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Pealkiri

2013 III quarter and nine months consolidated interim report (unaudited)

Teade

Nordecon publishes 2013 III quarter and nine months consolidated unaudited
interim report 

Tallinn, Estonia, 2013-11-07 15:30 CET (GLOBE NEWSWIRE) --
Announcement includes Nordecon AS’s consolidated financial statements for the
third quarter and nine months of 2013 (unaudited), overview of the key events
influencing the period’s financial result, outlook for the market and
description of the main risks. 

Interim report is attached to the announcement and is also published on NASDAQ
OMX Tallinn and Nordecon’s web page
(http://www.nordecon.com/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
                                                           2013             2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                 9,140           10,231
Trade and other receivables                              66,876           42,896
Prepayments                                               1,723            1,840
Inventories                                              23,932           26,243
Total current assets                                    101,671           81,210
Non-current assets                                                              
Investments in equity-accounted investees                   667              202
Other investments                                            26               26
Trade and other receivables                                 380            1,554
Investment property                                       4,930            4,930
Property, plant and equipment                             9,196            8,851
Intangible assets                                        14,848           14,857
Total non-current assets                                 30,047           30,420
TOTAL ASSETS                                            131,718          111,630
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                     38,618           27,185
Trade payables                                           40,435           31,968
Other payables                                            6,047            5,014
Deferred income                                           5,523           11,404
Provisions                                                  279              521
Total current liabilities                                90,902           76,092
Non-current liabilities                                                         
Loans and borrowings                                      3,911            3,671
Trade payables                                              259              259
Other payables                                               96               96
Provisions                                                1,011            1,210
Total non-current liabilities                             5,277            5,236
TOTAL LIABILITIES                                        96,179           81,328
                                                                                
EQUITY                                                                          
Share capital                                            19,657           19,657
Statutory capital reserve                                 2,554            2,554
Translation reserve                                        -355             -404
Retained earnings                                        11,176            6,039
Total equity attributable to owners of the               33,032           27,846
 parent                                                                         
Non-controlling interests                                 2,507            2,456
TOTAL EQUITY                                             35,539           30,302
TOTAL LIABILITIES AND EQUITY                            131,718          111,630



Condensed consolidated interim statement of comprehensive income

EUR '000                          Q3 2013  Q3 2012  9M  2013  9M  2012      2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                            59,236   54,134   134,733   117,054   159,422
Cost of sales                     -53,083  -50,296  -125,307  -111,028  -151,205
Gross profit                        6,153    3,838     9,426     6,026     8,217
                                                                                
Marketing and distribution           -142      -63      -281      -253      -389
 expenses                                                                       
Administrative expenses            -1,240   -1,437    -3,567    -3,941    -5,385
Other operating income                154      254       360       620       810
Other operating expenses             -292     -289      -351      -346      -566
Operating profit                    4,633    2,303     5,587     2,106     2,687
                                                                                
Finance income                        124      118       507       459       622
Finance costs                        -329     -133      -887      -672    -1,248
Net finance costs                    -205      -15      -380      -213      -626
                                                                                
Share of profit/loss of               120       90       197       139       -79
 equity-accounted investees                                                     
                                                                                
Profit before income tax            4,548    2,378     5,404     2,032     1,982
Income tax expense                    -51        0       -95       -44       -56
Profit for the period               4,497    2,378     5,309     1,988     1,926
                                                                                
Other comprehensive income:                                                     
Exchange differences on                82       55        49         2        59
 translating foreign operations                                                 
Total other comprehensive income       82       55        49         2        59
 for the period                                                                 
TOTAL COMPREHENSIVE INCOME FOR      4,579    2,433     5,358     1,990     1,985
 THE PERIOD                                                                     
                                                                                
Profit attributable to:                                                         
- Owners of the parent              4,409    2,121     5,137     1,630     1,477
- Non-controlling interests            88      257       172       358       449
Profit for the period               4,497    2,378     5,309     1,988     1,926
                                                                                
Total comprehensive income                                                      
 attributable to:                                                               
- Owners of the parent              4,491    2,176     5,186     1,632     1,536
- Non-controlling interests            88      257       172       358       449
Total comprehensive income          4,579    2,433     5,358     1,990     1,985
                                                                                
Earnings per share attributable                                                 
 to owners of the parent:                                                       
Basic earnings per share (EUR)       0.14     0.07      0.17      0.05      0.05
Diluted earnings per share (EUR)     0.14     0.07      0.17      0.05      0.05



