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2013 fourth quarter and twelve months consolidated interim report (unaudited)

Teade

Nordecon publishes 2013 fourth quarter and twelve months consolidated interim
report (unaudited) 

Tallinn, Estonia, 2014-02-13 15:30 CET (GLOBE NEWSWIRE) --
This announcement includes Nordecon AS’s consolidated financial statements for
the fourht quarter and twelve 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                                      31 December 2013  31 December 2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                               12,575            10,231
Trade and other receivables                             28,900            42,896
Prepayments                                              1,710             1,840
Inventories                                             23,899            26,243
Total current assets                                    67,084            81,210
Non-current assets                                                              
Investments in equity-accounted investees                  590               202
Other investments                                           26                26
Trade and other receivables                             10,645             1,554
Investment property                                      3,549             4,930
Property, plant and equipment                            9,030             8,851
Intangible assets                                       14,494            14,857
Total non-current assets                                38,334            30,420
TOTAL ASSETS                                           105,418           111,630
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                    23,876            27,185
Trade payables                                          25,918            31,968
Other payables                                           8,287             5,014
Deferred income                                          6,415            11,404
Provisions                                                 913               521
Total current liabilities                               65,409            76,092
Non-current liabilities                                                         
Loans and borrowings                                     3,303             3,671
Trade payables                                             155               259
Other payables                                              96                96
Provisions                                                 969             1,210
Total non-current liabilities                            4,523             5,236
TOTAL LIABILITIES                                       69,932            81,328
                                                                                
EQUITY                                                                          
Share capital                                           19,657            19,657
Statutory capital reserve                                2,554             2,554
Translation reserve                                       -299              -404
Retained earnings                                       11,234             6,039
Total equity attributable to owners of the              33,146            27,846
 parent                                                                         
Non-controlling interests                                2,340             2,456
TOTAL EQUITY                                            35,486            30,302
TOTAL LIABILITIES AND EQUITY                           105,418           111,630



Condensed consolidated interim statement of comprehensive income

EUR '000                                    Q4 2013  Q4 2012  12M 2013  12M 2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                                      39,220   42,554   173,953   159,422
Cost of sales                               -36,716  -40,358  -162,023  -151,205
Gross profit                                  2,504    2,196    11,930     8,217
                                                                                
Marketing and distribution expenses            -171     -136      -452      -389
Administrative expenses                      -1,439   -1,444    -5,006    -5,385
Other operating income                          104      190       464       810
Other operating expenses                       -745     -220    -1,096      -566
Operating profit                                253      586     5,840     2,687
                                                                                
Finance income                                  161      163       668       622
Finance costs                                  -140     -576    -1,027    -1,248
Net finance income/costs                         21     -413      -359      -626
                                                                                
Share of loss of equity-accounted              -343     -218      -146       -79
 investees                                                                      
                                                                                
Profit/loss before income tax                   -69      -45     5,335     1,982
Income tax expense                              -40      -12      -135       -56
Profit/loss for the period                     -109      -57     5,200     1,926
                                                                                
Other comprehensive income:                                                     
Exchange differences on translating              56       57       105        59
 foreign operations                                                             
Total other comprehensive income for the         56       57       105        59
 period                                                                         
TOTAL COMPREHENSIVE INCOME/EXPENSE FOR THE      -53        0     5,305     1,985
 PERIOD                                                                         
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                           58     -151     5,195     1,477
- Non-controlling interests                    -167       94         5       449
Profit/loss for the period                     -109      -57     5,200     1,926
                                                                                
Total comprehensive income/expense                                              
 attributable to:                                                               
- Owners of the parent                          114      -94     5,300     1,536
- Non-controlling interests                    -167       94         5       449
Total comprehensive income/expense              -53        0     5,305     1,985
                                                                                
Earnings per share attributable to owners                                       
 of the parent:                                                                 
Basic earnings per share (EUR)                 0.00     0.00      0.17      0.05
Diluted earnings per share (EUR)               0.00     0.00      0.17      0.05



