Market announcement

Title

2015 first quarter consolidated interim report (unaudited)

Message

This announcement includes Nordecon AS’s consolidated financial statements for
the first quarter and of 2015 (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 2015  31 December 2014
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                2,198             8,802
Trade and other receivables                             23,145            23,235
Prepayments                                              1,816             1,201
Inventories                                             24,821            24,788
Total current assets                                    51,980            58,026
Non-current assets                                                              
Investments in equity-accounted investees                  502               694
Other investments                                           26                26
Trade and other receivables                             11,276            11,211
Investment property                                      3,549             3,549
Property, plant and equipment                            9,648             9,319
Intangible assets                                       14,637            14,633
Total non-current assets                                39,638            39,432
TOTAL ASSETS                                            91,618            97,458
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                    19,548            20,588
Trade payables                                          21,256            26,267
Other payables                                           7,052             7,542
Deferred income                                          3,157             1,786
Provisions                                                 674               799
Total current liabilities                               51,687            56,982
Non-current liabilities                                                         
Loans and borrowings                                     3,382             3,145
Trade payables                                             109               109
Other payables                                              96                96
Provisions                                                 807               759
Total non-current liabilities                            4,394             4,109
TOTAL LIABILITIES                                       56,081            61,091
                                                                                
EQUITY                                                                          
Share capital                                           20,692            20,692
Own (treasury) shares                                   -1,582            -1,582
Share premium                                              547               547
Statutory capital reserve                                2,554             2,554
Translation reserve                                      1,295               771
Retained earnings                                       10,430            11,714
Total equity attributable to owners of the              33,936            34,696
 parent                                                                         
Non-controlling interests                                1,601             1,671
TOTAL EQUITY                                            35,537            36,367
TOTAL LIABILITIES AND EQUITY                            91,618            97,458



Condensed consolidated interim statement of comprehensive income

EUR´000                                               Q1 2015  Q1 2014      2014
Revenue                                                27,113   23,544   161,289
Cost of sales                                         -26,704  -22,374  -151,476
Gross profit                                              409    1,170     9,813
                                                                                
Marketing and distribution expenses                      -118     -249      -558
Administrative expenses                                -1,109   -1,124    -5,656
Other operating income                                    104       65       792
Other operating expenses                                  -38      -29      -376
Operating profit/loss                                    -752     -167     4,015
                                                                                
Finance income                                            165      164       738
Finance costs                                            -671     -961    -2,301
Net finance costs                                        -506     -797    -1,563
                                                                                
Share of profit/loss of equity-accounted investees        -96      -61        85
                                                                                
Profit/loss before income tax                          -1,354   -1,025     2,537
Income tax                                                  0       -1      -239
Profit/loss for the period                             -1,354   -1,026     2,298
                                                                                
Other comprehensive income                                                      
Items that may be reclassified subsequently to                                  
 profit or loss                                                                 
Exchange differences on translating foreign               524      721     1,069
 operations                                                                     
Total other comprehensive income                          524      721     1,069
TOTAL COMPREHENSIVE INCOME/EXPENSE                       -830     -305     3,367
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                                 -1,284   -1,074     1,956
- Non-controlling interests                               -70       48       342
Profit/loss for the period                             -1,354   -1,026     2,298
                                                                                
Total comprehensive income/expense attributable to:                             
- Owners of the parent                                   -760     -353     3,025
- Non-controlling interests                               -70       48       342
Total comprehensive income/expense for the period        -830     -305     3,367
                                                                                
Earnings per share attributable to owners of the                                
 parent:                                                                        
Basic earnings per share (EUR)                          -0.04    -0.03      0.06
Diluted earnings per share (EUR)                        -0.04    -0.03      0.06



Condensed consolidated interim statement of cash flows

EUR´000                                               Note  Q1 2015  Q1 2014
Cash flows from operating activities                                        
Cash receipts from customers1                                35,789   33,370
Cash paid to suppliers2                                     -34,416  -32,404
VAT paid                                                     -1,239   -1,488
Cash paid to and for employees                               -4,069   -4,659
Income tax paid                                                 -37        0
Net cash used in operating activities                        -3,972   -5,181
                                                                            
Cash flows from investing activities                                        
Paid on acquisition of property, plant and equipment           -275      -12
Proceeds from sale of property, plant and equipment    4         34       22
Acquisition of a subsidiary                                       0     -180
Acquisition of investments in associates                         -1        0
Loans provided                                                  -19      -13
Repayment of loans provided                                      40       95
Dividends received                                              103        4
Interest received                                                 6        0
Net cash used in investing activities                          -112      -84
                                                                            
