Börsiteade

Pealkiri

2012 III quarter and 9 months consolidated interim report (unaudited)

Teade

Nordecon AS announces its 2012 III quarter and 9 months consolidated interim
report (unaudited) 

Tallinn, Estonia, 2012-11-08 15:30 CET (GLOBE NEWSWIRE) --
Announcement includes Nordecon AS’ consolidated financial statements for 2012
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 presentation are attached to the announcement and are also
published on Nordecon’s web page
(http://www.nordecon.com/root/en/for-investor/investor-presentations). 



Condensed consolidated interim statement of financial position

EUR '000                                            30 September     31 December
                                                            2012            2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                  9,066           9,908
Trade and other receivables                               49,717          34,645
Prepayments                                                2,930           2,610
Inventories                                               25,002          24,120
Non-current assets held for sale                               0             242
Total current assets                                      86,715          71,525
Non-current assets                                                              
Investments in equity-accounted investees                    338             199
Other investments                                             26              26
Trade and other receivables                                2,427           2,504
Investment property                                        4,929           4,930
Property, plant and equipment                              8,817           7,437
Intangible assets                                         14,882          14,960
Total non-current assets                                  31,419          30,056
TOTAL ASSETS                                             118,134         101,581
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                      30,144          19,130
Trade payables                                            37,256          27,403
Other payables                                             4,196           4,930
Deferred income                                            8,334          10,587
Provisions                                                   229             485
Total current liabilities                                 80,159          62,535
Non-current liabilities                                                         
Loans and borrowings                                       6,411           9,513
Trade payables                                               198             199
Other payables                                                96              96
Provisions                                                   963             841
Total non-current liabilities                              7,668          10,649
TOTAL LIABILITIES                                         87,827          73,184
                                                                                
EQUITY                                                                          
Share capital                                             19,657          19,657
Statutory capital reserve                                  2,554           2,554
Translation reserve                                         -461            -463
Retained earnings                                          6,193           4,563
Total equity attributable to equity holders of            27,943          26,311
 the parent                                                                     
Non-controlling interest                                   2,364           2,086
TOTAL EQUITY                                              30,307          28,397
TOTAL LIABILITIES AND EQUITY                             118,134         101,581



Condensed consolidated interim statement of comprehensive income

EUR '000                          Q3 2012  Q3 2011   9M 2012   9M 2011      2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                            54,134   48,831   117,054   103,260   147,802
Cost of sales                     -50,296  -48,120  -111,028  -103,977  -147,608
Gross profit/loss                   3,838      711     6,026      -717       194
                                                                                
Distribution expenses                 -63      -74      -253      -238      -317
Administrative expenses            -1,437   -1,160    -3,941    -3,284    -4,641
Other operating income                254      367       620       746       806
Other operating expenses             -289       13      -346      -151      -672
Operating profit/loss               2,303     -143     2,106    -3,644    -4,630
                                                                                
Finance income                        118      144       459       494       938
Finance expenses                     -133     -271      -672      -884    -1,086
Net finance expense                   -15     -127      -213      -390      -148
                                                                                
Share of profit of                     90       55       139       104       100
 equity-accounted investees                                                     
                                                                                
Profit/loss before income tax       2,378     -215     2,032    -3,930    -4,678
Income tax expense                      0      -15       -44       -16       -30
Profit/loss for the period          2,378     -230     1,988    -3,946    -4,708
                                                                                
Other comprehensive                                                             
 income/expense:                                                                
Exchange differences on                55      -61         2       155      -329
 translating foreign operations                                                 
Total other comprehensive              55      -61         2       155      -329
 income/expense for the period                                                  
TOTAL COMPREHENSIVE                 2,433     -291     1,990    -3,791    -5,037
 INCOME/EXPENSE FOR THE PERIOD                                                  
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent              2,121     -506     1,630    -4,157    -5,304
- Non-controlling interests           257      276       358       211       596
Profit/loss for the period          2,378     -230     1,988    -3,946    -4,708
                                                                                
Total comprehensive                                                             
 income/expense attributable to:                                                
- Owners of the parent              2,176     -550     1,632    -4,059    -5,924
- Non-controlling interests           257      259       358       268       887
Total comprehensive                 2,433     -291     1,990    -3,791    -5,037
 income/expense                                                                 
                                                                                
Earnings per share attributable                                                 
 to owners of the parent:                                                       
Basic earnings per share (EUR)       0.07    -0.02      0.05     -0.14     -0.17
Diluted earnings per share (EUR)     0.07    -0.02      0.05     -0.14     -0.17



Condensed consolidated interim statement of cash flows

EUR '000                                                       9M 2012   9M 2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers1                                  131,577   116,904
Cash paid to suppliers2                                       -113,048  -101,479
VAT paid                                                        -4,500    -2,064
Cash paid to and for employees                                 -12,212    -9,475
Income tax paid/recovered                                          -55        67
Net cash from operating activities                               1,762     3,953
                                                                                
