Market announcement

Title

2016 III quarter and 9 months consolidated interim report (unaudited)

Message

This announcement includes Nordecon AS’s consolidated financial statements for
the third quarter and nine months 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/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/for-investor/investor-presentations). 



Condensed consolidated interim statement of financial position

EUR ‘000                                           30 September      31 December
                                                           2016             2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                 7,288            6,332
Trade and other receivables                              36,656           17,503
Prepayments                                               1,779            1,599
Inventories                                              23,941           23,603
Total current assets                                     69,664           49,037
Non-current assets                                                              
Investments in equity-accounted investees                 1,749            1,179
Other investments                                            26               26
Trade and other receivables                              10,866           10,516
Investment property                                       4,929            4,929
Property, plant and equipment                            11,417            9,623
Intangible assets                                        14,623           14,609
Total non-current assets                                 43,610           40,882
TOTAL ASSETS                                            113,274           89,919
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Borrowings                                               17,057           15,715
Trade payables                                           38,666           22,538
Other payables                                            7,612            5,475
Deferred income                                           2,568            3,233
Provisions                                                  522              825
Total current liabilities                                66,425           47,786
Non-current liabilities                                                         
Borrowings                                                7,936            5,098
Trade payables                                              104              104
Other payables                                              126               96
Provisions                                                1,053              768
Total non-current liabilities                             9,219            6,066
TOTAL LIABILITIES                                        75,644           53,852
                                                                                
EQUITY                                                                          
Share capital                                            19,720           20,692
Own (treasury) shares                                    -1,550           -1,582
Share premium                                               564              547
Statutory capital reserve                                 2,554            2,554
Translation reserve                                       1,597            1,358
Retained earnings                                        12,484           10,970
Total equity attributable to owners of the               35,369           34,539
 parent                                                                         
Non-controlling interests                                 2,261            1,528
TOTAL EQUITY                                             37,630           36,067
TOTAL LIABILITIES AND EQUITY                            113,274           89,919



Condensed consolidated interim statement of comprehensive income

EUR ‘000                           9M 2016  Q3 2016   9M 2015  Q3 2015      2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                            133,570   59,741   113,553   44,342   145,515
Cost of sales                     -124,979  -55,303  -107,252  -41,112  -136,484
Gross profit                         8,591    4,438     6,301    3,230     9,031
                                                                                
Marketing and distribution            -279      -61      -274      -52      -412
 expenses                                                                       
Administrative expenses             -4,629   -1,847    -3,418   -1,203    -5,026
Other operating income                 148       51       289       36       464
Other operating expenses              -539      -79       -83        0      -124
Operating profit                     3,292    2,502     2,815    2,011     3,933
                                                                                
Finance income                         336      101       491      166       655
Finance costs                         -785     -319      -965     -303    -4,383
Net finance costs                     -449     -218      -474     -137    -3,728
                                                                                
Share of profit of                     717      233       233      200       226
 equity-accounted investees                                                     
                                                                                
Profit before income tax             3,560    2,517     2,574    2,074       431
Income tax expense                    -245        0      -257        0      -257
Profit for the period                3,315    2,517     2,317    2,074       174
                                                                                
Other comprehensive income                                                      
Items that may be reclassified                                                  
 subsequently to profit or loss                                                 
Exchange differences on                239      127       389       58       587
 translating foreign operations                                                 
Total other comprehensive income       239      127       389       58       587
TOTAL COMPREHENSIVE INCOME           3,554    2,644     2,706    2,132       761
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent               2,437    2,011     2,482    2,085       179
- Non-controlling interests            878      506      -165      -11        -5
Profit for the period                3,315    2,517     2,317    2,074       174
                                                                                
Total comprehensive                                                             
 income/expense attributable to:                                                
- Owners of the parent               2,676    2,138     2,871    2,143       766
- Non-controlling interests            878      506      -165      -11        -5
Total comprehensive income for       3,554    2,644     2,706    2,132       761
 the period                                                                     
                                                                                