Cash flows from financing activities                                        
Proceeds from loans received                                    331        8
Repayment of loans received                                  -2,350   -2,056
Payment of finance lease liabilities                           -313     -356
Interest paid                                                  -157     -202
Dividends paid                                                  -30        0
Net cash used in financing activities                        -2,519   -2,606
                                                                            
Net cash flow                                                -6,603   -7,871
                                                                            
Cash and cash equivalents at beginning of period              8,802   12,575
Effect of movements in foreign exchange rates                    -1       -2
Decrease  in cash and cash equivalents                       -6,603   -7,871
Cash and cash equivalents at end of period                    2,198    4,702

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

2 Line item Cash paid to suppliers includes VAT paid.



Financial review

Financial performance

Nordecon group ended the first quarter of 2015 with a gross profit of 409
thousand euros (Q1 2014: 1,170 thousand euros) and a gross margin of 1.5% (Q1
2014: 5%). Compared with the same period last year, gross margin declined in
both of the main operating segments, Buildings and Infrastructure. The factor,
which had the strongest impact on the Group’s overall performance, was the loss
of the Infrastructure segment that resulted from a sharp decrease in major
self-performed winter works (large-scale earthworks) and a large proportion of
uncovered fixed costs. 

Most of the first-quarter revenue resulted from projects started in 2014 whose
margins were affected by the decrease in demand and ensuing rise in competitive
pressure that characterised the previous financial year. In the following
quarters, revenue will increasingly result from contracts secured in the
current market and competitive environment. The Group’s management projected a
decline or stagnation in the construction market and the accompanying rise in
competitive pressure in previous periods already (see also the chapters Order
book, Description of the main risks and Outlooks of the Group’s geographical
markets) and adopted measures for maintaining and, where possible, improving
profitability. We are aware that potential rises in input prices pose a risk
for long-term contracts and continue to prioritize a contract’s expected
profitability over revenue growth or retention. 

The Group’s administrative expenses for the first quarter of 2015 totalled
1,109 thousand euros, which is comparable to a year ago (Q1 2014: 1,124
thousand euros). The ratio of administrative expenses to revenue (12 months
rolling) was 3.4% (Q1 2014: 2.9%). Our cost-control measures continued to yield
strong results: administrative expenses remained below the target ceiling,
i.e., 4% of revenue. 

The first quarter of 2015 resulted in an operating loss of 752 thousand euros
(Q1 2014: an operating loss of 167 thousand euros) and a negative EBITDA of 285
thousand euros (Q1 2014: a positive EBITDA of 297 thousand euros). 

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange
losses that were smaller than those of the comparative period. The Ukrainian
hryvnia weakened by around 24%, which meant that Group companies whose
functional currency is the hryvnia had to re-measure their euro-denominated
liabilities. Exchange losses that are reported within finance costs totalled
516 thousand euros (Q1 2014: 776 thousand euros). In accounting, the same
movements in the exchange rate gave rise to a positive 524 thousand-euro change
in the translation reserve reported in equity (Q1 2014: 721 thousand euros) and
the net effect of the exchange loss on the Group’s net assets was a gain of 8
thousand euros (Q1 2014: a loss of 55 thousand euros). 

Accordingly, the Group ended the first quarter with a net loss of 1,354
thousand euros (Q1 2014: a net loss of 1,026 thousand euros), of which the net
loss attributable to owners of the parent, Nordecon AS, was 1,284 thousand
euros (Q1 2014: a net loss of 1,074 thousand euros). 

Cash flows

Operating activities of the first quarter of 2015 resulted in a net cash
outflow of 3,972 thousand euros (Q1 2014:  and outflow of 5,181 thousand
euros). Negative operating cash flow is typical of the first quarter and stems
from the cyclical nature of the construction business. Larger fixed costs and
preparations made for more active construction operations in the second quarter
cause outflows to exceed inflows. In addition, operating cash flows continued
to be influenced by a mismatch in settlement terms: the ones agreed with
customers are relatively long and in the case of public procurement mostly
extend from 30 to 56 days while subcontractors generally have to be paid within
21 to 45 days. 

Investing activities of the first quarter resulted in a net cash outflow of 112
thousand euros (Q1 2014: a net outflow of 84 thousand euros). Payments made for
property, plant and equipment totalled 275 thousand euros (Q1 2014: 12 thousand
euros). Dividends received amounted to 103 thousand euros (Q1 2014: 4 thousand
euros). 

