction (extensions to
     shopping centres and industrial facilities, and hydraulic engineering
     projects respectively).

Latvia and Lithuania

According to the Group’s assessment, the Latvian construction market will
continue adjusting to the post-recession environment also in 2012. We do not
exclude the possibility that in the next few years we will undertake some
projects in Latvia through our Estonian entities, involving partners where
necessary. Execution 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, we have suspended the operations of our 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 and does not change our
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 have been practically no private sector customers in that segment.
We do not believe that in 2012 there will be a significant increase in the
activity of customers that interest us in the Ukrainian market. Maintaining
minimal readiness at the current cost base, we have decided to continue our
business in Ukraine until the end of 2012. We review the sustainability of our
Ukrainian operations on a regular basis and will make a more definite decision
regarding the future in the autumn. 

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 2008-2010 has been slow and
achievement of political stability complicated. Demand continues to be
undermined by private customers’ pessimism about the political future of the
country and lack of financing for commencing construction operations. To date
private sector customers have not started investing in projects where the Group
would have a competitive advantage. 

The country with a population of around 46 million is facing some tough
choices. Unfortunately, the ongoing uncertainty is increasing the risks of
companies operating in the local construction market. 

Finland

In the Finnish market the Group offers subcontracting services in the field of
concrete works. This is an area where Estonian companies still have an edge
over local entities because our total 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, we will maintain a rational approach and will avoid taking
excessive risks in Finland. We are not planning to penetrate other segments of
the Finnish construction market (general contracting, project management, etc). 



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. In addition, in the region where the Group operates
construction operations are influenced by seasonality caused by the change of
seasons. 

The Group acknowledges the risks inherent in the execution of contracts
concluded in an environment of stiff competition. Securing a long-term
construction contract at an unreasonably low price in a situation where input
prices are rising involves as high risk because the contract may quickly start
generating a loss. 

In the next years, the Estonian construction market will be heavily dependent
on public sector investments. A significant proportion of the latter is made up
of support from the EU structural funds. The availability of that support is
relatively certain until the end of the current budget period (2007-2013).
According to disbursement terms, a supported project has to be completed by the
end of the budget period. This means that in 2013 the number of projects
launched will decrease significantly. We do not know the details of the budget
for 2014-2020, although it is clear that the investments included in it will
have a significant and direct impact on the business volumes of construction
companies. According to currently available information, the volume of planned
investments will decrease. 

The impacts of seasonality are the strongest in the Infrastructure segment
where a lot of work is done outdoors (road and port construction, surface
works, etc). In order to disperse the risk, the Group has secured road
maintenance contracts that generate year-round business. According to its
business strategy, the Group counteracts seasonal fluctuations in its
infrastructure operations with building construction operations that are less
exposed to seasonality. Thus, the Group endeavours to keep the operating
volumes of the two segments in balance (see also the chapter Performance by
business line). In addition, Group companies consistently seek new technical
solutions that would yield greater efficiency under changeable weather
conditions. 

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

On 25 September 2008, the Estonian Road Administration published a notice of
the public procurement of services for the design and build of the E263
Aruvalla-Kose road section. Nordecon AS (at that date the Group’s subsidiary
Nordecon Infra AS) and Ramboll Eesti AS submitted a joint bid of 32.4 million
euros. 

The procurement gave rise to numerous challenges in the period 2008-2010. Owing
to the challenges, the Road Administration decided to cancel the procurement
but the Public Procurement Dispute Review Committee declared the Road
Administration’s cancellation resolution invalid. The procurement process
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, declared the procurement process invalid
on the basis that during the 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 grant 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 of 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 Economic Affairs and
Communications. By the date of release of this report, no criminal charges have
been filed against any of the suspects. 

On 20 June 2012, the public prosecutor’s office issued an order for partial
termination of criminal proceedings instituted by the security police in
November 2011 for investigation of circumstances surrounding the public
procurement of the design and build of the Aruvalla-Kose road section. Erkki
Suurorg and Nordecon AS were charged with suspicion of attempting to conclude
an agreement for distorting competition and later also of promising a gratuity.
With the order, the public prosecutor’s office terminated criminal proceedings
related to the suspicion of promising a gratuity because it established that
the act had not taken place. 

Criminal proceedings concerning the alleged episode of a competition act
offence are still pending. Erkki Suurorg and Nordecon AS gave their testimony
during the preliminary investigation and have affirmed that the suspicions are
baseless. 

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
tender for public procurement contracts. 

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
contracts are used. In addition, as a rule, subcontractors are required to
secure the performance of their obligations with a bank guarantee provided to a
Group company. To remedy builder-caused deficiencies, which may be detected
during the warranty period, Group companies create warranties provisions based
on their historical experience. At 30 June 2012, the Group’s warranties
provisions (including current and non-current ones) totalled 1,103 thousand
euros. At 30 June 2011, the corresponding figure was 1,045 thousand euros. 