Earnings per share attributable                                                 
 to owners of the parent:                                                       
Basic earnings per share (EUR)        0.08     0.07      0.08     0.07      0.01
Diluted earnings per share (EUR)      0.08     0.07      0.08     0.07      0.01



Condensed consolidated interim statement of cash flows

EUR ‘000                                               9M 2016   9M 2015
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash flows from operating activities                                    
Cash receipts from customers1                          137,502   127,440
Cash paid to suppliers2                               -119,130  -112,650
VAT paid                                                -4,643    -2,990
Cash paid to and for employees                         -14,832   -15,373
Income tax paid                                           -245      -109
Net cash used in operating activities                   -1,348    -3,682
                                                                        
Cash flows from investing activities                                    
Paid on acquisition of property, plant and equipment      -145      -414
Paid on acquisition of intangible assets                   -25         0
Proceeds from sale of property, plant and equipment         97       238
Acquisition of a subsidiary                                  0        -8
Cash acquired on acquisition of a subsidiary                 0         9
Acquisition of an investment in an associate                 0        -1
Disposal of a subsidiary                                     6         0
Loans provided                                             -40       -97
Repayment of loans provided                                 40        67
Dividends received                                         153       108
Interest received                                            0         7
Net cash from/used in investing activities                  86       -91
                                                                        
Cash flows from financing activities                                    
Proceeds from loans received                             7,166     7,124
Repayment of loans received                             -1,520    -2,615
Finance lease principal paid                            -1,831    -1,309
Interest paid                                             -523      -580
Dividends paid                                          -1,068    -1,091
Net cash from financing activities                       2,224     1,529
                                                                        
Net cash flow                                              962    -2,244
                                                                        
Cash and cash equivalents at beginning of year           6,332     8,802
Effect of movements in foreign exchange rates               -6         0
Increase/decrease in cash and cash equivalents             962    -2,244
Cash and cash equivalents at end of year                 7,288     6,558

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 nine months of 2016 with a gross profit of 8,591
thousand euros (9M 2015: 6,301 thousand euros) and a gross margin of 6.4% (9M
2015: 5.5%). Despite growing competition, we succeeded in improving the gross
margin year on year. Most of the profit was earned by the Buildings segment
which raised its gross margin from 5.4% to 8.2%. The performance of the
Infrastructure segment whose gross margin plummeted to 3.6% (9M 2015: 8.9%)
remained less than satisfactory. The segment’s weak results are mainly
attributable to a lack of self-performed projects (such as major earthworks)
during the winter season and the third-quarter gross margin, which was weaker
than a year ago. Taking into account the market situation where projects
eligible to EU funding are still in the start-up phase and competition in the
road construction segment is exceptionally stiff, we expect that in 2016 the
profitability of the Infrastructure segment will remain lower than last year. 

On securing long-term contracts, we remain alert to the risks resulting from
growth in input prices and strive to prioritise, where possible, the contracts’
expected profitability over revenue growth. 

Administrative expenses for the first nine months of 2016 totalled 4,629
thousand euros. Compared with the same period last year, administrative
expenses grew (9M 2015: 3,418 thousand euros), primarily due to Nordecon’s
expansion to the Swedish market and higher profitability, which increased the
provisions made for performance bonuses. The ratio of administrative expenses
to revenue (12 months rolling) was 3.8% (9M 2015: 3.3%), remaining below the
target ceiling of 4% of revenue. 

Operating profit for the period was influenced by the write-down of other
receivables by 409 thousand euros (see note 12) due to the entry into force of
the final judgement on the Group’s dispute with Teede REV-2 AS over the
performance of the Koidula border crossing point contract in 2010 when our then
venture partner ceased to fulfil its obligations and we had to complete the
contract on our own. Although in essence the outcome of the litigation which
ended in June was positive for Nordecon, some of the Group’s claims were
rejected. Our nine-month operating profit was 3,292 thousand euros (9M 2015:
2,815 thousand euros) and EBITDA amounted to 4,723 thousand euros (9M 2015:
4,187 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 10%, 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 251 thousand
euros (9M 2015: 375 thousand euros). The same movements in the exchange rate
increased the translation reserve in equity by 239 thousand euros (9M 2015: 389
 thousand euros) and the net effect of the exchange differences on the Group’s
net assets was a loss of 12 thousand euros (9M 2015: a gain of 14 thousand
euros). 

