Market announcement

Title

2015 II quarter and 6 months 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                                          30 June 2015  31 December 2014
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                4,529             8,802
Trade and other receivables                             32,848            23,235
Prepayments                                              2,204             1,201
Inventories                                             25,738            24,788
Total current assets                                    65,319            58,026
Non-current assets                                                              
Investments in equity-accounted investees                  631               694
Other investments                                           26                26
Trade and other receivables                             11,663            11,211
Investment property                                      3,549             3,549
Property, plant and equipment                           10,223             9,319
Intangible assets                                       14,636            14,633
Total non-current assets                                40,728            39,432
TOTAL ASSETS                                           106,047            97,458
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                    25,360            20,588
Trade payables                                          31,138            26,267
Other payables                                           5,572             7,542
Deferred income                                            882             1,786
Provisions                                                 504               799
Total current liabilities                               63,456            56,982
Non-current liabilities                                                         
Loans and borrowings                                     5,617             3,145
Trade payables                                             109               109
Other payables                                              96                96
Provisions                                                 889               759
Total non-current liabilities                            6,711             4,109
TOTAL LIABILITIES                                       70,167            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                                      1,102               771
Retained earnings                                       11,188            11,714
Total equity attributable to owners of the              34,501            34,696
 parent                                                                         
Non-controlling interests                                1,379             1,671
TOTAL EQUITY                                            35,880            36,367
TOTAL LIABILITIES AND EQUITY                           106,047            97,458



Condensed consolidated interim statement of comprehensive income

EUR ’000                        First   Second     First        Second      Full
                                 half  quarter      half       quarter      year
                                 2015     2015      2014          2014      2014
Revenue                        69,211   42,098    67,444        43,900   161,289
Cost of sales                 -66,140  -39,436   -63,232       -40,858  -151,476
Gross profit                    3,071    2,662     4,212         3,042     9,813
                                                                                
Marketing and distribution       -222     -104      -344           -95      -558
 expenses                                                                       
Administrative expenses        -2,224   -1,115    -2,471        -1,347    -5,656
Other operating income            253      149       174           109       792
Other operating expenses          -74      -36       -64           -35      -376
Operating profit                  804    1,556     1,507         1,674     4,015
                                                                                
Finance income                    325      160       326           162       738
Finance costs                    -662        9    -1,222          -262    -2,301
Net finance costs/income         -337      169      -896          -100    -1,563
                                                                                
Share of profit of                 33      129        22            83        85
 equity-accounted investees                                                     
                                                                                
Profit before income tax          500    1,854       633         1,657     2,537
Income tax                       -257     -257      -179          -179      -239
Profit for the period             243    1,597       454         1,478     2,298
                                                                                
Other comprehensive income                                                      
Items that may be                                                               
 reclassified subsequently                                                      
 to profit or loss                                                              
Exchange differences on           331     -193       810            89     1,069
 translating foreign                                                            
 operations                                                                     
Total other comprehensive         331     -193       810            89     1,069
 income                                                                         
TOTAL COMPREHENSIVE INCOME        574    1,404     1,264         1,567     3,367
                                                                                
Profit attributable to:                                                         
- Owners of the parent            397    1,681       221         1,294     1,956
- Non-controlling interests      -154      -84       233           184       342
Profit for the period             243    1,597       454         1,478     2,298
                                                                                
Total comprehensive income                                                      
 attributable to:                                                               
- Owners of the parent            728    1,488     1,031         1,383     3,025
- Non-controlling interests      -154      -84       233           184       342
Total comprehensive income        574    1,404     1,264         1,567     3,367
 for the period                                                                 
                                                                                
Earnings per share                                                              
 attributable to owners of                                                      
 the parent:                                                                    
Basic earnings per share         0.01     0.05      0.01          0.04      0.06
 (EUR)                                                                          
Diluted earnings per share       0.01     0.05      0.01          0.04      0.06
 (EUR)                                                                          
                                                                                
                                                                                

Condensed consolidated interim statement of cash flows

EUR ’000                                              First half      First half
                                                            2015            2014
Cash flows from operating activities                                            
Cash receipts from customers1                             73,141          73,297
Cash paid to suppliers2                                  -67,292         -66,917
VAT paid                                                  -1,898          -2,478
Cash paid to and for employees                           -10,977          10,195
Income tax paid                                              -37               0
Net cash used in operating activities                     -7,063          -6,293
                                                                                