Condensed consolidated interim statement of cash flows

EUR '000                                                      9M  2013  9M  2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers1                                  136,517   131,577
Cash paid to suppliers2                                       -125,826  -113,048
VAT paid                                                        -2,419    -4,500
Cash paid to and for employees                                 -13,403   -12,212
Income tax paid                                                     -2       -55
Net cash used in/from operating activities                      -5,133     1,762
                                                                                
Cash flows from investing activities                                            
Purchase of property, plant and equipment                         -315    -1,758
Proceeds from sale of property, plant and equipment and            191       363
 intangible assets                                                              
Acquisition of associates                                         -350         0
Loans provided                                                    -377    -1,007
Repayment of loans provided                                        202        94
Dividends received                                                   4         0
Interest received                                                  359         0
Net cash used in investing activities                             -286    -2,308
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                    10,243     4,329
Repayment of loans received                                     -3,760    -2,146
Dividends paid                                                    -107       -80
Payment of finance lease liabilities                            -1,310    -1,542
Interest paid                                                     -736      -859
Net cash from/used in financing activities                       4,330      -298
                                                                                
Net cash flow                                                   -1,089      -844
                                                                                
Cash and cash equivalents at beginning of period                10,231     9,908
Effect of exchange rate fluctuations on cash and cash               -2         2
 equivalents                                                                    
Decrease  in cash and cash equivalents                          -1,089      -844
Cash and cash equivalents at end of period                       9,140     9,066

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

2 Line item Cash paid to suppliers includes VAT paid.



Financial review

Financial performance

Nordecon group’s gross profit for the first nine months of 2013 amounted to
9,426 thousand euros (9M 2012: 6,026 thousand euros) and gross margin was 7.0%
(9M 2012: 5.1%). 

In previous interim reports we have described the work done to increase the
Group’s profitability. The measures applied, including extensive internal
restructuring and cost cutting, have been effective. However, they have their
limits and the rate of internally generated growth in profitability cannot be
maintained indefinitely. 

The profit from long-term construction contracts is recorded gradually over the
contract term, based on the stage of completion of contract activity. During
the life of a contract, our estimates of the profitability of the contract may
change. If this happens, the proportionate share of contract profit already
recognised in the financial statements is adjusted to reflect the new estimate.
In the reporting period (particularly in the third quarter), a substantial
share of our construction projects reached the stage of completion and their
actual outcomes could be specified. Many of the projects were highly complex,
involving construction risks whose potential costs were considered in making
the profitability estimates. Thanks to effective performance, the costs were
not incurred. In particular, revision of outcomes increased profit on projects
for the construction of utility networks and environmental engineering.
Although the projects were won by making the lowest bids in public tenders, the
experience our people have gained in those segments over the years allowed us
to benefit from strong improvements in productivity. 

Margin improvements have also been supported by the external environment.
Market growth in the previous year, relative stability in materials and
subcontracting prices, and a slight decline in competitive pressure in certain
segments have created conditions that favour a rise in the projects’ average
profit margin. 

The Group’s administrative expenses for the first nine months of 2013 totalled
3,567 thousand euros, reflecting a certain decrease compared with a year ago
(9M 2012: 3,941 thousand euros). The ratio of administrative expenses to
revenue (12 months rolling) was 2.8% (9M 2012: 3.3%). Our cost-control measures
continue to yield strong results, allowing us to maintain administrative
expenses below the target ceiling, i.e. 5% of revenue. 

Operating profit for the first nine months of 2013 was 5,587 thousand euros (9M
2012: 2,106 thousand euros) and EBITDA was positive at 7,088 thousand euros (9M
2012: 3,735 thousand euros). 

The Group ended the reporting period with a net profit of 5,309 thousand euros
(9M 2012: 1,988 thousand euros). The profit attributable to owners of the
parent, Nordecon AS, was 5,137 thousand euros (9M 2012: 1,630 thousand euros). 

In the last quarter of the year we are going to complete many projects
(including road construction ones) whose total volume is significant. The
probability of realisation of their performance risks is higher than that of
the projects, which reached the stage of completion in the third quarter.
Moreover, by the date of release of the preliminary annual results, the court
will probably have ruled in the matter concerning the action brought against
the Estonian Maritime Museum (for further information, see the Credit risk
section of the chapter Description of the main risks in the directors’ report). 