Cash flows from investing activities                                            
Acquisition of property, plant and equipment                    -1,758       -31
Proceeds from sale of property, plant and equipment and            363       306
 intangible assets                                                              
Proceeds from sale of investment property                            0       352
Loans granted                                                   -1,007      -151
Repayment of loans granted                                          94     2,056
Dividends received                                                   0         4
Interest received                                                    0       102
Net cash used in/from investing activities                      -2,308     2,638
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                     4,329     1,795
Repayment of loans received                                     -2,146    -4,746
Dividends paid                                                     -80         0
Payment of finance lease liabilities                            -1,542    -1,401
Interest paid                                                     -859      -886
Other payments                                                       0        -4
Net cash used in financing activities                             -298    -5,242
                                                                                
Net cash flow                                                     -844     1,349
                                                                                
Cash and cash equivalents at beginning of period                 9,908     5,818
Effect of exchange rate fluctuations                                 2      -345
Decrease/increase  in cash and cash equivalents                   -844     1,349
Cash and cash equivalents at end of period                       9,066     6,822

1 Line item Cash receipts from customers includes VAT paid by customers.

2 Line item Cash paid to suppliers includes VAT paid to suppliers.



Financial review

Financial performance

Nordecon Group ended the first nine months of 2012 with a gross profit of 6,026
thousand euros (9M 2011: a gross loss of 717 thousand euros). Most of the
profit was earned in the second and third quarters where performance was not
weakened by adverse weather conditions and the fixed costs of the technological
standstill, which impacted the first quarter. Moreover, compared with the
previous year, profit was not undermined by loss-making contracts. In the
comparative period, losses from contracts secured in 2009-2010 were significant
and obscured the fact that the margins of contracts secured in 2011 would have
allowed us to earn a gross profit already last year. 

The main factors that helped restore operational profitability were Group-wide
austerity measures enforced in 2010 due to market slump, restructuring, and
streamlining of internal processes and operations. Although volume growth,
which emerged in 2011, has clearly improved the situation in the Estonian
construction market, we will have to continue working hard to maintain and
enhance the results achieved and to counteract threats to profitability. It
should be kept in mind that the profits of long-term construction contracts are
recognised based on the stage of completion of contract activity, which means
that profit is recorded gradually over the contract term. 

The rise in profitability has also been underpinned by changes in the
competitive environment. According to our assessment, in 2011 competition in
certain segments of the construction market (e.g. road construction and
construction of water and wastewater networks) weakened considerably. This may
be attributed to some construction companies going bankrupt or leaving the
market as well as the fact that in recent years all companies have had to
reduce their personnel and support structures, which has undermined some
players’ bidding capabilities. In addition, many companies were held back by
tougher financial conditions imposed by customers and the financing
institutions’ reluctance to provide guarantees. Most construction companies
have become aware that long-term construction contracts entail the risk of
growth in input prices. However, there is still no indication of a decrease in
competitive pricing pressure in building construction, where lack of private
sector customers has rendered the market too small for all general contractors.
Altogether, this means that companies are weighing the risks involved in
price-setting more carefully than during the period of rapid downturn but the
risks to profitability still persist. 

Administrative expenses for the reporting period totalled 3,941 thousand euros
including non-recurring consulting fees incurred to adjust the Group’s strategy
in the changing environment and partial provisions made for performance
bonuses. The ultimate size of the performance bonuses will be determined at the
end of the financial year. The ratio of administrative expenses to revenue was
3.4% (9M 2011: 3.2%). The 12 months’ rolling average ratio was 3.3% (9M 2011:
3.8%). The Group’s cost-control measures are yielding strong results and we
believe that on a whole-year basis we can maintain administrative expenses
below the target ceiling, i.e. 5% of revenue. 

The Group’s operating profit for the first nine months of 2012 was 2,106
thousand euros (9M 2011: an operating loss of 3,644 thousand euros). EBITDA was
positive at 3,735  thousand euros (9M 2011: negative at 1,846 thousand euros). 

The Group ended the first nine months of 2012 with a net profit of 1,988 
thousand euros. The profit attributable to owners of the parent, Nordecon AS,
was 1,630  thousand euros. The first nine months of 2011 ended in a net loss of
3,946 thousand euros and the loss attributable to owners of the parent was
4,157 thousand euros (i.e. subsidiaries with non-controlling interests operated
with a profit). 

Cash flows

Operating activities of the first nine months of 2012 resulted in a net cash
inflow of 1,762 thousand euros (9M 2011: 3,953 thousand euros). Operating cash
flows were influenced the most by cyclical fluctuations in project-related cash
flows. The settlement terms granted to customers are still unreasonably long
and in the case of public procurement generally extend from 45 to 100 days
while subcontractors ordinarily have to be paid within 21 to 45 days. In 2012
the difference between the settlement terms agreed with customers and those
agreed with subcontractors continued to increase. We counteract the cyclical
fluctuations with factoring and overdraft facilities provided for raising
additional working capital. 