Condensed consolidated interim statement of cash flows

EUR '000                                                      12M 2013  12M 2012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers1                                  204,768   193,524
Cash paid to suppliers2                                       -175,465  -161,447
VAT paid                                                        -5,131    -6,192
Cash paid to and for employees                                 -18,647   -16,888
Income tax paid                                                    -99       -56
Net cash from operating activities                               5,426     8,941
                                                                                
Cash flows from investing activities                                            
Purchase of property, plant and equipment                         -458    -1,792
Proceeds from sale of property, plant and equipment and            317       379
 intangible assets                                                              
Investments made in associates                                    -616         0
Loans provided                                                    -922    -1,709
Repayment of loans provided                                        245       399
Dividends received                                                   4         0
Interest received                                                  616        18
Net cash used in investing activities                             -814    -2,705
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                     3,440     3,190
Repayment of loans received                                     -2,970    -5,950
Dividends paid                                                    -121       -80
Payment of finance lease liabilities                            -1,670    -1,967
Interest paid                                                     -945    -1,106
Net cash used in financing activities                           -2,266    -5,913
                                                                                
Net cash flow                                                    2,346       323
                                                                                
Cash and cash equivalents at beginning of period                10,231     9,908
Effect of exchange rate fluctuations on cash and cash               -2         0
 equivalents                                                                    
Increase  in cash and cash equivalents                           2,346       323
Cash and cash equivalents at end of period                      12,575    10,231

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 2013 amounted to 11,930 thousand euros (2012:
8,217 thousand euros) and gross margin was 6.9% (2012: 5.2%). 

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.
During the year (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 for the financial statements. Thanks to successful
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. 

The rise in profitability was also 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 created conditions that favoured a rise in the projects’ average
profit margin. 

The Group’s administrative expenses for 2013 totalled 5,006 thousand euros,
reflecting a certain decrease compared with the previous year (2012: 5,385
thousand euros). The ratio of administrative expenses to revenue was 2.9%
(2012: 3.4%). Our cost-control measures continue to yield strong results – we
have been able to maintain administrative expenses below the target ceiling,
i.e. 5% of revenue. 

At the year-end, we wrote down real estate held for development (reported
within inventories) by 330 thousand euros (2012: no expenses from write-down of
real estate). In addition, non-recurring expenses from the write-down of
goodwill amounted to 348 thousand euros (2012: no expenses from write-down of
goodwill). As a result, we ended the year with an operating profit of 5,840
thousand euros (2012: 2,687 thousand euros) and an EBITDA of 8,162 thousand
euros (2012: 4,833 thousand euros). 

The Group’s net profit amounted to 5,200 thousand euros (2012: 1,926 thousand
euros). The profit attributable to owners of the parent, Nordecon AS, was 5,195
thousand euros (2012: 1,477 thousand euros). 

Cash flows

Operating activities for the year resulted in a net cash inflow of 5,426
thousand euros (2012: a net cash inflow of 8,941 thousand euros). In 2013, we
completed a number of major projects that commenced in previous periods and for
which we received substantial advances. Adjustment of subsequent billings for
advances received and project-related retentions (release of the retentions has
partially been postponed to 2014) led to a year over year decrease in net
operating cash inflow. Amounts paid to employees increased as well (also
proportionately), mostly on account of performance bonuses paid in the context
of improved profitability. 

Operating cash flows continued to be influenced by differences in settlement
terms: the ones agreed with customers are long and in the case of public
procurement generally extend from 45 to 56 days while subcontractors usually
have to be paid within 21 to 45 days. Moreover, although amounts retained under
subcontracts are smaller, they have to be released more quickly than those
released by customers. We use factoring to counteract the impacts of
cyclicality and overdraft facilities to raise working capital. 

