Börsiteade

Pealkiri

Financial report for the second quarter and six months ended 30 June 2011 (unaudited)

Teade

Nordecon publishes financial report for the second quarter and six months ended
30 June 2011 (unaudited) 

Tallinn, Estonia, 2011-08-11 15:35 CEST (GLOBE NEWSWIRE) --


Directors' 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 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 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 half of 2011

Changes in the Group's Estonian operations

There were no major changes in the Group's Estonian operations in the first
half 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 continues to act as a holding company for the
Group's main Estonian and foreign subsidiaries (except for the Ukrainian ones). 

Changes in the Group's foreign operations

Latvia

There have been no changes in the Group's Latvian operations compared with the
end 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 end 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

There have been no changes in the Group's Belarusian operations compared with
the end of 2010. The Group is completing its only active contract, the
construction of a production facility for a Finnish food industry company. The
project is performed through the Group's Belarusian subsidiary Eurocon Stroi
IOOO. According to the Group's development strategy, Belarus is not a target
foreign market and the project was undertaken to explore the market. 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 doing business in the 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. The decision to remain in Ukraine was underpinned by
well-planned activities during the slump and the prospects for 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 becomes clearer. 

Finland

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



Financial review

Margins

Nordecon Group ended the first half of 2011 with a gross loss of 1,428 thousand
euros (HY1 2010: 2,889 thousand euros). The negative figure results from
changes in the operating environment that required the Group to re-estimate the
outcomes of its loss-generating projects. In particular, the additional loss
estimate is attributable to construction inputs whose prices have been rising
in recent quarters and, to a certain extent, some unforeseen project
performance costs. The bulk of it stemmed from a few contracts secured in
2009-2010 for which losses had also been recognised earlier. The Group's
estimates of the losses expected to be incurred until the delivery of the
contracts are based on the current best knowledge. 

As regards loss-generating contracts, the strongest adverse impact was exerted
by the exhibition building of the Estonian Maritime Museum that is being built
inside the seaplane hangars next to the Tallinn Bay and is currently scheduled
for completion at the end of 2011. It is a unique renovation project where the
exceptionally poor condition of the building and the true complexity of the
work have come to light only in the course of the project. The Group has
accepted all losses incurred on account of its own miscalculations. However,
where circumstances have arisen that could not be foreseen at the time of the
procurement tender or where the customer has made changes to the initial
project or has requested additional work, the Group has exercised its
contractual right and demanded additional payment. 

Setting aside the few loss-making contracts signed during the downturn, the
profitability of the Group's core business has started improving year over
year. Above all, this has been achieved thanks to the following factors: 

  -- Since 2010, we have focused on improving the profitability, not the size of
     the Group's contracts portfolio.
  -- In 2010, a full set of stringent austerity measures was enforced across the
     Group.
  -- The Group's internal processes and operations have been effectively
     streamlined.

For construction companies, the year 2011 brought the news that in some
segments of the construction market (e.g. road construction and water and
wastewater network construction) competition has started to decrease. The main
reason is not yet bankruptcy of construction companies but the fact that in
recent years many companies have had to cut their personnel and support
structures to an extent that is undermining their bidding capabilities compared
with previous years. Furthermore, many companies are being held back by
increasingly tougher financial requirements imposed by customers holding
tenders and the limited availability of the guarantee facilities provided by
financing institutions. A majority of construction companies have become aware
that long-term construction contracts entail the risk of growth in input
prices. In general, 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 in
restoring the profitability of its core business. 

Administrative expenses for the first half-year totalled 2,142 thousand euros.
Compared with the same period in 2010, the Group has cut administrative
expenses by 7% and the item has become relatively stable. The ratio of
administrative expenses to revenue was 3.9% (HY1 2010: 6.1%). We are pleased to
report that our cost-saving measures have yielded strong results and according
to management's estimates on a full-year basis the Group will be able to
maintain administrative expenses below the target ceiling, i.e. 5% of revenue. 

The Group's operating loss for the first half-year was 3,501 thousand euros
(HY1 2010: 5,469 thousand euros). 