VAT and labour tax payments increased compared with the prior year. In the
reporting period, we purchased a significant amount of building materials from
abroad without the possibility of recovering input VAT but on the resale of our
services in Estonia VAT had to be paid. The amount of VAT payments is also
influenced by the fact that the Group is earning gross profit. In the previous
year, due to the incurrence of a gross loss, operating activities gave rise to
prepaid VAT, which was used, among other things, to offset labour tax
liabilities. In 2012 we have not had similar offsetting opportunities. 

Cash flows from investing activities resulted in a net outflow of 2,308 
thousand euros (9M 2011: a net inflow of 2,638 thousand euros). The main
reasons for the net outflow were loans granted to associates and payments made
for property, plant and equipment (including the acquisition of a new and more
productive asphalt plant through a sale and leaseback transaction). In the
comparative period, net cash flow from investing activities was positive on
account of settlement of loans granted. 

Financing activities resulted in a net cash outflow of 298 thousand euros (9M
2011: a net outflow of 5,242 thousand euros). A positive difference between
loan receipts and loan repayments indicates that we have had to borrow in order
to secure the liquidity required for our operating activities. The volume of
loans received was also increased by the acquisition of a new asphalt plant
through a sale and leaseback transaction. Finance lease payments have increased
due to more active investment. Dividends paid comprise profit distributions to
a subsidiary’s non-controlling shareholders. 

At 30 September 2012, the Group’s cash and cash equivalents totalled 9,066
thousand euros (30 September 2011: 6,822 thousand euros).  Management’s
comments on potential liquidity risks are presented in the chapter Description
of the main risks. 

Key financial figures and ratios

Figure/ratio                         9M 2012     9M 2011     9M 2010        2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue (EUR’000)                    117,054     103,260      75,257     147,802
Revenue growth/decrease, %             13.4%       37.2%      -40.2%         49%
Net profit/loss (EUR’000)              1,988      -4,039      -6,233      -4,708
Profit/loss attributable to            1,630      -4,250      -5,722      -5,304
 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)                0.05       -0.14       -0.19       -0.17
                                                                                
Administrative expenses to              3.4%        3.2%        4.5%        3.1%
 revenue, %                                                                     
Administrative expenses to              3.3%        3.8%        5.0%        3.1%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR’000)                       3,735      -1,846      -2,052      -1,819
EBITDA margin, %                        3.2%       -1.8%       -2.7%       -1.2%
Gross margin, %                         5.1%       -0.7%       -0.7%        0.1%
Operating margin, %                     1.8%       -3.5%       -6.0%       -3.1%
Operating margin excluding gains        1.4%       -3.9%       -6.3%       -3.5%
 on asset sales, %                                                              
Net margin, %                           1.7%       -3.9%       -8.3%       -3.2%
Return on invested capital, %           4.6%       -5.1%       -7.4%       -5.9%
Return on equity, %                     6.8%      -12.8%      -14.7%      -15.2%
Equity ratio, %                        25.7%       27.6%       36.7%       28.0%
Gearing, %                             41.1%       37.6%       33.0%       32.8%
Current ratio                           1.08        1.18        1.56        1.14
                                                                                
                                     30 Sept     30 Sept     30 Sept      31 Dec
                                        2012        2011        2010        2011
--------------------------------------------------------------------------------
Order book (EUR’000)                 146,070     155,421      89,430     134,043
--------------------------------------------------------------------------------



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 
Administrative expenses to        (interest-bearing liabilities + equity))*100  
 revenue = (administrative       Return on equity = (net profit for the period/ 
 expenses/ revenue)*100           the period’s average total equity)*100        
Administrative expenses to       Equity ratio = (total equity/ total liabilities
 revenue (rolling) = (past four   and equity)*100                               
 quarters’ administrative        Gearing = ((interest-bearing liabilities – cash
 expenses/past four quarters’     and cash equivalents)/ (interest-bearing      
 revenue)*100                     liabilities + equity))*100                    
EBITDA = operating profit +      Current ratio = total current assets/ total    
 depreciation and amortisation    current liabilities                           
 + impairment losses on                                                         
 goodwill                                                                       
EBITDA margin =                                                                 
 (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 2012, roughly 1% of the Group’s revenue was
generated outside Estonia. In the first nine months of 2011, foreign operations
accounted for 4% of the Group’s revenue. 

         9M 2012  9M 2011  9M 2010  2011
----------------------------------------
----------------------------------------
Estonia      99%      96%      96%   97%
Ukraine       0%       0%       3%    0%
Belarus       0%       2%       1%    1%
Finland       1%       2%       0%    2%

The decline in foreign revenues results from discontinuance of operations in
the Belarusian market (see also the chapter Changes in the Group’s business
operations in the reporting period). Finnish revenues comprise revenue from
rendering subcontracting services in the concrete works sector. We expect the
contribution of foreign markets to remain at a similar level until the end of
the year. 