Investing activities resulted in a net cash outflow of 814 thousand euros
(2012: a net outflow of 2,705 thousand euros). We continued to invest in
property, plant and equipment although not as extensively as the year before.
The volume of loans provided decreased and, in contrast to 2012, most of them
were short-term loans to be repaid in 2014. During the year, we made
contributions of 616 thousand euros to restore associates’ negative equity and,
as part of the same transactions, associates settled their loan interest
commitments. 

Financing activities resulted in a net cash outflow of 2,266 thousand euros
(2012: a net outflow 5,913 thousand euros). Loan receipts exceeded loan
repayments by 470 thousand euros, whereas in 2012 loan repayments exceeded loan
receipts by 2,760 thousand euros. Borrowing grew in connection with growth in
business operations. Compared with 2012, we made fewer early loan settlements
with funds raised from asset sales. Finance lease payments declined
considerably because several leases concluded in 2008 expired in 2013. 

At 31 December 2013, the Group’s cash and cash equivalents totalled 12,575
thousand euros (31 December 2012: 10,231 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                                        2013        2012        2011
--------------------------------------------------------------------------------
Revenue (EUR’000)                                173,953     159,422     147,802
Revenue growth                                      9.1%        7.9%       48.8%
Net profit/loss (EUR’000)                          5,200       1,926      -4,708
Profit/loss attributable to owners of the          5,195       1,477      -5,304
 parent (EUR’000)                                                               
Weighted average number of shares             30,756,728  30,756,728  30,756,728
Earnings per share (EUR)                            0.17        0.05       -0.17
                                                                                
Administrative expenses to revenue                  2.9%        3.4%        3.1%
                                                                                
EBITDA (EUR’000)                                   8,162       4,833      -1,819
EBITDA margin                                       5.5%        3.0%       -1.2%
Gross margin                                        6.9%        5.2%        0.1%
Operating margin                                    3.4%        1.7%       -3.1%
Operating margin excluding gains on sales of        3.2%        1.4%       -3.5%
 real estate                                                                    
Net margin                                          3.0%        1.2%       -3.2%
Return on invested capital                         10.6%        5.2%       -5.9%
Return on equity                                   15.8%        6.6%      -15.2%
Equity ratio                                       33.7%       27.1%       28.0%
Gearing                                            23.3%       33.7%       32.8%
Current ratio                                       1.03        1.08        1.14
                                                                                
As at 31 December                                   2013        2012        2011
--------------------------------------------------------------------------------
Order book (EUR’000)                              64,631     127,259     134,043
--------------------------------------------------------------------------------

* EBITDA for 2011 and 2013 includes impairment loss on goodwill of 435 thousand
euros and 348 thousand euros respectively. 

Revenue growth = (revenue for  Operating margin excluding gains on sales of real
 the reporting period/revenue   estate = ((operating profit -  gains on sale of 
 for the previous period) –     property, plant and equipment - gains on sale of
 1*100                          investment properties and real estate held for  
Earnings per share (EPS) =      sale)/revenue) *100                             
 net profit attributable to    Net margin = (net profit for the                 
 owners of the parent /         period/revenue)*100                             
 weighted average number of    Return on invested capital = ((profit before tax 
 shares 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’                Gearing = ((interest-bearing liabilities – cash  
 administrative expenses/past   and cash equivalents)/ (interest-bearing        
 four quarters’ revenue)*100    liabilities + equity))*100                      
EBITDA = operating profit +    Current ratio = total current assets/ total      
 depreciation and               current liabilities                             
 amortisation + 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 2013, around 5% of the Group’s revenue was generated outside Estonia
compared with 2% in 2012. 

         2013  2012  2011
-------------------------
-------------------------
Estonia   95%   98%   97%
Finland    5%    2%    2%
Belarus    0%    0%    1%

Finnish revenues comprise revenue from concrete works. In 2013 our Finnish
subsidiary won a substantial contract that increased its business volumes. 

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 we will focus on the Estonian market that
we know best and which entails fewer known market risks. The Group’s vision of
our 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, environmental engineering,
concrete works and real estate development. 

