Börsiteade

Pealkiri

Financial report for the third quarter and nine months ended 30 September 2011 (unaudited)

Teade

Nordecon publishes financial report for the third quarter and nine months ended
30 September 2011 (unaudited) 

Tallinn, Estonia, 2011-11-10 15:35 CET (GLOBE NEWSWIRE) --
Announcement includes Nordecon AS' consolidated financial statements for 2011
III quarter and 9 months, overview of the key events influencing the period's
financial result, outlook for the market and description of the main risks. 

Interim report is attached to the announcement and is also published on NASDAQ
OMX Tallinn and Nordecon's web page
(http://www.nordecon.com/root/en/for-investor/financial-reports/interim-reports)
. 

Period's investor report and fact sheet are published on Nordecon's web page
(http://www.nordecon.com/root/en/for-investor/investor-presentations). 



Condensed consolidated interim statement of financial position

EUR`000                                            30 September      31 December
                                                           2011             2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                 6,822            5,818
Trade and other receivables                              42,242           31,266
Prepayments                                               1,638            1,060
Inventories                                              25,245           24,982
Non-current assets held for sale                            331              321
Total current assets                                     76,278           63,447
Non-current assets                                                              
Investments in equity-accounted investees                   203               99
Other investments                                            26               26
Trade and other receivables                               2,583            2,215
Investment property                                       4,929            4,930
Property, plant and equipment                             7,554            9,038
Intangible assets                                        15,407           15,486
Total non-current assets                                 30,702           31,794
TOTAL ASSETS                                            106,980           95,241
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                     16,691           19,231
Trade payables                                           35,473           17,429
Other payables                                            3,565            3,446
Deferred income                                           8,220            4,425
Provisions                                                  631            1,160
Total current liabilities                                64,580           45,691
Non-current liabilities                                                         
Loans and borrowings                                     12,027           15,377
Trade payables                                              199              215
Other payables                                               96               96
Provisions                                                  435              423
Total non-current liabilities                            12,757           16,111
TOTAL LIABILITIES                                        77,337           61,802
EQUITY                                                                          
Share capital                                            19,657           19,657
Statutory capital reserve                                 2,554            2,558
Translation reserve                                        -135             -233
Retained earnings                                         6,100           10,257
Total equity attributable to equity holders of           28,176           32,240
 the parent                                                                     
Non-controlling interest                                  1,467            1,199
TOTAL EQUITY                                             29,643           33,439
TOTAL LIABILITIES AND EQUITY                            106,980           95,241



Condensed consolidated interim statement of comprehensive income

EUR`000                            Q3 2011  Q3 2010   9M 2011  9M 2010      2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                             48,831   37,856   103,260   75,257    99,312
Cost of sales                      -48,120  -35,512  -103,977  -75,803  -100,012
Gross profit/loss                      711    2,344      -717     -546      -700
                                                                                
Distribution expenses                  -74      -84      -238     -284      -401
Administrative expenses             -1,160   -1,096    -3,284   -3,368    -4,887
Other operating income                 367      135       746      497       820
Other operating expenses                13     -345      -151     -813    -3,807
Operating profit/loss                 -143      954    -3,644   -4,514    -8,975
                                                                                
Finance income                         144      114       494    2,817     3,059
Finance expenses                     -2,71   -2,847      -884   -4,332    -6,338
Net finance expense                   -127   -2,733      -390   -1,515    -3,279
                                                                                
Share of profit/loss of                 55     -239       104     -279      -517
 equity-accounted investees                                                     
                                                                                
Loss before income tax                -215   -2,017    -3,930   -6,308   -12,771
Income tax expense/income              -15      -41       -16       75        33
Loss for the period                   -230   -2,058    -3,946   -6,233   -12,738
                                                                                
Other comprehensive                                                             
 income/expense:                                                                
Exchange differences on                -61       71       155      -24       -28
 translating foreign operations                                                 
Total other comprehensive income/      -61       71       155      -24       -28
 expense for the period                                                         
TOTAL COMPREHENSIVE EXPENSE FOR       -291   -1,987    -3,884   -6,257   -12,766
 THE PERIOD                                                                     
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                -506   -1,934    -4,157   -5,722   -11,811
- Non-controlling interests            276     -124       211     -511      -927
Loss for the period                   -230   -2,058    -3,946   -6,233   -12,738
                                                                                