Geographical diversification of the revenue base has been a consciously
deployed strategy by which the Group mitigates the risks resulting from
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 which entails 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 building and infrastructure construction. The Group
is involved in the construction of commercial and industrial buildings and
facilities, road construction and maintenance, environmental engineering,
concrete works and real estate development. 

The Group’s revenue for the first nine months of 2012 was 117,054 thousand
euros, 13% up on the 103,260 thousand euros generated in the comparative
period. The foundation for revenue growth was laid in 2011 when the Estonian
construction market began recovering and the Group secured a number of major
new contracts which are currently in progress. The first half of 2012 was also
successful in terms of winning new contracts. Year over year revenue growth
should continue in the last quarter but at a somewhat slower pace. 

The Group aims to maintain the revenues of its operating segments (Buildings
and Infrastructure) in balance as this helps disperse risks and provides better
opportunities for continuing operations under stressed circumstances when one
segment experiences shrinkage. The Group has set an internal ceiling for
revenue from the construction of apartment buildings, which has to remain below
20% of its total sales. 

Segment revenue

At the end of the first nine months of 2012, the contribution of the
Infrastructure segment was somewhat larger than that of the Buildings segment
and it should remain so until the year-end. The Buildings segment ended nine
months with revenue of 49,637 thousand euros and the Infrastructure segment
with revenue of 64,607 thousand euros. The corresponding figures for the
comparative period were 48,756 thousand euros and 50,525 thousand euros
respectively (see note 8). 

For a long time, the bulk of the work in the construction market has been
related to infrastructure assets (mostly projects financed with the support of
the state and the EU structural funds) and the majority (70%) of contracts in
the Group’s order book belong to the Infrastructure segment. Despite this, in
recent periods the segments’ revenues have been more or less equal because the
present building 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. 

Revenue distribution between segments2  9M 2012  9M 2011  9M 2010  2011
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Buildings                                   42%      48%      47%   48%
Infrastructure                              58%      52%      53%   52%

2 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 operating
segments based on their nature (i.e. building or infrastructure construction).
In the segment reporting presented in the financial statements, aggregation and
allocation are based on the subsidiaries’ main field of activity (as required
by IFRS 8 Operating Segments). In the financial statements, the results of a
subsidiary that is primarily engaged in infrastructure construction are
presented in the Infrastructure segment. In Directors’ report, the revenues of
such a subsidiary are presented based on their nature. The differences between
the two reports are not significant because in general Group entities
specialise in specific areas except for the subsidiary Nordecon Betoon OÜ that
is involved in both building and infrastructure construction. The figures for
the parent company have been allocated in both parts of the interim report
based on the nature of the work. 

Revenue distribution within segments

The Buildings segment continued to earn most of its revenue from the
construction of public buildings financed by the public sector. The largest
project was the construction of the Ämari Air Base, which to date is
substantially complete. We have also substantially completed the construction
of the Estonian embassy in Kiev. The largest ongoing construction project is
the design and build of the translational medicine centre of the University of
Tartu. 

Improvements in the economic environment have triggered a rise in private
sector investments, particularly in the commercial buildings sub-segment.
During the period, we began building five new commercial buildings – three in
Tallinn, one in Tartu and one in Narva.  Compared with a year ago, private
sector investments have grown visibly but their relative scarcity compared with
public sector investments remains a problem. 

There was certain growth in private sector investments in the industrial and
warehouse facilities sub-segment but most of the revenue still resulted from
contracts performed for the agricultural sector. Compared with the prior year,
the contribution of the industrial and warehouse facilities sub-segment has
declined because the support provided by the EU structural funds that
co-finance the projects has decreased and the Belarusian contract has been
completed. Apartment buildings were built for non-Group customers, the Group
acting as a general contractor, not a developer. 

We expect revenue distribution within the Buildings segment to remain more or
less stable until the year-end. 

Revenue distribution within the Buildings        9M 2012  9M 2011  9M 2010  2011
 segment                                                                        
--------------------------------------------------------------------------------
Commercial buildings                                 24%      10%      24%   12%
Industrial and warehouse facilities                  28%      43%      31%   40%
Public buildings                                     44%      45%      33%   45%
Apartment buildings                                   4%       2%      12%    3%



As expected, at the reporting date the main revenue source in the
Infrastructure segment was road construction and maintenance. The sub-segment’s
contribution was boosted by contracts secured in the first half-year - the
construction of the Tartu western bypass and eastern ring road. Although the
relative importance of road construction and maintenance has decreased, its
revenue has increased year over year. 

In specialist engineering, growth was underpinned by the construction of
Sillamäe port, which commenced in the second half of 2011, and Kärdla guest
harbour, which began last summer. 

Similarly to preceding periods, a major share of the revenue of the
Infrastructure segment resulted from the construction of water and wastewater
networks (other engineering) financed with the support of the EU structural
funds across Estonia. 

The contribution of environmental engineering decreased because there is no
contract comparable to the bio-filter for the wastewater treatment plant of
Tallinn, which was under construction in 2011. We have won several
environmental engineering contracts in 2012 but the bulk of their construction
activity will fall in 2013. 