The Group’s revenue for 2013 amounted to 173,953 thousand euros, a 9%
improvement on the 159,422 thousand euros generated in 2012. 

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 2013, our two main operating segments, Buildings and Infrastructure,
generated revenue of 71,977 thousand euros and 98,550 thousand euros
respectively. The corresponding figures for 2012 were 66,924 thousand euros and
89,211 thousand euros (see note 8). The larger contribution and absolute
figures of the Infrastructure segment (also compared to 2012) are mostly
attributable to the performance of major road construction projects. 

Operating segments*  2013  2012  2011
-------------------------------------
-------------------------------------
Buildings             41%   42%   48%
Infrastructure        59%   58%   52%

* 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 in Tallinn. We expect
the investment activity of private sector customers to remain robust and the
contribution of the sub-segment to remain substantial also in the next
financial year. 

The revenues of the public buildings sub-segment decreased because we did not
have any major projects comparable to those performed in 2012. 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. Our largest projects of 2013 were 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 the construction of an academic
building for the NCO School of the Estonian National Defence College. In 2014
public investments in this market sub-segment are not expected to increase
significantly and, thus, competition will remain fierce. 

In the industrial and warehouse facilities sub-segment we continued to earn
most of the revenue from the construction of buildings procured by the
agricultural sector but the volume of such work was smaller than in previous
years because allocations from the EU structural funds that co-finance the
projects decreased at the end of the budget period. As regards new work for the
agricultural sector, in 2013 we won a contract of over 9 million euros for
building a dairy farm complex at Väätsa. Shrinkage in the volume of work done
for the agricultural sector was counterbalanced by non-agricultural private
investments in new industrial and production buildings. 

Our apartment building revenues resulted mostly from general contracting.
Compared with the previous year, the contribution of the sub-segment grew
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 was also successful in
the sale of the last apartments and office premises in the Tigutorn development
project. Only 4 Tigutorn apartments are still for sale. Phase I in our Magasini
29 development project (www.magasini.ee), which was launched in 2013, will be
completed in 2014. 

Revenue distribution within Buildings segment  2013  2012  2011
---------------------------------------------------------------
---------------------------------------------------------------
Commercial buildings                            45%   26%   12%
Industrial and warehouse facilities             29%   35%   40%
Public buildings                                21%   36%   45%
Apartment buildings                              5%    3%    3%



As expected, the main revenue source for the Infrastructure segment was road
construction. During the year, we were concurrently building the Aruvalla-Kose
section of the Tallinn-Tartu motorway, construction package 4 of the Tartu
western bypass and construction package 1 of the Tartu eastern ring road. All
those projects were delivered, in the stage of substantial completion, in the
last quarter of 2013. 

In specialist engineering, the main projects were Sillamäe port and Kärdla
guest harbour. The bulk of the work on Sillamäe port was done in 2012, which is
why the contribution of the sub-segment decreased compared with the previous
year. The work at Sillamäe will continue in 2014 but on a much smaller scale.
The construction of Kärdla guest harbour was completed in the last quarter of
2013. Compared to prior years, the number of potential investment projects
involving ports and other more complex facilities has increased but taking such
projects to the construction stage is time-consuming. 

The market for the construction of utility networks (other engineering) is
going to shrink. The year 2013 was the last one in the previous EU financial
framework through which investments of the sub-segment received most of their
financing. A large share of public procurement tenders for relevant projects
were already announced in previous years. Investments of the next EU budget
period are still under preparation and should reach the tendering stage (in
more considerable volumes) in 2015 and 2016. 

The contribution of environmental engineering grew thanks to growth in
investments made in the sector in previous years as well as successful bidding
– during the year we secured a contract of 6.4 million euros for the
reconstruction of the wastewater treatment plant of the town of Paide. However,
we expect a decrease in environmental engineering work due to the same reasons
that impact financing of the construction of utility networks from the EU
budget. 