Cash flows

Operating activities of the first nine months of 2013 resulted in a net cash
outflow of 5,133 thousand euros (9M 2012: a net cash inflow of 1,762 thousand
euros). When the Group operates with a profit, negative operating cash flow
results primarily from a mismatch between the projects’ actual stage of
completion (recognised revenue) and the amounts billed to customers. Cash
inflow is also reduced by the amounts retained under the terms of construction
contracts, which are released when construction activity ends. Retentions
extend from 5% to 10% of the volume of a contract, being comparable to its
profit margin. In addition, we have launched a housing development project. In
the comparative period, we did not have such projects and before we start
selling the apartments, the project’s cash flow will be negative. 

Besides the above, our operating cash flows continued to be influenced by
differences in settlement terms: the payment terms agreed with customers are
long and in the case of public procurement generally extend from 45 to 56 days
while subcontracts ordinarily have to be paid within 21 to 45 days. We use
factoring to counteract the impacts of cyclicality and overdraft facilities to
raise working capital. 

Cash flows from investing activities resulted in a net outflow of 286 thousand
euros (9M 2012: a net outflow of 2,308 thousand euros). We continued to invest
in property, plant and equipment although not as extensively as a year ago. The
volume of loans provided to associates decreased considerably and we received
more loan repayments. In addition, we made a contribution of 350 thousand euros
to restore an associate’s negative equity. 

Financing activities resulted in a net cash inflow of 4,330 thousand euros (9M
2012: a net outflow 298 thousand euros). Loan receipts exceeded loan repayments
by 6,483 thousand euros compared with 2,183 thousand euros in the first nine
months of 2012. We borrowed more working capital to meet the needs of growing
business volumes and to cover negative operating cash flow. On the other hand,
loan repayments, which were made to meet commitments under refinancing
agreements, were larger too. 

At 30 September 2013, the Group’s cash and cash equivalents totalled 9,140
thousand euros (30 September 2012: 9,066 thousand euros). Management’s comments
on liquidity risks are presented in the chapter Description of the main risks
in the directors’ report. 



Key financial figures and ratios

Figure/ratio                        9M  2013    9M  2012    9M  2011        2012
--------------------------------------------------------------------------------
Revenue (EUR’000)                    134,733     117,054     103,260     159,422
Revenue growth                         15.1%       13.4%       37.2%        7.9%
Net profit/loss (EUR’000)              5,309       1,988      -4,039       1,926
Profit/loss attributable to            5,137       1,630      -4,250       1,477
 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)                0.17        0.05       -0.14        0.05
                                                                                
Administrative expenses to              2.6%        3.4%        3.2%        3.4%
 revenue                                                                        
Administrative expenses to              2.8%        3.3%        3.8%        3.4%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR’000)                       7,088       3,735      -1,846       4,833
EBITDA margin                           5.3%        3.2%       -1.8%        3.0%
Gross margin                            7.0%        5.1%       -0.7%        5.2%
Operating margin                        4.1%        1.8%       -3.5%        1.7%
Operating margin excluding gains        4.0%        1.4%       -3.9%        1.4%
 on asset sales                                                                 
Net margin                              3.9%        1.7%       -3.9%        1.2%
Return on invested capital              8.9%        4.6%       -5.1%        5.2%
Return on equity                       16.1%        6.8%      -12.8%        6.6%
Equity ratio                           27.0%       25.7%       27.6%       27.1%
Gearing                                42.8%       41.1%       37.6%       33.7%
Current ratio                           1.12        1.08        1.18        1.08
                                                                                
                                     30 Sept     30 Sept     30 Sept      31 Dec
                                        2013        2012        2011        2012
--------------------------------------------------------------------------------
Order book (EUR’000)                  85,765     146,070     155,421     127,259
--------------------------------------------------------------------------------

                                        

Revenue growth = (revenue for   Operating margin excluding gains on asset sales 
 the reporting period/ revenue   = ((operating profit -  gains on sale of       
 for the previous period) –      property, plant and equipment - gains on sale  
 1*100                           of investment properties and real estate held  
Earnings per share (EPS) = net   for sale)/revenue) *100                        
 profit attributable to owners  Net margin = (net profit for the                
 of the parent / weighted        period/revenue)*100                            
 average number of shares       Return on invested capital = ((profit before tax
 outstanding                     + 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       and equity)*100                                
 four 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 2013, around 2% of the Group’s revenue was
generated outside Estonia compared with 1% in the same period in 2012. 