Total comprehensive                                                             
 income/expense attributable to:                                                
- Owners of the parent                -550   -1,863    -4,152   -5,746   -11,839
- Non-controlling interests            259     -124       268     -511      -927
Total comprehensive expense           -291   -1,987    -3,884   -6,257   -12,766
                                                                                
Earnings per share attributable                                                 
 to owners of the parent:                                                       
Basic earnings per share (EUR)       -0.02    -0.06     -0.14    -0.19     -0.38
Diluted earnings per share (EUR)     -0.02    -0.06     -0.14    -0.19     -0.38



Condensed consolidated interim statement of cash flows

                                                                    EUR`000     
                                                                9M 2011  9M 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers                                    116,904   79,613
Cash paid to suppliers                                         -101,479  -68,191
VAT paid                                                         -2,064   -2,978
Cash paid to and for employees                                   -9,475  -10,908
Income tax recovered/paid                                            67      -76
Net cash from/used in operating activities                        3,953   -2,540
                                                                                
Cash flows from investing activities                                            
Acquisition of property, plant and equipment                        -31      -87
Acquisition of intangible assets                                      0        0
Proceeds from sale of property, plant and equipment and             306      616
 intangible assets                                                              
Proceeds from sale of investment property                           352      677
Acquisition of subsidiaries, net of cash acquired                     0        1
Disposal of subsidiaries, net of cash transferred                     0     -618
Acquisition of associates                                             0     -321
Loans granted                                                      -151     -497
Repayment of loans granted                                        2,056      559
Dividends received                                                    4        4
Interest received                                                   102      295
Net cash from investing activities                                2,638      630
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                      1,795    5,305
Repayment of loans received                                      -4,746   -7,423
Dividends paid                                                        0        0
Payment of finance lease liabilities                             -1,401   -1,950
Interest paid                                                      -886     -935
Other payments made                                                  -4      -16
Net cash used in financing activities                            -5,242   -5,017
                                                                                
Net cash flow                                                     1,349   -6,928
                                                                                
Cash and cash equivalents at beginning of period                  5,818   14,392
Effect of exchange rate fluctuations                               -345        9
Increase/decrease  in cash and cash equivalents                   1,349   -6,928
Cash and cash equivalents at end of period                        6,822    7,473



Financial review

Margins

Nordecon Group ended the first nine months of 2011 with a gross loss of 717
thousand euros (9M 2010: gross loss of 546 thousand euros). The gross losses
incurred in the first and second quarters due to seasonal factors and
re-estimation of the outcomes of some loss-making contracts signed in 2009 and
2010 respectively could not be counterbalanced by the Group's third quarter
gross profit of 711 thousand euros. Results for the reporting period are
somewhat weaker than those for the comparative period (particularly the third
quarter). In the third quarter of 2010, Nordecon completed the construction of
the Mäo bypass, a major contract whose revenue and profit figures had a
significant impact on the Group's overall performance indicators. 

Gross result for the period was strongly influenced by re-estimation of the
outcomes of the Group's loss-generating projects, a step taken in the second
quarter due to changes in the operating environment. Additional losses were
recognised because of a rise in the prices of construction inputs and
identification of some unforeseen project performance costs. A major share of
the additional loss is attributable to a few contracts secured in 2009 and 2010
for which losses have also been recognised earlier. The Group's estimates of
the losses expected to be incurred until delivery 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 near 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 been discovered only in the course of the project. In line with the
contract, we have asked the customer for an extension of the delivery term and
additional compensation for costs incurred due to circumstances that could not
be foreseen at the time of the public procurement tender or additional work
requested by the customer. By the date of release of this report, however, only
part of the problems that have emerged have found contractually fixed solutions
while many of the Group's justified claims have still no cover. 

Setting aside a few loss-making projects secured during the downswing of the
market, the average profit margins of the Group's contracts show a gradual but
consistent improvement in relation to comparative periods. Recognition of
contract profits depends on the stage of completion of contract activity.
Therefore, the higher profitability of contracts secured in the reporting
period will have an impact only in the following quarters when actual on-site
activity reaches a greater volume. Above all, the improvement in profitability
is underpinned by the following factors: 

  -- Since 2010 the Group has prioritized profitability over growth of the
     contracts portfolio.
  -- In previous periods, a full set of stringent austerity measures was
     enforced across the Group.
  -- We continue to streamline our internal processes and operations.