Consolidated net loss was 3,715 thousand euros. The loss attributable to owners
of the parent, Nordecon AS, was 3,652 thousand euros. The first half of 2010
ended in a net loss of 4,175 thousand euros, including non-recurring net
finance income of 1,177 thousand euros earned on the sale of the Latvian
subsidiary. Excluding the latter, the Group's net loss for the first half of
2010 would have been 5,352 thousand euros. 

Cash flows

In the first half of 2011, the Group's operating activities resulted in a net
cash inflow of 1,846 thousand euros (HY1 2010: inflow of 690 thousand euros).
Operating cash flow continued to be influenced the most by cyclical
fluctuations in project-related cash flows (differences between the settlement
terms agreed with customers and subcontractors) and the performance of
loss-making projects. Positive cash flow was supported by factoring services
implemented for reducing the cyclical nature of cash flows and the prepayments
received under new large contracts. The negative cash flow of unprofitable
projects realises based on the actual performance of the work although their
book loss has already been recognised in previous periods. 

Investing activities generated a net inflow of 1,996 thousand euros (HY1 2010:
inflow of 461 thousand euros). Inflows consisted mostly of principal and
interest receipts for loans granted in previous periods, which totalled 1,812
thousand euros. 

Financing activities resulted in a net cash outflow of 2,994 thousand euros
(HY1 2010: outflow of 5,085 thousand euros). The structure of financing cash
flows has remained more or less stable. The Group is settling its loan
obligations faster than it is raising new debt. On the other hand, repayments
have decreased in relation to the comparative period thanks to agreements
reached with the banks. The renegotiation of settlement terms has not resulted
in any significant changes in the Group's  interest rates. 

At 30 June 2011, the Group's cash and cash equivalents totalled 6,343 thousand
euros (30 June 2010: 10,476 thousand euros). For information on liquidity
risks, please refer to the chapter Description of the main risks. 



Key financial figures and ratios



Figure / ratio                       6M 2011     6M 2010     6M 2009        2010
Revenue (EUR'000)                     54,429      37,401      78,298      99,312
Revenue growth/decrease, %               46%        -52%         58%        -36%
Net profit/loss (EUR'000)             -3,716      -4,175         329     -12,738
Profit/loss attributable to           -3,652      -3,788       1,353     -11,811
 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)               -0.12       -0.12        0.04       -0.38
Average number of employees              731         797       1,187         774
Revenue per employee (EUR'000)            74          47          66         128
Personnel expenses to revenue, %       12.2%       18.6%       15.4%       14.6%
Administrative expenses to              3.9%        6.1%        5.3%        4.9%
 revenue, %                                                                     
EBITDA1 (EUR'000)                     -2,278      -3,718       2,628      -5,512
EBITDA margin, %                       -4.2%       -9.9%        3.4%       -5.6%
Gross margin, %                        -2.6%       -7.7%        6.9%       -0.7%
Operating margin, %                    -6.4%      -14.6%        0.4%       -9.0%
Operating margin excluding gains       -6.8%      -14.6%        0.3%       -9.4%
 on asset sales, %                                                              
Net margin, %                          -6.8%      -11.2%        0.4%      -12.8%
Return on invested capital, %          -5.0%       -5.0%        1.9%      -15.8%
Return on assets, %                    -3.4%       -4.7%        0.2%       -8.3%
Return on equity, %                   -11.7%       -9.6%        0.6%      -32.6%
Equity ratio, %                        26.8%       38.2%       35.8%       35.1%
Gearing, %                             40.8%       25.2%       31.7%       42.3%
Current ratio                           1.19        1.53        1.36        1.39
                                                                                
                                     6M 2011     6M 2010     6M 2009        2010
Order book (EUR'000)                 140,234      89,440     100,214      85,607

1 For the purpose of calculating EBITDA, non-cash items include not only
depreciation and amortisation but also impairment losses on goodwill. 