We expect revenue distribution in the Infrastructure segment to remain more or
less stable until the year-end. 

Revenue distribution within the Infrastructure   9M 2012  9M 2011  9M 2010  2011
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    49%      56%      69%   47%
Specialist engineering (including hydraulic          15%       1%       1%   10%
 engineering)                                                                   
Other engineering                                    31%      33%      22%   35%
Environmental engineering                             5%      10%       8%    8%



Order book

At 30 September 2012, our order book stood at 146,070 thousand euros, being 6%
smaller than a year ago. 

On the one hand, order book has decreased due to gradual performance of major
contracts secured in 2011 (e.g. the design and build of the Aruvalla-Kose road
section, construction of berths at Sillamäe port). Addition of large contracts
is irregular. Initially they increase the order book significantly (positive
impact on order book), but as they are performed, the balance of major projects
declines (negative impact on order book). 

On the other hand, the decline is attributable to changes taking place in the
construction market. Due to market shrinkage, competition in the public
buildings sub-segment is fierce and, as a result, the proportion of such
contracts in the Group’s portfolio has decreased. 

However, we have been able to increase our order book in the commercial and
apartment buildings sub-segments (Buildings segment) and in the specialised
engineering (construction of water and wastewater networks) and environmental
engineering sub-segments (Infrastructure segment). 

                      30 Sept 2012  30 Sept 2011  30 Sept 2010  31 Dec 2011
---------------------------------------------------------------------------
Order book (EUR’000)       146,070       155,421        89,430      134,043

At 70% the Infrastructure segment continues to account for a major share of the
total order book (30 September 2011: 74%). 

Between the reporting date (30 September 2012) and the date of release of this
report, Group companies have been awarded construction contracts of
approximately 7,376 thousand euros. 



People

Staff and personnel expenses

At the reporting date, the Group (the parent and the subsidiaries) employed, on
average, 789 people including 372 engineers and technical personnel (ETP). In
connection with growth in the Group’s operating volumes, both the number ETP
and workers have increased year over year. Due to the seasonal nature of
construction activity, at the reporting date the number of staff was expectedly
larger than at the beginning of the financial year. For the same reason,
headcount should decrease slightly towards the year-end. 

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

               9M 2012  9M 2011  9M 2010  2011
----------------------------------------------
----------------------------------------------
ETP                372      362      380   351
Workers            417      390      428   380
Total average      789      752      808   731

The Group’s personnel expenses for the first nine months of 2012 including all
taxes totalled 11,835 thousand euros, 12% up on the comparative period  when
personnel expenses were 10,543 thousand euros. The growth in personnel expenses
is mainly attributable to growth in the number of staff. In the third quarter,
personnel expenses were further increased by the recognition of partial
provisions for potential performance bonuses. 

The remuneration expenses of the members of the council of Nordecon AS for the
first nine months of 2012, including associated social security charges,
amounted to 176 thousand euros (9M 2011: 69 thousand euros). The amount has
increased in connection with the decision of Nordecon AS’s annual general
meeting to increase the remuneration of the council as from 2012. The
remuneration expenses of the members of the board of Nordecon AS, including
social security charges, totalled 387 thousand euros (9M 2011: 204 thousand
euros). The figure has increased due to the termination benefits paid to the
member of the board who was recalled in May 2012. The remuneration expenses of
both the council and the board include the partial provisions made for their
potential performance bonuses. The ultimate size of the performance bonuses
will be determined at the end of the financial year. 

Labour productivity and labour cost efficiency

In connection with rapid revenue growth, both the Group’s labour productivity
and labour cost efficiency have improved year over year. Labour productivity
and labour cost efficiency have improved also compared with the end of 2011. 

In measuring operating efficiency, the Group uses the following productivity
and efficiency indicators, which are based on the number of employees and
personnel expenses paid: 

                                                9M 2012  9M 2011  9M 2010   2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling),            213.0    173.8    124.5  202.3
 (EUR’000)                                                                      
Change against the comparative period, %          22.5%    39.6%   -20.7%  57.7%
                                                                                
Nominal labour cost efficiency (rolling),          10.4      8.8      6.6   10.4
 (EUR’000)                                                                      
Change against the comparative period, %          18.5%    34.2%    -6.8%  51.6%



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



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market in
2012-2013 

  -- Infrastructure contracts, which have dominated the construction market in
     2012, will continue to prevail also in 2013. Opportunities for certain
     market growth are better in the buildings segment, where recovery has been
     slower, assuming that private sector customers (including foreign ones)
     that abandoned the market in prior years will return. The buildings segment
     will be influenced by two large public sector contracts, which are expected
     to be launched in 2013 - the Estonian National Museum and the Maarjamõisa
     Medical Campus of Tartu University Hospital. In housing development, the
     success of a project will depend on the developer’s ability to either offer
     a low cost or exploit a new niche. The banks’ financing terms will remain
     stringent.
  -- The construction market will remain disproportionately reliant on public
     procurement and projects executed with the support of the EU structural
     funds. In the second half of 2012 the volume of new procurement contracts
     will start decreasing because the current EU budget period  is coming to an
     end (2013) and co-financing terms require that a project should be
     completed during the budget period. Anticipation of shrinkage in public
     sector investments from 2013 onward will intensify competition and will put
     pressure on construction companies’ profit expectations. Uncertainty about
     the future is increased by lack of information about the investment volumes
     of the next EU budget period (2014-2020).

