Börsiteade

Pealkiri

2017 first quarter consolidated interim report (unaudited)

Teade

This announcement includes Nordecon AS’s consolidated financial statements for
the first quarter of 2017 (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
Tallinn and Nordecon’s web page
(http://www.nordecon.com/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/for-investor/investor-presentations). 



Condensed consolidated interim statement of financial position

EUR ‘000                                         31 March 2017  31 December 2016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                5,917             9,786
Trade and other receivables                             26,680            21,055
Prepayments                                              1,835             1,644
Inventories                                             25,480            22,992
Total current assets                                    59,912            55,477
Non-current assets                                                              
Investments in equity-accounted investees                1,540             1,640
Other investments                                           26                26
Trade and other receivables                             10,932            10,816
Investment property                                      4,929             4,929
Property plant and equipment                            11,503            11,111
Intangible assets                                       14,622            14,623
Total non-current assets                                43,552            43,145
TOTAL ASSETS                                           103,464            98,622
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Borrowings                                              17,504             6,297
Trade payables                                          29,935            29,811
Other payables                                           6,318             5,389
Deferred income                                          4,860             4,128
Provisions                                                 723               753
Total current liabilities                               59,340            46,378
Non-current liabilities                                                         
Borrowings                                               6,145            13,102
Trade payables                                             119                98
Other payables                                              96               117
Provisions                                                 897               881
Total non-current liabilities                            7,257            14,198
TOTAL LIABILITIES                                       66,597            60,576
                                                                                
EQUITY                                                                          
Share capital                                           19,720            19,720
Own (treasury) shares                                   -1,550            -1,550
Share premium                                              564               564
Statutory capital reserve                                2,554             2,554
Translation reserve                                      1,600             1,549
Retained earnings                                       12,004            13,091
Total equity attributable to owners of the              34,892            35,928
 parent                                                                         
Non-controlling interests                                1,975             2,118
TOTAL EQUITY                                            36,867            38,046
TOTAL LIABILITIES AND EQUITY                           103,464            98,622



Condensed consolidated interim statement of comprehensive income

EUR ‘000                                              Q1 2017  Q1 2016      2016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                                                41,604   27,731   183,329
Cost of sales                                         -40,980  -26,578  -172,350
Gross profit                                              624    1,153    10,979
                                                                                
Marketing and distribution expenses                      -113     -103      -413
Administrative expenses                                -1,457   -1,292    -6,106
Other operating income                                     42       41       362
Other operating expenses                                  -88      -12      -614
Operating loss/profit                                    -992     -213     4,208
                                                                                
Finance income                                            103      124       463
Finance costs                                            -169     -439    -1,088
Net finance costs                                         -66     -315      -625
                                                                                
Share of profit of equity-accounted investees              47      119       609
                                                                                
Loss/profit before income tax                          -1,011     -409     4,192
Income tax expense                                        -75        0      -259
Loss/profit for the period                             -1,086     -409     3,933
                                                                                
Other comprehensive income                                                      
Items that may be reclassified subsequently to                                  
 profit or loss                                                                 
Exchange differences on translating foreign                51      288       191
 operations                                                                     
Total other comprehensive income                           51      288       191
TOTAL COMPREHENSIVE EXPENSE/INCOME                     -1,035     -121     4,124
                                                                                
Loss/profit attributable to:                                                    
- Owners of the parent                                 -1,087     -570     3,044
- Non-controlling interests                                 1      161       889
Loss/profit for the period                             -1,086     -409     3,933
                                                                                
Total comprehensive expense/income attributable to:                             
- Owners of the parent                                 -1,036     -282     3,235
- Non-controlling interests                                 1      161       889
Total comprehensive expense/income for the period      -1,035     -121     4,124
                                                                                
Earnings per share attributable to owners of the                                
 parent:                                                                        
Basic earnings per share (EUR)                          -0.04    -0.02      0.10
Diluted earnings per share (EUR)                        -0.04    -0.02      0.10



Condensed consolidated interim statement of cash flows

EUR ‘000                                              Q1 2017  Q1 2016
----------------------------------------------------------------------
----------------------------------------------------------------------
Cash flows from operating activities                                  
Cash receipts from customers1                          45,609   29,588
Cash paid to suppliers2                               -46,567  -27,505
VAT paid                                               -1,018     -951
Cash paid to and for employees                         -4,596   -3,950
Income tax paid                                           -75        0
Net cash used in operating activities                  -6,647   -2,818
                                                                      
Cash flows from investing activities                                  
Paid on acquisition of property, plant and equipment      -33     -103
Paid on acquisition of intangible assets                   -2        0
Proceeds from sale of property, plant and                   0       28
equipment                                                             
Loans provided                                            -21      -18
Repayment of loans provided                                20        2
Dividends received                                        147        3
Interest received                                          27        0
Net cash from/used in investing activities                138      -88
                                                                      