Revenue growth/decrease = (revenue for the      Net margin = (net profit for the
 reporting period/ revenue for the previous      period/revenue)*100            
 period) - 1*100                                Return on invested capital =    
Earnings per share (EPS) = net profit            ((profit before tax + interest 
 attributable to equity holders of the parent    expense)/ the period's average 
 / weighted average number of shares             (interest-bearing liabilities +
 outstanding                                     equity))*100                   
Revenue per employee = revenue/average number   Return on assets = (operating   
 of employees                                    profit/the period's average    
Personnel expenses to revenue = (personnel       total assets)*100              
 expenses/revenue) *100                         Return on equity = (net profit  
Administrative expenses to revenue =             for the period/ the period's   
 (administrative expenses/ revenue)*100          average total equity)*100      
EBITDA = operating profit + depreciation and    Equity ratio = (total equity/   
 amortisation                                    total equity and               
EBITDA margin = (EBITDA/revenue)*100             liabilities)*100               
Gross margin = (gross profit/revenue)*100       Gearing = ((interest-bearing    
Operating margin = (operating                    liabilities - cash and cash    
 profit/revenue)*100                             equivalents)/ (interest bearing
Operating margin excluding gains on asset        liabilities + equity))*100     
 sales = ((operating profit - gains on sale of  Current ratio = total current   
 property, plant and equipment - gains on sale   assets/ total current          
 of investment properties and real estate held   liabilities                    
 for sale)/revenue) *100                                                        



Performance by geographical market

In the first half of 2011, roughly 96% of the Group's revenue was earned in
Estonia. In the comparative period, foreign operations accounted for 6% of the
Group's revenue. 

           6M 2011  6M 2010  6M 2009  2010
Estonia        96%      94%      84%   94%
Ukraine         0%       6%       2%    2%
Lithuania       0%       0%       1%    0%
Latvia          0%       0%      13%    0%
Belarus         3%       0%       0%    3%
Finland         1%       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 of the 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 half of 2011). Finnish revenues result from
the performance 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 known 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 half of 2011 was 54,429 thousand euros, a
46% increase on the 37,401 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 segment, decline of competition in certain market segments and
successful bidding for infrastructure contracts that could also 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

In the first half of 2011, the revenues of our two main business segments were
practically equal. The Buildings and Infrastructure segments ended the first
half-year with revenue of 25,704 thousand euros and 27,402 thousand euros
respectively. The corresponding figures for the comparative period were 18,254
thousand euros and 18,618 thousand euros. 

For a long 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 (72%) 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  6M 2011  6M 2010  6M 2009  2010
Buildings              46%      46%      49%   48%
Infrastructure         54%      54%      51%   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 revenue for the first half-year resulted
from the construction of public buildings. At the end of 2010, the Group won
two public sector contracts that were large under the circumstances - 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 major project
involving the reconstruction of the 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
various agricultural facilities and a food production facility that is being
built in Belarus. Compared with previous periods, the contribution of the
commercial buildings sub-segment has decreased considerably, primarily because
of a lack of private sector customers. In the construction of apartment
buildings the Group was a general contractor, not a developer. 

Revenue distribution within the Buildings        6M 2011  6M 2010  6M 2009  2010
 segment                                                                        
Commercial buildings                                  6%      26%      71%   37%
Industrial and warehouse facilities                  38%      21%      11%   18%
Public buildings                                     54%      38%      16%   35%
Apartment buildings                                   2%      15%       1%   10%

As usual, in the Infrastructure segment most of the revenue was generated by
road construction and maintenance. The contribution of the construction of
water and wastewater networks where the Group has won several tenders also in
2011 was expectedly large as well. Thanks to support from the EU structural
funds, this is one of the best-funded areas in Estonia. The European Union also
supports the performance of various environmental engineering projects where
the Group is well represented. Revenues from hydraulic engineering that depends
mostly on Estonian ports' investment policies have been negligible in the past
two years. 