         9M  2013  9M  2012  9M  2011  2012
-------------------------------------------
-------------------------------------------
Estonia       98%       99%       96%   98%
Finland        2%        1%        2%    2%
Belarus        0%        0%        2%    0%

Finnish revenues comprise revenue from concrete works. We expect the
contribution of foreign markets to remain at a similar level throughout the
year. 

Geographical diversification of the revenue base is a consciously deployed
strategy by which we mitigate the risks resulting from excessive concentration
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 that it knows best and which entails fewer known market risks. The
Group’s vision of its future operations in foreign markets is described in the
chapter Outlooks of the Group’s geographical markets in the directors’ report. 



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, specialist and environmental
engineering, concrete works and real estate development. 

The Group’s revenue for the first nine months of 2013 amounted to 134,733
thousand euros, a 15% improvement on the 117,054 thousand euros generated in
the comparative period. 

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 a strategic ceiling for
revenue from the construction of apartment buildings, which has to remain below
20% of total sales. 

Segment revenues

In the first nine months of 2013, our two main operating segments, Buildings
and Infrastructure, generated revenue of 52,294 thousand euros and 79,587
thousand euros respectively. The corresponding figures for the same period in
2012 were 49,747 thousand euros and 64,674 thousand euros (see note 8). The
larger contribution and absolute figures of the Infrastructure segment (also in
the previous year) are mostly attributable to the performance of major road
construction projects. 

Operating segments*  9M  2013  9M  2012  9M  2011  2012
-------------------------------------------------------
-------------------------------------------------------
Buildings                 38%       42%       48%   42%
Infrastructure            62%       58%       52%   58%

* In the directors’ report the Ukrainian buildings segment and the EU buildings
segment, which are disclosed separately in the financial statements as required
by IFRS 8 Operating Segments, are presented as a single segment. 

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



Sub-segment revenues

Last year’s rise in private sector investments laid the foundation for rapid
revenue growth in the commercial buildings sub-segment. We continued work under
previously secured contracts for the construction of commercial buildings in
Tallinn and Tartu and secured a contract of over 15 million euros for building
an extension to the ASTRI shopping centre in Narva and a contract of over 9
million euros for building the Stroomi shopping centre. We expect the
investment activity of private sector customers to remain robust and the
contribution of the sub-segment to remain substantial. 

The revenues of the public buildings sub-segment decreased because we did not
have any major projects comparable to those performed a year ago. The
competitive situation in this market segment is particularly challenging: it is
hard to win a contract without taking excessive risks but our current policy is
to avoid such risks. No major procurement tenders are expected to be announced
in this sub-segment in 2013 and, thus, volumes will probably not expand. Our
largest ongoing projects included the construction of the Translational
Medicine Centre of the University of Tartu, Phase V in the project of St Paul’s
Church in Tartu and an academic building for the NCO School of the Estonian
National Defence College. 

In the industrial and warehouse facilities sub-segment most of the revenue
resulted from the construction of buildings procured by the agricultural
sector. However, the volume of such work was smaller than in the previous years
because the current EU budget period is coming to an end and thus allocations
from the EU structural funds that co-finance the projects are decreasing.
Shrinkage in the sub-segment’s revenues has been counterbalanced by private
sector investments in new industrial and production buildings. For example, in
the reporting period, we won a contract of over 9 million euros for building a
dairy farm complex at Väätsa. 

The revenues of the apartment buildings sub-segment resulted mostly from
general contracting. On a whole-year basis, the contribution of the sub-segment
should increase because in May we won a contract of around 10 million euros for
the construction of an apartment building at Pirita tee 26 in Tallinn (our
recent years’ largest apartment building contract). The year has also been
successful in the sale of the last apartments and office premises in the
Tigutorn development project. At period-end, only 4 Tigutorn apartments were
still on sale. Phase I in our Magasini 29 development project
(www.magasini.ee), which was launched this year, will be completed in 2014. 

