Market announcement

Title

2016 first quarter consolidated interim report (unaudited)

Message

This announcement includes Nordecon AS’s consolidated financial statements for
the first quarter of 2016 (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 2016  31 December  2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                               4,236              6,332
Trade and other receivables                            19,006             17,503
Prepayments                                             1,422              1,599
Inventories                                            23,151             23,603
Total current assets                                   47,815             49,037
Non-current assets                                                              
Investments in equity-accounted investees               1,298              1,179
Other investments                                          26                 26
Trade and other receivables                            10,654             10,516
Investment property                                     4,929              4,929
Property, plant and equipment                           9,403              9,623
Intangible assets                                      14,614             14,609
Total non-current assets                               40,924             40,882
TOTAL ASSETS                                           88,739             89,919
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                   15,687             15,715
Trade payables                                         20,997             22,538
Other payables                                          7,777              5,475
Deferred income                                         1,713              3,233
Provisions                                                721                825
Total current liabilities                              46,895             47,786
Non-current liabilities                                                         
Loans and borrowings                                    4,793              5,098
Trade payables                                            104                104
Other payables                                             96                 96
Provisions                                                905                768
Total non-current liabilities                           5,898              6,066
TOTAL LIABILITIES                                      52,793             53,852
                                                                                
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                                     1,646              1,358
Retained earnings                                      10,400             10,970
Total equity attributable to owners of the             34,257             34,539
 parent                                                                         
Non-controlling interests                               1,689              1,528
TOTAL EQUITY                                           35,946             36,067
TOTAL LIABILITIES AND EQUITY                           88,739             89,919



Condensed consolidated interim statement of comprehensive income

EUR ‘000                                              Q1 2016  Q1 2015      2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                                                27,731   27,113   145,515
Cost of sales                                         -26,578  -26,704  -136,484
Gross profit                                            1,153      409     9,031
                                                                                
Marketing and distribution expenses                      -103     -118      -412
Administrative expenses                                -1,292   -1,109    -5,026
Other operating income                                     41      104       464
Other operating expenses                                  -12      -38      -124
Operating loss/profit                                    -213     -752     3,933
                                                                                
Finance income                                            124      165       655
Finance costs                                            -439     -671    -4,383
Net finance costs                                        -315     -506    -3,728
                                                                                
Share of profit/loss of equity-accounted investees        119      -96       226
                                                                                
Loss/profit before income tax                            -409   -1,354       431
Income tax expense                                          0        0      -257
Loss/profit for the year                                 -409   -1,354       174
                                                                                
Other comprehensive income                                                      
Items that may be reclassified subsequently to                                  
 profit or loss                                                                 
Exchange differences on translating foreign               288      524       587
 operations                                                                     
Total other comprehensive income                          288      524       587
TOTAL COMPREHENSIVE EXPENSE/INCOME                       -121     -830       761
                                                                                
Loss/profit attributable to:                                                    
- Owners of the parent                                   -570   -1,284       179
- Non-controlling interests                               161      -70        -5
Loss/profit for the year                                 -409   -1,354       174
                                                                                
Total comprehensive expense/income attributable to:                             
- Owners of the parent                                   -282     -760       766
- Non-controlling interests                               161      -70        -5
Total comprehensive expense/income for the year          -121     -830       761
                                                                                
Earnings per share attributable to owners of the                                
 parent:                                                                        
Basic earnings per share (EUR)                          -0.02    -0.04      0.01
Diluted earnings per share (EUR)                        -0.02    -0.04      0.01



Condensed consolidated interim statement of cash flows

EUR ‘000                                              Q1 2016  Q1 2015
----------------------------------------------------------------------
----------------------------------------------------------------------
Cash flows from operating activities                                  
Cash receipts from customers1                          29,588   35,789
Cash paid to suppliers2                               -27,505  -34,416
VAT paid                                                 -951   -1,239
Cash paid to and for employees                         -3,950   -4,069
Income tax paid                                             0      -37
Net cash used in operating activities                  -2,818   -3,972
                                                                      
