Market announcement

Title

Financial report for the first quarter of 2013

Message

Nordecon AS publishes financial report for the first quarter of 2013.

Tallinn, Estonia, 2013-05-09 13:35 CEST (GLOBE NEWSWIRE) --
Announcement includes Nordecon AS’s consolidated financial statements for the
first quarter of 2013 (unaudited), overview of the key events influencing the
period’s financial result, outlook for the market and description of the main
risks. 

Interim report is attached to the announcement and is also published on NASDAQ
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                                         31 March 2013  31 December 2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                6,474            10,231
Trade and other receivables                             36,692            42,896
Prepayments                                              2,251             1,840
Inventories                                             25,497            26,243
Total current assets                                    70,914            81,210
Non-current assets                                                              
Investments in equity-accounted investees                  193               202
Other investments                                           26                26
Trade and other receivables                                384             1,554
Investment property                                      4,930             4,930
Property, plant and equipment                            9,023             8,851
Intangible assets                                       14,832            14,857
Total non-current assets                                29,388            30,420
TOTAL ASSETS                                           100,302           111,630
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                    26,225            27,185
Trade payables                                          27,504            31,968
Other payables                                           4,482             5,014
Deferred income                                          6,754            11,404
Provisions                                                 446               521
Total current liabilities                               65,411            76,092
Non-current liabilities                                                         
Loans and borrowings                                     3,659             3,671
Trade payables                                             259               259
Other payables                                              96                96
Provisions                                               1,281             1,210
Total non-current liabilities                            5,295             5,236
TOTAL LIABILITIES                                       70,706            81,328
                                                                                
EQUITY                                                                          
Share capital                                           19,657            19,657
Statutory capital reserve                                2,554             2,554
Translation reserve                                       -457              -404
Retained earnings                                        5,366             6,039
Total equity attributable to owners of the              27,120            27,846
 parent                                                                         
Non-controlling interests                                2,476             2,456
TOTAL EQUITY                                            29,596            30,302
TOTAL LIABILITIES AND EQUITY                           100,302           111,630



Condensed consolidated interim statement of comprehensive income

EUR '000                                              Q1 2013  Q1 2012      2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                                                27,081   22,475   159,422
Cost of sales                                         -26,488  -22,439  -151,205
Gross profit                                              593       36     8,217
                                                                                
Marketing and distribution expenses                       -62      -76      -389
Administrative expenses                                -1,236   -1,230    -5,385
Other operating income                                    200      113       810
Other operating expenses                                  -37      -88      -566
Operating profit/loss                                    -542   -1,245     2,687
                                                                                
Finance income                                            201      145       622
Finance costs                                            -301     -284    -1,248
Net finance costs                                        -100     -139      -626
                                                                                
Share of loss of equity-accounted investees                -9      -24       -79
                                                                                
Profit/loss before income tax                            -651   -1,408     1,982
Income tax expense                                         -1        0       -56
Profit/loss for the period                               -652   -1,408     1,926
                                                                                
Other comprehensive income/expense:                                             
Exchange differences on translating foreign               -53       61        59
 operations                                                                     
Total other comprehensive income/expense for the          -53       61        59
 period                                                                         
TOTAL COMPREHENSIVE INCOME/EXPENSE FOR THE PERIOD        -705   -1,347     1,985
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                                   -673   -1,364     1,477
- Non-controlling interests                                21      -44       449
Profit/loss for the period                               -652   -1,408     1,926
                                                                                
Total comprehensive income/expense attributable to:                             
- Owners of the parent                                   -726   -1,303     1,536
- Non-controlling interests                                21      -44       449
Total comprehensive income/expense                       -705   -1,347     1,985
                                                                                
Earnings per share attributable to owners of the                                
 parent:                                                                        
Basic earnings per share (EUR)                          -0.02    -0.04      0.05
Diluted earnings per share (EUR)                        -0.02    -0.04      0.05