  -- Players will continue consolidating, particularly in the field of general
     contracting in building construction where the number of medium-sized
     operators (annual turnover of around 15-40 million euros) is still too
     large. The tenders of 2012 reflect that pricing pressure in the segment
     remains strong. Based on the past three years’ experience it is reasonable
     to assume that stiff competition and insufficient demand will bring about
     slow shrinkage rather than rapid adjustment of the number of companies
     intermediating construction services. Besides competition, the number and
     business volumes of market participants will depend on their ability to
     make successful bids and to meet tendering requirements. In the execution
     phase, the decisive factors are financial management (including relations
     with banks) and the ability to secure sufficient liquidity.

  -- Companies will continue to challenge the results of poorly prepared public
     procurements but mostly on account of substantive, not technical issues.
     Somewhat fewer public procurements will be cancelled because customers have
     prepared the budgets using unrealistic construction prices that are tens of
     percents lower than the bids made by construction companies.
  -- The contracts signed with public sector customers will impose rigorous
     conditions on construction companies, including extensive obligations,
     strict sanctions, different financial guarantees, extremely long settlement
     terms, etc. In a situation where public procurement is based on
     underbidding, this increases the risks of all market participants.
  -- Growth in input prices will decelerate compared with the previous year,
     remaining within the range of a few percent (on a quarterly basis)
     throughout 2012. However, there are areas where price fluctuations are
     unpredictable and may be notably greater and hard or even impossible to
     influence (petroleum and metal products and some other materials). The rise
     in input prices, which began in 2011, has reached a point where it is
     holding back private customers’ investment decisions.
  -- The situation in the labour market will remain relatively stable. Companies
     have adapted to the situation but when volumes increase the availability of
     qualified labour will again be an issue. In 2012 the base wage paid by
     construction companies, which have to maintain tight cost control, is not
     likely to rise but the pressure for a wage increase remains high. There
     will be no more surges in labour migration to the Nordic countries. As the
     size of the Nordic construction market stabilises, the same will probably
     happen to labour migration.
  -- In 2012 the construction market will continue to be seriously and somewhat
     unpredictably impacted by massive funds raised from the sale of carbon
     dioxide emission quotas, which are allocated within an extremely short
     period for improving the energy efficiency of buildings. It has already
     triggered demand hikes in certain segments of the construction market
     (joint filling, facade and roof works, installation of heating systems,
     etc), causing unreasonable rises in respective prices and hence temporary
     problems for the entire sector. In 2013, when the resources are depleted,
     volumes will plummet and competition will heighten, particularly among
     smaller and medium-sized players in the segments involved.

  -- The volume of private investments in the construction sector will depend on
     the economic growth rate, the export markets and related forecasts.
     According to economic statistics on 2011, in recent years companies,
     investors and banks have made decisions that have held back private sector
     investments. The recovery, which began in 2012, will continue in 2013 but
     the decision-making processes will be slow and cautious and private sector
     customers will not yet become a viable alternative to public sector
     customers. Moreover, the European debt crisis, which has both direct and
     indirect influence on investment decisions, has not been definitively
     resolved. Still, we expect to see a few large investments in certain
     sub-segments of both building and infrastructure construction (extensions
     to shopping centres and industrial facilities, and hydraulic engineering
     projects respectively).



Latvia and Lithuania

According to the Group’s assessment, the Latvian construction market will
continue adjusting to the post-recession environment also in 2012. We do not
exclude the possibility that in the next few years we will undertake some
projects in Latvia through our Estonian entities, involving partners where
necessary. Execution of project-based business assumes that the projects can be
performed profitably. The decision does not change our strategic objectives in
Latvia, i.e. the objective of operating in the Latvian construction market
through local subsidiaries. 

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

Ukraine

The Group operates in Ukraine as a general contractor and project manager in
the segment of commercial buildings and production facilities, offering its
services primarily to foreign private sector customers. In the past three
years, there have been practically no private sector customers in that segment.
We do not believe that at the end of 2012 there will be a significant increase
in the activity of customers that interest us in the Ukrainian market.
Maintaining minimal readiness at the current cost base, we have decided to
continue our business in Ukraine until the end of 2012. 

Most probably we will continue operating in Ukraine with a similar action plan
also in 2013. At the end of 2012, management of our Ukrainian operations will
be assigned to a new CEO who has been working for an entity related to the
Group’s Ukrainian operations for over six years. The main task set by the Group
for the first half of 2013 is to conduct a critical analysis of the prospects
of the Group’s Ukrainian operations and to develop an appropriate action plan. 