In addition to managing the risks, which are directly related to construction
operations, in recent years the Group has sought to mitigate also those
operational risks that are inherent in preliminary activities. In particular,
we have focused on the bidding process, i.e. the Group’s compliance with the
procurement terms and conditions and budgeting. Any errors made in the planning
stage are generally irreversible and, in a situation where the price is
contractually fixed, may result in a direct financial loss. 



Financial risks

Credit risk

Despite continued uncertainty, the Group did not have to recognise any
significant credit losses. The credit risk exposure of the Group’s receivables
continues to be low because the proportion of public sector customers that
receive their financing from the state and local government as well as the EU
structural funds is high. The main indicator of the realisation of credit risk
is settlement default that exceeds 180 days coupled with no activity on the
part of the debtor that would confirm the intent to settle. 

In the first half of 2012, recoveries of receivables written down in prior
periods exceeded credit losses by 4 thousand euros (HY1 2011: the Group
recognised a credit loss of 2 thousand euros). 

Liquidity risk

The Group remains exposed to higher than average liquidity risk resulting from
a mismatch between the long settlement terms demanded by customers (mostly 45
to 56 days) and increasingly shorter settlement terms negotiated by
subcontractors (mostly 21 to 45 days). The Group counteracts the differences in
settlement terms by using factoring where possible. 

The Group continues to work with the banks in implementing its financing
program for 2011-2014, which was developed in 2011 with the assistance of one
of the world’s leading consulting firms (Roland Berger Strategy Consultants).
In line with the program, the banks will support the Group’s liquidity position
by refinancing long-term loans and by granting repayment holidays for loan
principal (for 2011-2012 with the option to extend the repayment holiday for
2013). Where necessary, the banks will support the Group with additional
short-term loans. At the end of the reporting period, the Group had received
loans of this kind of 6.2 million euros. 

At 30 June 2012, the Group’s current assets exceeded its current liabilities
1.05-fold (30 June 2011: 1.19-fold). Bank loans make up a significant
proportion of current liabilities. In accordance with IFRS EU, loan commitments
have to be classified into current and non-current liabilities based on the
contractual conditions effective at the reporting date. Although management
believes that it is likely that the Group’s overdraft liabilities and other
short-term bank loans will be refinanced for another 12 months, relevant
decisions will be made in the next quarters of 2012. Therefore, at the
reporting date the loan commitments constituted short-term liabilities.
According to the Group’s estimates, current liabilities include loans of 10,499
thousand euros that will probably be refinanced. If the current ratio were
adjusted accordingly, it would be 1.37. 

At the reporting date, the Group’s cash and cash equivalents totalled 5,332
thousand euros (30 June 2011: 6,343 thousand euros). 

Interest rate risk

The Group’s interest-bearing liabilities to banks have both fixed and floating
interest rates. Finance lease liabilities have mainly floating interest rates.
The base rate for floating interest rates is mostly Euribor. At 30 June 2012,
the Group’s interest-bearing loans and borrowings totalled 36,544 thousand
euros, an increase of 5,202 thousand euros year-over-year. Interest expense for
the first half of 2012 amounted to 504 thousand euros. Compared with the first
half of 2011, interest expense has increased by 5 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 weak operating cash flow. The first risk factor is mitigated by
fixing, where possible, the interest rates of liabilities during the period of
low market interest rates. Realisation of the second risk factor depends on the
success of operating activities. 

In recent years, banks and leasing companies have been increasingly interested
in charging a floating interest rate. This increases the Group’s exposure to
additional finance costs that may result from a rise in the base interest rate.
The Group has not acquired any derivatives for hedging the risks arising from
instruments with a floating interest rate. 

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) and in Ukrainian hryvnas
(UAH). From the beginning of 2012 the Group is not exposed to currency risks
related to the Belarusian ruble (BYR) because the Group has practically
discontinued its operations in Belarus. The exchange rate of the Ukrainian
hryvna against the euro has been stable since 2010. In the first half of 2012,
fluctuations in the euro-hryvna exchange rate remained below 5%. The Group’s
net foreign exchange gain for the first half of 2012 was 83 thousand euros (HY1
2011: a loss of 109 thousand euros). 

Since Estonia’s adoption of the euro at the beginning of 2011, the Group’s
Finnish operations do not involve a currency risk. Nor does the Group have any
currency risk in Lithuania where operations have been suspended. Currency risk
is also reduced by the fact that the prices of construction materials and
services that the Group’s Estonian entities purchase from abroad are mostly
denominated in euros. 

The Group has not acquired any derivatives to hedge its currency risks.



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
2011 was 147.8 million euros. Currently Nordecon Group employs more than 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