Financing activities resulted in a net cash outflow of 2,519 thousand euros (Q1
2014: a net outflow of 2,606 thousand euros). Loan repayments exceeded loan
receipts by 2,019 thousand euros (Q1 2014: by 2,048 thousand euros). Repayments
comprise changes in overdraft balances as well as regular payments made under
long-term loan agreements of 943 thousand euros (Q1 2014: 364 thousand euros). 

At 31 March 2015, the Group’s cash and cash equivalents totalled 2,198 thousand
euros (31 March 2014: 4,702 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                         Q1 2015     Q1 2014     Q1 2013        2014
Revenue (EUR’000)                     27,113      23,544      27,081     161,289
Revenue change                         15.2%      -13.1%       20.5%       -7.1%
Net loss/profit (EUR’000)             -1,354      -1,026        -652       2,298
Loss/profit attributable to           -1,284      -1,074        -673       1,956
 owners of the parent (EUR’000)                                                 
Weighted average number of        30,756,726  30,756,726  30,756,727  30,756,728
 shares                                                                         
Earnings per share (EUR)               -0.04       -0.03       -0.02        0.06
                                                                                
Administrative expenses to              4.1%        4.8%        4.6%        3.5%
 revenue                                                                        
Administrative expenses to              3.4%        2.9%        3.3%        3.5%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR’000)                        -285         297         -35       5,585
EBITDA margin                          -1.1%        1.3%       -0.1%        3.5%
Gross margin                            1.5%        5.0%        2.2%        6.1%
Operating margin                       -2.8%       -0.7%       -2.0%        2.5%
Operating margin excluding gains       -3.1%       -0.8%       -2.3%        2.3%
 on sale of real estate                                                         
Net margin                             -5.0%       -4.4%       -2.4%        1.4%
Return on invested capital             -2.0%       -1.4%       -0.7%        5.8%
Return on equity                       -3.8%       -3.0%       -2.2%        6.4%
Equity ratio                           38.8%       38.5%       29.5%       37.3%
Return on assets                       -1.4%       -1.1%       -0.6%        2.3%
Gearing                                35.5%       31.7%       39.4%       24.8%
Current ratio                           1.01        1.01        1.08        1.02
As at                               31 March    31 March    31 March      31 Dec
                                        2015        2014        2013        2014
Order book (EUR’000)                  72,689      83,864     126,740      83,544

                                        

Revenue change = (revenue for the           Net margin = (net profit for the    
 reporting period/revenue for the previous   period/revenue)*100                
 period) – 1*100                            Return on invested capital =        
Earnings per share (EPS) = net profit        ((profit before tax + interest     
 attributable to owners of the parent /      expense)/ the period’s average     
 weighted average number of shares           (interest-bearing liabilities +    
 outstanding                                 equity))*100                       
Administrative expenses to revenue =        Return on equity = (net profit for  
 (administrative expenses/ revenue)*100      the period/ the period’s average   
Administrative expenses to revenue           total equity)*100                  
 (rolling) = (past four quarters’           Equity ratio = (total equity/ total 
 administrative expenses/past four           liabilities and equity)*100        
 quarters’ revenue)*100                     Return on assets = (net profit for  
EBITDA = operating profit + depreciation     the period/ the period’s average   
 and amortisation + impairment losses on     total assets)*100                  
 goodwill                                   Gearing = ((interest-bearing        
EBITDA margin = (EBITDA/revenue)*100         liabilities – cash and cash        
Gross margin = (gross profit/revenue)*100    equivalents)/ (interest-bearing    
Operating margin = (operating                liabilities + equity))*100         
 profit/revenue)*100                        Current ratio = total current       
Operating margin excluding gains on sale     assets/ total current liabilities  
 of real estate = ((operating profit -                                          
 gains on sale of non-current assets –                                          
 gains on sale of real estate)/revenue)                                         
 *100                                                                           



Performance by geographical market

In the first quarter of 2015, around 5% of the Group’s revenue was generated
outside Estonia compared with 8% in the first quarter of 2014. 

         Q1 2015  Q1 2014  Q1 2013  2014
Estonia      95%      92%      97%   94%
Finland       2%       7%       3%    2%
Ukraine       3%       1%       0%    4%

Finnish revenue comprises revenue from concrete works in the building
construction segment. The contribution of the Finnish market has decreased
because major projects in Finland have been completed. The contribution of the
Ukrainian market where we continue work under one building construction
contract has increased. 