Revenue distribution within Buildings         9M  2013  9M  2012  9M  2011  2012
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Commercial buildings                               47%       24%       10%   26%
Industrial and warehouse facilities                29%       28%       43%   35%
Public buildings                                   20%       44%       45%   36%
Apartment buildings                                 4%        4%        2%    3%



As expected, the main revenue source for the Infrastructure segment was road
construction. We are currently working on several large projects that involve
not only seasonally restricted operations such as asphalt-laying but also
various kinds of earthwork and construction of structures, which could also be
carried out in the winter weather of the beginning of the year. Since most of
the work relating to projects in progress will be performed in 2013, the
contribution of the sub-segment should remain high. 

In specialist engineering, we continued our work at Sillamäe port and Kärdla
guest harbour. The contribution of the sub-segment has decreased compared with
the previous year because most of the construction work at Sillamäe port was
completed in 2012. We do not expect to win any major public or private
specialist engineering projects in the remaining part of the year. 

In 2012 Nordecon secured a number of environmental engineering contracts. Most
of the construction work relating to them falls in 2013. In addition, in the
reporting period we signed a contract of 6.4 million euros for the
reconstruction of the wastewater treatment plant of the town of Paide. Thus,
the contribution of environmental engineering will probably remain larger than
in the previous year, with some of the rise resulting from shrinkage in the
construction of utility networks (other engineering). The decrease in the
latter is consistent with general market developments. The current year is the
last one in the EU financial framework that is coming to an end and most of the
work to be conducted with the support of allocated funds has already been
awarded. 

Revenue distribution within Infrastructure            9M       9M       9M  2012
 segment                                            2013     2012     2011      
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    56%      49%      56%   51%
Specialist engineering (including hydraulic           8%      15%       1%   15%
 engineering)                                                                   
Other engineering                                    24%      31%      33%   27%
Environmental engineering                            12%       5%      10%    7%



Order book

At 30 September 2013, our order book stood at 85,765 thousand euros, a 41%
decrease compared with a year ago. 

The largest decrease in our order book (backlog of contracts signed but not yet
performed) has occurred in road construction (approx. 77%) where in the past
year we have been working on three large public procurement projects: (the
Aruvalla-Kose section on the Tallinn-Tartu motorway, Tartu western bypass and
Tartu eastern ring road). New national investments in large-scale road
construction projects have been practically non-existent. In 2013, the state
will probably select contractors for two large road construction projects but
the total volume of the contracts will be less than 15 million euros. The order
book for the construction of outdoor utility networks (other engineering
sub-segment in the directors’ report) has shrunk too, because such work is
typically procured with the support of the EU structural funds but in the last
year of the EU budget period relevant allocations have been expectedly smaller. 

On the other hand, the order books of the commercial buildings, industrial and
warehouse facilities, and environmental engineering sub-segments have
increased. In the case of the first two the rise is attributable to growth in
private sector investments. In the case of the third, it has been achieved
thanks to successful bidding and, partly, the fact that towards the end of the
current EU budget period EU-supported investments in environmental engineering
projects have increased. 

The order book no longer includes the remaining balance of the Tivoli housing
development project in Tallinn city centre (30 September 2012: 12,951 thousand
euros). Nordecon published a stock exchange announcement on the termination of
the contract on 13 June 2013. 

As at the end of      9M  2013  9M  2012  9M  2011     2012
-----------------------------------------------------------
Order book (EUR’000)    85,765   146,070   155,421  127,259

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 69% and 31% of the order book
respectively. This is a radical change: compared with recent years the figures
for the two segments have reversed (30 September 2012: 30% and 70%
respectively). Building construction contracts will continue to dominate the
order book until the end of this year and probably also in the near future. In
the next EU budget period (2014-2020) investments in infrastructure
construction, which to date have mostly been made with the support of the EU
structural funds, will not be as large as they were in the current period
(2007-2013). In particular, this applies to next year because the national
investment plan has not yet been adopted. Hence, we expect the revenues of the
Infrastructure segment to decline in 2014 (for further information, see the
Business risks section of the chapter Description of the main risks in the
directors’ report). 

Between the reporting date (30 September 2013) and the date of release of this
report, Group companies have secured additional construction contracts of
approximately 3,768 thousand euros. 



People

Staff and personnel expenses

In the first nine months of 2013, the Group (the parent and the subsidiaries)
employed, on average, 784 people including 360 engineers and technical
personnel (ETP). The number of staff did not increase significantly compared
with a year ago. 