Cash flows from investing activities                                  
Paid on acquisition of property, plant and equipment     -103     -275
Proceeds from sale of property, plant and equipment        28       34
Acquisition of investments in associates                    0       -1
Loans provided                                            -18      -19
Repayment of loans provided                                 2       40
Dividends received                                          3      103
Interest received                                           0        6
Net cash used in investing activities                     -88     -112
                                                                      
Cash flows from financing activities                                  
Proceeds from loans received                            1,562      331
Repayment of loans received                              -201   -2,350
Finance lease principal paid                             -395     -313
Interest paid                                            -158     -157
Dividends paid                                              0      -30
Net cash from/used in financing activities                808   -2,519
                                                                      
Net cash flow                                          -2,098   -6,603
                                                                      
Cash and cash equivalents at beginning of year          6,332    8,802
Effect of movements in foreign exchange rates               2       -1
Decrease in cash and cash equivalents                  -2,098   -6,603
Cash and cash equivalents at end of year                4,236    2,198

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 2016 with a gross profit of 1,153
thousand euros (Q1 2015: 409 thousand euros) and a gross margin of 4.2% (Q1
2015: 1.5%). Despite increasing competition, we succeeded in improving the
gross margin compared with a year ago. The profit was generated by the
Buildings segment which raised its gross margin from 6 to 11%. The results of
the Infrastructure segment remained expectedly modest with the loss incurred
growing considerably year over year.  The loss is mainly attributable to the
fact that during the winter season there is a lack of operations that could be
performed with own resources (major earthworks) and, thus, a large share of the
segment’s fixed costs remains uncovered. 

We are aware that growth in input prices poses a risk for long-term contracts
and continue to prioritise a contract’s expected profitability over revenue
growth. 

Our administrative expenses for the first quarter of 2016 totalled 1,292
thousand euros. Compared with the same period last year, administrative
expenses increased slightly  (Q1 2015: 1,109 thousand euros), primarily due to
our expansion to the Swedish market. The ratio of administrative expenses to
revenue (12 months rolling) was 3.6% (Q1 2015: 3.4%). Our cost-control measures
continue to be effective: we have been able to keep administrative expenses
below the target ceiling, i.e., 4% of revenue. 

We ended the first quarter of 2016 with an operating loss of 213 thousand euros
(Q1 2015: an operating loss of 752 thousand euros). EBITDA was positive at 233
thousand euros (Q1 2015: negative at 285 thousand euros). 

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange
losses that were smaller than a year earlier. During the period, the Ukrainian
currency weakened by around 12%, which meant that Group entities whose
functional currency is the hryvnia had to restate their euro-denominated
liabilities. Exchange losses reported in finance costs totalled 291 thousand
euros (Q1 2015: 516 thousand euros). The same movements in the exchange rate
increased the translation reserve in equity by 288 thousand euros (Q1 2015: 524
 thousand euros) and the net effect of exchange differences on our net assets
was a loss of 3 thousand euros (Q1 2015: a gain of 8 thousand euros). Although
exchange losses continue to undermine our net result, the weakening of the
Ukrainian hryvnia has started to slow and exchange losses have become
consistently smaller. 

Due to the above factors, the period ended in a net loss of 409 thousand euros
(Q1 2015: a net loss of 1,354 thousand euros), of which net loss attributable
to owners of the parent, Nordecon AS, amounted to 570 thousand euros (Q1 2015:
1,284 thousand euros). 

Cash flows

In the first quarter of 2016, operating activities resulted in a net cash
outflow of 2,818 thousand euros (Q1 2015:  an outflow of 3,972 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 flow 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 gave rise to a net cash outflow of 88 thousand euros (Q1
2015: an outflow of 112 thousand euros). Cash flow was mainly influenced by
payments for property, plant and equipment which totalled 103 thousand euros
(Q1 2015: 275 thousand euros). Dividends received amounted to 3 thousand euros
(Q1 2015: 103 thousand euros). 