Cash flows from investing activities                                            
Paid on acquisition of property, plant and                  -380            -360
 equipment                                                                      
Proceeds from sale of property, plant and                    238             111
 equipment                                                                      
Acquisition of a subsidiary                                    0            -180
Acquisition of investments in associates                      -1               0
Loans provided                                               -27            -268
Repayment of loans provided                                   55              95
Dividends received                                           103               4
Interest received                                              5               1
Net cash used in investing activities                         -7            -597
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                               6,909           9,695
Repayment of loans received                               -1,797          -4,255
Payment of finance lease liabilities                        -875            -706
Interest paid                                               -348            -391
Dividends paid                                            -1,091            -923
Net cash from financing activities                         2,798           3,420
                                                                                
Net cash flow                                             -4,272          -3,470
                                                                                
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                    -4,272          -3,470
Cash and cash equivalents at end of period                 4,529           9,103

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 half of 2015 with a gross profit of 3,071
thousand euros (first half 2014: 4,212 thousand euros) and a gross margin of
4.4% (first half 2014: 6.2%). Compared with the same period last year, gross
margin declined in the Buildings segment and improved slightly in the
Infrastructure segment where the main sources of profit were road construction
and road maintenance. The Group’s second-quarter gross margin was comparable to
that of second quarter 2014 but not sufficient to offset the weaker result for
the first quarter. 

Nordecon’s management has noted the stagnation and the resulting strong
competitive pressures in the construction market already in earlier periods
(see also the chapters Order book, Description of the main risks and Outlooks
of the Group’s geographical markets) and has enforced measures for maintaining
the Group’s profitability. In the infrastructure segment, the expected recovery
has not materialized and launches of new projects have mostly been deferred. In
the buildings segment, bidding activity is relatively high but the prices of
most new contracts do not cover the risks involved and instigate caution. In
entering into long-term contracts, we remain aware of the risks inherent in
changes taking place in our operating environment and uphold the policy that
contracts are not signed to simply grow the portfolio and new projects may not
cause a significant rise in our operational risks. 

The Group’s administrative expenses for the first half of 2015 totalled 2,224
thousand euros, a slight decrease compared with a year ago (first half 2014:
2,471 thousand euros). The ratio of administrative expenses to revenue (12
months rolling) was 3.3% (first half 2014: 3.1%). The Group’s cost-control
measures continue to yield strong results: we have been able to keep
administrative expenses below the target ceiling, i.e., 4% of revenue. 

The Group ended the first half of 2015 with an operating profit of 804 thousand
euros (first half 2014: 1,507 thousand euros) and an EBITDA of 1,732 thousand
euros (first half 2014: 2,455 thousand euros). 

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange
losses that were smaller than a year ago. During the period, the Ukrainian
currency weakened by around 18%, which meant that Group companies whose
functional currency is the hryvnia had to restate their euro-denominated
liabilities. Exchange losses reported within finance costs totalled 316
thousand euros (first half 2014: 854 thousand euros). In the second quarter,
the hryvnia strengthened slightly, which lowered the Group’s exchange loss for
the period by 200 thousand euros compared with the first quarter. The same
movements in the exchange rate gave rise to a positive change of 331 thousand
euros in the translation reserve in equity (first half 2014: 810 thousand
euros) and the net effect of the exchange loss on the Group’s net assets was a
gain of 15 thousand euros (first half 2014: a loss of 44 thousand euros). 

Net profit for the period amounted to 243 thousand euros (first half 2014: 454
thousand euros), of which net profit attributable to owners of the parent,
Nordecon AS, was 397 thousand euros (first half 2014: 221 thousand euros). 

Cash flows

Operating activities of the period resulted in a net cash outflow of 7,063
thousand euros (first half 2014:  an outflow of 6,293 thousand euros). The
negative operating cash flow of the first half-year stems from the cyclical
nature of the construction business. Larger fixed costs and preparations for a
more active construction period cause outflows to exceed inflows. Cash flows
are strongly affected by the fact that neither public nor private sector
contracts require customers to make advance payments while the Group has to
make prepayments to sub-contractors, materials suppliers, etc. In the present
market situation, making of an advance payment by the customer is an exception
rather than a rule, which puts additional pressure on the cash flows of
construction companies. In addition, cash inflow is reduced by retentions that
extend from 5 to 10% of the contract price and are released only at the end of
the construction period. Cash flow is also 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. During the
period, there was also a slight increase in payments to employees that resulted
from performance bonuses paid for projects completed in the previous year with
higher than expected profit margins. 

