Börsiteade

Pealkiri

2011 I quarter and 3 months consolidated interim report (unaudited)

Teade

Nordecon AS publishes 2011 I quarter and 3 months consolidated interim report
(unaudited) 

Tallinn, Estonia, 2011-05-11 15:35 CEST (GLOBE NEWSWIRE) --


DIRECTOR'S REPORT

Group strategy and objectives

Nordecon Group's main strategic objectives until 2013

- To complete the significant adjustments to the Group's structure and
governance that were launched in 2009 in order to secure profitable and rapid
growth in the rise phase of the market 

- To operate in Latvia, Lithuania and Belarus on a project basis, assuming that
this is profitable 

- To continue buildings construction operations in Ukraine in line with the
current strategy 

- To maintain preparedness for re-launching more active operations in foreign
markets (as a general contractor) as soon as the situation in the construction
market has become sufficiently supportive 

- To operate in the Finnish concrete works market (as a contractor) through a
subsidiary in order to support development of the business line 

- To become the leading construction group in Estonia that earns half of its
revenue from infrastructure and the other half from buildings construction by
the end of 2013 

The key theme of the strategy for 2010-2013 is “To respond to market changes
swiftly and flexibly and to enter the next economic growth cycle successfully” 

In the board's opinion, in forthcoming years the Group will have to focus on
its core business operations in its main market, Estonia, where Nordecon is
represented in practically all construction segments and can rely on extensive
local experience. In order to adapt to changes in the external environment, the
Group will have to continue taking advantage of the benefits yielded by
internal restructuring and streamlining, improving profitability by proactive
cost management, and creating opportunities for successfully entering the
growth phase of the construction market (also in the target foreign markets). 

According to the board's proposal, until 2013 (inclusive) the Group will focus
on achieving the above. The strategy for the next three years has to support
the Group's recovery from the slump still prevailing in the construction market
and to prepare ground for seizing the opportunities provided by a steadier
growth that is anticipated to emerge in 2012. 

In the foreseeable future, we will not seek to increase revenue without
applying measures that ensure profitability because this might lead to taking
unjustified risks in a situation where rapidly rising input prices may have a
strong impact on companies' performance in subsequent periods. 



CHANGES IN THE GROUP'S BUSINESS OPERATIONS IN THE FIRST QUARTER OF 2011

Changes in the Group's Estonian operations

There were no major changes in the Group's Estonian operations in the first
quarter of 2011. The Group did not enter any new operating segments or exit any
current segments or sub-segments. 

Since the beginning of 2011, a significant proportion of the Group's core
business has been conducted by the parent, Nordecon AS, which at the end of
2010 merged with its subsidiaries Nordecon Ehitus AS and Nordecon Infra AS,
which were involved in buildings and infrastructure construction respectively.
At the same time, Nordecon AS will continue acting as a holding company for the
Group's main Estonian and foreign subsidiaries. 

Changes in the Group's foreign operations

Latvia

There have been no changes in the Group's Latvian operations compared with the
fourth quarter of 2010. The Group has currently no active construction
contracts in Latvia and no subsidiaries domiciled in Latvia. 

Lithuania

There have been no changes in the Group's Lithuanian operations compared with
the fourth quarter of 2010. The Group has no currently active construction
contracts in Lithuania and the activities of the Lithuanian subsidiary Nordecon
Statyba UAB have been suspended. 

Belarus

The Group continues project-based business in Belarus, building a factory for a
Finnish food industry company under a contract signed in a previous period. The
Group does not have any other active contracts in Belarus. The project is
performed through the Group's Belarusian subsidiary Eurocon Stroi IOOO.
According to the Group's development strategy, Belarus is not among the Group's
target foreign markets and the above project was simply aimed at learning about
local business practice. We have decided that after the delivery of the project
in 2011 the Group will exit the Belarusian market. The decision was prompted by
the fact that the Belarusian business and legal environment is not yet
sufficiently transparent and supportive for continuing stable permanent
operations in the Belarusian construction sector. 

Ukraine

We have decided that the Group will continue operating in Ukraine in 2011 and
that the target is to maintain optimal preparedness for re-launching
construction activities as soon as the situation in the local construction
market improves. Because of economic and political problems (and difficulties
in the banking sector), the country has not been able to re-attract a
sufficient number of foreign investors that are the Group's target customers.
The decision to remain in Ukraine was underpinned by well-planned activities
during the slump and the prospects of market recovery in the next few years. 

Real estate development projects that require extensive investment (the Group
has an interest in two conserved development projects) will remain suspended to
minimise the risks until the situation in Ukraine eases up. 

Finland

Nordecon Betoon OÜ and its Finnish subsidiary Estcon Oy will continue providing
subcontracting services in the concrete works sector in Finland where the
Group's strengths include top quality technical expertise, mobility and a
competitive price. 