Condensed consolidated interim statement of cash flows

EUR '000                                                        Q1 2013  Q1 2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers1                                    33,379   33,481
Cash paid to suppliers2                                         -32,499  -31,652
VAT paid                                                           -907   -1,558
Cash paid to and for employees                                   -4,151   -4,073
Income tax paid                                                      -3      -12
Net cash used in operating activities                            -4,181   -3,814
                                                                                
Cash flows from investing activities                                            
Purchase of property, plant and equipment                          -127     -288
Proceeds from sale of property, plant and equipment and              48      128
 intangible assets                                                              
Loans provided                                                     -322     -294
Repayment of loans provided                                         196        9
Dividends received                                                    4        0
Interest received                                                     6        0
Net cash used in investing activities                              -195     -445
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                      3,318    1,503
Repayment of loans received                                      -1,969     -851
Payment of finance lease liabilities                               -476     -605
Interest paid                                                      -253     -310
Net cash from/used in financing activities                          620     -263
                                                                                
Net cash flow                                                    -3,756   -4,522
                                                                                
Cash and cash equivalents at beginning of period                 10,231    9,908
Effect of exchange rate fluctuations                                 -1       -1
Decrease  in cash and cash equivalents                           -3,756   -4,522
Cash and cash equivalents at end of period                        6,474    5,385

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

2 Line item Cash paid to suppliers includes VAT paid.



Financial review

Financial performance

Nordecon group’s gross profit for the first quarter of 2013 was 593 thousand
euros (Q1 2012: 36 thousand euros). Generally first quarter results are
impacted by a high proportion of fixed costs in the Infrastructure segment
because seasonal factors impede outdoor work. However, this year the share of
infrastructure projects where work could be done also during the winter months
was larger than usual (e.g. earthwork for some major road construction projects
and the construction of structures). Gross margin for the period was 2.2% (Q1
2012: 0.2%). 

In previous interim reports we have described the work done to restore the
Group’s profitability. The measures applied, including extensive internal
restructuring and decisive cost cuts, have been effective but their effect on
each subsequent year’s profit is inherently limited. In interpreting the
results, it should be noted that the profits of long-term construction
contracts are earned gradually, based on the stage of completion of contract
activity. 

So far, the external environment has favoured the recovery of construction
companies. In the first quarter, most builders performed contracts secured in
previous periods. The combination of market growth and relatively stable input
and subcontracting prices created a solid basis for a rise in the projects’
average profit margin. However, competition for public procurement contracts
that will be put out to tender this year will be fierce, as companies expect a
decrease in the volume of work procured by the public sector due to the
depletion of resources allocated from the EU financial framework that is coming
to an end in 2013. This will intensify competition and pricing pressure in all
segments of the construction market. The Group is aware that long-term
construction contracts involve the risk of growth in input prices and remains
committed to prioritizing the profitability of contracts secured over
increasing or maintaining its revenue figures. On the other hand, the
investment activity of private sector customers, which is expected to rise
slightly in 2013, should have a positive impact on the margins of construction
companies. 

The Group’s first-quarter administrative expenses totalled 1,236 thousand
euros, remaining more or less stable compared with the 1,230 thousand euros
incurred in the first quarter of 2012. The ratio of administrative expenses to
revenue (12 months rolling) was 3.3% (Q1 2012: 3.1%). Our cost-control measures
continue to yield strong results, allowing us to maintain administrative
expenses below the target ceiling, i.e. 5% of revenue. 

Operating loss for the first quarter of 2013 was 542 thousand euros (Q1 2012:
an operating loss of 1,245 thousand euros) and EBITDA was negative at 35
thousand euros (Q1 2012: negative at 647 thousand euros). 

The Group ended the first quarter with a net loss of 652 thousand euros (Q1
2012: a net loss of 1,408 thousand euros). The loss attributable to owners of
the parent, Nordecon AS, was 673 thousand euros (Q1 2012: a loss of 1,364
thousand euros). 