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

               9M  2013  9M  2012  9M  2011  2012
-------------------------------------------------
-------------------------------------------------
ETP                 360       372       362   367
Workers             424       417       390   397
Total average       784       789       752   764

The Group’s personnel expenses for the first nine months of 2013 including all
taxes totalled 13,584 thousand euros, 15% up on the comparative period when the
figure was 11,835 thousand euros. Personnel expenses have increased due to
growth in both operating volumes and performance bonuses. Selective increases
of basic salaries have had less impact. 

The service fees of the members of the council of Nordecon AS for the first
nine months of 2013 amounted to 120 thousand euros and associated social
security charges totalled 40 thousand euros (9M 2012: 132 thousand euros and 44
thousand euros respectively). The figures (also for 2012) include the
provisions made in the third quarter for performance bonuses that may be paid
based on the Group’s result of operations. 

The service fees of the members of the board of Nordecon AS amounted to 195
thousand euros and associated social security charges totalled 64 thousand
euros (9M 2012: 291 thousand euros and 96 thousand euros respectively,
including the remuneration of the member of the board that was removed on 30
April 2012). The figures (also for 2012) include the provisions made in the
third quarter for performance bonuses that may be paid based on the Group’s
result of operations. 

Labour productivity and labour cost efficiency

In recent years, the number of the Group’s employees has been relatively stable
and thus the rise in nominal labour productivity stems mostly from revenue
growth. Nominal labour cost efficiency for the period was weakened by growth in
performance bonuses paid in the context of improved profitability. In
comparative periods, the proportion of performance bonuses in the Group’s
personnel expenses was smaller. Basic salaries have not been substantially
increased. Payment of performance bonuses is an ordinary activity that is
linked to the achievement of certain profit targets. Compared with comparative
historical figures, the period’s nominal labour cost efficiency was relatively
high. 

We measure the efficiency of our core business using the following productivity
and efficiency indicators, which are based on the number of employees and
personnel expenses paid: 

                                             9M  2013  9M  2012  9M  2011   2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling),          231.6     213.0     173.8  208.7
 (EUR’000)                                                                      
Change against the comparative period            8.7%     22.5%     39.6%   3.2%
                                                                                
Nominal labour cost efficiency (rolling),         9.5      10.4       8.8    9.5
 (EUR’000)                                                                      
Change against the comparative period           -8.3%     18.5%     34.2%  -8.6%



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)                                             
--------------------------------------------------------------------------------



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 2013, competition for public sector contracts has intensified. The volume of
public sector investments has decreased and the prospects of maintaining
current operating volumes in 2014 are not good. Strong competitive pressure is
driving bid prices down although input prices seem to be rising. Competition is
particularly fierce in the building construction segment. We acknowledge 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 tend to rise involves
a high risk, because the contract may quickly start generating a loss. Thus, in
price-setting we currently prioritize profitability over increasing or
maintaining the revenue figures. 

In the next periods, demand for construction services will be driven by public
sector investments, which in recent years have mostly been made with the
assistance of EU support. Present allocations from the EU structural funds are
linked, both in terms of size and timing, to the current EU financial framework
(2007-2013). The funds left for the last year of the budget period are smaller
than earlier, which means that in 2013 fewer new projects have been started. In
general, the amounts that will be allocated to Estonia during the next EU
financial framework (2014-2020) are known but the volume and timeframe of
investments involving construction work have not yet been approved. According
to the latest information, the overall volume of construction-related
investments is expected to decline and 2014 may become a so-called ‘gap’ year
between the two budget periods, where most efforts will directed at preparatory
administrative activities required for enabling the investments. 

In light of the above, it is likely that in 2014 the Group’s business volumes
will shrink, particularly in the Infrastructure segment where the proportion of
public sector investments has been the largest. Our action plan foresees
redirecting our resources (including some of the labour of the Infrastructure
segment) to increasing the proportion of contracts secured from the private
sector. According to its business model, Nordecon operates in all segments of
the construction market. Therefore, we are somewhat better positioned than
those companies that operate in one specific (particularly infrastructure)
segment. 

Our primary goal is to maintain profitability even when construction volumes
shrink. In many functions (e.g. support services), our costs have increased
considerably more slowly than the volumes of our operating activities.
Essentially, our costs are at the levels where they were taken by various cost
cuts after the last major downturn in the construction market, which was in
2009-2010. This means that if construction volumes change, we will not have to
undertake any extensive restructuring. 

