Market announcement

Title

2013 II quarter and 6 months consolidated interim report (unaudited)

Message

Nordecon publishes 2013 II quarter and 6 months consolidated interim report

Tallinn, Estonia, 2013-08-08 15:30 CEST (GLOBE NEWSWIRE) --
Announcement includes Nordecon AS’s consolidated financial statements for the
second quarter and six months 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                                          30 June 2013  31 December 2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                4,423            10,231
Trade and other receivables                             52,580            42,896
Prepayments                                              2,187             1,840
Inventories                                             23,999            26,243
Total current assets                                    83,189            81,210
Non-current assets                                                              
Investments in equity-accounted investees                  547               202
Other investments                                           26                26
Trade and other receivables                                382             1,554
Investment property                                      4,930             4,930
Property, plant and equipment                            9,573             8,851
Intangible assets                                       14,808            14,857
Total non-current assets                                30,266            30,420
TOTAL ASSETS                                           113,455           111,630
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                    29,672            27,185
Trade payables                                          37,616            31,968
Other payables                                           4,971             5,014
Deferred income                                          4,333            11,404
Provisions                                                 334               521
Total current liabilities                               76,926            76,092
Non-current liabilities                                                         
Loans and borrowings                                     4,154             3,671
Trade payables                                             259               259
Other payables                                              96                96
Provisions                                               1,096             1,210
Total non-current liabilities                            5,605             5,236
TOTAL LIABILITIES                                       82,531            81,328
                                                                                
EQUITY                                                                          
Share capital                                           19,657            19,657
Statutory capital reserve                                2,554             2,554
Translation reserve                                       -437              -404
Retained earnings                                        6,686             6,039
Total equity attributable to owners of the              28,460            27,846
 parent                                                                         
Non-controlling interests                                2,464             2,456
TOTAL EQUITY                                            30,924            30,302
TOTAL LIABILITIES AND EQUITY                           113,455           111,630



Condensed consolidated interim statement of comprehensive income

EUR '000                            Q2 2013  Q2 2012  6M 2013  6M 2012      2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                              48,416   40,445   75,497   62,920   159,422
Cost of sales                       -45,736  -38,293  -72,224  -60,732  -151,205
Gross profit                          2,680    2,152    3,273    2,188     8,217
                                                                                
Marketing and distribution              -77     -114     -139     -190      -389
 expenses                                                                       
Administrative expenses              -1,091   -1,274   -2,327   -2,504    -5,385
Other operating income                    6      253      206      366       810
Other operating expenses                -22       31      -59      -57      -566
Operating profit/loss                 1,496    1,048      954     -197     2,687
                                                                                
Finance income                          182      196      383      341       622
Finance costs                          -257     -255     -558     -539    -1,248
Net finance costs                       -75      -59     -175     -198      -626
                                                                                
Share of profit/loss of                  86       73       77       49       -79
 equity-accounted investees                                                     
                                                                                
Profit/loss before income tax         1,507    1,062      856     -346     1,982
Income tax expense                      -43      -44      -44      -44       -56
Profit/loss for the period            1,464    1,018      812     -390     1,926
                                                                                
Other comprehensive                                                             
 income/expense:                                                                
Exchange differences on                  20     -114      -33      -53        59
 translating foreign operations                                                 
Total other comprehensive                20     -114      -33      -53        59
 income/expense for the period                                                  
TOTAL COMPREHENSIVE INCOME/EXPENSE    1,484      904      779     -443     1,985
 FOR THE PERIOD                                                                 
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                1,401      873      728     -491     1,477
- Non-controlling interests              63      145       84      101       449
Profit/loss for the period            1,464    1,018      812     -390     1,926
                                                                                
Total comprehensive income/expense                                              
 attributable to:                                                               
- Owners of the parent                1,421      759      695     -544     1,536
- Non-controlling interests              63      145       84      101       449
Total comprehensive income/expense    1,484      904      779     -443     1,985
                                                                                
Earnings per share attributable to                                              
 owners of the parent:                                                          
Basic earnings per share (EUR)         0.05     0.03     0.02    -0.02      0.05
Diluted earnings per share (EUR)       0.05     0.03     0.02    -0.02      0.05