The Group’s net profit amounted to 3,315 thousand euros (9M 2015: 2,317
thousand euros), of which net profit attributable to owners of the parent,
Nordecon AS, amounted to 2,437 thousand euros (9M 2015: 2,482 thousand euros). 

Cash flows

In the first nine months of 2016, operating activities resulted in a net cash
outflow of 1,348 thousand euros (9M 2015:  an outflow of 3,682 thousand euros).
Although cash receipts from customers exceeded cash paid to suppliers,
operating cash flow proved negative due to VAT paid and payments made to and
for employees. Operating cash flow continues to be affected by the fact that
neither public nor private sector customers are required to make advance
payments while the Group has to make prepayments to subcontractors, materials
suppliers, etc. In addition, cash inflow is reduced by retentions which extend
from 5 to 10% of the contract price and are released at the end of the
construction period only. 

Investing activities produced a net cash inflow of 86 thousand euros (9M 2015:
an outflow of 91 thousand euros). The largest line items were payments made for
property, plant and equipment of 170 thousand euros (9M 2015: 414 thousand
euros) and dividends received of 153 thousand euros (9M 2015: 108 thousand
euros). 

Financing activities generated a net cash inflow of 2,224 thousand euros (9M
2015: an inflow of 1,529 thousand euros). Our financing cash flow is strongly
influenced by loan and lease transactions. 

Proceeds from loans received amounted to 7,166 thousand euros, consisting of
use of overdraft facilities and development loans (9M 2015: 7,124 thousand
euros). Loan repayments totalled 1,520  thousand euros, consisting of scheduled
repayments of long-term investment and development loans (9M 2015: 2,615
thousand euros). Investments in road construction equipment and a new asphalt
concrete plant increased finance lease payments which totalled 1,831  thousand
euros (9M 2015: 1,309  thousand euros). Dividends paid amounted to 1,068
thousand euros (9M 2015: 1,091 thousand euros). 

At 30 September 2016, the Group’s cash and cash equivalents totalled 7,288
thousand euros (30 September 2015: 6,558 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                         9M 2016     9M 2015     9M 2014        2015
--------------------------------------------------------------------------------
Revenue (EUR ’000)                   133,570     113,553     120,936     145,515
Revenue change                         17.6%       -6.1%      -10.2%       -9.8%
Net profit (EUR ’000)                  3,315       2,317       3,250         174
Net profit attributable to             2,437       2,482       2,607         179
 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)                0.08        0.08        0.08        0.01
                                                                                
Administrative expenses to              3.5%        3.0%        3.3%        3.5%
 revenue                                                                        
Administrative expenses to              3.8%        3.3%        3.4%        3.5%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR ’000)                      4,723       4,187       5,871       5,769
EBITDA margin                           3.5%        3.7%        4.9%        4.0%
Gross margin                            6.4%        5.5%        7.3%        6.2%
Operating margin                        2.5%        2.5%        3.6%        2.7%
Operating margin excluding gain         2.4%        2.3%        3.5%        2.4%
 on asset sales                                                                 
Net margin                              2.5%        2.0%        2.7%        0.1%
Return on invested capital              6.8%        5.0%        6.5%        2.1%
Return on equity                        9.0%        6.2%        9.0%        0.5%
Equity ratio                           33.2%       35.9%       34.2%       40.1%
Return on assets                        3.3%        2.3%        3.0%        0.2%
Gearing                                28.3%       33.4%       33.4%       25.5%
Current ratio                           1.05        1.07        1.05        1.03
                                                                                
As at                                30 Sept     30 Sept     30 Sept      31 Dec
                                        2016        2015        2014        2015
--------------------------------------------------------------------------------
Order book (EUR ’000)                133,846      76,261      92,455     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 nine months of 2016, Nordecon earned around 7% of its revenue
outside Estonia compared with 4% in the same period last year. The contribution
of foreign markets has increased through revenue generated in Sweden. The
contribution of the Ukrainian market has remained relatively stable. Finnish
revenues result from concrete works in the building construction segment. 