According to the Group's assessment, in 2011 competition in some segments of
the construction market (e.g. road construction and water and wastewater
network construction) has somewhat weakened. The main reason is not yet
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
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. To
date, a vast 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 a 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 sustainable profitability in its operating activities. 

Administrative expenses for the first nine months totalled 3,284 thousand
euros. Compared with the same period in 2010, administrative expenses have
decreased by 2.5%, reaching relative stability in relation to current operating
volumes. The ratio of administrative expenses to revenue was 3.2% (9M 2010:
4.5%). 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 nine months was 3,737 thousand euros
(9M 2010: 4,514 thousand euros). EBITDA for the period was negative at 1,939
thousand euros (9M 2010: 2,052 thousand euros). 

The Group's net loss was 4,039 thousand euros. The loss attributable to owners
of the parent, Nordecon AS, was 4,250 thousand euros. The first nine months of
2010 ended in a net loss of 6,233 thousand euros, including non-recurring
finance income and expenses on the sale of the Latvian subsidiary and the
write-down of loans. Excluding those, the Group's net loss for the first nine
months of 2010 would have been 4,838 thousand euros. 

Cash flows

In the first nine months of 2011, the Group's operating activities resulted in
a net cash inflow of 3,953 thousand euros (9M 2010: outflow of 2,540 thousand
euros). Operating cash flow continued to be strongly influenced by cyclical
fluctuations in project-related cash flows (differences between the settlement
terms agreed with customers and subcontractors) and the performance of the
aforementioned loss-making projects. Positive cash flow was supported by
factoring implemented for reducing the cyclical nature of cash flows and
proceeds from new large contracts. The negative cash flow of unprofitable
projects realises as the work is performed although the estimated loss has
already been recognised in previous periods. 

Investing activities generated a net inflow of 2,638 thousand euros (9M 2010:
inflow of 630 thousand euros) that consisted mostly of repayments of loans
granted in prior periods of 2,056 thousand euros. 

Financing activities resulted in a net cash outflow of 5,242 thousand euros (9M
2010: outflow of 5,017 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. Renegotiation of settlement terms has not resulted in any
significant changes in the Group's interest rates. 

At 30 September 2011, the Group's cash and cash equivalents totalled 6,822
thousand euros (30 September 2010: 5,818 thousand euros). For information on
liquidity risks, see the chapter Description of the main risks. 



Key financial figures and ratios

Figure / ratio                       9M 2011     9M 2010     9M 2009        2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue (EUR'000)                    103,260      75,257     125,755      99,312
Revenue growth/decrease, %             37.2%      -40.2%      -32.7%        -36%
Net profit/loss (EUR'000)             -4,039      -6,233       2,987     -12,738
Profit/loss attributable to           -4,250      -5,722       4,182     -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)               -0.14       -0.19        0.14       -0.38
Average number of employees              752         808       1,110         774
Revenue per employee (EUR'000)           137          93         113         128
Personnel expenses to revenue, %       10.2%       14.0%       14.2%       14.6%
Administrative expenses to              3.2%        4.5%        4.9%        4.9%
 revenue, %                                                                     
EBITDA1 (EUR'000)                     -1,939      -2,052       6,230      -5,512
EBITDA margin, %                       -1.9%       -2.7%        5.0%       -5.6%
Gross margin, %                        -0.7%       -0.7%        8.4%       -0.7%
Operating margin, %                    -3.6%       -6.0%        2.3%       -9.0%
Operating margin excluding gains       -4.0%       -6.3%        2.1%       -9.4%
 on asset sales, %                                                              
Net margin, %                          -3.9%       -8.3%        2.4%      -12.8%
Return on invested capital, %          -5.1%       -7.4%        5.3%      -15.8%
Return on assets, %                    -3.7%       -3.9%        1.9%       -8.3%
Return on equity, %                   -12.8%      -14.7%        5.5%      -32.6%
Equity ratio, %                        27.6%       36.7%       36.9%       35.1%
Gearing, %                             37.6%       33.0%       25.7%       42.3%
Current ratio                           1.18        1.56        1.43        1.39
                                                                                