Revenue distribution within the Infrastructure   6M 2011  6M 2010  6M 2009  2010
 segment                                                                        
Road construction and maintenance                    46%      65%      32%   62%
Specialist engineering (including hydraulic           1%       1%      17%    1%
 engineering)                                                                   
Other engineering                                    38%      26%      38%   28%
Environmental engineering                            16%       8%      14%    8%



Order book

At 30 June 2011, the Group's order book stood at 140,234 thousand euros, being
significantly larger than at 30 June 2010 when the figure was 89,440 thousand
euros. In addition to a general rise in the Group's construction volumes
compared with the slump of 2010, the growth includes a substantial one-off
transaction: the cost of the design and build of the Aruvalla-Kose section of
E263, the Tallinn-Tartu road (approx. 39.3 million euros). 

                                   6M 2011  6M 2010  6M 2009    2010
Order book, in thousands of euros  140,234   89,440  100,214  85,607

At 72% the Infrastructure segment continues to account for a major proportion
of the Group's total order book (30 June 2010: 66%). 

In a situation where the decrease in input prices has been replaced by a rise
in all areas of the construction sector, the Group's management continues to
focus on improving the profitability of the contract portfolio. 

Between the reporting date (30 June 2011) and the date of release of this
report, Group companies have been awarded additional construction contracts of
approximately 14,977 thousand euros. 



People

Staff and personnel expenses

At the end of the first six months of 2011, the Group (including the parent and
the subsidiaries) employed, on average, 731 people including around 352
engineers and technical personnel (ETP). In the past year, the decrease in
personnel has decelerated. In 2011 headcount is expected to remain stable or to
grow slightly. Besides additional seasonal labour hired for the second and
third quarters, the figure may be influenced by year-over-year growth in the
Group's operating volumes. 

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



               6M 2011  6M 2010  6M 2009  2010
ETP                352      362      480   362
Workers            379      435      707   412
Total average      731      797    1,187   774

The Group's personnel expenses for the first half of 2011 including all
associated taxes totalled 6,620 thousand euros, a 5% decrease compared with the
6,945 thousand euros incurred in the first half of 2010. Personnel expenses
have declined on account of a decrease in the total number of staff. 

In the first half of 2011, the remuneration of the members of the council of
Nordecon AS including associated social security charges amounted to 50
thousand euros. The corresponding figure for the first half of 2010 was also 50
thousand euros. The remuneration of the members of the board of Nordecon AS
including social security charges totalled 156 thousand euros compared with 72
thousand euros for the first half 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 the current
     year, the market will start picking up and construction volumes will grow
     somewhat. In addition to the infrastructure sector, new projects will be
     launched in the buildings construction sector. The latter should offer the
     main opportunities for growth, primarily through 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 profitable 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,
     long 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. However, an even larger number of (public procurement)
     tenders will be cancelled because customers have prepared their budgets
     using the construction prices of 2009-2010 which in the current situation
     are no longer realistic and the bids made by construction companies exceed
     them by tens of percents. The time and finance costs are regrettably high
     for all involved.
  -- The situation in the labour market has stabilised to a certain extent 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 general, in 2011 the base wage paid by construction companies
     that have to maintain tight cost control is not yet 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 (joint filling, facade and roof works, heating
     systems, etc) as well as related segments, which will cause an unreasonable
     rise in respective prices and may cause temporary problems for the entire
     sector.
  -- Overall economic recovery should increase the banks' interest in granting
     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 would not trigger major
     market growth but would give a much-needed signal of the stabilisation of
     the investment climate, creating a basis for more visible growth in 2012.
     Realisation of the assumption depends on whether the euro-zone countries
     will be able to prevent the debt crisis from spreading further into the
     banking sector.