Financing activities generated a net cash inflow of 808 thousand euros (Q1
2015: an outflow of 2,519 thousand euros). Our financing cash flow is strongly
influenced by loan and lease transactions. Proceeds from loans received
amounted to 1,562 thousand euros, consisting of use of overdraft facilities and
development loans (Q1 2015: 331 thousand euros). Loan repayments totalled 201
thousand euros. In the comparative period, loan repayments amounted to 2,350
thousand euros, resulting mainly from changes in overdraft balances. Compared
with a year ago, there was also slight growth in finance lease payments which
totalled 395 thousand euros (Q1 2015: 313 thousand euros). 

At 31 March 2016, the Group’s cash and cash equivalents totalled 4,236 thousand
euros (31 March 2015: 2,198 thousand euros). Management’s commentary on
liquidity risks is presented in the chapter Description of the main risks. 



Key financial figures and ratios

Figure/ratio                         Q1 2016     Q1 2015     Q1 2014        2015
--------------------------------------------------------------------------------
Revenue (EUR ’000)                    27,731      27,113      23,544     145,515
Revenue change                          2.3%       15.2%      -13.1%       -9.8%
Net loss/profit (EUR ’000)              -409      -1,354      -1,026         174
Net loss/profit attributable to         -570      -1,284      -1,074         179
 owners of the parent (EUR ’000)                                                
Weighted average number of        30,756,726  30,756,726  30,756,726  30,756,728
 shares                                                                         
Earnings per share (EUR)               -0.02       -0.04       -0.03        0.01
                                                                                
Administrative expenses to              4.7%        4.1%        4.8%        3.5%
 revenue                                                                        
Administrative expenses to              3.6%        3.4%        2.9%        3.5%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR ’000)                        233        -285         297       5,769
EBITDA margin                           0.8%       -1.1%        1.3%        4.4%
Gross margin                            4.2%        1.5%        5.0%        6.2%
Operating margin                       -0.8%       -2.8%       -0.7%        2.7%
Operating margin excluding gain        -0.8%       -3.1%       -0.8%        2.4%
 on asset sales                                                                 
Net margin                             -1.5%       -5.0%       -4.4%        0.1%
Return on invested capital             -0.5%       -2.0%       -1.4%        2.1%
Return on equity                       -1.1%       -3.8%       -3.0%        0.5%
Equity ratio                           40.5%       38.8%       38.5%       40.1%
Return on assets                       -0.5%       -1.4%       -1.1%        0.2%
Gearing                                28.8%       35.5%       31.7%       25.5%
Current ratio                           1.02        1.01        1.01        1.03
                                    31 March    31 March    31 March      31 Dec
                                        2016        2015        2014        2015
--------------------------------------------------------------------------------
Order book (EUR ’000)                120,702      72,689      83,864     125,698
--------------------------------------------------------------------------------

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



Performance by geographical market

In the first quarter of 2016, Nordecon earned around 7% of its revenue outside
Estonia compared with 5% in the same period last year. 

         Q1 2016  Q1 2015  Q1 2014  2015
----------------------------------------
----------------------------------------
Estonia      93%      95%      92%   96%
Sweden        3%       0%       0%    0%
Ukraine       3%       3%       1%    3%
Finland       1%       2%       7%    1%

The contribution of the Ukrainian market where we are performing two large
building construction contracts has stabilised. Revenues generated in Sweden
where we are building a five-storey apartment building have levelled with those
earned in Ukraine. Finnish revenues result from concrete works in the building
construction segment. 

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, economic conditions in our chosen foreign markets are
also volatile and have a strong impact on our current results. Increasing the
contribution of foreign markets is on Nordecon’s strategic agenda. Our vision
of our foreign operations 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 in more challenging
circumstances where one sub-segment may experience noticeable shrinkage. 