FINANCIAL REVIEW

Margins

Nordecon Group ended the first quarter of 2011 with a gross loss of 73 thousand
euros compared with a gross loss of 1,517 thousand euros for the first quarter
of 2010. Although the Group did not yet earn a profit, the year-over-year
improvement in the gross result is an indicator of positive developments our
operating environment. The loss is partly attributable to adverse weather
conditions that did not allow doing sufficient outdoor work (particularly in
the Infrastructure segment). For the second consecutive year, the level of
winter precipitation in Estonia was higher than average leading to zero profit
or, in some cases, even a loss on road maintenance contracts. Moreover, the
prolonged winter season lengthened the technological standstill during which
the Group incurs fixed costs without earning revenue in an area that has a
strong impact on its overall performance. 

Compared with the same period in 2010, the Group achieved a significant
increase in operating revenue while maintaining tight cost control. As a
result, in the first quarter we practically reached break-even. Above all,
operational profitability has improved on account of the following factors: 

- The impact of the risks that realised on the performance of some long-term
contracts secured mainly in 2009 has in all material respects been identified
and associated losses have been recognised in previous periods. In 2010 the
Group shifted the focus on improving the profitability, not the size, of its
contracts portfolio. 

- At the end of 2010 the Group won several contracts with the targeted gross
profit whose full-scale performance could start during the winter months. 

- And, last but not least, the stringent austerity and streamlining measures
applied in the past two years have yielded clearly positive results. 

For construction companies, the year 2011 brought the discovery that in some
segments competition has started to subside. The main reason is not yet the
bankruptcies of construction companies but the fact that in recent years many
companies have had to cut their personnel and support structures to an extent
which today is undermining their bidding capabilities. Furthermore, many
companies are being held back by increasingly tougher financing requirements
imposed by customers organizing tenders and the limited availability of
guarantee facilities provided by financing institutions. A majority of
construction companies have become aware of the fact that long-term
construction contracts entail the risk of growth in input prices. All this is
exerting positive influence on the margins of new construction contracts.
Although the Group's margins do not yet meet the target, management believes
that the Group is moving in the right direction for restoring the profitability
of its operating activities in 2011 as a whole. Considering the contracts in
the Group's uncompleted portfolio, i.e. the order book figures, the overall
trend has become distinctly positive. 

Administrative expenses for the first quarter of 2011 totalled 1,067 thousand
euros. Compared with the same period in 2010, the Group has cut its
administrative expenses by 9% and the figure has levelled off. The ratio of
administrative expenses to revenue was 6.0% (Q1 2010: 10.4%). We are pleased to
report that our cost-saving measures have yielded good results and that
according to management's estimates on a full-year basis the Group will be able
to maintain the level of administrative expenses below the target, i.e. 5% of
revenue. 

The Group's first-quarter operating loss was 1,116 thousand euros (Q1 2010:
2,912 thousand euros). 

Consolidated net loss was 1,234 thousand euros. The loss attributable to owners
of the parent, Nordecon AS, was 1,177 thousand euros. The first quarter of 2010
ended in a net loss of 1,642 thousand euros, including non-recurring net
finance income of 1,177 thousand euros on the sale of the Latvian subsidiary.
Excluding the effect of the latter, the Group's net loss for the first quarter
of 2010 would have been 2,819 thousand euros. 

Cash flows

In the first quarter of 2011, the Group's operating activities resulted in a
net cash outflow of 1,977 thousand euros. In the comparative period, operating
activities resulted in a net cash inflow of 2,359 thousand euros. Compared with
the same period in 2010, operating cash inflow has been replaced by operating
cash outflow. This is mainly attributable to cyclical fluctuations in
project-related cash flows and the impact of unprofitable projects. The
customers' settlement terms have lengthened to approx. 45 to 100 days. This
means that under many projects, the first payments for work started in the
first quarter are made in the second quarter, etc. The negative cash flow of
unprofitable projects realises based on the performance of the work although
their book loss has been recognised in previous periods. 

Investing activities generated a net inflow of 248 thousand euros compared with
a net outflow of 476 thousand euros for the first quarter of 2010. In the
reporting period, inflows consisted mostly of receipts for sale of property,
plant and equipment. In the comparative period, the net outflow was mainly
attributable to the disposal of the Latvian subsidiary. 

Financing activities resulted in a net cash outflow of 1,783 thousand euros. In
the comparative period, the net outflow was 3,914 thousand euros. The structure
of financing cash flows has remained more or less stable. The Group is raising
slightly less debt capital than is required for meeting its loan commitments on
a timely basis. On the other hand, repayments have decreased year-over-year
thanks to agreements reached with the banks. The renegotiation of settlement
terms did not cause any significant changes in interest rates. 

At 31 March 2011, the Group's cash and cash equivalents totalled 2,303 thousand
euros (31 March 2010: 12,376 thousand euros). For information on potential
liquidity risks, please refer to the chapter Description of the main risks. 