         9M 2016  9M 2015  9M 2014  2015
----------------------------------------
----------------------------------------
Estonia      93%      96%      94%   96%
Sweden        4%       0%       0%    0%
Ukraine       2%       3%       2%    3%
Finland       1%       1%       4%    1%

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. 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 revenue for the first nine months of 2016 totalled 133,570 thousand
euros, a roughly 18% increase on the 113,553 thousand euros generated in the
same period last year. The overall downturn in the infrastructure construction
market is also affecting our revenue structure. The revenue of the Buildings
segment grew as anticipated, primarily thanks to contracts secured from the
private sector, while the revenue of the Infrastructure segment decreased by
around 16%, year on year, due to a lack of large-scale road construction
projects. In the comparative period, we had two major road construction
projects that generated a substantial amount of revenue (construction package 5
of the Tartu western bypass and the Keila-Valkse section of national road no. 8
Tallinn-Paldiski, km 24.9-29.5). However, thanks to a new asphalt concrete
plant acquired at the beginning of the year, we were able to achieve strong
growth in our asphalt concrete sales. Revenue from the sale of asphalt concrete
amounted to 1,801 thousand euros (9M 2015: 621 thousand euros). 

During the period, Buildings and Infrastructure generated revenue of 96,648
thousand euros and 32,111 thousand euros respectively. The corresponding
figures for the first nine months of 2015 were 70,944 thousand euros and 39,789
thousand euros (see note 8). Our order book has a similar structure: at
period-end 78% of contracts secured but not yet performed was attributable to
the Buildings segment (9M 2015: 73%). 

Operating segments*  9M 2016  9M 2015  9M 2014  2015
----------------------------------------------------
----------------------------------------------------
Buildings                72%      61%      63%   64%
Infrastructure           28%      39%      37%   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 a year ago, the revenue structure of the Buildings segment has
changed considerably. In the period under review, the segment’s strongest
revenue contributors, in practically equal proportions, were the apartment
buildings and public buildings sub-segments. In the public buildings
sub-segment, 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, a barracks at the Tapa military base, and a building
complex at the Ämari air base and delivered to the customer phase I of
Järveküla school. We continue the design and construction of the Lintsi
warehouse complex and 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 the apartment buildings we are working on is located
in Tallinn. The period’s main revenue contributors were the three phases of the
Pikksilma homes in Kadriorg and the Meerhof 2.0 building complex at Pirita tee
20a. The contributions of foreign markets continue to grow as well. In Ukraine,
we are completing the Lepse street residential quarter in Kiev and continue
building a housing district in the city of Brovary in the Kiev region. In
Sweden, we are building two apartment buildings in Stockholm. 

The contribution of our own development projects in Tartu and Tallinn (included
in the apartment buildings sub-segment) continues to increase slowly but
surely. In the first nine months of 2016, our own development projects
generated revenue of 3,012 thousand euros (9M 2015: 2,708 thousand euros). We
have completed 4 apartment buildings in the first three development phases of
our Tammelinn project in Tartu. In March, we began building phase IV which
comprises a five-floor apartment building with 25 apartments. By the reporting
date, around 90% of the apartments were already covered with notarised
preliminary sale agreements (www.tammelinn.ee). By period-end, we had also sold
16 of the 20 apartment ownerships in the first three phases of our Magasini 29
development project in Tallinn (www.magasini.ee), 5 of them this year. We
continue to build the development’s fifth and last terraced house. In
September, we began building two apartment buildings with a total of 30
apartments in Hane street in Tallinn. In carrying out our development
activities, we monitor potential risks in the housing development market that
stem from rapid growth in the supply of new housing as well as relative price
increases with due care. 