                                     30 Sept     30 Sept     30 Sept      31 Dec
                                        2011        2010        2009        2010
--------------------------------------------------------------------------------
Order book (EUR'000)                 155,421      89,430     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 =        Operating margin excluding gains on asset sales
 (revenue for the reporting       = ((operating profit -  gains on sale of      
 period/ revenue for the          property, plant and equipment - gains on sale 
 previous period) - 1*100         of investment properties and real estate held 
Earnings per share (EPS) = net    for sale)/revenue) *100                       
 profit attributable to equity   Net margin = (net profit for the               
 holders of the parent /          period/revenue)*100                           
 weighted average number of      Return on invested capital = ((profit before   
 shares outstanding               tax + interest expense)/ the period's average 
Revenue per employee =            (interest-bearing liabilities + equity))*100  
 revenue/average number of       Return on assets = (operating profit/the       
 employees                        period's average total assets)*100            
Personnel expenses to revenue =  Return on equity = (net profit for the period/ 
 (personnel expenses/revenue)     the period's average total equity)*100        
 *100                            Equity ratio = (total equity/ total equity and 
Administrative expenses to        liabilities)*100                              
 revenue = (administrative       Gearing = ((interest-bearing liabilities - cash
 expenses/ revenue)*100           and cash equivalents)/ (interest bearing      
EBITDA = operating profit +       liabilities + equity))*100                    
 depreciation and amortisation   Current ratio = total current assets/ total    
EBITDA margin =                   current liabilities                           
 (EBITDA/revenue)*100                                                           
Gross margin = (gross                                                           
 profit/revenue)*100                                                            
Operating margin = (operating                                                   
 profit/revenue)*100                                                            
--------------------------------------------------------------------------------



Performance by geographical market

In the first nine months of 2011, roughly 4% of the Group's revenue was
generated outside Estonia. In the comparative period, foreign operations also
accounted for 4% of the Group's revenue. 

           9M 2011  9M 2010  9M 2009  2010
------------------------------------------
------------------------------------------
Estonia        96%      96%      85%   94%
Ukraine         0%       3%       2%    2%
Lithuania       0%       0%       1%    0%
Latvia          0%       0%      12%    0%
Belarus         2%       1%       0%    3%
Finland         2%       0%       0%    1%

Half of the Group's foreign revenue resulted from project-based construction
activity in Belarus that will be completed at the end of this 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 reporting
period). The other half of foreign revenue was earned on concrete works
performed in Finland. 

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 our 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 development of residential real
estate. 

The Group's revenue for the first nine months of 2011 was 103,260 thousand
euros, 37% up on the 75,257 thousand euros generated a year ago and also an
improvement on the full-year figure for 2010. Last year, the downturn that had
ravaged the Estonian construction market for almost three years bottomed out.
Revenue growth is attributable to a decline in competition in certain market
segments, successful bidding for projects in various infrastructure
sub-segments, and moderate growth in the buildings construction segment. 

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 nine months of 2011, the revenues of our two main business
segments were practically equal. The Buildings and Infrastructure segments
ended nine months with revenue of 48,757 thousand euros and 50,525 thousand
euros respectively. The corresponding figures for the comparative period were
34,859 thousand euros and 39,149 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 (74%) 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 on a full-year basis the contributions of
the Buildings and Infrastructure segments will have similar proportions. 

Revenue distribution between segments *

Business segments  9M 2011  9M 2010  9M 2009  2010
--------------------------------------------------
--------------------------------------------------
Buildings              48%      47%      44%   48%
Infrastructure         52%      53%      56%   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 nine-month revenue resulted from
construction of public buildings and industrial facilities. In the public
buildings sub-segment, the largest contracts included construction of buildings
for the Koidula border station, an academic building for the Social Sciences
Faculty of the University of Tartu, buildings for the Ämari Air Base and an
exhibition building (the seaplane hangars) for 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 prior
periods, the contribution of the commercial buildings sub-segment has decreased
considerably, primarily because of a relative scarcity of private sector
customers. However, the number of private sector customers has started to
increase - this is indicated by a four-percentage point growth in the
contribution of the sub-segment compared with the first half-year. In the
construction of apartment buildings, the Group was a general contractor, not a
developer. 

Revenue distribution within the Buildings        9M 2011  9M 2010  9M 2009  2010
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Commercial buildings                                 10%      24%      64%   37%
Industrial and warehouse facilities                  43%      31%       9%   18%
Public buildings                                     45%      33%      23%   35%
Apartment buildings                                   2%      12%       4%   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 new tenders also
in 2011 (other engineering) 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 performance of various environmental
engineering projects where the Group is well represented. In forthcoming
quarters, the contribution of specialist engineering should increase in
connection with the realization of a major project - the construction of new
berths for Sillamäe port. 