KEY FIGURES AND RATIOS

Figure / ratio                       Q1 2011     Q1 2010     Q1 2009        2010
Revenue (EUR'000)                     17,723      11,248      37,750      99,312
Revenue growth/decrease                  58%        -70%        -24%        -36%
Net loss (EUR'000)                    -1,234      -1,606         -34     -12,738
Loss attributable to owners of        -1,177      -1,316         450     -11,811
 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)               -0.04       -0.04        0.01       -0.38
Average number of employees              699         745       1,223         774
Revenue per employee (EUR'000)            25          15          31         128
Personnel expenses to revenue          17.4%       29.6%       16.7%       14.6%
Administrative expenses to              6.0%       10.4%        6.3%        4.9%
 revenue                                                                        
EBITDA1 (EUR'000)                       -484      -1,968         947      -5,512
EBITDA margin                          -2.7%      -17.5%        2.5%       -5.6%
Gross margin                           -0.4%      -13.5%        6.2%       -0.7%
Operating margin                       -6.3%      -25.9%       -0.6%       -9.0%
Operating margin excluding gains       -7.5%      -25.9%       -0.7%       -9.4%
 on asset sales                                                                 
Net margin                             -7.0%      -14.3%       -0.1%      -12.8%
Return on invested capital             -1.5%       -1.7%        0.5%      -15.8%
Return on assets                       -1.2%       -2.6%       -0.1%       -8.3%
Return on equity                       -3.8%       -3.6%       -0.1%      -32.6%
Equity ratio                           35.5%       44.0%       36.7%       35.1%
Gearing                                44.8%       22.8%       31.8%       42.3%
Current ratio                           1.36        1.74        1.28        1.39
                                                                                
                                    31 March    31 March    31 March      31 Dec
                                        2011        2010        2009        2010
Order book (EUR'000)                  91,974      88,603     109,556   1,339,459

1 On calculating EBITDA, non-cash expenses include depreciation and
amortisation as well as impairment losses on goodwill of 411 thousand euros
recognised in 2010. 

Earnings per share (EPS) = net profit            Net margin = net profit for the
 attributable to equity holders of the parent /   period / revenue              
 weighted average number of shares outstanding   Return on invested capital =   
Revenue per employee = revenue / average number   (profit before tax + interest 
 of employees                                     expense) / the period's       
Personnel expenses to revenue = personnel         average (interest-bearing     
 expenses / revenue                               liabilities + equity)         
Administrative expenses to revenue =             Return on assets = operating   
 administrative expenses / revenue                profit / the period's average 
EBITDA = earnings before interest, taxes,         total assets                  
 depreciation and amortisation                   Return on equity = net profit  
EBITDA margin = EBITDA / revenue                  for the period / the period's 
Gross margin = gross profit / revenue             average total equity          
Operating margin = operating profit / revenue    Equity ratio = total equity /  
Operating margin excluding gains on asset sales   total equity and liabilities  
 = (operating profit - gains on sale of          Gearing = (interest-bearing    
 property, plant and equipment - gains on sale    liabilities - cash and cash   
 of investment properties and real estate held    equivalents) / (interest      
 for sale) / revenue                              bearing liabilities + equity) 
                                                 Current ratio = total current  
                                                  assets / total current        
                                                  liabilities                   



PERFORMANCE BY GEOGRAPHICAL MARKET

In the first quarter of 2011, roughly 6% of the Group's revenue was generated
outside Estonia. In the first quarter of 2010, foreign operations accounted for
4% of the Group's revenue. 

           Q1 2011  Q1 2010  Q1 2009  2010
Estonia        92%      96%      83%   94%
Ukraine         0%       4%       3%    2%
Lithuania       0%       0%       2%    0%
Latvia          0%       0%      12%    0%
Belarus         5%       0%       0%    3%
Finland         3%       0%       0%    1%

The greatest proportion of foreign revenue was earned from project-based
construction business in Belarus, which is expected to be completed in the
second half-year. Management has decided that the Group will not seek any new
projects in Belarus (see also the chapter Changes in the Group's business
operations in the first quarter of 2011). Finnish revenues result from
subcontracting in the field of concrete works. 

Revenue distribution between different geographical segments is a consciously
deployed strategy by which the Group avoids excessive reliance on a single
market. Although in the long term the Group's strategy foresees increasing
foreign operations, in the short term the Group will focus on the Estonian
market and seizing opportunities in an environment that it knows best and that
entails comparatively fewer market risks. The Group's vision of the future of
its foreign operations is described in the chapter Outlooks of the Group's
geographical markets. 



PERFORMANCE BY BUSINESS LINE

The core business of Nordecon Group is general contracting and project
management in the field of buildings and infrastructure construction. The Group
is involved, among other things, in the construction of commercial and
industrial buildings and facilities, road construction and maintenance,
environmental engineering, concrete works and real estate development. 

Consolidated revenue for the first quarter of 2011 was 17,723 thousand euros, a
58% increase on the 11,248 thousand euros generated a year ago. Last year, the
downturn that ravaged the Estonian construction market in 2008-2010 bottomed
out. Revenue growth is attributable to the following factors: moderate growth
in the buildings construction market, decline of competition in certain market
segments and successful bidding for infrastructure contracts that could be
performed during the winter season. 

The Group aims to maintain the revenues of its business segments (Buildings and
Infrastructure) in balance as this helps disperse risks and provides a more
solid foundation under stressed circumstances when one segment experiences
shrinkage. In view of estimated demand for apartments, in forthcoming years the
proportion of revenue from the construction of apartment buildings will remain
significantly below the strategic 20% ceiling. 