Cash flows from financing activities                                  
Proceeds from loans received                            3,430    1,562
Repayment of loans received                               -19     -201
Finance lease principal paid                             -480     -395
Interest paid                                            -147     -158
Dividends paid                                           -144        0
Net cash from financing activities                      2,640      808
                                                                      
Net cash flow                                          -3,869   -2,098
                                                                      
Cash and cash equivalents at beginning of period        9,786    6,332
Effect of movements in foreign exchange rates               0        2
Decrease in cash and cash equivalents                  -3,869   -2,098
Cash and cash equivalents at end of period              5,917    4,236


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 ended the first  quarter of 2017 with a gross profit of 624
thousand euros (Q1 2016: 1,153 thousand euros) and a gross margin of 1.5% (Q1
2016: 4.2%). The gross margin weakened year on year due to stiffer competition.
We drew attention to the fact that changes in the market situation would put
pressure on profitability already in 2016. We earned our first-quarter gross
profit in the building construction segment although the gross margin of our
Buildings segment dropped to 4.1% (Q1 2016: 10.7%). The decline in
profitability is partly attributable to the loss of the Swedish subsidiary,
which incurred some costs in the final stage of its first building construction
contract which were not fully foreseen on entering the new market. Our results
in the infrastructure construction segment were expectedly modest although the
loss of our Infrastructure segment decreased compared with a year earlier. The
main reasons for the segment’s loss were its lack of self-performed work (major
earthworks, etc.) during the winter season and a large share of uncovered fixed
costs. 

Administrative expenses for the first quarter of 2017 totalled 1,457 thousand
euros. Compared with a year earlier, administrative expenses grew slightly (Q1
2016: 1,292 thousand euros) but the ratio of administrative expenses to revenue
(12 months rolling) decreased to 3.2% (Q1 2016: 3.6%). Although we made changes
to the Group’s structure and continued investing in foreign markets which
unavoidably and expectedly increases administrative expenses in the start-up
phase, our cost-control measures continued to produce good results and we were
able to keep administrative expenses below the target ceiling of 4% of revenue. 

Operating loss for the first quarter of 2017 amounted to 992 thousand euros (Q1
2016: an operating loss of 213 thousand euros). EBITDA was negative at 503
thousand euros (Q1 2016: positive at 233 thousand euros). 

During the period, the euro/Ukrainian hryvnia exchange rate was relatively
stable and our exchange losses from adverse movements in the euro/Ukrainian
hryvnia exchange rate were considerably smaller than a year earlier.  In the
first quarter, the Ukrainian currency weakened against the euro by around 1.9%,
which meant that Group entities whose functional currency is the hryvnia had to
restate their euro-denominated liabilities. Exchange losses reported in finance
costs totalled 49 thousand euros (Q1 2016: 291 thousand euros). 

The Group’s net loss amounted to 1,086  thousand euros (Q1 2016: a net loss of
409 thousand euros), of which net loss attributable to owners of the parent,
Nordecon AS, was 1,087 thousand euros (Q1 2016: 570 thousand euros). 

Cash flows

In the first quarter of 2017, operating activities produced a net cash outflow
of 6,647 thousand euros (Q1 2016:  an outflow of 2,818 thousand euros).
Negative operating cash flow is typical of the first quarter and stems from the
cyclical nature of the construction business. In the second quarter, larger
fixed costs and preparations made for more active construction operations,
particularly in the infrastructure segment, cause outflows to exceed inflows.
In addition, operating cash flow is influenced by a mismatch between the
settlement terms agreed with customers and subcontractors and the fact that
neither public nor private sector customers are required to make advance
payments while we have to make prepayments to subcontractors, materials
suppliers, etc. We deal with equalising the settlement terms agreed with
customers and suppliers on a daily basis, mostly through factoring. In addition
to factoring accounts receivable, we have concluded a frame agreement for
reverse factoring which enables our subcontractors who do not have sufficient
credit standing to obtain a factoring limit from a financing institution to use
our limit. 

Investing activities produced a net cash inflow of 138 thousand euros (Q1 2016:
an outflow of 88 thousand euros). The largest items were payments for property,
plant and equipment of 33 thousand euros (Q1 2016: 103 thousand euros) and
dividends received of 147 thousand euros (Q1 2016: 3 thousand euros). 

Financing activities generated a net cash inflow of 2,640 thousand euros (Q1
2016: an inflow of 808 thousand euros). Financing cash flows were strongly
influenced by loan and lease transactions. Proceeds from loans received
totalled 3,430 thousand euros, consisting of use of overdrafts and development
loans (Q1 2016: 1,562 thousand euros). Compared with a year ago, there was
slight growth in finance lease payments which totalled 480 thousand euros (Q1
2016: 395 thousand euros). The rise in finance lease payments is attributable
to large-scale investments in road construction equipment (including the
acquisition of a new asphalt concrete plant) made in the second quarter. 

At 31 March 2017, the Group’s cash and cash equivalents totalled 5,917 thousand
euros (31 March 2016: 4,236 thousand euros). Management’s commentary on
liquidity risks is presented in the chapter Description of the main risks. 