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. Regrettably, the Ukrainian construction market
has not recovered notably in 2011 although 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. The recovery of the Ukrainian economy from the crisis of 2008-2009 has
been slow, which has affected 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. The Group's management is confident that the ongoing
downturn in 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

Although there is a certain temporal development lag, the Belarusian business
environment has features similar to the Ukrainian one: bureaucracy, complex
taxation principles and constraints on 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 its 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 a certain edge over
local entities through lower personnel expenses. The Finnish concrete works
market allows the Group (both as a contractor and subcontractor) to compete for
selected projects (the main criteria are the location and the customer's risk
profile). We expect demand for concrete works to remain stable in 2011.
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 an exponential
slide in profitability. 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 30 June 2011, the
provisions (including current and non-current ones) totalled 1,045 thousand
euros. At 30 June 2010, the corresponding figure was 857 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 sufficiently promptly. At the
end of the first half-year, our customers' settlement behaviour was relatively
good considering the economic situation although there were also some problem
customers. The proportion of overdue receivables is stable; the figure consists
mostly of items that not significantly overdue and stem from the routines to be
completed between public sector companies and their financing authorities. 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 half of 2011, expenses from write-down of receivables totalled 2
thousand euros. In the first half 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 4 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 1.19-fold (30 June 2010: 1.53-fold) and available cash
funds totalled 6,343 thousand euros (30 June 2010: 10,476 thousand euros). 

The balance of free cash funds has increased compared with the end of the first
quarter by 4,040 thousand euros. Despite an improvement in its liquidity
position, the Group remains exposed to higher than average liquidity risk
resulting from a gap between the customers' long settlement terms (mostly 45 to
56 days) and the subcontractors' increasing interest to negotiate shorter
settlement terms (mostly 21-45 days). In addition, business growth is
increasing the Group's need for working capital, a trend that will become more
apparent in subsequent quarters. The Group counteracts the differences in
settlement terms by using factoring where possible. In order to raise
additional working capital, the Group has started negotiations with banks based
on the Nordecon Group Business Plan and Financing Program 2011-2014, prepared
at the request of Nordecon AS by one of the world's leading consulting firms
Roland Berger Strategy Consultants GmbH. 

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 30 June 2011, the Group's interest-bearing loans and borrowings
totalled 31,344 thousand euros, an increase of 3,177 thousand euros
year-over-year. Interest expense for the first half-year amounted to 499
thousand euros. Compared with the same period in 2010, interest expense has
increased by 4 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 a low interest coverage ratio caused by low 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 interest payment cash flow risk depends on the success of operating
activities. The Group has not acquired derivatives to hedge its interest rate
risk. 

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 half of 2011 resulted in a
net exchange loss of 109 thousand euros. In the comparative period, exchange
differences resulted in a net exchange loss of 59 thousand euros. 



Condensed consolidated interim statement of financial position

EUR`000                                                 30 June      31 December
                                                           2011             2010
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                 6,343            5,818
Trade and other receivables                              43,660           31,266
Prepayments                                               1,943            1,060
Inventories                                              26,795           24,982
Non-current assets held for sale                            313              321
Total current assets                                     79,054           63,447
Non-current assets                                                              
Investments in equity-accounted investees                   147               99
Other investments                                            26               26
Trade and other receivables                               2,454            2,215
Investment property                                       4,930            4,930
Property, plant and equipment                             7,840            9,038
Intangible assets                                        15,432           15,486
Total non-current assets                                 30,829           31,794
TOTAL ASSETS                                            109,883           95,241
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                     18,697           19,231
Trade payables                                           34,450           17,429
Other payables                                            3,721            3,446
Deferred income                                           8,951            4,425
Provisions                                                  763            1,160
Total current liabilities                                66,582           45,691
Non-current liabilities                                                         
Loans and borrowings                                     12,648           15,377
Trade payables                                              199              215
Other payables                                               96               96
Provisions                                                  423              423
Total non-current liabilities                            13,366           16,111
TOTAL LIABILITIES                                        79,948           61,802
EQUITY                                                                          
Share capital                                            19,657           19,657
Statutory capital reserve                                 2,554            2,558
Translation reserve                                         -90             -233
Retained earnings                                         6,605           10,257
Total equity attributable to equity holders of the       28,726           32,240
 parent                                                                         
Non-controlling interest                                  1,209            1,199
TOTAL EQUITY                                             29,935           33,439
TOTAL LIABILITIES AND EQUITY                            109,883           95,241