The main risks in the Ukrainian market stem from the low administrative
efficiency of the central and local government and the judicial system.
Ukraine’s recovery from the economic crisis of 2008-2010 has been slow and
achievement of political stability complicated. Demand continues to be
undermined by private customers’ pessimism about the political future of the
country and lack of financing for commencing construction operations. To date
private sector customers have not started investing in projects where the Group
would have a competitive advantage. 

The country with a population of around 46 million continues to experience
tough times. Unfortunately, the ongoing uncertainty is increasing the risks of
companies operating in the local construction market. 

Finland

In the Finnish market the Group offers subcontracting services in the field of
concrete works. This is an area where Estonian companies still have an edge
over local entities because our total personnel expenses are lower. The Finnish
concrete works (sub)contracting market allows us to compete for selected
projects (the main criteria are the location and the customer’s low risk
level). The prospects of continuing operations in Finland in 2013 according to
the same action plan are good. Nevertheless, we will maintain a rational
approach and will avoid taking excessive risks. We are not planning to
penetrate other segments of the Finnish construction market (general
contracting, project management, etc). 



Description of the main risks

Business risks

The main factors, which affect the Group’s business volumes and profit margins,
are competition in the construction market and changes in the demand for
construction services. In addition, in the region where the Group operates
construction operations are influenced by seasonality caused by the change of
seasons. 

The Group acknowledges the risks inherent in the execution of contracts
concluded in an environment of stiff competition. Securing a long-term
construction contract at an unreasonably low price in a situation where input
prices are rising involves as high risk because the contract may quickly start
generating a loss. 

In the next years, the Estonian construction market will be heavily dependent
on public sector investments. A significant proportion of the latter is made up
of support from the EU structural funds. The availability of that support is
relatively certain until the end of the current budget period (2007-2013).
According to disbursement terms, a supported project has to be completed by the
end of the budget period. This means that in 2013 the number of projects
launched will decrease significantly. We do not know the details of the budget
for 2014-2020, although it is clear that the investments included in it will
have a significant and direct impact on the business volumes of construction
companies. According to currently available information, the volume of planned
investments will decrease. 

The impacts of seasonality are the strongest in the Infrastructure segment
where a lot of work is done outdoors (road and port construction, surface
works, etc). In order to disperse the risk, the Group has secured road
maintenance contracts that generate year-round business. According to its
business strategy, the Group counteracts seasonal fluctuations in its
infrastructure operations with building construction operations that are less
exposed to seasonality. Thus, the Group endeavours to keep the operating
volumes of the two segments in balance (see also the chapter Performance by
business line). In addition, Group companies consistently seek new technical
solutions that would yield greater efficiency under changeable weather
conditions. 

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

On 26 September 2012, the Public Prosecutor’s Office issued a ruling by which
it terminated the criminal proceedings instituted against Nordecon AS and a
member of its management board, Erkki Suurorg, in November 2010. 

The criminal matter concerned the first procurement of services for the design
and build of the Aruvalla-Kose road section arranged by the Estonian Road
Administration. In connection with the procurement, Erkki Suurorg and Nordecon
AS (at the time Nordecon Infra AS) were charged with suspicion of attempting to
conclude an agreement for distorting competition and to engage in concerted
practices, as well as of attempting to offer a bribe which in the course of the
proceedings was reclassified to an attempt to grant gratuities. 

The criminal proceedings concerning the attempt to grant gratuities were
terminated by the Public Prosecutor’s Office already earlier, with a ruling
issued on 20 June 2012. In the final ruling, the Public Prosecutor’s Office
found, based on evidence gathered, that the suspicions brought against Erkki
Suurorg and Nordecon AS had no basis and terminated the criminal proceedings
against them in their entirety. 

Operational risks

To manage their daily construction risks, Group companies purchase contractors’
all risks insurance. Depending on the nature of the project and the requests of
the customer, both general frame agreements and special, project-specific
contracts are used. In addition, as a rule, subcontractors are required to
secure the performance of their obligations with a bank guarantee provided to a
Group company. To remedy builder-caused deficiencies, which may be detected
during the warranty period, Group companies create warranties provisions based
on their historical experience. At 30 September 2012, the Group’s warranties
provisions (including current and non-current ones) totalled 1,092 thousand
euros. At 30 September 2011, the corresponding figure was 925 thousand euros. 

In addition to managing the risks, which are directly related to construction
operations, in recent years the Group has sought to mitigate also those
operational risks that are inherent in preliminary activities. In particular,
we have focused on the bidding process, i.e. the Group’s compliance with the
procurement terms and conditions and budgeting. Any errors made in the planning
stage are generally irreversible and, in a situation where the price is
contractually fixed, may result in a direct financial loss. 