Cash flows

Operating activities of the first quarter of 2013 resulted in a net cash
outflow of 4,181 thousand euros (Q1 2012: a net outflow of 3,814 thousand
euros). Negative operating cash flow in the first quarter is quite common and
attributable to the cyclical nature of construction activity. Higher fixed
costs and preparations made for more active construction operations in the
second quarter cause outflows to exceed inflows. Operating cash flow continued
to be influenced by a difference between settlement terms. The settlement terms
agreed with customers are long and in the case of public procurement generally
extend from 45 to 56 days while subcontracts ordinarily have to be paid within
21 to 45 days. We counteract the mismatch between cash inflows and outflows
with factoring and overdraft facilities obtained for meeting working capital
requirements. 

Cash flows from investing activities resulted in a net outflow of 195 thousand
euros (Q1 2012: a net outflow of 445 thousand euros). We continued to invest in
property, plant and equipment although not as extensively as a year ago. The
volume of loans to associates was similar to the prior year but we received
more loan repayments. 

Financing activities resulted in a net cash inflow of 620 thousand euros (Q1
2012: a net outflow of 263 thousand euros). The net amount of loan receipts and
repayments was positive at 1,349 thousand euros, being twice larger than a year
ago, when the figure was 652 thousand euros. The Group borrowed more working
capital because business volumes have increased compared with the previous
year. Repayments, which were mostly related to meeting commitments under
refinancing agreements, were larger as well. 

At 31 March 2013, the Group’s cash and cash equivalents totalled 6,474 thousand
euros (31 March 2012: 5,385 thousand euros).  Management’s comments on
liquidity risks are presented in Description of the main risks. 



Key financial figures and ratios

Figure/ratio                         Q1 2013     Q1 2012     Q1 2011        2012
--------------------------------------------------------------------------------
Revenue (EUR’000)                     27,081      22,475      17,723     159,422
Revenue growth, %                        20%         27%         58%        7.9%
Net profit/loss (EUR’000)               -652      -1,408      -1,234       1,926
Profit/loss attributable to             -673      -1,364      -1,177       1,477
 owners of the parent (EUR’000)                                                 
Weighted average number of        30,756,727  30,756,728  30,756,728  30,756,728
 shares                                                                         
Earnings per share (EUR)               -0.02       -0.04       -0.04        0.05
                                                                                
Administrative expenses to              4.6%        5.5%        6.0%        3.4%
 revenue, %                                                                     
Administrative expenses to              3.3%        3.1%        4.5%        3.4%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR’000)                         -35        -647        -484       4,833
EBITDA margin, %                       -0.1%       -2.9%       -2.7%        3.0%
Gross margin, %                         2.2%        0.2%       -0.4%        5.2%
Operating margin, %                    -2.0%       -5.5%       -6.3%        1.7%
Operating margin excluding gains       -2.3%       -6.0%       -7.5%        1.4%
 on asset sales, %                                                              
Net margin, %                          -2.4%       -6.3%       -7.0%        1.2%
Return on invested capital, %          -0.7%       -2.1%       -1.5%        5.2%
Return on equity, %                    -2.2%       -5.1%       -3.8%        6.6%
Equity ratio, %                        29.5%       29.9%       35.5%       27.1%
Gearing, %                             39.4%       42.2%       44.8%       33.7%
Current ratio                           1.08        1.07        1.36        1.08
                                    31 March    31 March    31 March      31 Dec
                                        2013        2012        2011        2012
--------------------------------------------------------------------------------
Order book (EUR’000)                 126,740     136,235      91,974     127,259
--------------------------------------------------------------------------------

                                        

Revenue growth = (revenue for   Operating margin excluding gains on asset sales 
 the reporting period/ revenue   = ((operating profit -  gains on sale of       
 for the previous period) –      property, plant and equipment - gains on sale  
 1*100                           of investment properties and real estate held  
Earnings per share (EPS) = net   for sale)/revenue) *100                        
 profit attributable to owners  Net margin = (net profit for the                
 of the parent / weighted        period/revenue)*100                            
 average number of shares       Return on invested capital = ((profit before tax
 outstanding                     + 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       and equity)*100                                
 four 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 quarter of 2013, around 3% of the Group’s revenue was generated
outside Estonia compared with 2% in the first quarter of 2012. 