Geographical diversification of the revenue base is a consciously deployed
strategy by which we mitigate the risks resulting from excessive reliance on a
single market. Our strategy foresees increasing foreign operations in the
longer term; for further information, see the chapter Strategic agenda for
2014-2017. Our vision of the Group’s operations in foreign markets is described
in the chapter Outlooks of the Group’s geographical markets. 



Performance by business line

Segment revenues

We strive to maintain the revenues of our operating segments (Buildings and
Infrastructure) in balance as this helps disperse risks and provides better
opportunities for continuing construction operations also in stressed
circumstances where one segment experiences noticeable shrinkage. 

Nordecon’s revenues for the first quarter of 2015 totalled 27,113 thousand
euros, a 15% increase on the 23,544 thousand euros generated in the first
quarter of 2014. As anticipated, most of the revenue growth resulted from the
Buildings segment that has been less affected by the contraction in public
sector spending. Revenue growth in the Infrastructure segment was underpinned
by slight growth in road construction volumes; however, the rise in road
construction is not comparable to the level achieved a few years ago. In 2015,
the volumes of projects performed with EU support are expected to remain at the
level of 2014. 

Hence, the two segments’ revenue figures for the first quarter of 2015 were
21,815 thousand euros for Buildings and 4,914 thousand euros for
Infrastructure. The corresponding figures for the first quarter of 2014 were
18,826 thousand euros and 4,314 thousand euros (see note 8). The same revenue
structure is reflected in our order book as at the end of the first quarter of
2015 where 62% of contracts (in terms of value) belonged to the Buildings
segment (Q1 2014: 72%). 

Operating segments*  Q1 2015  Q1 2014  Q1 2013  2014
Buildings                78%      80%      46%   65%
Infrastructure           22%      20%      54%   35%

* In the 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 the directors’ report, projects have been allocated to operating segments
based on their nature (i.e., building or infrastructure construction). In the
segment reporting presented in the financial statements, allocation is based on
the subsidiaries’ main field of activity (as required by IFRS 8 Operating
Segments). In the financial statements, the results of a subsidiary that is
primarily engaged in infrastructure construction are presented in the
Infrastructure segment. In the directors’ report, the revenues of such a
subsidiary are presented based on their nature. The differences between the two
reports are not significant because in general Group entities specialise in
specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in
both building and infrastructure construction. The figures for the parent
company are allocated in both parts of the interim report based on the nature
of the work. 

Sub-segment revenues

Compared with the same period last year, the revenue structure of the Buildings
segment has changed somewhat. The largest contributor is still the commercial
buildings sub-segment whose largest ongoing projects are in Tallinn (e.g.,
Viimsi Centre and the Eesti Loto and Lõõtsa commercial buildings) and Pärnu
(reconstruction of Estonia Spa). We expect private sector investment activity
to remain robust and the contribution of the sub-segment to remain at a similar
or higher level throughout the year. 

The volumes of the industrial and warehouse facilities sub-segment have
declined. In previous periods, most of the sub-segment’s revenue resulted from
agricultural projects carried out with EU-investment support. Currently,
EU-supported projects have been replaced by warehouse and logistics centres
(e.g., the Smarten logistics centre) that do not counterbalance the decrease in
agricultural projects.  There has also been a rise in work done for the heavy
industry (e.g., different construction works on the Petroter 3 oil plant). We
do not expect the revenues of the sub-segment to increase substantially. 

Competition in the public buildings sub-segment is particularly challenging: it
is hard to win a procurement without taking risks but our current policy is to
avoid unreasonable risks. The period’s largest projects were the construction
of the Võru State Secondary School and work done on the premises of the
Kuperjanov Infantry Battalion. If competition remains fierce, it is not likely
that the contribution of the sub-segment will increase significantly. 

Our apartment building revenues resulted mostly from general contracting. The
main revenue contributors were the apartment building at Kentmanni põik 3 and
phase II of the Tondi residential quarter in Tallinn that were secured last
year. The contribution of our own development projects in Tartu and Tallinn
continues to increase. At the end of 2014, we completed two new apartment
buildings with a total of 35 apartments in the Tammelinn district in Tartu.
Sales of the apartments have been successful: by period-end 22 apartments had
been sold. We have started construction of phase II of the development where
one third of the 20 apartments that will be built have already been sold or
reserved (www.tammelinn.ee). In Tallinn, we continue to sell apartment
ownerships in phase I and build phase II of our Magasini 29 development project
(www.magasini.ee). By the end of the reporting period, 6 of the 8 apartment
ownerships in phase I had been sold. 