Condensed consolidated interim statement of cash flows

EUR '000                                                        6M 2013  6M 2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers1                                    70,286   65,346
Cash paid to suppliers2                                         -68,190  -62,528
VAT paid                                                         -1,024   -2,079
Cash paid to and for employees                                   -9,026   -7,809
Income tax paid                                                      -1      -11
Net cash used in operating activities                            -7,955   -7,081
                                                                                
Cash flows from investing activities                                            
Purchase of property, plant and equipment                          -228     -836
Proceeds from sale of property, plant and equipment and             102      363
 intangible assets                                                              
Acquisition of associates                                          -350        0
Loans provided                                                     -349     -376
Repayment of loans provided                                         196       19
Dividends received                                                    4        0
Interest received                                                   357        0
Net cash used in investing activities                              -268     -830
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                      7,002    6,334
Repayment of loans received                                      -3,266   -1,322
Payment of finance lease liabilities                               -848   -1,090
Interest paid                                                      -471     -587
Net cash from financing activities                                2,417    3,335
                                                                                
Net cash flow                                                    -5,806   -4,576
                                                                                
Cash and cash equivalents at beginning of period                 10,231    9,908
Effect of exchange rate fluctuations                                 -2        0
Decrease  in cash and cash equivalents                           -5,806   -4,576
Cash and cash equivalents at end of period                        4,423    5,332

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 half of 2013 amounted to 3,273
thousand euros (HY1 2012: 2,188 thousand euros) and gross margin was 4.3% (HY1
2012: 3.5%). 

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. Moreover, 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. 

The external environment has supported improvements in the Group’s
profitability. The previous year’s market growth and relatively stable
materials and subcontracting prices have created a solid basis for a rise in
the projects’ average profit margin. Another factor that has facilitated growth
in profitability has been a rise in the proportion of contracts signed with the
private sector. However, competition for public procurement contracts to be
signed this year will be fierce, as companies expect a decrease in the work
procured by the public sector due to the depletion of resources in the current
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. 

The Group’s administrative expenses for the first half of 2013 totalled 2,327
thousand euros, reflecting a certain decrease compared with a year ago (HY1
2012: 2,504 thousand euros). The ratio of administrative expenses to revenue
(12 months rolling) was 3.0% (HY1 2012: 3.2%). 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 profit for the first half of 2013 was 954 thousand euros (HY1 2012:
an operating loss of 197 thousand euros) and EBITDA was positive at 1,965
thousand euros (HY1 2012: 925 thousand euros). 

The Group ended the first half-year with a net profit of 813 thousand euros
(HY1 2012: a net loss of 389 thousand euros). The profit attributable to owners
of the parent, Nordecon AS, was 729 thousand euros (HY1 2012: a loss of 491
thousand euros). 

Cash flows

Operating activities of the first half of 2013 resulted in a net cash outflow
of 7,955 thousand euros (HY1 2012: a net outflow of 7,081 thousand euros).
Negative operating cash flow in the first half-year is attributable to the
cyclical nature of construction activity. Higher fixed costs and preparations
made for launching more active construction operations in the second quarter
cause outflows to exceed inflows. Our operating cash flows are also influenced
by differences in settlement terms: the payment 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 use
factoring to counteract the impacts of cyclicality and overdraft facilities to
raise working capital. 

Cash flows from investing activities resulted in a net outflow of 268 thousand
euros (HY1 2012: a net outflow of 830 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 previous year but we received
more loan repayments. In addition, we made a contribution of 350 thousand euros
to restore an associate’s negative equity. 

Financing activities resulted in a net cash inflow of 2,417 thousand euros (HY1
2012: 3,335 thousand euros). The net amount of loan receipts and repayments was
positive at 3,736 thousand euros compared with 5,012 thousand euros for the
first half of 2012. The Group borrowed more working capital because business
volumes have increased compared with the previous year. However, loan
repayments, which were mostly made to meet commitments under refinancing
agreements, were larger as well. 