         Q1 2013  Q1 2012  Q1 2011  2012
----------------------------------------
----------------------------------------
Estonia      97%      98%      92%   98%
Finland       3%       2%       3%    2%
Belarus       0%       0%       5%    0%

Finnish revenues comprise revenue from concrete works. We expect the
contribution of foreign markets to remain at a similar level throughout the
year. 

Geographical diversification of the revenue base is a consciously deployed
strategy by which we mitigate the risks resulting from excessive concentration.
Although in the long term our strategy foresees increasing foreign operations,
in the short term the Group will focus on the Estonian market that it knows
best and which entails fewer known market risks. The Group’s vision of its
future operations in foreign markets 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, specialist and environmental
engineering, concrete works and real estate development. 

The Group’s revenue for the first quarter of 2013 was 27,081 thousand euros, a
20% improvement on the 22,475 thousand euros generated in the first quarter of
2012. 

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 a strategic ceiling for
revenue from the construction of apartment buildings, which has to remain below
20% of total sales. 

Segment revenues

In the first quarter of 2013, the revenues of the two main segments were more
or less equal, amounting to 12,703 thousand euros for Buildings and 13,157
thousand euros for Infrastructure. The corresponding prior-year figures were
11,713 thousand euros and 10,043 thousand euros (see note 8). The
Infrastructure segment increased its revenue by 30% and, in contrast to the
past few years, outperformed the Buildings segment largely thanks to the fact
that the number of Infrastructure projects where work could also be done in the
winter season was somewhat larger than usual. Compared with the first quarter
of 2012, the proportion of building construction contracts in the Group’s
portfolio has increased (mostly through contracts secured from the private
sector), contributing to growth in building construction revenues. 

Operating segments*  Q1 2013  Q1 2012  Q1 2011  2012
----------------------------------------------------
----------------------------------------------------
Buildings                46%      54%      51%   42%
Infrastructure           54%      46%      49%   58%

* In Directors’ report the Ukrainian buildings segment and the EU buildings
segment, which are disclosed separately in the financial statements as required
by IFRS 8 Operating Segments, are presented as a single segment 

In Directors’ report, projects have been allocated to operating segments based
on their nature (i.e. building or infrastructure construction). In the segment
reporting presented in the financial statements, allocation is based on the
subsidiaries’ main field of activity (as required by IFRS 8 Operating
Segments). In the financial statements, the results of a subsidiary that is
primarily engaged in infrastructure construction are presented in the
Infrastructure segment. In 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. 

Sub-segment revenues

Additional private sector contracts secured in 2012 facilitated revenue growth
in the commercial buildings sub-segment. We are currently building several
commercial buildings in Tallinn and Tartu and, at the end of the quarter,
secured a contract of over 15 million euros for building an extension to the
ASTRI shopping centre in Narva. We expect the investment activity of private
sector customers to continue through 2013 and the proportion of the sub-segment
to remain considerable. 

The revenues of the public buildings sub-segment decreased because we did not
have any major projects comparable to those performed a year ago. The
competitive situation in this market segment is exceptionally challenging: it
is difficult to win procurement tenders without taking excessive risks but our
current policy is to avoid unjustified risks. No major procurement tenders are
expected to be announced in this sub-segment in 2013 and, thus, volumes will
probably not expand. Our largest ongoing projects in the sub-segment are the
construction of the Translational Medicine Centre of the University of Tartu
and Phase V of St Paul’s Church in Tartu. 