Nordecon’s revenues for the first quarter of 2016 totalled 27,731 thousand
euros, a roughly 2% increase on the 27,113 thousand euros generated in the same
period last year. The overall downturn in infrastructure construction also left
its mark on our revenue structure. The revenues of the Buildings segment grew
as anticipated while those of the Infrastructure segment decreased almost
two-fold. In the first quarter of 2016, Buildings and Infrastructure generated
revenue of 24,411 thousand euros and 2,749 thousand euros respectively. The
corresponding figures for the same period last year were 21,815 thousand euros
and 4,914 thousand euros (see note 8). Our order book has a similar structure:
at period-end 70% of contracts secured but not yet performed was attributable
to the Buildings segment (Q1 2015: 62%). 

Operating segments*  Q1 2016  Q1 2015  Q1 2014  2015
----------------------------------------------------
----------------------------------------------------
Buildings                88%      78%      80%   64%
Infrastructure           12%      22%      20%   36%

* 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 changed considerably. The largest revenue source was the public
buildings sub-segment where growth was underpinned by the state’s increasing
investment in national defence. During the period, we completed the
construction of the Piusa border guard station and continued the construction
of a building complex for the Ämari air base, a barracks for the Tapa military
base and the Järveküla school as well as the design and construction of the
Lintsi warehouse complex. In addition, we started the reconstruction of Ugala
theatre in the city of Viljandi. 

Most of our apartment building revenue resulted from general contracting. In
Estonia, a major share of apartment buildings we are working on is located in
Tallinn. The period’s main revenue contributors were phase III of the Tondi
residential quarter, phases I and II of the Pikksilma homes in Kadriorg and the
Meerhof 2.0 building complex at Pirita tee 20a. In Ukraine, we continue to
build the Lepse street residential quarter in Kiev and five apartment buildings
in the city of Brovary in Kiev region. In Sweden, we are building a five-storey
apartment building in Stockholm. The contribution of our own development
projects in Tartu and Tallinn continues to increase as well. In the first two
development phases of the Tammelinn project in Tartu we have completed 3
apartment buildings. Sales have been highly successful: by period-end, only 1
of the 55 apartments was still for sale. In phase III, which is close to
completion, 14 of the 20 apartments which will be finished in June have been
sold or reserved. In March, we began building phase IV which comprises a
five-storey apartment building with 25 apartments. By the reporting date,
around a third of those apartments were already sold or reserved
(www.tammelinn.ee). By period-end, we had also sold 11 of the 20 apartment
ownerships in the first three phases of our Magasini 29 development project in
Tallinn (www.magasini.ee). We have started building the development’s fifth and
last terraced house. In carrying out our development activities, we monitor
potential risks in the housing development market that stem from an upswing in
the supply of new housing as well as comparative price increases with due care. 

The volumes of the commercial buildings sub-segment, which used to dominate the
Buildings segment for a long time, declined considerably. We anticipated the
shrinkage of the sub-segment already at the end of 2015. During the period, we
completed and delivered on time the Veerenni business building in Tallinn. The
largest project in progress is the office and retail complex Arsenali Keskus in
Tallinn. 

The volumes of the industrial and warehouse facilities sub-segment grew
compared with the same period last year. Private investment in industrial and
warehouse buildings has increased. The period’s largest projects were the
construction of a warehouse for Riigiressursside Keskus OÜ in Tallinn and a
production building for Vecta Design OÜ in Pärnu. Work continued on the KEVILI
South Terminal (a cereals storage and handling complex). 

Revenue breakdown in Buildings segment  Q1 2016  Q1 2015  Q1 2014  2015
-----------------------------------------------------------------------
Public buildings                            35%      12%      18%   16%
Apartment buildings                         28%      19%      11%   22%
Commercial buildings                        20%      58%      45%   50%
Industrial and warehouse facilities         17%      11%      26%   12%

Similarly to previous years, in the first quarter of 2016 the main revenue
source in the Infrastructure segment was road construction. We continued to
deliver road maintenance services in the Järva and Hiiu counties and the Keila
and Kose maintenance areas in Harju county. Kose is a new maintenance area,
where work started in February 2016. In addition, we performed some smaller
road construction projects and did forest road improvement work for the State
Forest Management Centre. We expect that road construction will remain the main
revenue source in the Infrastructure segment through 2016 and that, similarly
to the two previous years, most of the work will be done under small or
medium-sized reconstruction and repair contracts. 