Revenue distribution within Infrastructure segment        2013  2012  2011
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Road construction and maintenance                          54%   51%   47%
Specialist engineering (including hydraulic engineering)    8%   15%   10%
Other engineering                                          26%   27%   35%
Environmental engineering                                  12%    7%    8%



Order book

At 31 December 2013, our order book stood at 64,631 thousand euros, a 49%
decrease compared with the end of 2012. 

The largest decrease in our order book (backlog of contracts signed but not yet
performed) has occurred in road construction (approx. 82%) where in 2013 we
were involved in three major public procurement projects (construction of the
Aruvalla-Kose section on the Tallinn-Tartu motorway, the Tartu western bypass,
and the Tartu eastern ring road). All of them were completed by the year-end.
The new national road management plan reflects a change in the structure of
road construction investments. In particular, the proportion of large-scale
projects is going to diminish. This means that companies engaged in road
construction have to face a new reality – the average cost of road construction
contracts is going to decrease, which will inevitably affect the competitive
environment. 

The order book for the construction of utility networks (other engineering
sub-segment in the directors’ report) has also shrunk significantly, 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 were expectedly
smaller. 

On the other hand, the order books of the commercial buildings and industrial
and warehouse facilities sub-segments have almost doubled, mostly thanks to
growth in private sector investments. 

As at 31 December       2013     2012     2011
----------------------------------------------
Order book (EUR’000)  64,631  127,259  134,043

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 77% and 23% of the order book
respectively. This is a radical change: compared with recent years the figures
for the two segments have reversed (31 December 2012: 35% and 65%
respectively). Building construction contracts will probably continue to
dominate the order book for the next few years. In the current 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 2007-2013. In particular, this applies to 2014 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). 

We believe that in a situation where the market is expected to shrink, our
priority cannot be increasing or maintaining the Group’s revenue. Instead, the
main focus should be on improving profitability. We do not consider the present
decline in the Group’s order book to be critical. Based on our historical
experience, it is quite typical that a significant portion of budgeted
operating volumes is secured through new contracts signed during the year. 

Between the reporting date (31 December 2013) and the date of release of this
report, Group companies have secured additional construction contracts of
approximately 7,073 thousand euros. 



People

Staff and personnel expenses

In 2013, the Group (the parent and the subsidiaries) employed, on average, 757
people including 357 engineers and technical personnel (ETP). The number of
staff did not change significantly compared with 2012. 

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

               2013  2012  2011
-------------------------------
-------------------------------
ETP             357   367   351
Workers         400   397   380
Total average   757   764   731

The Group’s personnel expenses for 2013 including all taxes totalled 20,792
thousand euros, 24% up on the comparative period when the figure was 16,803
thousand euros. Personnel expenses increased due to growth in operating volumes
and performance bonuses provided for and paid in an environment of improved
profitability. Selective increases of basic salaries had less impact. 

In 2013, the service fees of the members of the council of Nordecon AS amounted
to 141 thousand euros and associated social security charges totalled 47
thousand euros (2012: 141  thousand euros and 47 thousand euros respectively).
Expenses on the provision for council members’ performance bonuses, made based
on the Group’s performance indicators, amounted to 22 thousand euros and the
provision for associated social security charges amounted 7 thousand euros
(2012: 52 thousand euros and 17 thousand euros respectively). 

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 (2012: 248 thousand euros and 82 thousand euros respectively, including
the remuneration of the member of the board that was removed on 30 April 2012).
Expenses on the provision for board members’ performance bonuses, made based on
the Group’s performance indicators, amounted to 81 thousand euros and the
provision for associated social security charges amounted 27 thousand euros
(2012: 201 thousand euros and 66 thousand euros respectively, including the
proportionate share of the member of the board that was removed on 30 April
2012). 