Despite slight growth in private sector investment in industrial and warehouse
facilities, most of the sub-segment’s revenue still resulted from contracts
performed for the agricultural sector. However, compared with the first quarter
of 2012, their volume has declined because the support allocated from the EU
structural funds that co-finance the projects has decreased. 

The Group built apartment buildings as a general contractor, not a developer.
Within the apartment buildings sub-segment, revenue from sale of the Tigutorn
apartments increased compared with a year ago. 

Revenue distribution within Buildings segment  Q1 2013  Q1 2012  Q1 2011  2012
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Commercial buildings                               47%      19%      11%   26%
Industrial and warehouse facilities                28%      32%      28%   35%
Public buildings                                   18%      42%      58%   36%
Apartment buildings                                 7%       7%       3%    3%



In the first quarter of 2013, the main revenue source for the Infrastructure
segment was road construction. We have several large projects involving not
only seasonally restricted operations such as asphalt-laying but also various
kinds of earthwork and construction of structures, which could also be done in
the weather of the first quarter. Most of the work relating to those projects,
which are still in progress, will be performed in 2013. 

In specialist engineering, our main projects were construction of facilities
for Sillamäe port and construction of Kärdla guest harbour. The bulk of work at
Sillamäe port has been completed and the remaining operations require better
weather conditions.  This one of the reasons why the sub-segment’s contribution
has decreased compared with the previous year. 

In 2012 we secured a number of environmental engineering contracts. Most of the
work relating to those contracts will be performed in 2013. In addition, in the
reporting period, we signed a contract of 6.4 million euros on the
reconstruction of the wastewater treatment plant of the town of Paide. Thus,
the contribution of environmental engineering will probably remain larger than
in the previous year with some of the rise resulting from shrinkage in the
construction of water and wastewater networks (other engineering). The decrease
in the latter is consistent with general market developments. The current year
is the last one in the EU financial framework that is coming to an end and most
of the work to be conducted with the support of allocated funds has already
been tendered. 

Revenue distribution within Infrastructure       Q1 2013  Q1 2012  Q1 2011  2012
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    44%      36%      21%   51%
Specialist engineering (including hydraulic          10%      19%       1%   15%
 engineering)                                                                   
Other engineering                                    32%      41%      50%   27%
Environmental engineering                            14%       4%      28%    7%



Order book

At 31 March 2013, our order book stood at 125,740 thousand euros, being 8%
smaller than a year ago. 

The decrease in order book compared with the first quarter of 2012 is
attributable to the gradual performance of major contracts (e.g. the design and
build of the Aruvalla-Kose road section and construction of berths at Sillamäe
port). Addition of large contracts is irregular. Initially new contracts
increase the order book considerably (positive impact on order book), but as
they are performed, their balance declines (negative impact on order book). 

Compared with the end of 2012, the order book has remained stable – the Group
has won new contracts in the same volume as older contracts have been
performed. This is a good indicator for the first quarter. The largest increase
was in the commercial buildings sub-segment where we won the contract on
building an extension to the ASTRI shopping centre in Narva. 

The order book used to include the outstanding balance of the Tivoli housing
development project in Tallinn city centre of 12,757 thousand euros. On 4
February 2013, Tivoli Arendus OÜ sent us a notice of termination of the
contract, which in our opinion is baseless. Accordingly, as at the date of
release of this report Nordecon AS considers the notice of termination
unfounded and the contract still effective. However, in light of the
circumstances, we believe that it is unlikely that construction work can
continue under the same contract. 

As at the end of      Q1 2013  Q1 2012  Q1 2011     2012
--------------------------------------------------------
Order book (EUR’000)  125,740  136,235   91,974  127,259

Because of the general situation in the construction market, infrastructure
contracts account for a larger proportion of the order book than building
construction contracts. However, compared with a year ago, the lead of the
Infrastructure segment has decreased significantly. At the reporting date,
infrastructure contracts accounted for 56% of the order book compared with 78%
at 31 March 2012. 