Although the contribution of other engineering (utility network construction)
has increased compared with a year ago, the contracts secured are small and
sustained growth of the sub-segment is unlikely. Contraction in the EU support
continues to have an adverse impact on our environmental engineering volumes
and we do not expect the sub-segment to grow. In specialist engineering, there
is no sign of any major hydraulic engineering investments in the current year
and the addition of other complex engineering projects is also likely to be
irregular. 

Revenue breakdown in Infrastructure segment      Q1 2016  Q1 2015  Q1 2014  2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    65%      79%      46%   81%
Other engineering                                    30%      15%      12%   14%
Environmental engineering                             5%       5%      32%    4%
Specialist engineering (including hydraulic           0%       1%      10%    1%
 engineering)                                                                   



Order book

At 31 March 2016, the Group’s order book (backlog of contracts signed but not
yet performed) stood at 120,702 thousand euros, a 66% increase year over year.
Order books grew in both the Buildings and the Infrastructure segment. 

                     31 March 2016      31 March  31 March 2014      31 December
                                            2015                            2015
--------------------------------------------------------------------------------
Order book (EUR            120,702        72,689         83,864          125,698
 ’000)                                                                          

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 70% and 30% of the Group’s order book
respectively (31 March 2015: 62% and 38% respectively). 

Compared with a year earlier, the order book of the Buildings segment grew by
around 87%. Major growth was posted in all sub-segments except commercial
buildings whose order book contracted by around 70% year over year. The order
book is the largest in the apartment buildings sub-segment where growth is
attributable to large contracts signed at the end of 2015, including those for
the construction of the Meerhof 2.0 building complex at Pirita tee 20a in
Tallinn, five apartment buildings in the city of Brovary in the Kiev region in
Ukraine and a five-storey apartment building in Stockholm, Sweden. At the
beginning of 2016, we also secured contracts for the construction of phase III
in the Pikksilma homes development in Kadriorg and apartment buildings at Kopli
4a and 6 in Tallinn.  Growth in the order book of the public buildings
sub-segment is mostly attributable to the design and construction of the
Järveküla school and the Lintsi warehouse complex and the reconstruction of the
Ugala theatre in Viljandi. Slight growth in the order book of the industrial
and warehouse facilities sub-segment results from the construction of  a
warehouse for Riigiressursside Keskus OÜ and the South Terminal (a cereals
storage and handling complex) for farmers’ cooperative KEVILI. 

Compared with a year earlier, the order book of the Infrastructure segment grew
by 32%. The rise was largely underpinned by growth in the road construction
sub-segment, which was supported by the contracts secured for the provision of
road maintenance services in the Järva, Hiiu, and Kose road maintenance areas
in the period 2016-2021. The order books of the environmental engineering
sub-segment, which continues to perform a contract for the design and
construction of an extension to the Kohtla-Järve wastewater treatment plant,
and other engineering sub-segment also grew somewhat. However, due to the small
size of their contracts this did not have a strong impact on the segment’s
overall portfolio growth. According to our estimates, in 2016 the volume of
public investments will not increase substantially compared with 2015 and the
new EU financial framework (2014-2020) will not have an impact on the
construction sector before the second half-year. Thus, we do not expect the
revenues of the Infrastructure segment to increase in 2016 (for further
information, see the Business risks section of the chapter Description of the
main risks). 

In the light of order book growth and developments in our chosen markets, we
forecast volume growth for 2016. In an environment of stiff competition, we
pursue the policy of avoiding unjustified risks whose realisation in the
contract performance phase would have an adverse impact on our results. 
Instead, we prefer to keep costs under control and focus on projects with
positive prospects. 

Between the reporting date (31 March 2016) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 12,121 thousand euros. 