Revenue distribution within Buildings segment  Q1 2015  Q1 2014  Q1 2013  2014
Commercial buildings                               58%      45%      47%   42%
Industrial and warehouse facilities                11%      26%      28%   33%
Public buildings                                   12%      18%      18%    7%
Apartment buildings                                19%      11%       7%   18%

In the first quarter of 2015, the main revenue source in the Infrastructure
segment was road construction. We continue to provide services under road
maintenance contracts in the Järva and Hiiu counties and the Keila maintenance
area. Favourable weather conditions also allowed to do work on two major road
construction projects in Tartu (construction package 5 of the Tartu western
bypass) and Keila (Keila-Valkse section of national road no. 8 Tallinn –
Paldiski, km 24.9-29.5). We expect that road construction will remain the main
revenue source in the Infrastructure segment and, similarly to last year, most
of the road construction revenue will result from small or medium-sized
reconstruction and repair projects. 

In specialist engineering, we did small-scale port construction work on the
island of Hiiumaa. At present, there is currently no information about any
major investments involving hydraulic engineering work. The revenues of the
sub-segment may increase through other complex engineering work but relevant
volumes are likely to be irregular. 

The decline in EU support continues to have a strong impact on environmental
engineering work whose volumes have decreased more rapidly than those of other
sub-segments. The contribution of utility network construction (other
engineering) has increased slightly but contracts that have been secured are
small and continuing growth of the sub-segment is unlikely. 

Revenue distribution within Infrastructure       Q1 2015  Q1 2014  Q1 2013  2014
 segment                                                                        
Road construction and maintenance                    79%      46%      44%   72%
Specialist engineering (including hydraulic           1%      10%      10%    2%
 engineering)                                                                   
Other engineering                                    15%      12%      32%   19%
Environmental engineering                             5%      32%      14%    7%



Order book

At 31 March 2015, the Group’s order book (backlog of contracts signed but not
yet performed) stood at 72,689 thousand euros, a 13% decrease compared with a
year ago. The order book of the Infrastructure segment has increased but the
rise has not compensated for the decline in work secured by the Buildings
segment. 

                      Q1 2015  Q1 2014  Q1 2013    2014
Order book (EUR’000)   72,689   83,864  113,983  83,544
                                                       

In the Infrastructure segment, the road construction sub-segment that is
engaged in two large road construction projects in Tartu and Keila (see the
chapter Sub-segment revenues) increased its order book. The order books of
other sub-segments remained stable compared with a year ago. 

In the Buildings segment, the order books of the apartment buildings and public
buildings sub-segments grew while the order book of the industrial and
warehouse facilities sub-segment that is more strongly affected by the fall in
EU-supported agricultural projects decreased. 

At the reporting date, contracts secured by Buildings and Infrastructure
accounted for 62% and 38% of the Group’s order book respectively (31 March
2014: 72% and 28% respectively). The distribution is typical of the past two
years but radically different from earlier periods when the order books of the
two segments were more or less equal. It is likely that the change in the order
book structure will persist for the next few years. In the current EU budget
period (2014-2020) investments in infrastructure construction, made mostly with
the support of the EU structural funds, will not be as large as in 2007-2013.
The new EU budget period will have an impact on the construction sector at the
end of 2015 at the earliest. Hence, we expect that the revenues of the
Infrastructure segment will decline in 2015 (for further information, see the
Business risks section of the chapter Description of the main risks). 

We believe that in a situation of exceptionally stiff competition, the main
challenge is to maintain the Group’s revenue and profitability. 

Between the reporting date (31 March 2015) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 9,891 thousand euros. 



People

Staff and personnel expenses

In the first quarter of 2015, the Group (the parent and the subsidiaries)
employed, on average, 711 people including 362 engineers and technical
personnel (ETP). Headcount remained practically the same as a year ago. 

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

               Q1 2015  Q1 2014  Q1 2013  2014
ETP                362      341      361   357
Workers            349      359      379   375
Total average      711      700      739   732



The Group’s personnel expenses for the first quarter of 2015 including all
taxes totalled 3,781 thousand euros, which is comparable to the first quarter
of 2014 when the figure was 3,741 thousand euros. 

In the first quarter of 2015, the service fees of the members of the council of
Nordecon AS amounted to 35 thousand euros and associated social security
charges totalled 12 thousand euros (Q1 2014: 35 thousand euros and 12 thousand
euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 74
thousand euros and associated social security charges totalled 24 thousand
euros (Q1 2014: 69 thousand euros and 23 thousand euros respectively). 