Between the reporting date (31 March 2013) and the date of release of this
report, Group companies have secured additional construction contracts of
approximately 18,517 thousand euros. 



People

Staff and personnel expenses

In the first quarter of 2013, the Group (the parent and the subsidiaries)
employed, on average, 739 people including 349 engineers and technical
personnel (ETP). The number of staff did not increase substantially compared
with a year ago. 

Average number of the Group’s employees (comprising the parent and the
subsidiaries) 

               Q1 2013  Q1 2012  Q1 2011  2012
----------------------------------------------
----------------------------------------------
ETP                361      362      337   367
Workers            379      372      362   397
Total average      739      734      699   764

The Group’s personnel expenses for the first quarter of 2013 including all
taxes totalled 4,056 thousand euros, 29% up on the comparative period when
personnel expenses were 3,147 thousand euros. The growth in personnel expenses
is mainly attributable to performance pay provided on the completion of
projects. Selective increases of basic salaries had less impact. 

In the first quarter of 2013, the service fees of the members of the council of
Nordecon AS amounted to 37 thousand euros and associated social security
charges totalled 12 thousand euros (Q1 2012: 17 thousand euros and 6 thousand
euros respectively). The figure has increased in connection with the decision
of Nordecon AS’s annual general meeting to increase the council’s fees as from
the beginning of 2012. The fees for the months preceding the general meeting
were paid out and recognised retrospectively in the second quarter of 2012. 

The service fees of the members of the board of Nordecon AS amounted to 51
thousand euros and associated social security charges totalled 17 thousand
euros (Q1 2012: 56 thousand euros and 18 thousand euros respectively including
the remuneration of the member of the board that was removed on 30 April 2012). 

Labour productivity and labour cost efficiency

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. 

                                                Q1 2013  Q1 2012  Q1 2011   2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling),            214.3    206.4    138.7  208.7
 (EUR’000)                                                                      
Change against the comparative period, %           3.9%    48.8%     9.3%   3.2%
                                                                                
Nominal labour cost efficiency (rolling),           9.3     10.7      7.4    9.5
 (EUR’000)                                                                      
Change against the comparative period, %         -13.2%    43.6%    17.6%  -8.6%



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



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 tend to rise involves as high risk because the contract may quickly
start generating a loss. 

In the next periods, the Estonian construction market will depend mainly on
public sector investments. A significant proportion of those investments will
be funded with the assistance of the EU structural funds. The availability of
EU support is relatively certain until the end of the current budget period
(2007-2013). However, the allocations remaining for the last year of the budget
period are smaller than in the previous years, which means, that the number of
new projects started in 2013 will decrease significantly. The expenditures of
the EU financial framework for 2014-2020 that will be designated for
investments involving construction work are still unclear. Although the amounts
allocated to Estonia under the cohesion policy programmes will increase, the
national priorities may have changed. Nevertheless, the planned investments
will have a significant and direct impact on the business volumes of
construction companies. 

The impacts of seasonality are the strongest in the Infrastructure segment
where a lot of work is done outdoors (road and port construction, earthwork,
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. 

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 performance of their obligations with a bank guarantee provided to a
Group company or the Group retains part of the amount payable until the
completion of the contract. To remedy builder-caused deficiencies, which may be
detected during the warranty period, Group companies create warranty provisions
based on their historical experience. At 31 March 2013, the Group’s warranties
provisions (including current and non-current ones) totalled 1,377 thousand
euros. At 31 March 2012, the corresponding figure was 1,153 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 the risks
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. The errors made in the planning stage are usually
irreversible and, in a situation where the price is contractually fixed, may
result in a direct financial loss. 

Financial risks

Credit risk

In the reporting period, the Group did not recognise any significant credit
losses. The credit risk exposure of the Group’s receivables continued to be low
because the proportion of public sector customers that receive their financing
from the state and local governments as well as the EU structural funds
continued to be 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 quarter of 2013, reversals of prior period credit losses gave rise
to a gain of 9 thousand euros (Q1 2012: credit losses on the write-down of
receivables totalled 4 thousand euros). 