People

Staff and personnel expenses

In the first quarter of 2016, Nordecon Group (the parent and the subsidiaries)
employed, on average, 652 people including 353 engineers and technical
personnel (ETP). Compared with the same period in 2015 headcount, particularly
the number pf workers, decreased by around 8% due to shrinkage in the portfolio
of projects performed with own resources. 

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

               Q1 2016  Q1 2015  Q1 2014  2015
----------------------------------------------
----------------------------------------------
ETP                353      362      341   356
Workers            299      349      359   334
Total average      652      711      700   690

Our personnel expenses for the first quarter of 2016 including all taxes
totalled 4,109 thousand euros (Q1 2015: 3,781 thousand euros). Personnel
expenses have increased due to pay-rises provided to some of the employees and
performance bonuses paid for successfully completed projects. 

The service fees of the members of the council of Nordecon AS for the first
quarter of 2016 amounted to 34 thousand euros and associated social security
charges totalled 11 thousand euros (Q1 2015: 35 thousand euros and 12 thousand
euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 87
thousand euros and associated social security charges totalled 28 thousand
euros (Q1 2015: 74 thousand euros and 24 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 2016  Q1 2015  Q1 2014   2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling), (EUR       216.4    224.5    227.7  210.9
 ’000)                                                                          
Change against the comparative period             -3.6%    -1.4%     6.3%  -4.3%
                                                                                
Nominal labour cost efficiency (rolling),           8.0      8.2      8.4    8.0
 (EUR)                                                                          
Change against the comparative period             -4.4%    -2.1%    -9.7%  -0.6%

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



Description of the main risks

Business risks

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

Competition continues to be fierce in all segments of the construction market.
In 2016, public investment is not likely to grow substantially. 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 construction. We acknowledge the risks inherent in the
performance 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
tough is risky because negative developments in the economy may quickly render
the contract onerous. Thus, in price-setting we currently prioritise a
reasonable balance of contract performance risks and tight cost control over
revenue growth. 

Demand for construction services continues to be strongly influenced by the
volume of public 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. Moreover, these allocations are
not expected to have an impact on the construction sector before the second
half of 2016 or even later. 

In the light of the above factors, we see opportunities for business growth
compared with 2015 mostly in our chosen foreign markets. We expect that in
Estonia infrastructure construction volumes will remain at the level of 2015
while investment in building construction may grow slightly. Our action plan
foresees using our resources (including some of the labour released from the
Infrastructure segment) to increase the share of contracts secured from the
private sector. According to its 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 seasonal changes in weather
conditions, which have the strongest impact on infrastructure construction
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 strategy is to counteract the seasonality of
infrastructure operations with building construction that is less exposed to
seasonal fluctuations. Our long-term goal is to be flexible and keep our two
operating segments in relative balance (see also the chapter Performance by
business line). Where possible, our entities 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
insurance 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 due until
the contract has been completed. To remedy construction deficiencies which may
be detected during the warranty period, Group companies create warranty
provisions based on their historical experience. At 31 March 2016, the Group’s
warranty provisions (including current and non-current ones) totalled 1,137
thousand euros (31 March 2015: 1,066 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, we did not incur any significant credit losses from
operating activities. The credit risk exposure of receivables is low because
the solvency of all prospective customers is assessed, the share of public
sector customers is large and customers’ settlement behaviour is consistently
monitored. 

The main indicator of the realisation of credit risk is settlement default that
exceeds 180 days along with no activity on the part of the debtor that would
confirm the intent to settle. 

In the first quarter of 2016 and in the comparative period, we 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 agreed with customers (mostly 30 to
56 days) and increasingly shorter settlement terms negotiated by subcontractors
(mostly 21 to 45 days). We counteract the differences in settlement terms by
using factoring where possible. 

At the reporting date, the Group’s current assets exceeded its current
liabilities 1.02-fold (31 March 2015: 1.01-fold). The key factors which
influence the current ratio are the 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 (primarily overdraft facilities) for a
period exceeding twelve months. 