Investing activities resulted in a net outflow of 7 thousand euros (first half
2014: a net outflow of 597 thousand euros). Cash flows from investing
activities were influenced the most by acquisitions of property, plant and
equipment of 380 thousand euros (first half 2014: 360 thousand euros) and sales
of used items of property, plant and equipment for 238 thousand euros (first
half 2014: 111 thousand euros). Loans provided decreased year over year.
Dividends received amounted to 103 thousand euros (first half 2014: 4 thousand
euros). 

Financing activities resulted in a net cash inflow of 2,798 thousand euros
(first half 2014: a net inflow of 3,420 thousand euros). Loan receipts exceeded
repayments by 5,112 thousand euros (first half 2014: by 5,440 thousand euros).
A major share of cash inflow from financing activities resulted from use of
overdraft facilities for raising working capital for operating activities and
use of bank loans for partial financing of own development projects. Dividends
distributed in the first half of 2015 totalled 1,091 thousand euros (first half
2014: 923 thousand euros). 

At 30 June 2015, the Group’s cash and cash equivalents totalled 4,529 thousand
euros (30 June 2014: 9,103 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                      First half  First half  First half   Full year
                                        2015        2014        2013        2014
Revenue (EUR’000)                     69,211      67,444      75,497     161,289
Revenue change                            3%        -11%         20%       -7.1%
Net profit (EUR’000)                     243         454         812       2,298
Net profit attributable to               397         221         728       1,956
 owners of the parent (EUR’000)                                                 
Weighted average number of        30,756,728  30,756,728  30,756,728  30,756,728
 shares                                                                         
Earnings per share (EUR)                0.01        0.01        0.02        0.06
                                                                                
Administrative expenses to              3.2%        3.7%        3.1%        3.5%
 revenue                                                                        
Administrative expenses to              3.3%        3.1%        3.0%        3.5%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR’000)                       1,732       2,455       1,965       5,585
EBITDA margin                           2.5%        3.6%        2.6%        3.5%
Gross margin                            4.4%        6.2%        4.3%        6.1%
Operating margin                        1.2%        2.2%        1.3%        2.5%
Operating margin excluding gains        0.8%        2.1%        1.1%        2.3%
 on sale of real estate                                                         
Net margin                              0.4%        0.7%        1.1%        1.4%
Return on invested capital              1.3%        1.6%        2.2%        5.8%
Return on equity                        0.7%        1.3%        2.7%        6.4%
Equity ratio                           33.8%       33.8%       27.3%       37.3%
Return on assets                        0.2%        0.4%        0.7%        2.3%
Gearing                                39.6%       31.6%       45.4%       24.8%
Current ratio                           1.03        1.07        1.08        1.02
As at                                30 June     30 June     30 June      31 Dec
                                        2015        2014        2013        2014
Order book (EUR’000)                  70,837      87,236     103,230      83,544



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



Performance by geographical market

In the first half of 2015, the Group generated around 4% of its revenue outside
Estonia compared with 7% in the same period in 2014. The contribution of
foreign markets has decline due to a decrease in sales in Finland. 

         First half 2015  First  half 2014  First half 2013  Full year 2014
Estonia              96%               93%              98%             94%
Finland               1%                6%               2%              2%
Ukraine               3%                1%               0%              4%

Finnish revenue comprised revenue from concrete works in the building
construction segment. The contribution of the Finnish market has decreased
because major projects have been completed. The relative importance of the
Ukrainian market, where we mainly continue performing 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. However, conditions in our chosen foreign markets are also
volatile and have a strong impact on our current results. Our strategy foresees
increasing foreign operations in the longer term; for further information, see
the chapter Strategic agenda for 2014-2017. Our vision of our 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 half of 2015 totalled 69,211 thousand euros,
a 3% increase on the 67,444 thousand euros generated in the first half of 2014.
Revenue grew in both the Buildings and the Infrastructure segment. In the
Buildings segment, the strongest growth was achieved in housing construction.
In the Infrastructure segment, revenue growth continues to be underpinned by
slight growth in road construction volumes that have not yet regained the level
measured a few years ago. Unfortunately, our engineering sub-segments have not
recovered as anticipated, which is why we expect that in 2015 the volumes of
projects performed with EU support will remain at the low levels of the
previous financial year. 

The segments’ revenues for the first half of 2015 were 49,154 thousand euros
for Buildings and 18,543 thousand euros for Infrastructure. The corresponding
figures for the first half of 2014 were 47,826 thousand euros and 17,936
thousand euros (see note 8). The Group’s order book has the same structure: at
period-end 63% of contracts secured but not yet performed (in terms of value)
were related to the Buildings segment (first half 2014: 67%). 