The Group has recognised a trade receivable of approximately 2.4 million euros
(includes a portion of late payment interest) due from the customer of the
exhibition building of the Estonian Maritime Museum. Under the contract,
determination of whether the claim has merit is at the discretion of the
Arbitration Court of the Estonian Chamber of Commerce and Industry. The Group’s
management is convinced that the claim has merit and has therefore not written
the receivable down. The case is expected to be ruled upon in the second half
of 2013. 

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 but sometimes up to 100 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. 

At the reporting date, the Group’s current assets exceeded its current
liabilities 1.08-fold (31 March 2012: 1.07-fold). Interest-bearing liabilities
account for 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. To date, banks have refinanced the Group’s liabilities for periods not
exceeding 12 months, which is why a substantial portion of loans are classified
as current liabilities although it is probable that some borrowings
(particularly overdraft facilities) will be refinanced again when 12 months
have passed. During and partly after the end of the reporting period, loans of
13,415 thousand euros which at 31 December 2012 were recognised as current
liabilities (at 31 March 2013 corresponding loan balances totalled 16,729
thousand euros) were refinanced (or the Group obtained binding confirmations of
their refinancing during 2013) and their settlement dates were (or will be)
deferred to 2014. 

At the reporting date, the Group’s cash and cash equivalents totalled 6,474
thousand euros (31 March 2012: 5,385 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 most floating rate contracts is Euribor. At 31 March 2013,
the Group’s interest-bearing loans and borrowings totalled 29,884 thousand
euros, an increase of 808 thousand euros year over year. Interest expense for
the first quarter of 2013 amounted to 245 thousand euros. Compared with the
first quarter of 2012, interest expense decreased by 2 thousand euros. The
Group’s interest rate risk results mainly from a rise in the base rate for
floating interest rates (Euribor/EONIA). The risk is mitigated by fixing, where
possible, the interest rates of liabilities during the period of low market
interest rates. 

The Group has not acquired any derivatives for hedging the risks arising from
instruments with a floating interest rate. 

Currency risk

In the first quarter of 2013, the exchange rate of the Ukrainian hryvna against
the euro was stable. The Group’s net foreign exchange gain for the period was
89 thousand euros (Q1 2012: a net foreign exchange loss of 91 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 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.