Due to the strained political situation in Ukraine, we believe that the
realisation of our Ukrainian investment properties may take longer than
originally expected. Accordingly, at the reporting date the Group’s loans to
its Ukrainian associates of 8,448 thousand euros were classified as non-current
assets. 

At the reporting date, interest-bearing liabilities accounted for a significant
share of our current liabilities. Under IFRS EU, loan commitments have to be
classified into current and non-current based on contract terms in force at the
reporting date. So far, banks have refinanced liabilities for periods not
exceeding 12 months, which is why a substantial portion of loans is classified
as current although it is probable that some borrowings (particularly overdraft
facilities) will be refinanced when the 12 months have passed. At 31 March
2016, the Group’s current loan liabilities totalled 15,687 thousand euros.
After the reporting period, banks have refinanced or committed to refinancing
current loan liabilities of 4,098 thousand euros, settlement of 3,498 thousand
euros of which will be deferred to 2017. 

At the reporting date, our cash and cash equivalents totalled 4,236 thousand
euros (31 March 2015: 2,198 thousand euros). 

Interest rate risk

Our 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. Compared with the same period
last year, interest-bearing liabilities decreased by 2,450 thousand euros. The
decline is mainly attributable to a decrease in factoring liabilities. We use
factoring to counteract the differences in the settlement terms agreed with
customers and subcontractors (see also the chapter Liquidity risk).  At 31
March 2016, interest-bearing loans and borrowings totalled 20,480 thousand
euros (31 March 2015: 22,930 thousand euros). Interest expense for the first
quarter of 2016 amounted to 147 thousand euros (Q1 2015: 152 thousand euros). 

The main source of interest rate risk is a possible rise in the variable
component 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 rise 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. We do not use
derivatives to hedge 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), Ukrainian hryvnias
(UAH) and Swedish kronas (SEK). 

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 12%. For our Ukrainian subsidiaries, this
meant additional foreign exchange losses on the translation of their
euro-denominated loans into the local currency. Relevant exchange losses
totalled 291 thousand euros (Q1 2015: 516 thousand euros). Exchange gains and
losses on financial instruments are recognised in Finance income and Finance
costs respectively. Translation of receivables and liabilities from operating
activities did not give rise to any exchange gains or losses. 

The reciprocal receivables and liabilities of our 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 
Ukrainian associates in euros give rise to exchange losses that ought to be
recognised in the Group’s accounts. 

Due to movements in the Swedish krona/euro exchange rate, translation of
operating receivables and payables resulted in an exchange loss of 2 thousand
euros for the period (Q1 2015: nil euros). The exchange loss has been
recognised in Other operating expenses. 

We have not acquired derivatives to hedge currency risk.