The Group’s operations are also influenced by the change of seasons. The
impacts of seasonality are the strongest in the Infrastructure segment where a
lot of work is done outdoors (road and port construction, earthwork, etc). To
disperse the risk, we secure road maintenance contracts that generate
year-round business. According to our business strategy, we counteract seasonal
fluctuations in infrastructure operations with building construction operations
that are less exposed to seasonality. Thus, the Group endeavours to keep the
two segments in balance (see also the chapter Performance by business line in
the directors’ report). In addition, our companies consistently seek new
technical solutions that would yield greater efficiency under changeable
weather conditions. 

Operational risks

To manage their daily construction risks, Group companies purchase contractors’
all risks insurance. Depending on the nature of the project and the requests of
the customer, both general frame agreements and special, project-specific
contracts are used. In addition, as a rule, subcontractors are required to
secure performance of their obligations with a bank guarantee provided to a
Group company or the Group retains part of the amount payable until the
completion of the contract. To remedy builder-caused deficiencies, which may be
detected during the warranty period, Group companies create warranty provisions
based on their historical experience. At 30 September 2013, the Group’s
warranties provisions (including current and non-current ones) totalled 998
thousand euros. At 30 September 2012, the corresponding figure was 1,092
thousand euros. 

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

Financial risks

Credit risk

In the reporting period, the Group did not 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 governments as well as the EU structural funds
continued to be 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. 

In the first nine months of 2013, impairment losses on receivables totalled 261
thousand euros (9M 2012: 233 thousand euros). 

The Group’s statement of financial position includes a trade receivable of
approximately 2.4 million euros (includes a portion of late payment interest)
due from the customer of the exhibition building of the Estonian Maritime
Museum. Under the contract, determination of whether the Group’s claim against
the debtor 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. By
the date of release of this report, hearings have been held and the parties
have to submit their final opinions to the court. The court is expected to rule
upon the matter in January 2014. 

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 but sometimes up to 100 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. 

At the reporting date, the Group’s current assets exceeded its current
liabilities 1.12-fold (30 September 2012: 1.08-fold). Interest-bearing
liabilities account for 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. To date, banks have refinanced the Group’s liabilities for
periods not exceeding 12 months, which is why a substantial portion of loans
are classified as current liabilities although it is probable that some
borrowings (particularly overdraft facilities) will be refinanced again when
the 12 months have passed. In the first nine months of 2013, the Group
refinanced loans of 13,415 thousand euros which at 31 December 2012 were
recognised as current liabilities (at 30 September 2013 relevant loan balances
totalled 15,322 thousand euros) and deferred their maturities to 2014. 

At the reporting date, the Group’s cash and cash equivalents totalled 9,140
thousand euros (30 September 2012: 9,066 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 most floating-rate contracts is Euribor. At 30 September
2013, the Group’s interest-bearing loans and borrowings totalled 42,528
thousand euros, an increase of 5,937 thousand euros year over year. Growth in
factoring liabilities accounted for 5,096 thousand euros of the overall rise in
loans and borrowings. Interest expense for the first nine months of 2013
amounted to 783 thousand euros, 16 thousand euros down from a year ago. The
Group’s interest rate risk results mainly from a rise in the base rate for
floating interest rates (Euribor/EONIA). The risk is mitigated by fixing, where
possible, the interest rates of liabilities during the period of low market
interest rates. 

The Group has not acquired any derivatives to hedge 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). In the first nine months of 2013, the exchange rate of the Ukrainian
hryvna against the euro was stable. The Group’s net foreign exchange loss for
the period was 43 thousand euros (9M 2012: a net foreign exchange loss of 8
thousand euros). 