Financial risks

Credit risk

In the reporting period, the Group did not have to recognise any significant
credit losses. The credit risk exposure of the Group’s receivables continued to
be low because the proportion of public sector customers that receive their
financing from the state and local government as well as the EU structural
funds was high. The main indicator of the realisation of credit risk is
settlement default that exceeds 180 days coupled with no activity on the part
of the debtor that would confirm the intent to settle. 

At the end of the first nine months of 2012, credit losses on the write-down of
receivables totalled 233 thousand euros (9M 2011: 28 thousand euros). 

The Group has recognised a trade receivable of approximately 2.4 million euros
(includes a portion of late payment interest) related to the construction of
the Exhibition Building of the Estonian Maritime Museum. Under the contract,
determination of whether the claim has merit is at the discretion of the
Arbitration Court of the Estonian Chamber of Commerce and Industry. The Group’s
management is convinced that the claim has merit and has therefore not written
the receivable down. Most probably the case will be ruled upon in 2013. 

Liquidity risk

The Group remains exposed to higher than average liquidity risk resulting from
a mismatch between the long settlement terms demanded by customers (mostly 45
to 56 days) and increasingly shorter settlement terms negotiated by
subcontractors (mostly 21 to 45 days). The Group counteracts the differences in
settlement terms by using factoring where possible. 

The Group continues to work with the banks in implementing its financing
program for 2011-2014, which was developed in 2011 with the assistance of one
of the world’s leading consulting firms, Roland Berger Strategy Consultants. In
line with the program, the banks will support the Group’s liquidity position by
refinancing long-term loans and by granting repayment holidays for loan
principal (for 2011-2012 with the option to extend the repayment holiday for
2013). Where necessary, the banks will support the Group with additional
short-term loans. At the end of the reporting period, the Group had received
loans of this kind (including unused facilities) of 6.2 million euros. 

At 30 September 2012, the Group’s current assets exceeded its current
liabilities 1.08-fold (30 September 2011: 1.18-fold). Bank loans make up a
significant proportion of current liabilities. In accordance with IFRS EU, loan
commitments have to be classified into current and non-current liabilities
based on the contractual conditions effective at the reporting date. Although
management believes that it is likely that the Group’s overdraft liabilities
and other short-term bank loans will be refinanced for another 12 months,
relevant decisions will be made in 2013 when the loans fall due. Therefore, at
the reporting date the loan commitments constituted short-term liabilities.
According to the Group’s estimates, current liabilities include loans of 10,499
thousand euros that will probably be refinanced. If the items were reported as
long-term liabilities, the current ratio would be 1.24. 

At the reporting date, the Group’s cash and cash equivalents totalled 9,066
thousand euros (30 September 2011: 6,822 thousand euros). 

Interest rate risk

The Group’s interest-bearing liabilities to banks have both fixed and floating
interest rates. Finance lease liabilities have mainly floating interest rates.
The base rate for floating interest rates is mostly Euribor. At 30 September
2012, the Group’s interest-bearing loans and borrowings totalled 36,555
thousand euros, an increase of 7,837 thousand euros year over year, of which
6,535 thousand euros resulted from an increase in short-term factoring
liabilities. Interest expense for the first nine months of 2012 amounted to 799
thousand euros. Compared with the first nine months of 2011, interest expense
has increased by 55 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/EONIA) and a low interest coverage ratio caused by weak operating cash
flow. The first risk factor is mitigated by fixing, where possible, the
interest rates of liabilities during the period of low market interest rates.
Realisation of the second risk factor depends on the success of operating
activities. 

In recent years, banks and leasing companies have been increasingly interested
in charging a floating interest rate. This increases the Group’s exposure to
additional finance costs that may result from a rise in the base interest rate.
The Group has not acquired any derivatives for hedging the risks arising from
instruments with a floating interest rate. 

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in
the currency of the host country, i.e. in euros (EUR) and in Ukrainian hryvnas
(UAH). From the beginning of 2012 the Group is not exposed to currency risks
related to the Belarusian ruble (BYR) because the Group has practically
discontinued its operations in Belarus. The exchange rate of the Ukrainian
hryvna against the euro has been stable since 2010. In the first nine months of
2012, fluctuations in the euro-hryvna exchange rate remained below 10%. The
Group’s net foreign exchange loss for the first nine months of 2012 was 8
thousand euros (9M 2011: a net foreign exchange gain of 35 thousand euros). 

Since Estonia’s adoption of the euro at the beginning of 2011, the Group’s
Finnish operations do not involve a currency risk. Nor does the Group have any
currency risk in Lithuania where operations have been suspended. Currency risk
is also reduced by the fact that the prices of construction materials and
services that the Group’s Estonian entities purchase from abroad are mostly
denominated in euros. 

The Group has not acquired any derivatives to hedge its currency risks.



Nordecon is a group of construction companies whose core business is
construction project management and general contracting in the buildings and
infrastructure segments. 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, the Group includes more
than 10 subsidiaries. The Group’s consolidated revenue for 2011 was 147.8
million euros. Currently, Nordecon Group employs more than 700 people. Since 18
May 2006 the parent 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