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market

  -- In 2016, public 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 2016 will not increase
     substantially. 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 investments in building construction.
  -- The long and painful process of construction market consolidation will
     continue, albeit slowly. In particular, this applies to general contracting
     in building construction where the number of medium-sized construction
     service intermediaries (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 security, quality, adherence to deadlines and the
     builder’s liability.
  -- Competition is tough 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 the winners and the average bids. At
     the same time it is clear that in the current market situation the prices
     of construction inputs are not going to decrease noticeably and in order to
     succeed companies need to be efficient. Regrettably, the number of
     materials producers, suppliers, and subcontractors that are trying to
     survive or succeed in the difficult environment by dishonest means, e.g.,
     by supplying goods with concealed defects or considerably lower quality
     than the one recorded in the product certificate, has been increasing quite
     rapidly. If the trend continues, both construction service providers and
     end-customers will have to apply strict and thorough quality control
     measures to make sure that the outcome meets their expectations. Unfair
     competition is putting visible pressure on prices and the quality of the
     construction service. Unfortunately, the situation is worsened by the
     customers’ (including state institutions’ and state-owned companies’)
     increasing tendency to lower the bidders’ qualification requirements and
     prioritise quality more on paper than in practice.
  -- 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 sales prices that are affordable for prospective
     buyers. The prices of new apartments are relatively high compared to the
     standard of living and the banks’ lending terms are strict. This has held
     back rapid growth of the housing market but in the second half of 2015 the
     supply of new housing grew significantly, slowing down the sale of
     apartments with relatively high sales prices. Similarly to previous
     periods, successful projects include those that create or fill a niche. In
     Tallinn and Tartu, the picture is encouraging but in the rest of the
     country activity is still relatively sluggish.
  -- There is a growing contrast between the stringent terms of public
     contracts, which require the builder to agree to extensive obligations,
     strict sanctions, various financial guarantees, long settlement terms,
     etc., and the modest tendering requirements. Lenient qualification
     requirements and the precondition of making a low bid have made it easier
     for an increasing number of builders to win a contract but have heightened
     the contract performance risks taken by customers in respect of funding,
     deadlines and quality.
  -- The prices of construction inputs will remain relatively stable but growth
     in housing development has made it unlikely that the prices charged by
     local building construction subcontractors would decline any further.
     Certainly there are areas where major changes in the environment may
     trigger more abrupt price movements. For example, in the period under
     review the price of structural steel surged and there appeared a lack of
     certain categories of the material, which will inevitably affect builders
     that have entered into large long-term contracts without mitigating
     relevant risks. The rise in housing construction is lengthening the supply
     periods of various essential materials and services, making it impossible
     to carry out all processes in the previous optimistic timeframes. As a
     result, activities require more extensive planning or need to be postponed.
  -- Shortage of skilled labour (including project and site managers) will
     persist but so far it has weakened the quality of the construction
     process/service rather than the companies’ performance capacity. Labour
     migration to the Nordic countries will remain steady and despite a
     comparative decline in construction volumes, e.g., in Finland, the number
     of job seekers who return to the Estonian construction market will not
     increase considerably. This will sustain pressure for a wage increase,
     particularly in the case of younger and less experienced workforce whose
     mobility and willingness to change jobs is naturally higher.

Ukraine

In Ukraine, we provide general contracting and project management services to
private sector customers in the segment of building construction. Political and
economic instability continues to restrict the adoption of business decisions
but construction activity in Kiev and the surrounding area has not halted. In
2016, we will continue our operations 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 considerably better prospects for increasing our operations and
profitability. We assess the situation in the Ukrainian construction market
regularly and critically and are ready to restructure our operations as and
when necessary. Should the crisis spread to Kiev (which at the date of release
of this report is 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 have provided mainly subcontracting services in the concrete
segment but based on experience gained have started preparations for expanding
into the general contracting market. The local concrete work market allows
competing for projects where the customer wishes to source all concrete works
from one reliable partner. Still, our policy is to maintain a rational approach
and avoid taking excessive risks. 

Sweden

In July 2015, Nordecon Group acquired a 100% stake in SWENCN AB, a company
registered in the Kingdom of Sweden, and expanded to the Swedish market where
we intend to offer mainly construction of residential and non-residential
buildings, particularly in central Sweden. In October 2015, we signed the first
contract for the construction of a five-storey apartment building in Stockholm.
The cost of the work amounts to around 8.4 million euros. We will sustain
efforts aimed at increasing our operations in Sweden and are currently
moderately optimistic about the developments. 

Latvia and Lithuania

It is not likely that we will enter the Latvian or the Lithuanian construction
market in the next few years. 

However, we do not rule out the possibility of carrying out certain projects in
Latvia through our Estonian entities, with the involvement of partners where
necessary. Undertaking a project assumes that it can be performed profitably. 

We have suspended the operations of our Lithuanian subsidiary, Nordecon Statyba
UAB, for the time being and are monitoring developments in the Lithuanian
construction market. Temporary suspension of operations does not cause any
major costs for us and does not change our interest to do business in the
Lithuanian construction market on a project basis through a subsidiary
operating in the local market. 



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,
Finland and Sweden. 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 2015 was 145.5 million euros. Currently Nordecon Group employs
over 650 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