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



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market

  -- In 2013 construction volumes in the infrastructure segment are still larger
     but the segment’s lead over building construction is diminishing. The
     public sector is contributing to building construction through two major
     projects – the construction of a new main building for the Estonian
     National Museum and the Maarjamõisa medical campus of Tartu University
     Hospital. The turnover of the infrastructure segment is undermined by the
     depletion of funds allocated from the EU budget for the period 2007-2013.
     The private sector is investing mainly in building construction. The rise
     in private sector investments should continue in 2014.
  -- The construction market continues to be disproportionately reliant on
     public procurement and projects executed with the support of the EU
     structural funds. In the last year of the current EU budget period, the
     volume of new procurements has decreased. The volumes and timing of
     projects to be executed using the support of the next EU financial
     framework (2014-2020) are still unclear. The volumes of new investments
     made by two large public sector customers, Riigi Kinnisvara AS (a
     state-owned real estate company) and the National Road Administration, are
     going to decline. It is more likely than not that this year growth of the
     Estonian construction market is going to decelerate and next year the
     market may see certain shrinkage.
  -- The industry will see further consolidation, 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, but the process will be slower than expected. Based on the
     past three years’ experience it is likely that stiff competition and
     insufficient demand will induce some general contractors to go slowly out
     of business or shrink in size rather than merge with another or exit the
     market. However, it is also becoming increasingly common that two to four
     smaller players that are seeking ways to remain in business will form a
     consortium to bid for major procurement contracts, meet tendering terms and
     secure the required funding.
  -- Competition is increasing in all segments of the construction market. The
     average number of bidders for a contract has increased and there is already
     a notable gap between the lowest bids made by the winners and the average
     bids. The situation is somewhat similar to 2009 when anticipation of a fall
     in demand caused a rapid decline in construction prices, which triggered a
     slide in the prices of many construction inputs. However, currently there
     are no massive decreases in input prices and companies that are banking on
     this in the bidding phase may run into difficulty. Construction prices and
     thus also profit margins are already under strong competitive pressure.
  -- In new housing development, the success of a project depends on the
     developer’s ability to control the input prices included in its business
     plan and thus to set an affordable sales price. Although the overall
     situation is improving steadily, the offering of new residential real
     estate cannot be increased dramatically because the prices of new
     apartments are relatively high compared with the standard of living and the
     banks’ lending terms remain strict.  Similarly to the previous year,
     successful projects include those that create or fill a niche.
  -- The contracts signed with public sector customers continue to impose tough
     conditions on construction companies: extensive obligations, strict
     sanctions, various financial guarantees, extremely long settlement terms,
     etc. Contractors cannot implement more optimal solutions identified in the
     construction phase that would reduce the construction or operating costs of
     the asset without sanctions because procurement terms do not allow this. In
     a situation where public procurement is based on underbidding, the above
     factors increase the risks of all market participants. Still, compared to
     two or three years ago, the situation has improved and in some respects
     procurement terms have become more reasonable for construction companies.
  -- The prices of construction inputs will remain relatively stable. Local
     subcontracting prices may decrease due to weakening demand but, taking into
     account the subcontractors’ financial and human resources, the decline
     cannot be substantial or long-lasting. In some areas, price fluctuations
     are be unpredictable and, thus, notably greater and hard or even impossible
     to influence (oil and metal products, certain materials and equipment).
  -- There is a shortage of high-quality labour (including project and site
     managers). Shrinkage in construction volumes in Estonia may increase labour
     supply but not substantially. Labour migration to the Nordic countries will
     remain steady and although those markets (particularly Finland) may also
     shrink, the number of job seekers that will return will not increase
     considerably. Accordingly, the basic wage of construction-sector employees
     will not decrease. Instead, the rise in the cost of living is creating
     pressure for a wage increase.

Latvia and Lithuania

In our opinion, the Latvian construction market, which was hit by a severe
downturn a few years ago, has not regained sufficient stability and similarly
to Estonia in 2013 it will probably see shrinkage in public sector demand.
Therefore, the Group is not going to enter to the Latvian construction market
permanently in 2013. 

In the next few years we may 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 strategy for the future, i.e. the objective of
operating in our neighbouring construction markets through local subsidiaries. 

The operations of our Lithuanian subsidiary, Nordecon Statyba UAB, have been
suspended. We are monitoring market developments and may 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 strategy for the
future, 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.
Regardless of this, we will continue our business in Ukraine in 2013. There are
some signs that investment activity in Ukraine will recover in 2013 to a
certain extent although the economic and political risks do not allow us to
expect any rapid changes. We continue to monitor the situation in the Ukrainian
construction market closely and will restructure our operations as appropriate.
We also continue to seek opportunities for exiting our two conserved real
estate projects or signing a construction contract with a potential new owner. 

Finland

In the Finnish market, we offer mainly subcontracting services in the field of
concrete works but based on experience gained, we are going to deliver some
more complex services in 2013. The local concrete works market provides
opportunities for competing for projects where the customer wishes to purchase
all concrete works from one reliable partner. Nevertheless, we will maintain a
rational approach and will avoid taking excessive risks. We are not planning to
penetrate any other segments of the Finnish construction market (general
contracting, project management, etc). 



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
2012 was 159.4 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