Labour productivity and labour cost efficiency

We measure the efficiency of our operating activities using the following
productivity and efficiency indicators, which are based on the number of
employees and personnel expenses incurred: 

                                                Q1 2015  Q1 2014  Q1 2013   2014
Nominal labour productivity (rolling),            224.5    227.7    214.3  220.4
 (EUR’000)                                                                      
Change against the comparative period             -1.4%     6.3%     3.9%  -4.0%
                                                                                
Nominal labour cost efficiency (rolling),           8.2      8.4      9.3    8.0
 (EUR)                                                                          
Change against the comparative period             -2.1%    -9.7%   -13.2%   4.8%



Nominal labour productivity (rolling) = (past four quarters’ revenue) / (past   
 four quarters’ average number of employees)                                    
Nominal labour cost efficiency (rolling) = (past four quarters’ revenue) / (past
 four quarters’ personnel expenses)                                             



Description of the main risks

Business risks

The main factors, which affect the Group’s business volumes and profit margins,
are competition in the construction market and changes in the demand for
construction services. 

Competition is fierce in all segments of the construction market. In 2015,
public sector investment is not expected to increase substantially compared
with 2014. There is strong competitive pressure on builders’ bid prices in a
situation where input prices have remained relatively stable. Competition is
particularly aggressive in general building and utility network construction.
We acknowledge 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 cannot be lowered
significantly and competition is fierce is risky because negative developments
in the economy may quickly render the contract onerous. Thus, in price-setting
we currently prioritize a reasonable balance of contract performance risks over
plain revenue growth. 

Demand for construction services continues to be strongly influenced by the
volume of public sector investment, which in turn depends on the co-financing
received from the EU structural funds. Total support allocated to Estonia
during the current EU budget period (2014-2020) amounts to 5.9 billion euros,
exceeding the figure of the previous financial framework, but the amounts
earmarked for construction work are substantially smaller. In the construction
market, the effects of the EU funding are not likely to have an impact before
the end of 2015. 

In the light of the above factors, we do not expect any significant business
growth in 2015. It is probable that the volumes of the Infrastructure segment
will shrink but the decline should be counterbalanced by increasing investment
activity in the Buildings segment. Our action plan foresees redirecting our
resources (including some of the labour of the Infrastructure segment) to
increasing the share of contracts secured from the private sector. According to
our business model, Nordecon operates in all segments of the construction
market. Therefore, we are somewhat better positioned than companies that
operate in one narrow (and, in the current market situation, particularly some
infrastructure) segment. 

The Group’s business is also influenced by the fact that construction
operations are seasonal. The impacts of seasonal fluctuations are the strongest
in the Infrastructure segment where a lot of work is done outdoors (road and
port construction, earthworks, etc.). To disperse the risk, we secure road
maintenance contracts that generate year-round business. Our business strategy
is to counteract seasonal fluctuations in infrastructure operations with
building construction that is less exposed to seasonality. Thus, our long-term
goal is to keep the two segments in balance (see also the chapter Performance
by business line). In addition, where possible, our companies implement
appropriate technical solutions that allow working efficiently also in
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 2015, the Group’s warranty
provisions (including current and non-current ones) totalled 1,066 thousand
euros. The figure for the comparative period was 1,416 thousand euros. 

In addition to managing the risks 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.,
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 period, the Group did not incur any major credit losses. The credit risk
exposure of the Group’s receivables continued to be low because the share of
public sector customers is significant and the customers’ settlement behaviour
is monitored on an ongoing basis. The main indicator of the realization 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 2015 as well as in the comparative period, the Group
did not incur any impairment losses on receivables. 

Liquidity risk

The Group remains exposed to higher than usual liquidity risk resulting from a
mismatch between the long settlement terms demanded by customers (mostly 30 to
56 days) and increasingly shorter settlement terms negotiated by subcontractors
(mostly 21 to 45 days). The Group counteracts the differences in settlement
terms by using factoring where possible. 

At the reporting date, the Group’s current assets exceeded its current
liabilities 1.01-fold (31 March 2014: 1.01-fold). The key factors which
influence the current ratio are classification of the Group’s loans to its
Ukrainian associates as non-current assets and the banks’ general policy not to
refinance interest-bearing liabilities for a period exceeding twelve months. 

The political situation in Ukraine remains tense and we believe that
realization of our Ukrainian investment properties may take longer than
originally expected. Accordingly, at the reporting date the Group’s loan
receivables from its Ukrainian associates of 10,894 thousand euros were
classified as non-current assets. 