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

Our industrial and warehouse facilities revenues have grown year on year.
Private investment in industrial and warehouse buildings has increased. During
the period, our largest projects were the construction of a warehouse for
Riigiressursside Keskus in Tallinn, a production facility for Vecta Design in
Pärnu, and KEVILI South Terminal (a cereals storage and handling complex). We
continue to build an extension to the warehouse of Smarten and have started to
build production and warehouse facilities for Harmet at Kumna, near Tallinn. 

Revenue breakdown in Buildings segment  9M 2016  9M 2015  9M 2014  2015
-----------------------------------------------------------------------
Apartment buildings                         32%      20%      14%   22%
Public buildings                            31%      13%       6%   16%
Commercial buildings                        15%      56%      43%   50%
Industrial and warehouse facilities         22%      11%      37%   12%

Similarly to previous years, in the first nine months of 2016 the main revenue
source in the Infrastructure segment was road construction where we had mostly
medium-sized and small projects. Our largest projects were the reconstruction
of Majaka street in Tallinn and Meoma-Alatskivi and Rannamõisa-Kloogaranna road
sections. We continue to render road maintenance services in the Järva and Hiiu
counties and the Keila and Kose maintenance areas of the Harju county. Kose is
a new area, where work started in February 2016. We also provided the State
Forest Management Centre with forest road improvement services. We expect that
road construction will remain the main revenue source in the Infrastructure
segment through 2016 but the amount of its revenues will decrease compared with
the previous year. 

A decrease in EU support continues to affect our other engineering and
environmental engineering sub-segments whose revenues have decreased by around
one third year on year. In specialist engineering, there is no sign of major
hydraulic engineering investments in the current year and addition of other
complex engineering projects is also likely to be irregular. 

Revenue breakdown in Infrastructure segment      9M 2016  9M 2015  9M 2014  2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    86%      82%      74%   81%
Other engineering                                     9%      13%      15%   14%
Environmental engineering                             5%       4%       8%    4%
Specialist engineering (including hydraulic           0%       1%       3%    1%
 engineering)                                                                   



Order book

At 30 September 2016, the Group’s order book (backlog of contracts signed but
not yet performed) stood at 133,846 thousand euros, a 76% increase year over
year. Order books grew in both the Buildings and the Infrastructure segment. In
the third quarter, Group companies secured new contracts of 53,714 thousand
euros. 

                       30 Sept 2016  30 Sept 2015  30 Sept 2014  31 Dec 2015
----------------------------------------------------------------------------
Order book (EUR ’000)       133,846        76,261        92,455      125,698

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 78% and 22% of the Group’s order book
respectively (30 September 2015: 73% and 27% respectively). 

Compared with a year ago, the order book of the Buildings segment has grown by
around 88%. Major growth has been posted by nearly all sub-segments. 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-floor apartment building in Stockholm, Sweden. In 2016, we
have also secured contracts for the construction of phase III in the Pikksilma
homes development in Kadriorg, apartment buildings at Kopli 4a and 6, phase II
of the development at Pirita tee 20a, and apartment buildings at Virbi 10 in
Tallinn and an apartment building in the Nacka district in Stockholm. Growth in
the order book of the public buildings sub-segment is mostly attributable to
the construction of a depot at the Tapa military base and the reconstruction of
Ugala Theatre in Viljandi as well as the contract secured in the third quarter
of 2016 for building the armoured vehicle infrastructure, a canteen and a
barracks at the Tapa military base. The growth in the order book of the
industrial and warehouse facilities sub-segment is supported by the
construction of an extension to the warehouse of Smarten and production and
warehouse facilities for Harmet. After some decline, the order book of the
commercial buildings sub-segment has also started to grow. In the second
quarter, we signed large-scale contracts for the design and construction of the
office premises complex Viimsi Äritare and the non-renovated part of the
historical Luther furniture factory and the accompanying outdoor facilities at
Vana-Lõuna 39 in Tallinn. In the third quarter, we secured a contract for the
construction of a commercial building in the Rotermann quarter in Tallinn. 