Segment revenue

The first-quarter revenues of our two main business segments were practically
equal. Usually, the Buildings segment generates more first-quarter revenue
because the winter season hinders full-scale performance of infrastructure
projects such as road construction. However, the first quarter of 2011 was
different because the Infrastructure segment had some projects whose
performance was not significantly influenced by the weather. The Buildings and
Infrastructure segments ended the first quarter of 2011 with revenue of 8,744
thousand euros and 8,389 thousand euros respectively. The corresponding figures
for the comparative period were 8,326 thousand euros and 2,802 thousand euros. 

For some time most tenders in the construction market have been related to
infrastructure (mainly projects financed with the support of the state and the
EU structural funds) and the majority (71%) of contracts in the Group's order
book belong to the Infrastructure segment. Regardless of this, the revenues of
the segments have been practically equal because the Group's active buildings
construction contracts have a shorter term than those of infrastructure
construction. Infrastructure contracts have a longer term (e.g. road
maintenance contracts) and their contribution to realised revenue is therefore
comparatively smaller. We expect that in the next quarters the contributions of
the Buildings and Infrastructure segments will have similar proportions. 

Revenue distribution between segments *

Business segments  Q1 2011  Q1 2010  Q1 2009  2010
Buildings              51%      72%      58%   48%
Infrastructure         49%      28%      42%   52%

* In connection with the entry into force of IFRS 8 Operating Segments, the
Group has changed segment reporting in its financial statements. In Directors'
report the Ukrainian and Belarusian buildings segment and the EU buildings
segment, which are disclosed separately in the financial statements, are
presented as a single segment. In addition, the segment information presented
in Directors' report does not include the disclosures on “other segments” that
are presented in the financial statements. 

In Directors' report, projects have been aggregated and allocated to business
segments based on their nature (i.e. buildings or infrastructure construction).
In the segment reporting presented in the financial statements, aggregation and
allocation is based on the Group entities' main field of activity (as required
by IFRS 8 Operating Segments). In the financial statements the results of an
entity that is primarily engaged in infrastructure construction are presented
within the Infrastructure segment. In Directors' report, the revenues of such
an entity are presented based on their nature. The differences between the two
reports are not significant because in general Group entities specialize in
specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in
both buildings and infrastructure construction. 

Revenue distribution within segments

In the Buildings segment, most of the first quarter revenue resulted from the
construction of public buildings. At the end of 2010, the Group won two public
sector contracts whose size in the current market situation is substantial -
one for the construction of the buildings of the Koidula border station and the
other for the construction of the academic building of the Social Sciences
Faculty of the University of Tartu. In addition, the Group continued a
large-scale project involving the reconstruction of the historic seaplane
hangars in Tallinn into the premises of the Estonian Maritime Museum. In the
industrial and warehouse facilities sub-segment most of the revenue resulted
from the construction of the Ahtme peak load boiler plant, which is under
completion, and the food industry facilities being built in Belarus. 

Distribution of revenues within the Buildings segment is influenced by the
scarcity of projects on offer, which is forcing companies to compete in all
market segments as the number of contracts awarded is small compared to bids
made. The situation does not allow concentrating on a specific area. Another
important factor is the general economic environment. During the downturn,
private companies' investments in commercial and industrial buildings were
modest while the central and local governments' investments in schools, nursery
schools and public buildings increased, partly thanks to the support received
from the EU structural funds. In the reporting period the Group built apartment
buildings for external customers as a general contractor, not a developer. 

Revenue distribution within the Buildings        Q1 2011  Q1 2010  Q1 2009  2010
 segment                                                                        
Commercial buildings                                 11%      22%      75%   37%
Industrial and warehouse facilities                  28%      28%       8%   18%
Public buildings                                     58%      34%      12%   35%
Apartment buildings                                   3%      16%       4%   10%

The Infrastructure segment achieved a three-fold increase in revenue compared
with the first quarter of 2010 and the trends are reflected in the segment's
internal revenue distribution. A significant proportion of revenue resulted
from work that could be done during the winter season. This includes projects
for the construction of water and wastewater networks because the Group has won
several tenders in that field. We expect that the proportion of such projects
will remain relatively large also in the rest of the year. In environmental
engineering, the biggest project was the construction of a bio-filter for the
water utility services provider AS Tallinna Vesi in Paljassaare. The proportion
of road construction and maintenance revenues has decreased because the
revenues of other sub-segments have grown. Most likely, the proportion of the
Group's road construction and maintenance revenues will start increasing from
the next quarter. Hydraulic engineering that depends heavily on Estonian ports'
investment policies was almost non-existent in the reporting period. 

Revenue distribution within the Infrastructure   Q1 2011  Q1 2010  Q1 2009  2010
 segment                                                                        
Road construction and maintenance                    21%      52%      20%   62%
Specialist engineering (including hydraulic           1%       3%      22%    1%
 engineering)                                                                   
Other engineering                                    50%      30%      17%   28%
Environmental engineering                            28%      15%      41%    8%



ORDER BOOK

At 31 March 2011, the Group's order book stood at 91,974 thousand euros, 4% up
on the 88,603 thousand euros posted a year ago. In the past quarters, the
decline in the Group's order book has notably decelerated and the forward order
book has levelled off at around 85 to 95 million euros. 