At the reporting date, interest-bearing liabilities accounted for a significant
share of our current liabilities. In accordance with IFRS EU, loan commitments
have to be classified into current and non-current liabilities based on
contract terms in force 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 the 12 months have passed. At 31 March 2015, the Group’s
current loan liabilities totalled 14,472 thousand euros. During the first
quarter and after the reporting period banks have committed to refinancing
current loan liabilities of 7,155 thousand euros, settlement of 6,555 thousand
euros of which will be deferred to 2016. 

At the reporting date, the Group’s cash and cash equivalents totalled 2,198
thousand euros (31 March 2014: 4,702 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. The amount of the
Group’s interest-bearing liabilities has remained similar to a year ago but the
liability structure has changed.  Current and non-current bank loans have
decreased by 3,346 thousand euros while factoring liabilities and, to a lesser
extent, finance lease liabilities have increased. The Group uses factoring to
counteract the difference in settlement terms agreed with customers and
subcontractors (see also the chapter Liquidity risk).  At 31 March 2015, the
Group’s interest-bearing loans and borrowings totalled 22,930 thousand euros
(31 March 2014: 22,953 thousand euros). Interest expense for the first quarter
of 2015 amounted to 152 thousand euros, a decrease of 31 thousand euros
compared with the first quarter of 2014. 

The main source of the Group’s interest rate risk is a possible rise in the
base rate of floating interest rates (EURIBOR, EONIA or the creditor’s own base
rate). In the light of the Group’s relatively heavy loan burden this would
cause a significant increase in interest expense, which would have an adverse
impact on profit. We mitigate the risk by pursuing a policy of entering, where
possible, into fixed-rate contracts when the market interest rates are low. As
regards loan products offered by banks, observance of the policy has proved
difficult and most new contracts have a floating interest rate. The Group does
not use derivatives to hedge its interest rate risk. 

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 Ukrainian hryvnias
(UAH). 

The hryvnia has been weakening because the political and economic environment
in Ukraine continues to be strained due to the conflict between Ukraine and
Russia which broke out at the beginning of 2014 and at the beginning of 2015
the National Bank of Ukraine decided to discontinue determination of the
national currency’s indicative exchange rate. During the period, the hryvnia
weakened against the euro by around 24%. For the Group’s Ukrainian
subsidiaries, this meant additional foreign exchange losses on the translation
of their euro-denominated loan commitments into the local currency. Relevant
exchange losses totalled 516 thousand euros (Q1 2014: 776 thousand euros). 

Exchange gains and losses on financial instruments are reported within Finance
income and Finance costs in the statement of comprehensive income. Translation
of receivables and liabilities from operating activities did not give rise to
any exchange gains or losses. 

The reciprocal receivables and liabilities of the Group’s Ukrainian and
non-Ukrainian entities which are connected with the construction business and
denominated in hryvnias do not give rise to exchange losses. Nor do the loans
provided to the Group’s Ukrainian associates in euros give rise to exchange
losses that ought to be recognised in the Group’s statement of comprehensive
income. 

The Group has not acquired derivatives to hedge its currency risk.