Compared with a year earlier, the order book of the Infrastructure segment has
grown by 43%. The rise is largely underpinned by growth in the road
construction sub-segment, which is 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 book of the road
construction sub-segment is also influenced by the reconstruction of Logi
street and the construction of new checkpoints and waiting areas in the
north-western part of the Old City Harbour in Tallinn. The order book of the
environmental engineering sub-segment, where we continue to perform a contract
for the design and construction of an extension to the Kohtla-Järve wastewater
treatment plant, has also grown somewhat. The order books of other
Infrastructure sub-segments have decreased. 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 a visible
impact on the construction sector. Thus, it is more likely than not that in
2016 the revenue of the Infrastructure segment will decrease compared with the
year before (for further information, see the Business risks section of the
chapter Description of the main risks). 

However, in the light of order book growth and developments in our chosen
markets, we forecast overall 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 (30 September 2016) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 16 041 thousand euros. 



People

Staff and personnel expenses

In the first nine months of 2016, Nordecon Group (the parent and the
subsidiaries) employed, on average, 679 people including 374 engineers and
technical personnel (ETP). Compared with the same period in 2015, the number of
workers decreased by around 3% due to shrinkage in the portfolio of
self-performed projects while the number of engineers and technical personnel
grew slightly. 

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

               9M 2016  9M 2015  9M 2014  2015
----------------------------------------------
----------------------------------------------
ETP                374      357      353   356
Workers            305      342      378   334
Total average      679      699      731   690

Our personnel expenses for the first nine months of 2016 including all taxes
totalled 14,898 thousand euros (9M 2015: 13,056 thousand euros), a roughly 14%
increase year over year. The growth in personnel expenses is attributable to
the Group’s expansion to the Swedish market, selective pay-rises and
performance bonuses. 

The service fees of the members of the council of Nordecon AS for the first
nine months of 2016 amounted to 145 thousand euros and associated social
security charges totalled 48 thousand euros (9M 2015: 120 thousand euros and 39
thousand euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 480
thousand euros and associated social security charges totalled 158 thousand
euros (9M 2015: 329 thousand euros and 109 thousand euros respectively). 

The fees (also for the comparative period) include the provisions made in the
third quarter on the basis of the Group’s financial indicators for payment of
potential performance bonuses. 

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: 

                                                9M 2016  9M 2015  9M 2014   2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling), (EUR       245.1    217.5    218.8  210.9
 ’000)                                                                          
Change against the comparative period             12.7%    -0.6%    -5.5%  -4.3%
                                                                                
Nominal labour cost efficiency (rolling),           8.2      8.2      7.5    8.0
 (EUR)                                                                          
Change against the comparative period              0.6%     9.8%   -21.9%  -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)                                             
--------------------------------------------------------------------------------

Nominal labour productivity increased year on year, mainly through revenue
growth. 



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 stiff in all segments of the construction market
and in 2016 public investment is not likely to grow substantially. Thus,
builders’ bid prices are under strong competitive pressure while the prices of
construction inputs in the aggregate have not decreased noticeably. Even though
unhealthily aggressive competition in building construction has started to
recede thanks to growth in the volume of projects put out to tender, the slump
in infrastructure construction is fuelling fierce competition for the limited
number of contracts available. Bidders increasingly include not only well-known
general contractors but also former subcontractors, a trend attributable to the
state and local governments’ policy to lower the qualification requirements of
public procurement tenders. 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, the allocations will
have an impact on the construction sector in the second half of 2016 only. 

Despite the above factors, we see opportunities for achieving overall
year-on-year business growth in 2016: the rise in the Estonian building
construction segment is increasingly supported by positive developments in our
chosen foreign markets. 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. 

Our 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 30 September 2016, the
Group’s warranty provisions (including current and non-current ones) totalled
1,117 thousand euros (30 September 2015: 1,880 thousand euros). 

In addition to managing the risks directly related to construction operations,
in recent years we have also 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 recognised credit losses of 506 thousand euros of which
97 thousand euros resulted from the write-down of trade receivables and 409
thousand euros from the write-down of other receivables (see also the chapter
Financial performance). In the comparative period, we did not incur any credit
losses. The overall credit risk exposure of receivables is low because the
solvency of all prospective customers is evaluated, 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. 