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 year was weakened mainly 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 on the achievement of certain profit
targets is an ordinary activity and, 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: 

                                                       2013   2012   2011
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nominal labour productivity (rolling), (EUR’000)        230  208.7  202.3
Change against the comparative period                 10.1%   3.2%  57.7%
                                                                         
Nominal labour cost efficiency (rolling), (EUR’000)     8.4    9.5   10.4
Change against the comparative period                -11.6%  -8.6%  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)                                             
--------------------------------------------------------------------------------





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 intensified. The volume of
public sector investments decreased and the prospects of maintaining operating
volumes in 2014 are not good. Strong competitive pressure is driving bid prices
down although input prices seem to be rising slowly. 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. In recent years a major share of investments was made with
the assistance of EU support whose allocation was linked, both in terms of size
and timing, to the EU financial framework 2007-2013. In general, the amounts
that will be allocated to Estonia during the next EU financial framework
(2014-2020) are known but the volume and schedule of investments involving
construction work have not yet been finalised. According to information
released to date, the overall volume of construction-related investments will
decline compared with the previous budget period and 2014 may become a
so-called ‘gap’ year between two budget periods, where most efforts are
directed at preparatory administrative activities required for enabling the
investments. 

In light of the above, it is likely that in 2014 our 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 our business model, Nordecon operates in all segments of
the construction market. Therefore, we are somewhat better positioned than
those companies that operate in only 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, we endeavour 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 31 December 2013, the Group’s
warranties provisions (including current and non-current ones) totalled 1,546 
thousand euros. At the end of 2012, the corresponding figure was 1,407 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 2013, impairment losses on receivables totalled 305 thousand euros (2012:
239 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 submitted their final opinions to the court. According to the regulations
of the Arbitration Court, the latest date for a ruling is 28 February 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) 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 1.03-fold (31 December 2012: 1.08-fold). The figure has dropped
compared with the previous year due to the reclassification of loans provided
to the Group’s Ukrainian subsidiaries. 

The political situation in Ukraine has aggravated and we believe that we will
need more time for realising our Ukrainian investment properties. Accordingly,
at the year-end we reclassified loan receivables from our Ukrainian associates
to non-current assets. On the other hand, we had our largest Ukrainian
development project appraised as at the year-end and determined that there was
no need to write the loan receivables down. 

Interest-bearing liabilities account for a significant proportion of our
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. At 31 December 2013,
overdrafts (balances in use) that need to be refinanced in 2014 totalled 6,910
thousand euros. At the date of release of this report, the amount is expected
to increase rather than decrease. If interest-bearing liabilities were
refinanced to the above extent, the adjusted current ratio would be 1.15.
Similarly to previous years, we are working with our main financing partners to
find ways for restructuring our liabilities. The plan for 2014 should be
completed by April. 

At the reporting date, the Group’s cash and cash equivalents totalled 12,575
thousand euros (31 December 2012: 10,231 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 31 December 2013,
the Group’s interest-bearing loans and borrowings totalled 27,178 thousand
euros, a decrease of 3,677 thousand euros year over year. Interest expense for
2013 amounted to 1,055  thousand euros, 42 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 2013, the exchange rate of the Ukrainian hryvna against the euro was
stable. The Group’s net foreign exchange loss for the period was 104 thousand
euros (2012: a net foreign exchange loss of 95 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 2014 public investment is expected to decrease in connection with the
     commencement of a new EU budget period. The investments made by the largest
     public sector customers, Riigi Kinnisvara AS (a state-owned real estate
     company) and the National Road Administration, that reach the stage of
     conclusion of a construction contract in 2014, will either not increase
     significantly or may even decrease. The situation may be somewhat
     alleviated by private customers’ increasing investment in building
     construction.
  -- 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 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, there are
     currently 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 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, 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 the Estonian market in 2014 it will probably see shrinkage in public sector
demand. Accordingly, it is unlikely that we will enter to the Latvian
construction market permanently in 2014. 

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.
The political situation in Ukraine gives cause for concern and undoubtedly
affects adoption of business decisions by construction market participants.
Regardless of this, we will continue our business in Ukraine in 2014. Compared
with the previous year, we have a larger Ukrainian order book than a year ago.
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 also deliver some more
complex services. 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 unaudited consolidated revenue of the
Group in 2013 was 174 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