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market

  -- In 2015, public sector investments will not grow significantly and the
     extent to which they can be realised is still unclear. Although in the
     2014-2020 EU budget period the support allocated to Estonia will increase
     to 5.9 billion euros (2007-2013: 4.6 billion euros), the share of support
     that will influence the construction market will not increase. Instead,
     compared with the previous period, there will be a rise in allocations to
     other areas.
  -- Investments made by the largest public sector customers (e.g., state-owned
     real estate company Riigi Kinnisvara AS and National Road Administration)
     that reach signature of a construction contract in 2015 will not increase
     significantly and may be postponed to 2016. As a result, the Estonian
     construction market (particularly infrastructure construction segments)
     will remain in relative stagnation. To some extent, the situation will be
     improved by the positive level of private sector investments in building
  -- The long and painful market consolidation will continue, although slowly.
     In particular, this applies to general contracting in building construction
     where the number of medium-sized operators (annual turnover of around 15-40
     million euros) is too large. Based on recent years’ experience it is likely
     that stiff competition and insufficient demand will cause some general
     contractors to go slowly out of business or shrink in size rather than
     merge or exit the market. According to our assessment, in recent years the
     process has been slowed down by the customers’ (particularly public sector
     customers’) increasing desire to apply less stringent tendering
     requirements to increase competition and lower the price even though this
     increases the risks related to collateral, quality, adherence to deadlines
     and builder’s liability.
  -- Competition will increase in all segments of the construction market. The
     average number of bidders for a contract has increased and there is a wide
     gap between the lowest bids made by winners and the average bids. The
     situation is somewhat similar to 2009 when expectations of shrinkage in
     demand prompted a fall in construction prices, which triggered a slide in
     the prices of many construction inputs. However, currently we do not see
     any downshift in input prices and companies that are banking on this in the
     bidding phase may run into difficulty. Stiff competition is putting
     pressure on contract prices and, thus, also profit margins.
  -- In new housing development, the success of a project depends on the
     developer’s ability to control the input prices included in the business
     plan and, thus, set affordable sales prices. 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 previous periods, successful projects
     include those that create or fill a niche.
  -- There is an increasing contrast between the stringent terms of public
     sector contracts, which impose on builders extensive obligations, strict
     sanctions, different financial guarantees, long settlement terms, etc. and
     modest tendering requirements. Low qualification requirements and the
     precondition of making a low bid have made it easier to win a contract but
     have heightened the risks taken by customers in respect of contract
     performance and delivery.
  -- The prices of construction inputs will remain relatively stable. For a
     short term, shrinkage in demand may lower local subcontracting prices.
     However, taking into account subcontractors’ financial and human resources,
     the decline cannot be large or long-lasting. In some areas, price
     fluctuations will be unpredictable and, thus, may be notably greater and
     hard or even impossible to influence (oil and metal products, certain
     materials and equipment).
  -- Shortage of skilled labour (including project and site managers) will
     persist but this will weaken the quality of the construction
     process/service rather than the companies’ performance capabilities.
     Shrinkage in the Estonian construction volumes may increase labour supply
     but not substantially. Labour migration to the Nordic countries will remain
     steady and even though Nordic construction volumes (particularly in
     Finland) will decline as well, the number of job seekers that will return
     will not increase considerably. This sustains pressure for a wage increase.

Latvia and Lithuania

The Latvian construction market, which was hit by a severe downturn a few years
ago, has not regained sufficient stability and, similarly to the Estonian
market, in 2015 it will probably be adversely affected by a slowdown in public
sector demand. Accordingly, it is unlikely that we will enter the Latvian
construction market permanently in 2015. 

In the near term we may undertake some projects in Latvia through our Estonian
entities, involving partners where necessary. Undertaking a project assumes
that it can be performed profitably. The decision does not change our strategy
for the future, i.e., the goal to operate in our neighbouring construction
markets through local subsidiaries. 

The operations of the Group’s Lithuanian subsidiary, Nordecon Statyba UAB, are
suspended. We monitor the market situation and may resume operations in the
next few years because developments in the Lithuanian construction market have
been quite positive in the Baltic context. 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 goal to operate in the Lithuanian construction market
through local subsidiaries. 

Ukraine

In Ukraine, we prefer to provide general contracting and project management
services to foreign private sector customers in the segment of building
construction. However, due to the market situation, we have also signed
contracts with local investors where the terms have not involved any
unreasonable or uncontrollable risks. The unstable political and economic
situation hinders adoption of business decisions but construction activity in
Kiev has not halted. In 2015, the Group will continue its business in the Kiev
region and our current Ukrainian order book is larger than a year ago. Despite
the armed conflict in eastern Ukraine, for Nordecon the market situation in
Kiev has not deteriorated compared with a year or two ago. Hard times have
reduced the number of inefficient local (construction) companies and when the
economy normalises we will have much better prospects for increasing our
operations and profitability. We monitor the situation in the Ukrainian
construction market closely and consistently and are ready to restructure our
operations as and when necessary. Should the crisis spread to Kiev (currently
highly unlikely), we can suspend our operations immediately. We continue to
seek opportunities for exiting our two real estate projects that have been put
on hold or signing a construction contract with a prospective new owner. 

Finland

In Finland, we offer mainly subcontracting services in the concrete works
segment but based on experience gained, have also started to perform some more
complex works. The local concrete works market allows competing for projects
where the customer wishes to source all concrete works from one reliable
partner. Our policy is to maintain a rational approach and avoid taking
excessive risks. At present, we are not planning to penetrate any other
segments of the Finnish construction market (general contracting, project
management, etc.). 

Sweden

In 2015, we started preparations for potential expansion into the Swedish
market. We are planning to offer construction of residential and
non-residential buildings, particularly in central Sweden. 



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
2014 was 161 million euros and net profit 2.3 million euros. Currently Nordecon
Group employs more than 710 people. Since 18 May 2006 the company's shares have
been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange. 




         Andri Hõbemägi
         Nordecon AS
         Head of Investor Relations
         Tel: +372 6272 022
         Email: [email protected]
         www.nordecon.com