Condensed consolidated interim statement of comprehensive income

EUR`000                             Q2 2011  Q2 2010  6M 2011  6M 2010      2010
Revenue                              36,706   26,153   54,429   37,401    99,312
Cost of sales                       -38,061  -27,525  -55,857  -40,290  -100,012
Gross loss                           -1,355   -1,372   -1,428   -2,889      -700
                                                                                
Distribution expenses                   -68      -72     -164     -200      -401
Administrative expenses              -1,057   -1,105   -2,124   -2,273    -4,887
Other operating income                  153      319      379      362       820
Other operating expenses                -58     -325     -164     -469    -3,807
Operating loss                       -2,385   -2,555   -3,501   -5,469    -8,975
                                                                                
Finance income                          167      195      350    2,702     3,059
Finance expenses                       -306     -284     -611   -1,484    -6,338
Net finance income / expense           -139      -89     -261    1,218    -3,279
                                                                                
Share of profit / loss of                47      -40       47      -40      -517
 equity-accounted investees                                                     
                                                                                
Loss before income tax               -2,477   -2,684   -3,715   -4,291   -12,771
Income tax expense / income              -5      116       -1      116        33
Loss for the period                  -2,482   -2,568   -3,716   -4,175   -12,738
                                                                                
Other comprehensive income /                                                    
 expense:                                                                       
Exchange differences on                 101      -59      216      -95       -28
 translating foreign operations                                                 
Total other comprehensive income /      101      -59      216      -95       -28
 expense for the period                                                         
TOTAL COMPREHENSIVE EXPENSE FOR      -2,381   -2,627   -3,500   -4,270   -12,766
 THE PERIOD                                                                     
                                                                                
Loss attributable to:                                                           
- Owners of the parent               -2,475   -2,471   -3,652   -3,788   -11,811
- Non-controlling interests              -7      -97      -64     -387      -927
Loss for the period                  -2,482   -2,568   -3,716   -4,175   -12,738
                                                                                
Total comprehensive expense                                                     
 attributable to:                                                               
- Owners of the parent               -2,420   -2,530   -3,510   -3,883   -11,839
- Non-controlling interests              39      -97       10     -387      -927
Total comprehensive expense          -2,381   -2,627   -3,500   -4,270   -12,766
                                                                                
Earnings per share attributable to                                              
 owners of the parent:                                                          
Basic earnings per share (EUR)        -0.10    -0.08    -0.12    -0.12     -0.38
Diluted earnings per share (EUR)      -0.10    -0.08    -0.12    -0.12     -0.38



Condensed consolidated interim statement of cash flows

EUR`000                                                         6M 2011  6M 2010
Cash flows from operating activities                                            
Cash receipts from customers                                     58,164   46,025
Cash paid to suppliers                                          -49,220  -35,757
VAT paid                                                         -1,246   -2,010
Cash paid to and for employees                                   -5,851   -7,532
Income tax paid                                                      -1      -36
Net cash from operating activities                                1,846      690
                                                                                
Cash flows from investing activities                                            
Acquisition of property, plant and equipment                        -13      -78
Proceeds from sale of property, plant and equipment and             280      344
 intangible assets                                                              
Proceeds from sale of investment property                             0      677
Disposal of subsidiaries, net of cash transferred                     0     -617
Acquisition of associates                                             0       -2
Loans granted                                                       -87     -178
Repayment of loans granted                                        1,631      177
Dividends received                                                    4        4
Interest received                                                   181      134
Net cash from investing activities                                1,996      461
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                        892    2,344
Repayment of loans received                                      -2,408   -5,675
Payment of finance lease liabilities                               -931   -1,351
Interest paid                                                      -545     -407
Other payments made                                                  -2        4
Net cash used in financing activities                            -2,994   -5,085
                                                                                
Net cash flow                                                       848   -3,934
                                                                                
Cash and cash equivalents at beginning of period                  5,818   14,392
Effect of exchange rate fluctuations                               -323       18
Increase / decrease in cash and cash equivalents                    848   -3,934
Cash and cash equivalents at end of period                        6,343   10,476



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