Operating              First half      First half      First half      Full year
 segments*                   2015            2014            2013           2014
Buildings                     68%             71%             41%            65%
Infrastructure                32%             29%             59%            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 considerably. The contribution of the industrial and
warehouse facilities sub-segment has contracted sharply while the contributions
of other sub-segments have increased. The largest contributor is still the
commercial buildings sub-segment. 

The largest ongoing projects of the commercial buildings sub-segment are in
Tallinn: the Eesti Loto, Lõõtsa and Veerenni business buildings as well as the
Viimsi centre which is close to completion. In June, we completed and delivered
on time the reconstruction of the Estonia Spa in Pärnu. We expect private
sector investment activity to continue and the contribution of the sub-segment
to remain at a similar or higher level throughout the year. 

In the industrial and warehouse facilities sub-segment volumes have declined
due to a decrease in both agricultural projects that used to dominate for a
long time based on EU support and  warehouse and logistics facility projects.
We do not expect the revenues of the sub-segment to increase substantially in
the current year. 

The volumes of the public buildings sub-segment have grown mainly through an
increase in the state’s investments in national defence. The period’s largest
projects were the construction of the Võru state secondary school and
construction work on the premises of the Kuperjanov infantry battalion. In
addition, we began building the Piusa border guard station and a building
complex at the Ämari air base. 

Our apartment building revenues resulted mostly from general contracting. The
period’s main revenue contributors were the apartment building at Kentmanni
põik 3 and phase II of the Tondi residential quarter in Tallinn that were
started last year. In the second quarter, we began building phase I of
Pikksilma Kodu in Kadriorg, Tallinn. 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
Tammelinn, Tartu. Sales have been successful: by the end of the period, 27 of
the apartments had been sold or reserved. We continue to build phase II of the
development where over half of the 20 apartments in the building that will be
completed this September have already been sold under preliminary agreements or
reserved (www.tammelinn.ee). In Tallinn, we continue to sell apartment
ownerships in phases I and III and build phase III of our Magasini 29
development project (www.magasini.ee). By the end of the period, 7 of the 13
apartment ownerships in phases I and II had been sold. 

Revenue distribution in         First half   First half  First half    Full year
 Buildings segment                    2015         2014        2013         2014
Commercial buildings                   59%          49%         45%          42%
Industrial and warehouse               10%          33%         34%          33%
 facilities                                                                     
Public buildings                       13%           6%         19%           7%
Apartment buildings                    18%          12%          2%          18%

In the first half of 2015, the main revenue source in the Infrastructure
segment was road construction. We continued 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) and started (in the second quarter) work on several smaller road
repair projects whose total volume is substantial. In addition, Nordecon
continues to deliver road maintenance services in the Järva and Hiiu counties
and the Keila maintenance area. We expect that road construction will remain
the main revenue source in the Infrastructure segment through 2015 and,
similarly to last year, most of the projects will be small or medium-sized
reconstruction and repair projects. 

In specialist engineering, we did small-scale port construction work on the
island of Hiiumaa. Investments in hydraulic engineering as well as our relevant
revenue have declined in recent years and we do not expect to secure any large
hydraulic engineering projects in the near future. The revenues of the
sub-segment may increase through other complex engineering works but their
addition is likely to be irregular. 

Shrinkage in support provided from the EU structural funds continues to have a
strong impact on environmental engineering 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 in             First half  First half      First  Full year
 Infrastructure segment                   2015        2014  half 2013       2014
Road construction and maintenance          82%         74%        54%        72%
Specialist engineering (including           1%          4%         8%         2%
 hydraulic engineering)                                                         
Other engineering                          10%          7%        27%        19%
Environmental engineering                   7%         15%        11%         7%



Order book

At 30 June 2015, the Group’s order book (backlog of contracts signed but not
yet performed) stood at 70,837 thousand euros, a 19% decrease compared with a
year ago. The order book decreased in both the Buildings segment and the
Infrastructure segment. 

                        First half      First half     First half      Full year
                              2015            2014           2013           2014
Order book                  70,837          87,236        103,230         83,544
 (EUR’000)                                                                      

In the Infrastructure segment, there was a slight increase in the order book of
the road construction sub-segment that is engaged in two large road
construction projects started in 2014 in Tartu and Keila (see the chapter
Sub-segment revenues) and has secured several smaller road repair projects. The
order books of the other sub-segments decreased significantly 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, which is strongly affected by the fall in
EU-supported agricultural projects, decreased. 