                                   Q1 2011  Q1 2010  Q1 2009
Order book, in thousands of euros   91,974   88,603  109,556

At 71% the Infrastructure segment continues to account for a major proportion
of the Group's total order book (31 March 2010: 77%). 

As a result of market shrinkage, in 2010 the value of the uncompleted portfolio
hit the bottom. In a situation where the decrease in input prices has been
replaced by a rise in almost all areas of the construction sector, the Group's
management continues to focus on improving the profitability of the contract
portfolio rather than increasing its size or growth rate. 

Between the reporting date (31 March 2011) and the date of release of this
report, Group companies have been awarded additional construction contracts of
approximately 57,221 thousand euros. The figure includes a contract on the
design and build of the Aruvalla-Kose section of the Tallinn-Tartu road of
39,262 thousand euros signed on 15 April 2011 and a contract on the
construction of the facilities of the Ämari air base of 10,854 thousand euros
signed on 2 May 2011. In light of the above, we expect that in subsequent
periods the portfolio will grow on account of the emerging recovery of the
construction market. 



PEOPLE

Staff and personnel expenses

At the end of the first quarter of 2011, the Group (including the parent and
the subsidiaries) employed, on average, 699 people including around 337
engineers and technical personnel (ETP). In recent quarters, the decrease in
personnel has decelerated and reached a turning point. The Group's management
believes that in 2011 headcount will remain stable or will grow slightly. The
figure will be influenced by additional seasonal labour hired for the second
and third quarters as well as anticipated business growth. 

Average number of the Group's employees (including the parent and its
subsidiaries): 



               Q1 2010  Q1 2010  Q1 2009
ETP                337      354      499
Workers            362      391      624
Total average      699      745    1,223

The Group's personnel expenses for the first quarter of 2011, including all
associated taxes, totalled 3,076 thousand euros, an 8% decrease compared with
the 3,332 thousand euros incurred in the first quarter of 2010. 

Personnel expenses have declined on account of downsizing compared with a year
ago and a decrease in performance pay that is linked to the projects' profit
margins. 

In the first quarter of 2011, the remuneration of the members of the council of
Nordecon AS including associated social security charges amounted to 21
thousand euros. The corresponding figure for the first quarter of 2010 was 25
thousand euros. The remuneration of the members of the board of Nordecon AS
including social security charges totalled 72 thousand euros compared with 36
thousand euros in the first quarter of 2010. The remuneration provided to the
board has increased because in the comparative period the board had two members
while the current number is four. The composition of board changed in
connection with the merger of two subsidiaries and the Group's parent that took
place at the end of 2010. 



OUTLOOKS OF THE GROUP'S GEOGRAPHICAL MARKETS

Estonia

According to the assessment of the Group's management, in 2011 the Estonian
construction market will be influenced by the following factors: 

- Total demand in the construction market will remain disproportionately
dependent on public procurement tenders and projects performed with the support
of the EU structural funds. Project performance success is closely related to
the administrative capabilities and procurement organisation skills of the
central and local government which have improved compared with previous periods
but are still of unreliable quality, causing hold-ups and difficulties both
during the procurement proceedings and the performance of construction work. 

- The contraction of the construction market ended with 2010. In 2011 the
market will start recovering and construction volumes will grow somewhat. In
addition to the infrastructure sector, where volumes are expected to remain
steady, new projects will gradually be launched in the buildings construction
sector. The latter should offer the main opportunities for growth, primarily
because of the return of private sector customers (including foreign investors)
that abandoned the market in previous years. However, in 2011 demand is not yet
expected to recover to a level where all currently operating construction
companies could secure sufficient business. 

- Market consolidation will continue owing to the contraction in volumes in
2008-2010. In the past two years, many medium-sized and small real estate
development and buildings construction companies that were unable to respond to
market changes sufficiently quickly or had taken excessive real estate risks
were forced to exit the market. In 2011, the number of construction companies
will continue decreasing primarily because rising input prices are rendering
the performance of contracts in the portfolios of companies that have survived
a fall in market and construction prices too unprofitable for those that have
not noticed the trend or have chosen to ignore it due to cash flow problems. It
is quite probable that in 2011 or 2012 even some fairly well-known companies
(including those engaged in infrastructure construction) will have to
discontinue or restructure their operations. Above all, construction companies'
ability to continue their operation will depend on how well they can manage
their finances and whether they can maintain sufficient liquidity. 

- Both active projects and those secured in 2011 will be significantly
influenced by various terms and conditions (including different warranties,
extended settlement terms, etc) dictated by customers that are becoming
increasingly unfavourable for construction companies. 

- Construction contracts' profit margins will remain under pressure from
continuously fierce competition and rising input prices. In addition, companies
may continue challenging the results of poorly prepared public procurement
tenders. The time and finance costs of the proceedings are high for all
involved. It seems, though, that the most problematic time was in 2010 and the
situation has started to improve. It will be increasingly important to
meticulously comply with every detail of the tender requirements 

 -The situation in the labour market has stabilised and construction workers'
outflow to the Scandinavian countries will not increase significantly.
Companies have adapted to the situation but when volumes recover the
availability of qualified labour will again be an issue. In 2011 the base wages
paid by construction companies that have to maintain tight cost control are not
expected to increase. 