At 30 June 2013, the Group’s cash and cash equivalents totalled 4,423 thousand
euros (30 June 2012: 5,332 thousand euros). Management’s comments on liquidity
risks are presented in the chapter Description of the main risks. 



Key financial figures and ratios

Figure/ratio                         6M 2013     6M 2012     6M 2011        2012
--------------------------------------------------------------------------------
Revenue (EUR’000)                     75,497      62,920      54,429     159,422
Revenue growth                           20%         16%         46%        7.9%
Net profit/loss (EUR’000)                812        -390      -3,716       1,926
Profit/loss attributable to              728        -491      -3,652       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       -0.02       -0.12        0.05
                                                                                
Administrative expenses to              3.1%        4.0%        3.9%        3.4%
 revenue                                                                        
Administrative expenses to              3.0%        3.2%        4.1%        3.4%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR’000)                       1,965         925      -2,278       4,833
EBITDA margin                           2.6%        1.5%       -4.2%        3.0%
Gross margin                            4.3%        3.5%       -2.6%        5.2%
Operating margin                        1.3%       -0.3%       -6.4%        1.7%
Operating margin excluding gains        1.1%       -0.7%       -6.8%        1.4%
 on asset sales                                                                 
Net margin                              1.1%       -0.6%       -6.8%        1.2%
Return on invested capital              2.2%        0.3%       -5.0%        5.2%
Return on equity                        2.7%       -1.4%      -11.7%        6.6%
Equity ratio                           27.3%       25.0%       26.8%       27.1%
Gearing                                45.4%       48.5%       40.8%       33.7%
Current ratio                           1.08        1.05        1.19        1.08
                                     30 June     30 June     30 June      31 Dec
                                        2013        2012        2011        2012
--------------------------------------------------------------------------------
Order book (EUR’000)                 103,230     166,367     140,234     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 half of 2013, around 2% of the Group’s revenue was generated
outside Estonia compared with 1% in the first half of 2012. 

         6M 2013  6M 2012  6M 2011  2012
----------------------------------------
----------------------------------------
Estonia      98%      99%      96%   98%
Finland       2%       1%       1%    2%
Belarus       0%       0%       3%    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
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 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 six months of 2013 was 75,497 thousand euros,
a 20% improvement on the 62,920 thousand euros generated in the first six
months 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 half of 2013, our two main operating segments, Buildings and
Infrastructure, generated revenue of 30,796 thousand euros and 42,638 thousand
euros respectively. The corresponding figures for the previous year were 28,360
thousand euros and 32,769 thousand euros (see note 8). The rise in the
contribution and absolute figures of the Infrastructure segment (also compared
with the previous year) is mostly attributable to the performance of major road
construction projects. 

Operating segments *  6M 2013  6M 2012  6M 2011  2012
-----------------------------------------------------
-----------------------------------------------------
Buildings                 41%      46%      46%   42%
Infrastructure            59%      54%      54%   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

Last year’s rise in private sector investments triggered rapid revenue growth
in the commercial buildings sub-segment. The Group’s projects in progress
include several commercial buildings in Tallinn and Tartu. New contracts
secured during the year include an extension to the ASTRI shopping centre in
Narva (a contract of over 15 million euros) and the Stroomi shopping centre (a
contract of over 9 million euros, secured in the month following the reporting
period). We expect the investment activity of private sector customers to
remain robust and the contribution of the sub-segment to remain substantial
through 2013. 

The revenues of the public buildings sub-segment have decreased because we do
not have any major projects comparable to those performed a year ago. The
competitive situation in this market segment is particularly challenging: it is
hard to win a procurement tender without taking excessive risks but our current
policy is to avoid such 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 are the construction of the Translational
Medicine Centre of the University of Tartu and Phase V of St Paul’s Church in
Tartu. 

In the industrial and warehouse facilities sub-segment most of the revenue
resulted from the construction of buildings procured by the agricultural
sector. However, the volume of such work was smaller than in the previous years
because the current EU budget period is coming to an end and thus allocations
from the EU structural funds that co-finance the projects are decreasing.
Shrinkage in the sub-segment’s revenues has been counterbalanced by private
sector investments in new industrial and production buildings. 