Revenue distribution within the Infrastructure   9M 2011  9M 2010  9M 2009  2010
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    56%      69%      43%   62%
Specialist engineering (including hydraulic           1%       1%      16%    1%
 engineering)                                                                   
Other engineering                                    33%      22%      31%   28%
Environmental engineering                            10%       8%      10%    8%



Order book

At 30 September 2011, the Group's order book stood at 155,421 thousand euros,
being significantly larger than at 30 September 2010 when the figure was 89,430
thousand euros. In addition to an increase attributable to general growth in
the Estonian construction market compared with the slump of 2010, the figure
includes the remaining value of the design and build of the Aruvalla-Kose
section of the E263 Tallinn-Tartu highway, a project with a major individual
impact (total contractual value approx. 39.3 million euros). 

                                   9M 2011  9M 2010  9M 2009    2010
--------------------------------------------------------------------
Order book, in thousands of euros  155,421   89,430  100,214  85,607

At 74% the Infrastructure segment continues to account for a major proportion
of the Group's total order book (30 September 2010: 72%). 

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 September 2011) and the date of release of this
report, Group companies have been awarded additional construction contracts of
approximately 8,033 thousand euros. 



People

Staff and personnel expenses

At the end of September 2011, the Group (including the parent and the
subsidiaries) employed, on average, 752 people including 362 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 is 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): 

               9M 2011  9M 2010  9M 2009  2010
----------------------------------------------
----------------------------------------------
ETP                362      380      456   362
Workers            390      428      654   412
Total average      752      808    1,110   774

The Group's personnel expenses for the first nine months of 2011 including all
associated taxes totalled 10,543 thousand euros, a figure similar to the 10,550
thousand euros incurred in the first nine months of 2010. 

In the first nine months of 2011, the remuneration of the members of the
council of Nordecon AS including associated social security charges amounted to
69 thousand euros. The corresponding figure for the first nine months of 2010
was also 69 thousand euros. The remuneration of the members of the board of
Nordecon AS including social security charges totalled 204 thousand euros
compared with 95 thousand euros for the comparative period. 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 the 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. Above all, construction companies'
     ability to continue their operation still depends 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. Although in 2011
     growth in input prices has started decelerating, remaining at a few percent
     on a quarterly basis, there are areas where price volatility is notably
     greater and hard or impossible to influence (petroleum and metal products,
     building materials).
  -- 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 of the proceedings are
     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. On the whole, 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), 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 will not trigger major
     market growth but will give a much-needed signal of the stabilisation of
     the investment climate, creating a basis for some growth in the Estonian
     construction market in 2012 unless global developments reverse the process.
     Realisation of the growth will depend heavily on the euro-zone countries'
     ability to stabilise the emerged debt crisis and prevent it from spreading
     further in the banking sector as well as its impacts on the Group's home
     market as a whole.

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 that the projects can
be performed profitably. The decision does not change the Group's strategic
objectives in Latvia, i.e. the objective of conducting future operations in the
Latvian construction market through local subsidiaries. 

For the time being, the Group has suspended the operations of its
Lithuanian-based subsidiary, Nordecon Statyba UAB. We are monitoring market
developments and do not rule out the possibility that in the next few years the
Group will resume its Lithuanian operations on a project basis. Temporary
suspension of operations does not cause any major costs for the Group. It does
not change the Group's strategic objectives in Lithuania, i.e. the objective of
conducting future operations in the Lithuanian construction market through
local subsidiaries. 

Ukraine

The Group will continue in Ukraine primarily 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.
Maintaining minimal readiness at the current cost base, the Group has decided
to carry on its business in Ukraine. 

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 has mainly been undermined by private customers'
inability to raise financing for commencing construction. Stabilisation of the
political situation has not occurred at the expected pace and private sector
customers have not started investing in projects where the Group has a
competitive advantage. 

Still, the construction market of a country with a population of around 46
million has strong business potential. Our key success factor is relatively
little competition among project management companies offering flexible
construction management in combination with European practices and
competencies. We are confident that the present 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, the new thinking will improve the
Group's position. 