- In 2011 and 2012 the construction market will be seriously and unfortunately
somewhat unpredictably impacted by a massive and rapid allocation of funds
raised from the sale of the carbon dioxide emission quotas for improving the
energy efficiency of buildings. Around 150 million euros will be distributed
for that purpose within roughly one and a half years. This will trigger rapid
demand hikes in some specialized construction segments (e.g. joint filling,
facade and roof works, and heating systems) as well as related segments, which
will cause an unreasonable rise in respective prices and may cause temporary
problems for the entire sector. 

- The post-depression macroeconomic and construction market indicators will
continue to improve. As a result, the banks will be increasingly interested to
grant private-sector customers new investment loans and, in the case of a
suitable risk profile, also funding for real estate development. The
investments made with the involvement of banks will not trigger major growth in
market volumes but they will give a much-needed signal of the stabilisation of
the investment climate, creating a basis for more visible market growth in
2012. 

Nordecon Group's main operational objectives for 2011

In 2011 Nordecon Group will focus on raising profitability compared with 2010
by: 

- Vigorously improving the efficiency of various aspects of its core operations

- Maintaining strict control over fixed costs

- Keeping up and improving the team spirit and dedication of the Nordecon people

Latvia and Lithuania

According to the Group's assessment, the Latvian construction market will
continue adjusting to the post-recession environment also in 2011. The Group
does not exclude the possibility that in the next few years it will undertake
some projects in Latvia through its Estonian entities, involving partners where
necessary. Continuation of project-based business assumes the availability of
profitable projects. The decision does not change the Group's strategic
objectives in the Latvian construction market, i.e. the objective of conducting
future operations in the Latvian market through local subsidiaries. 

The Lithuanian construction market does not show any signs of recovery in areas
where Group entity Nordecon Statyba UAB is competitive. Therefore, the
operations of the Lithuanian-based Nordecon Statyba UAB have been suspended and
the Group is monitoring the market situation. The temporary suspension of
operations does not cause any major costs for the Group. It is possible that
the Lithuanian operations will remain suspended through 2011. The decision does
not change the Group's strategic objectives in the Lithuanian construction
market, i.e. the objective of conducting future operations in the Lithuanian
market through local subsidiaries. 

Ukraine

The Group will continue operating in Ukraine as a general contractor and
project manager in the construction of commercial buildings and production
facilities. In 2009 and 2010, there were practically no private foreign
customers in those sub-segments. Although the Ukrainian construction market is
not expected to recover notably in 2011 there are some signs of improvement.
The Group has decided to continue its operation in Ukraine. Costs are kept
minimal and the Group is maintaining readiness for re-launching more active
operations. 

The main risks in the Ukrainian market are connected with the low
administrative efficiency of the central and local government and the judicial
system, inflation, and the availability of quality construction inputs. Demand
is mainly undermined by private customers' lack of financing. The political
situation has not stabilised as quickly as anticipated and private sector
customers have not started investing in projects where the Group has a
competitive advantage. 

However, the construction market of a country with a population of around 46
million has strong business potential. The Group's key success factor is
relatively little competition among project management companies (the Group
offers flexible construction management in combination with European practices
and competencies) compared with the real needs of a normally functioning
construction market. We are confident that the crisis experienced by the
Ukrainian construction market and economy as a whole will transform local
understanding and expectations of general contracting and project management in
the construction business and, in the long-term perspective, the new thinking
will improve the Group's position. 

Belarus

The Belarusian business environment has features similar to the Ukrainian one
although there is a certain temporal shift: bureaucracy, complex taxation
principles and constraints on providing cross-border services. The potential of
the Belarusian construction market is also comparable to the Ukrainian one.
There is demand for new buildings, the state has started to permit more direct
foreign investment and there are no contemporarily managed construction
companies in the market. Despite this, in 2011 the Group will operate in
Belarus on a project basis, completing the only active project. After this, for
the time being no new projects will be started. 

Finland

In Finland, the Group provides subcontracting services in the field of concrete
works. This is an area where Estonian companies still have an edge over local
entities through lower personnel expenses. The Finnish concrete works market
allows the Group to compete for selected projects (the main criteria are the
location and the customer's risk profile). In 2011 demand for concrete works
should remain stable. Nevertheless, the Group will maintain a rational approach
and will avoid taking excessive risks in Finland. The Group is currently not
planning to penetrate other segments of the Finnish construction market
(general contracting, project management, etc). 



DESCRIPTION OF THE MAIN RISKS

Business risks

Management believes that in the near future the main business risk will be
stiff competition that induces companies to bid unreasonably low prices in a
situation where input prices have started rising and may cause steep losses. In
the construction market, the situation is aggravated by the fact that the need
for winning contracts that would cover fixed costs and overheads at a level
ensuring normal operating capacities is increasing. The Group's management
expects to mitigate the risks by tight cost control and effective austerity
measures as well as attention to detail and thorough analysis of new projects. 

To mitigate the risks arising from the seasonal nature of the construction
business (primarily the weather conditions during the winter months), the Group
has acquired road maintenance contracts that generate year-round business. In
addition, Group companies are constantly seeking new technical solutions that
would allow working more efficiently under changeable weather conditions. 