The revenues of the apartment buildings sub-segment resulted from general
contracting, not development. In the second half-year the contribution of the
apartment buildings sub-segment should increase because in May we won a
contract of around 10 million euros for the construction of an apartment
building at Pirita tee 26 in Tallinn (our recent years’ largest contract for
the construction of an apartment building). 

Revenue distribution within Buildings segment  6M 2013  6M 2012  6M 2011  2012
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Commercial buildings                               45%      19%       6%   26%
Industrial and warehouse facilities                34%      28%      38%   35%
Public buildings                                   19%      49%      54%   36%
Apartment buildings                                 2%       4%       2%    3%



As expected, the main revenue source for the Infrastructure segment was road
construction. We are currently working on several large projects that involve
not only seasonally restricted operations such as asphalt-laying but also
various kinds of earthwork and construction of structures, which could also be
carried out in the winter weather of the beginning of the year. Since most of
the work relating to projects in progress will be performed in 2013, the
contribution of the sub-segment should remain high. 

In specialist engineering, we continued our work at Sillamäe port and Kärdla
guest harbour. The contribution of the sub-segment has decreased compared with
the previous year because most of the construction work at Sillamäe port was
completed in 2012. We do not expect any major public or private sector
investments in specialist engineering projects to be announced in the second
half of the year. 

In 2012 Nordecon 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 for 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       6M 2013  6M 2012  6M 2011  2012
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    54%      40%      46%   51%
Specialist engineering (including hydraulic           8%      16%       1%   15%
 engineering)                                                                   
Other engineering                                    27%      38%      37%   27%
Environmental engineering                            11%       6%      16%    7%



Order book

At 30 June 2013, our order book stood at 103,230 thousand euros, a 38% decrease
compared with a year ago. 

The largest decrease in our order book (backlog of contracts signed but not yet
performed) occurred in road construction (approx. 75%) where in recent years we
have been working on three large public procurement projects: (the
Aruvalla-Kose section on the Tallinn-Tartu motorway, Tartu western bypass and
Tartu eastern ring road). New national investments in large-scale road
construction projects have been practically non-existent. In 2013, the state
will probably select contractors for two large road construction projects but
the total volume of the contracts will be less than 15 million euros. The order
book for the construction of outdoor utility (water and wastewater) networks
has shrunk too, because such work is typically procured with the support of the
EU structural funds but in the last year of the EU budget period relevant
allocations are expectedly smaller. 

On the other hand, the order books of the commercial buildings and
environmental engineering sub-segments have increased. In the commercial
buildings sub-segment this has occurred thanks to growth in private sector
investments and in the environmental engineering sub-segment thanks to the
Group’s successful bidding and, partly, because in the past year EU-supported
investments in environmental facilities have increased. 

The order book no longer includes the remaining balance of the Tivoli housing
development project in Tallinn city centre (30 June 2012: 13,048 thousand
euros). Nordecon published a stock exchange announcement on the termination of
the contract on 13 June 2013. 

As at the end of      6M 2013  6M 2012  6M 2011     2012
--------------------------------------------------------
Order book (EUR’000)  103,230  166,367  140,234  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 52% of the order book (30 June 2012:
69%). 

Between the reporting date (30 June 2013) and the date of release of this
report, Group companies have secured additional construction contracts of
approximately 15,290 thousand euros. 



People

Staff and personnel expenses

In the first half of 2013, the Group (the parent and the subsidiaries)
employed, on average, 774 people including 362 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 (at the parent and the subsidiaries)

               6M 2013  6M 2012  6M 2011  2012
----------------------------------------------
----------------------------------------------
ETP                362      371      352   367
Workers            412      400      379   397
Total average      774      771      731   764

The Group’s personnel expenses for the first half of 2013 including all taxes
totalled 8,582 thousand euros, 20% up on the comparative period when personnel
expenses were 7,143 thousand euros. Personnel expenses have increased through
growth in operating volumes and performance bonuses paid in a situation of
improved profitability. Selective increases in basic salaries have had less
impact. 