Belarus

Although developing with a certain time lag, the Belarusian business
environment has features similar to the Ukrainian one: bureaucracy, complex
taxation principles and various 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, no new projects will be started in Belarus. 

Finland

In the Finnish market the Group focuses solely on providing subcontracting
services in the field of concrete works. This is an area where Estonian
companies continue to have a certain edge over local entities because their
total personnel expenses are lower. The Finnish concrete works (subcontracting)
market allows us to compete for selected projects (the main criteria are the
location and the customer's low risk level). 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 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 September 2011, the
provisions (including current and non-current ones) totalled 925 thousand
euros. At 30 September 2010, the corresponding figure was 1,332 thousand euros. 

Institution of criminal proceedings against Nordecon AS and a member of its
board 

The Estonian Road Administration published a notice of the public procurement
tender for the design and build of the E263 Aruvalla-Kose road section on 25
September 2008. Nordecon AS (at that date the Group's subsidiary Nordecon Infra
AS) and Ramboll Eesti AS participated in the tender with a joint bid of 506.2
million kroons (32.4 million euros). 

The tender gave rise to numerous disputes and challenges between 2008 and 2010.
Owing to the challenges, the Road Administration endeavoured to cancel the
procurement tender but the public procurement dispute review committee declared
the Road Administration's resolution for cancellation invalid. The tender
reached the stage where the joint bid of Nordecon AS and Ramboll Eesti AS was
selected as the successful one and only the contract needed to be signed.
However, on 26 October 2010 the financial control department of the ministry of
finance, exercising state supervision, adopted a resolution that declared the
public procurement tender invalid on the basis that during the procurement
proceedings the Road Administration had repeatedly and seriously violated the
Public Procurement Act. 

Nordecon AS and Ramboll Eesti AS challenged the resolution of the financial
control department of the ministry of finance in the administrative court and
applied for preliminary legal protection that would have allowed moving on with
the public procurement proceedings. The court did not apply preliminary legal
protection although it found that the challenge had potential. 

The Security Police Board instituted criminal proceedings for investigation of
circumstances surrounding the public procurement tender for the design and
build of the Aruvalla-Kose road section. Member of the management board of
Nordecon AS Erkki Suurorg and Nordecon AS (at the time Nordecon Infra AS) were
charged with suspicion of attempting to conclude an agreement for distorting
competition. Suspicion charges were also brought against the director general
of the Road Administration and the chancellor of the ministry of economics.
Nordecon AS and Erkki Suurorg have given their testimony to the Security Police
Board and have affirmed that the charges against them are baseless. By the date
of release of this report, no criminal charges have been filed against any of
the suspects. 

If criminal charges are brought and a conviction takes effect, then under
section 400 of the Penal Code the maximum pecuniary punishment for Nordecon AS
may extend to 10% of turnover and for a time the company may not be allowed to
participate in public procurement tenders. 

Credit risk

For credit risk management, a potential customer's settlement behaviour and
creditworthiness are analysed already in the tendering stage. When the contract
has been signed, 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 nine months of 2011, our customers' settlement behaviour was relatively
good considering the economic situation although there were also a few problem
customers. The proportion of overdue receivables is stable; the figure consists
mostly of items that are not significantly past due 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 agreement has been reached are recognised as an expense. 

In the first nine months of 2011, expenses from write-down of receivables
totalled 28 thousand euros (9M 2010: 2 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 1.18-fold (30 September 2010: 1.56-fold) and available cash
funds totalled 6,822 thousand euros (30 September 2010: 7,473 thousand euros). 

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 the reporting period, the liquidity position was
further weakened by the completion of loss-making projects. Moreover, business
growth is increasing the Group's need for working capital, the impacts of which
will emerge 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. At the date of release of this report,
negotiations are reaching a close and we believe that relevant agreements will
be signed in 2011. 

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 September 2011, the Group's interest-bearing loans and
borrowings totalled 28,718 thousand euros, an increase of 2,017 thousand euros
year-over-year. Interest expense for the first nine months of 2011 amounted to
774 thousand euros. Compared with the same period in 2010, interest expense has
increased by 36 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 foreign exchange gains and losses for the first nine months of 2011
resulted in a net exchange gain of 35 thousand euros. In the comparative
period, exchange differences resulted in a net exchange loss of 400 thousand
euros. 



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 more than 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