To manage their daily construction risks, Group companies purchase contractors'
all risks insurance. Depending on the nature of the project, both general frame
agreements and special project-specific contracts are used. In addition, as a
rule, subcontractors are required to secure the performance of their
obligations with a bank guarantee issued for the benefit of a Group company. To
remedy builder-caused deficiencies which may be detected during the warranty
period, Group companies create warranties provisions. At 31 March 2011, the
provisions (including current and non-current ones) totalled 1,109 thousand
euros. At 31 March 2010, the corresponding figure was 916 thousand euros. 

Credit risk

For credit risk management, a potential customer's settlement behaviour and
creditworthiness are analysed already in the tendering stage. Subsequent to the
signature of a contract, the customer's settlement behaviour is monitored on an
ongoing basis from the making of an advance payment to adherence to the
contractual settlement schedule, which usually depends on the documentation of
the delivery of work performed. We believe that the system in place allows us
to respond to customers' settlement difficulties with sufficient speed. At the
end of the reporting period, our customers' settlement behaviour was good in
the current economic situation although there were also some large problem
customers. The proportion of overdue receivables has increased. On the one
hand, this heightens the risk of future credit losses but on the other hand,
many debtors with overdue accounts are state or local government institutions
with whom major problems are less likely. In accordance with the Group's
accounting policies, all receivables that are more than 180 days overdue or in
respect of which no additional settlement agreements have been reached are
recognised as an expense. 

In the first quarter of 2011, expenses from write-down of receivables totalled
2 thousand euros. In the first quarter of 2010, recoveries of previously
expensed receivables exceeded expenses from the write-down of receivables and
the Group could recognise a reduction of expenses of 9 thousand euros. 

Liquidity risk

Free funds are placed in overnight or fixed-interest term deposits with the
largest banks in the markets where the Group operates. To ensure timely
settlement of liabilities, approximately two weeks' working capital is kept in
current accounts or overnight deposits. Where necessary, overdraft facilities
are used. At the reporting date, the Group's current assets exceeded its
current liabilities 1.36-fold (31 March 2010: 1.74-fold) and available cash
funds totalled 2,303 thousand euros (31 March 2010: 12,376 thousand euros). 

The balance of free cash funds has decreased compared with the end of 2010.
This is attributable to the commencement of full-scale construction operations
after the technological standstill of the winter season, particularly in the
Infrastructure segment. The customers' settlement terms have lengthened and
extend to 45 to 100 days as a rule. According to management's estimates the
decrease in cash funds is of a cyclical nature and will reverse in the
following quarters because settlement dates generally fall in the second to
fourth quarters. The cash balance should see gradual growth also on account of
new projects whose margins are higher than the current ones that were secured
in an environment of aggressive competition. 

Interest rate risk

The Group's interest-bearing liabilities to banks have mainly fixed interest
rates. Finance lease liabilities have floating interest rates and are linked to
EURIBOR. At 31 March 2011, the Group's interest-bearing loans and borrowings
totalled 30,361 thousand euros, an increase of 1,217 thousand euros
year-over-year. Interest expense for the first quarter of 2011 amounted to 273
thousand euros. Compared with the same period in 2010, interest expense has
contracted by 21 thousand euros. The Group's interest rate risk is currently
influenced by two factors: a rise in the base rate for floating interest rates
(EURIBOR) and comparative weakness of operating cash flows. The first factor is
mitigated by fixing, where possible, the interest rates of liabilities during
the period of low market interest rates. The realisation of the cash flow risk
depends on the success of operating activities. The Group has not acquired
derivatives to hedge its interest rate risks. 

Currency risk

As a rule, construction contracts and subcontractors' service contracts are
made in the currency of the host country: in euros (EUR), in Ukrainian hryvnas
(UAH) and in Belarusian rubles (BYR). In connection with discontinuance of
operations in Latvia and Lithuania, the currency risks of those countries are
no longer relevant. Services purchased from other countries are mostly priced
in euros, which does not constitute a currency risk for the Group's Estonian
entities. 

The Group's foreign exchange gains and losses result mainly from its Ukrainian
and Belarusian operations because the Ukrainian and Belarusian national
currency float against the euro. The Group has not acquired derivatives to
hedge its currency risks. 

The Group's exchange gains and losses for the first quarter of 2011 resulted in
a net exchange loss of 139 thousand euros. In the comparative period, exchange
differences resulted in a net exchange gain of 174 thousand euros. 



CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Condensed consolidated interim statement of financial position

EUR´000                                                31 March      31 December
                                                           2011             2010
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                 2,303            5,818
Trade and other receivables                              29,348           31,266
Prepayments                                               1,322            1,060
Inventories                                              26,516           24,982
Non-current assets held for sale                            321              321
Total current assets                                     59,810           63,447
Non-current assets                                                              
Investments in equity-accounted investees                    99               99
Other investments                                            26               26
Trade and other receivables                               2,421            2,215
Investment property                                       4,930            4,930
Property, plant and equipment                             8,359            9,038
Intangible assets                                        15,459           15,486
Total non-current assets                                 31,294           31,794
TOTAL ASSETS                                             91,104           95,241
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                     16,366           19,231
Trade payables                                           18,245           17,429
Other payables                                            3,935            3,446
Deferred income                                           4,658            4,425
Provisions                                                  871            1,160
Total current liabilities                                44,075           45,691
Non-current liabilities                                                         
Loans and borrowings                                     13,994           15,377
Trade payables                                              295              215
Other payables                                                0               96
Provisions                                                  423              423
Total non-current liabilities                            14,712           16,111
TOTAL LIABILITIES                                        58,787           61,802
                                                                                
EQUITY                                                                          
Share capital                                            19,657           19,657
Statutory capital reserve                                 2,555            2,558
Translation reserve                                        -146             -233
Retained earnings                                         9,081           10,257
Total equity attributable to equity holders of           31,147           32,240
 the parent                                                                     
Non-controlling interest                                  1,170            1,199
TOTAL EQUITY                                             32,317           33,439
TOTAL LIABILITIES AND EQUITY                             91,104           95,241



Condensed consolidated interim statement of comprehensive income

EUR´000                                               Q1 2011  Q1 2010      2010
Revenue                                                17,723   11,248    99,312
Cost of sales                                         -17,796  -12,765  -100,012
Gross loss                                                -73   -1,517      -700
                                                                                
Distribution expenses                                     -96     -128      -401
Administrative expenses                                -1,067   -1,168    -4,887
Other operating income                                    226       43       820
Other operating expenses                                 -106     -144    -3,807
Operating loss                                         -1,116   -2,912    -8,975
                                                                                
Finance income                                            183    2,508     3,059
Finance expenses                                         -305   -1,201    -6,338
Net finance income / expense                             -122    1,307    -3,279
                                                                                
Share of loss of equity-accounted investees                 0       -1      -517
                                                                                
Loss before income tax                                 -1,238   -1,606   -12,771
Income tax expense / income                                 4        0        33
Loss for the period                                    -1,234   -1,606   -12,738
                                                                                
Other comprehensive income / expense:                                           
Exchange differences on translating foreign               115      -36       -28
 operations                                                                     
Total other comprehensive income / expense for the        115      -36       -28
 period                                                                         
TOTAL COMPREHENSIVE EXPENSE FOR THE PERIOD             -1,119   -1,642   -12,766
                                                                                
Loss attributable to:                                                           
- Owners of the parent                                 -1,177   -1,316   -11,811
- Non-controlling interests                               -57     -290      -927
Loss for the period                                    -1,234   -1,606   -12,738
                                                                                
Total comprehensive expense attributable to:                                    
- Owners of the parent                                 -1,090   -1,352   -11,839
- Non-controlling interests                               -29     -290      -927
Total comprehensive expense                            -1,119   -1,642   -12,766
                                                                                
Earnings per share attributable to owners of the                                
 parent:                                                                        
Basic earnings per share (EUR)                          -0.04    -0.04     -0.38
Diluted earnings per share (EUR)                        -0.04    -0.04     -0.38



Condensed consolidated interim statement of cash flows

EUR´000                                                         Q1 2011  Q1 2010
Cash flows from operating activities                                            
Cash receipts from customers                                     21,774   22,017
Cash paid to suppliers                                          -20,525  -14,374
VAT paid                                                           -372   -1,336
Cash paid to and for employees                                   -2,853   -3,937
Income tax paid                                                      -1      -11
Net cash used in / from operating activities                     -1,977    2,359
                                                                                
Cash flows from investing activities                                            
Acquisition of property, plant and equipment                         -6      -52
Proceeds from sale of property, plant and equipment and             277       27
 intangible assets                                                              
Disposal of subsidiaries, net of cash transferred                     0     -633
Loans granted                                                       -39      -75
Repayment of loans granted                                           13      170
Dividends received                                                    0        2
Interest received                                                     3       85
Net cash from / used in investing activities                        248     -476
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                        163    1,222
Repayment of loans received                                      -1,164   -4,202
Payment of finance lease liabilities                               -493     -711
Interest paid                                                      -289     -217
Other payments made                                                   0       -6
Net cash used in financing activities                            -1,783   -3,914
                                                                                
Net cash flow                                                    -3,512   -2,031
                                                                                
Cash and cash equivalents at beginning of period                  5,818   14,392
Effect of exchange rate fluctuations                                 -3       15
Decrease in cash and cash equivalents                            -3,512   -2,031
Cash and cash equivalents at end of period                        2,303   12,376



Nordecon is a group of construction companies whose core business is
construction project management and general contracting in the buildings and
infrastructures segment. Geographically the Group operates in Estonia, Ukraine
and Finland. The parent of the Group is Nordecon AS, a company registered and
located in Tallinn, Estonia. In addition to the parent company, there are more
than 10 subsidiaries in the Group. The consolidated revenue of the Group in
2010 was 99.3 million euros. Currently Nordecon Group employs nearly 700
people. Since 18 May 2006, the company's shares have been quoted in the main
list of the NASDAQ OMX Tallinn Stock Exchange. 


         Raimo Talviste
         Nordecon AS
         Head of Finance and Investor Relations
         Tel: +372 615 4445
         Email: [email protected]
         www.nordecon.com