Liquidity risk

The Group remains exposed to higher than usual liquidity risk. At the reporting
date, the Group’s current assets exceeded its current liabilities 1.05-fold (30
September 2015: 1.07-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 (particularly overdraft facilities) for a period
exceeding twelve months. 

Due to the strained political and economic situation in Ukraine, we believe
that the Group’s investment properties in that country cannot be realised in
the short term. Accordingly, as at the reporting date the Group’s loans to its
Ukrainian associates of 8,555 thousand euros are classified as non-current
assets. 

Interest-bearing liabilities make up 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. At 30
September 2016, short-term loan liabilities totalled 17,057 thousand euros (30
September 2015: 23,566 thousand euros), including overdraft liabilities of
12,241 thousand euros (30 September 2015: 13,576 thousand euros) which will
probably be refinanced after 12 months. 

At the reporting date, the Group’s cash and cash equivalents totalled 7,288
thousand euros (30 September 2015: 6,558 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 declined by 3,881 thousand euros. Loan
and factoring liabilities decreased (by 5,299 thousand euros) while finance
lease liabilities increased (by 1,418 thousand euros). The growth in finance
lease liabilities is mainly attributable to the acquisition of a new asphalt
concrete plant. We use factoring to counteract the mismatch in the settlement
terms agreed with customers and subcontractors.  At 30 September 2016,
interest-bearing liabilities totalled 24,993 thousand euros (30 September 2015:
28,874 thousand euros). Interest expense for the first nine months of 2016
amounted to 501 thousand euros (9M 2015: 585 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 have entered
into a derivative contract to hedge the risks resulting from changes in the
interest rates of the finance lease contract underlying the acquisition of the
new asphalt concrete plant. 

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. In the first nine months of 2016,
the hryvnia weakened against the euro by around 10%. 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 251 thousand euros (9M 2015: 375 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 gain of 5 thousand
euros for the period (9M 2015: nil thousand euros). The exchange gain has been
recognised in Other operating income. 

We do not use derivatives to hedge our 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 portion 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 the National Road
     Administration) that reach signature of a construction contract in 2016
     will not increase substantially. Even though the Ministry of Defence has
     been a positive exception for builders by carrying out procurements which
     have made a significant contribution to market revival, the Estonian
     construction market (particularly infrastructure construction segments)
     will remain in relative stagnation. The situation is mitigated 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 general
     contractors (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 decelerated due to
     customers’ (particularly public sector customers’) increasing desire to
     apply less stringent tendering requirements in order to increase
     competition and lower the price even though this increases their own risks
     related to security, quality, adherence to deadlines, and the builder’s
     liability.
  -- Competition is tough in all segments of the construction market,
     intensifying in line with market developments. The rise in the average
     number of bidders for a contract reflects this. However, the gap between
     the lowest bids made by winners and the average ones is narrowing, which
     shows that the quality of procurement documents is gradually improving and
     bidders’ prices are evening up. 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 a 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 substantive 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 problem is underpinned 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 since the second half of 2015
     the supply of new housing has grown 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 participation 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 terms 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 subcontractors, particularly in building construction, will decline.
     Certainly there are areas where major changes in the environment may
     trigger more abrupt price movements.
  -- The rise in housing construction has lengthened the supply periods of
     various essential materials and services, making it impossible to carry out
     all processes in the former optimistic timeframes. As a result, activities
     require more extensive planning or may need to be postponed.
  -- Persisting shortage of skilled labour (including project and site managers)
     may start restricting companies’ performance capacities, having an impact
     on different aspects of the construction process including quality. Labour
     migration to the Nordic countries will remain steady and the number of job
     seekers who return to the Estonian construction market is not likely to
     increase considerably. All of the above will sustain pressure for a wage
     increase, particularly in the case of the 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 on the construction of a five-floor apartment building in Stockholm.
The cost of the work amounts to around 8.4 million euros. In 2016, we secured a
contract for the construction of another, smaller apartment building in
Stockholm. 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
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