In the first half of 2013, the service fees of the members of the council of
Nordecon AS amounted to 71 thousand euros and associated social security
charges totalled 23 thousand euros (HY1 2012: 71 thousand euros and 23 thousand
euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 101
thousand euros and associated social security charges totalled 33 thousand
euros (HY1 2012: 147 thousand euros and 49 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 recent years, the number of the Group’s employees has been relatively stable
and thus the rise in nominal labour productivity stems mostly from revenue
growth. Nominal labour cost efficiency for the period was weakened by the
larger amount of performance bonuses paid because of profitable operation in
the previous year. In previous years, the proportion of performance bonuses in
the Group’s total personnel expenses was smaller. Basic salaries have not been
substantially increased. 

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 2013  6M 2012  6M 2011   2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling),            224.6    208.6    155.9  208.7
 (EUR’000)                                                                      
Change against the comparative period              7.7%    33.8%    25.0%   3.2%
                                                                                
Nominal labour cost efficiency (rolling),           9.4     10.6      8.2    9.5
 (EUR’000)                                                                      
Change against the comparative period            -11.3%    29.1%    30.9%  -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 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 in 2013 the number of
new, starting projects will decrease significantly. The expenditures of the EU
financial framework 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, 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 30 June 2013, the Group’s warranties
provisions (including current and non-current ones) totalled 1,150 thousand
euros. At 30 June 2012, the corresponding figure was 1,103 thousand euros. 

In addition to managing the risks, which are directly related to construction
operations, in recent years we have sought to mitigate 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 half of 2013, reversals of prior period credit losses gave rise to
a gain of 6 thousand euros (HY1 2012: a gain of 4 thousand euros). 

The Group’s statement of financial position includes 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 (30 June 2012: 1.05-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. In the first half of 2013, the Group refinanced loans of 13,415
thousand euros which at 31 December 2012 were recognised as current liabilities
(at 30 June 2013 relevant loan balances totalled 16,013 thousand euros) and
deferred their maturity dates to 2014. 

At the reporting date, the Group’s cash and cash equivalents totalled 4,423
thousand euros (30 June 2012: 5,332 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 30 June 2013, the
Group’s interest-bearing loans and borrowings totalled 33,826 thousand euros, a
decrease of 2,719 thousand euros year over year. Interest expense for the first
half of 2013 amounted to 532 thousand euros. Compared with the first half of
2012, interest expense increased by 28 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

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). In the first half 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 64 thousand euros (HY1 2012: a net foreign exchange gain of 83
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. Private sector
     investments, which will grow compared with 2012, will mostly be made in 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 current EU budget period, the volume of new
     procurements will decrease. The volumes and timing of projects to be
     executed using the support of the next EU financial framework (2014-2020)
     are still unclear. The investment volumes of two large public sector
     customers, Riigi Kinnisvara AS (a state-owned real estate company) and the
     National Road Administration, are going to decline. It is more likely than
     not that this year growth of the Estonian construction market is going to
     decelerate and next year the market may see certain shrinkage.
  -- 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, but the process will be slower than expected. 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 tendering terms 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. Still,
     compared to two or three years ago, the situation has improved and in some
     respects procurement terms have become more reasonable for construction
     companies.
  -- 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
     are be unpredictable and, thus, notably greater and hard or even impossible
     to influence (oil and metal products, certain materials and equipment).
  -- There is a shortage of high-quality skilled labour (including project and
     site managers). The decline in local construction volumes may increase
     labour supply but not substantially. Labour migration to the Nordic
     countries will remain steady and although those markets (particularly
     Finland) may also see some shrinkage, the number of job seekers that will
     return will not increase considerably. Accordingly, the basic wage of
     construction-sector employees will not decrease. Instead, the rise in the
     cost of living sustains pressure for a wage 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. 

The operations of our Lithuanian subsidiary, Nordecon Statyba UAB, have been
suspended. 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 will recover in 2013 to a
certain extent although the economic and political risks do not allow us to
expect any rapid changes. We continue to monitor the situation in the Ukrainian
construction market closely and will restructure our operations as appropriate.
We also continue to seek opportunities for exiting our two 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 partner. Nevertheless, we will maintain a
rational approach and will avoid taking excessive risks. We are not planning to
penetrate any 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