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 63% and 37% of the Group’s order book
respectively (30 June 2014: 67% and 33% respectively). The domination of the
Buildings segment 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 present order book structure will persist for the
next few years. In the current EU budget period (2014-2020) investments in
infrastructure construction, which are mostly made 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 also the Business risks section
of the chapter Description of the main risks). 

The volume of contracts secured in the second quarter of 2015 proved smaller
than expected, which is also reflected in our order book. In a situation of
stiff competition, we have avoided taking unjustified risks that could have an
adverse impact on the Group. We prefer to keep costs under control and focus on
projects with a positive outlook. According to our assessment, in the present
situation it is difficult to maintain revenue and profit margins at the level
of 2014 without taking unreasonable risks. Therefore, a decline in the second
half-year is more than likely. 

Between the reporting date (30 June 2015) and the date of release of this
report, Group companies secured additional construction contracts in the region
of 10,032 thousand euros. 



People

Staff and personnel expenses

In the first half of 2015, the Group (the parent and the subsidiaries)
employed, on average, 693 people including 351 engineers and technical
personnel (ETP). 

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

               First half 2015  First half 2014  First half 2013  Full year 2014
ETP                        351              353              362             357
Workers                    342              388              412             375
Total average              693              741              774             732

Compared with a year ago, headcount decreased by 6.5%, mostly through a decline
in the number of workers that is attributable to shrinkage in the volume of
work performed with own resources. Personnel expenses for the first half-year
decreased accordingly. The Group’s personnel expenses for the first half-year
including all taxes totalled 8,329 thousand euros (first half 2014: 8,904
thousand euros). 

In the first half of 2015, 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 (first half 2014: 71 thousand euros and 23
thousand euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 171
thousand euros and associated social security charges totalled 56 thousand
euros (first half 2014: 138 thousand euros and 46 thousand euros respectively). 



Labour productivity and labour cost efficiency

The rise in the Group’s labour productivity and labour cost efficiency,
relative to the same period last year, is attributable to both revenue growth
and a decrease in headcount and personnel expenses. 

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: 

                                 First half   First half  First half   Full year
                                       2015         2014        2013        2014
Nominal labour productivity           225.8        224.1       224.6       220.4
 (rolling), (EUR’000)                                                           
Change against the comparative         0.7%        -0.2%        7.7%       -4.0%
 period                                                                         
                                                                                
Nominal labour cost efficiency          8.4          7.9         9.4         8.0
 (rolling), (EUR)                                                               
Change against the comparative         5.8%       -16.0%      -11.3%        4.8%
 period                                                                         



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 likely to grow substantially compared with
2014, as was expected in the comparative period. There is strong competitive
pressure on builders’ bid prices in a situation where input prices have not
decreased noticeably. 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 and tight cost control 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. The reporting period
reflects unequivocally that these allocations are not going to impact the
construction sector in 2015. Instead, their effect will emerge later. 

In the light of the above factors, we do not expect year over year business
growth in 2015. It is probable that the volumes of the Infrastructure segment
will shrink but the decline should be counterbalanced by increasing 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, earthwork, 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 30 June 2015, the Group’s warranty
provisions (including current and non-current ones) totalled 1,036 thousand
euros. The figure for the comparative period was 1,199 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

During 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 half 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 1.03-fold (30 June 2014: 1.07-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 11,022 thousand euros were
classified as non-current assets. 

At period-end, 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 generally 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 the reporting date, the Group’s cash and cash equivalents totalled 4,529
thousand euros (30 June 2014: 9,103 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 the comparative
period but the liability structure has changed. Current and non-current bank
loans have decreased by 3,023 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 30 June
2015, the Group’s interest-bearing loans and borrowings totalled 30,977
thousand euros (30 June 2014: 29,602 thousand euros). Interest expense for the
first half of 2015 was 342 thousand euros (first half 2014: 363 thousand
euros). 

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 differences between Ukraine and
Russia which emerged 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. In the first half of 2015, the hryvnia
weakened against the euro by around 18%. 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 316 thousand euros (first half 2014: 854 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
     intangible 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
     construction.
  -- The long and painful construction 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 noticeable 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 to 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 the builder extensive obligations, strict
     sanctions, various 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 for builders 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 may thus be 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, have
been 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, Nordecon started preparations for potential expansion into the Swedish
market. The Group is planning to offer construction of residential and
non-residential buildings, particularly in central Sweden. To begin
construction activity, in July 2015 we acquired 100% of ownership interest in
SWENCN AB, a company registered in the Kingdom of 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 close to 700 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