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market in
2013 

  -- Construction volumes will be larger in the infrastructure segment but the
     segment’s lead over building construction will diminish at an increasing
     pace. Private sector investments, which will grow compared with 2012, will
     mostly be channelled to the buildings segment. Moreover, the public sector
     will contribute to building construction through two major contracts - the
     construction of a new main building of the Estonian National Museum and the
     Maarjamõisa medical campus of Tartu University Hospital. The turnover of
     the infrastructure segment, on the other hand, will be undermined by the
     depletion of funds allocated from the EU budget for the period 2007-2013.
  -- The construction market will remain disproportionately reliant on public
     procurement and projects executed with the support of the EU structural
     funds. In the last year of the EU budget period, the volume of new
     procurements will decrease because most funds have already been allocated. 
     Co-financing terms generally require that a project should be completed
     during the budget period. Thus, most of the remaining procurements will be
     announced in the first half of 2013. This means that in the second half of
     the year public procurement of construction work may plummet. The EU
     financial framework 2014-2020 has still not been finalised. This increases
     uncertainty about how the construction market will develop in 2014 and
     forces companies to make their decisions based on shorter-term prospects.
  -- The industry will see further consolidation, particularly in the field of
     general contracting in building construction where the number of
     medium-sized operators (annual turnover of around 15-40 million euros) is
     still too large. Based on the past three years’ experience it is likely
     that stiff competition and insufficient demand will induce some general
     contractors to go slowly out of business or shrink in size rather than
     merge with another or exit the market. However, it will also become
     increasingly common that two to four smaller players that are seeking ways
     to remain in business will form a consortium to bid for major procurement
     contracts, meet stringent tendering conditions and secure the required
     funding.
  -- Competition will intensify in all segments of the construction market. The
     average number of bidders for a contract has increased and there is already
     a notable gap between the lowest bids made by the winners and the average
     bids. The situation is somewhat similar to 2009 when anticipation of a fall
     in demand caused a rapid decline in construction prices, which triggered a
     slide in the prices of many construction inputs. However, currently there
     are no massive decreases in the prices of construction inputs and companies
     that are banking on this in the bidding phase may run into difficulty.
     Profit margins are already under strong competitive pressure.
  -- In new housing development, the success of a project will depend on the
     developer’s ability to control the input prices included in its business
     plan and thus to set an affordable sales price. Although the overall
     situation is improving steadily, the offering of new residential real
     estate cannot be increased dramatically because the prices of new
     apartments are relatively high compared with the standard of living and the
     banks’ lending terms remain strict.  Similarly to the previous year,
     successful projects will include those that create or fill a niche.
  -- The contracts signed with public sector customers will continue to impose
     tough conditions on construction companies: extensive obligations, strict
     sanctions, various financial guarantees, extremely long settlement terms,
     etc. Contractors cannot implement more optimal solutions identified in the
     construction phase that would reduce the construction or operating costs of
     the procured asset without sanctions because procurement terms do not allow
     this. In a situation where public procurement is based on underbidding, the
     above factors increase the risks of all market participants.
  -- The prices of construction inputs will remain relatively stable. Local
     subcontracting prices may decrease due to weakening demand but, taking into
     account the subcontractors’ financial and human resources, the decline
     cannot be substantial or long-lasting. In some areas, price fluctuations
     continue to be unpredictable and, thus, notably greater and hard or even
     impossible to influence (petroleum and metal products, certain materials
     and equipment).
  -- The situation in the labour market will be comparatively stable. There is
     still a shortage of qualified labour (including project and site managers)
     but construction companies, which have to maintain tight cost control, are
     not ready for a general rise in the base wage.  However, as the cost of
     living is increasing, pressure for a wage increase remains strong. Labour
     migration to the Nordic countries will also remain steady and despite
     potential market shrinkage (particularly in Finland), the number of job
     seekers is not expected to increase.

Latvia and Lithuania

In our opinion, the Latvian construction market, which was hit by a severe
downturn a few years ago, has not regained sufficient stability and similarly
to Estonia in 2013 it will probably see shrinkage in public sector demand.
Therefore, the Group is not going to enter to the Latvian construction market
permanently in 2013. 

In the next few years we may 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 our strategy for the future, i.e. the objective of
operating in our neighbouring construction markets through local subsidiaries. 

We have suspended the operations of our Lithuanian subsidiary, Nordecon Statyba
UAB. We are monitoring market developments and may resume our Lithuanian
operations in the coming years on a project basis. Temporary suspension of
operations does not cause any major costs for the Group and does not change our
strategy for the future, 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.
Regardless of this, we will continue our business in Ukraine in 2013. There are
some signs that investment activity in Ukraine may pick up in 2013 although the
economic and political risks do not allow us to expect any rapid changes. We
will monitor the situation in the Ukrainian construction market closely and
will be ready to carry out additional restructuring at the companies involved.
We will continue seeking opportunities for exiting the conserved real estate
projects or signing a construction contract with a potential new owner. 

Finland

In the Finnish market we offer mainly subcontracting services in the field of
concrete works but based on experience gained, we are going to deliver some
more complex services in 2013. The local concrete works market provides
opportunities for competing for projects where the customer wishes to purchase
all concrete works from one reliable company. Nevertheless, we will maintain a
rational approach and will avoid taking excessive risks. We are not planning to
penetrate other segments of the Finnish construction market (general
contracting, project management, etc). 



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
2012 was 159.4 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