Key financial figures and ratios

Figure/ratio for the period         Q1  2017    Q1  2016    Q1  2015        2016
--------------------------------------------------------------------------------
Revenue (EUR ’000)                    41,604      27,731      27,113     183,329
Revenue change                         50.0%        2.3%       15.2%       26.0%
Net loss/profit (EUR ’000)            -1,086        -409      -1,354       3,933
Net loss/profit attributable to       -1,087        -570      -1,284       3,044
 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)               -0.04       -0.02       -0.04        0.10
                                                                                
Administrative expenses to              3.5%        4.7%        4.1%        3.3%
 revenue                                                                        
Administrative expenses to              3.2%        3.6%        3.4%        3.3%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR ‘000)                       -503         233        -285       6,017
EBITDA margin                          -1.2%        0.8%       -1.1%        3.3%
Gross margin                            1.5%        4.2%        1.5%        6.0%
Operating margin                       -2.4%       -0.8%       -2.8%        2.3%
Operating margin excluding gain        -2.4%       -0.8%       -3.1%        2.2%
 on asset sales                                                                 
Net margin                             -2.6%       -1.5%       -5.0%        2.1%
Return on invested capital             -1.5%       -0.5%       -2.0%        8.5%
Return on equity                       -2.9%       -1.1%       -3.8%       10.6%
Equity ratio                           35.6%       40.5%       38.8%       38.6%
Return on assets                       -1.1%       -0.5%       -1.4%        4.2%
Gearing                                29.3%       28.8%       35.5%       16.7%
Current ratio                           1.01        1.02        1.01        1.20
As at                               31 March    31 March    31 March      31 Dec
                                        2017        2016        2015        2016
--------------------------------------------------------------------------------
Order book (EUR ’000)                130,109     120,702      72,689     131,335
--------------------------------------------------------------------------------


Revenue change = (revenue for the    Operating margin excluding gain on asset   
 reporting period / revenue for the   sales = ((operating profit or loss – gain 
 previous period) – 1 * 100           on sales of non-current assets – gain on  
Earnings per share (EPS) = net        sales of real estate) / revenue) * 100    
 profit or loss attributable to      Net margin = (net profit or loss for the   
 owners of the parent / weighted      period / revenue) * 100                   
 average number of shares            Return on invested capital = ((profit or   
 outstanding                          loss before tax + interest expense) / the 
Administrative expenses to revenue    period’s average (interest-bearing        
 = (administrative expenses /         liabilities + equity)) * 100              
 revenue) * 100                      Return on equity = (net profit or loss for 
Administrative expenses to revenue    the period / the period’s average total   
 (rolling) = (past four quarters’     equity) * 100                             
 administrative expenses / past      Equity ratio = (total equity / total       
 four quarters’ revenue) * 100        liabilities and equity) * 100             
EBITDA = operating profit or loss +  Return on assets = (net profit or loss for 
 depreciation and amortisation +      the period / the period’s average total   
 impairment losses on goodwill        assets) * 100                             
EBITDA margin = (EBITDA / revenue)   Gearing = ((interest-bearing liabilities – 
 * 100                                cash and cash equivalents) /              
Gross margin = (gross profit or       (interest-bearing liabilities + equity)) *
 loss / revenue) * 100                100                                       
Operating margin = (operating        Current ratio = total current assets /     
 profit or loss / revenue) * 100      total current liabilities                 
--------------------------------------------------------------------------------



Performance by geographical market

In the first quarter of 2017, Nordecon earned around 9% of its revenue outside
Estonia compared with 7% in the same period last year. 

         Q1  2017  Q1  2016  Q1  2015  2016
-------------------------------------------
-------------------------------------------
Estonia       91%       93%       95%   93%
Sweden         6%        3%        0%    4%
Finland        2%        1%        2%    1%
Ukraine        1%        3%        3%    4%

The proportion of revenue generated in the Swedish market increased
considerably compared with a year earlier. We continued to build two apartment
buildings and started preparations for the design and construction of a third
one. Although the proportion of revenue generated in Ukraine decreased, the
amount of Ukrainian revenues remained comparable to the first quarter of 2016.
In Ukraine, most of the revenue resulted from one large building construction
contract. Our Finnish revenues resulted from concrete works in the building
construction segment. 

Geographical diversification of the revenue base is a consciously deployed
strategy by which we mitigate the risks resulting from excessive reliance on
one market. However, conditions in some of our selected foreign markets are
also volatile and have a strong impact on our current results. Increasing the
contribution of foreign markets is one of Nordecon’s strategic targets. Our
vision of our foreign operations is described in the chapter Outlooks of the
Group’s geographical markets. 



Performance by business line

Segment revenues

We strive to maintain the revenues of our operating segments (Buildings and
Infrastructure) in balance as this helps disperse risks and provides better
opportunities for continuing construction operations in more challenging
circumstances when the operating volumes of a sub-segment fall sharply. 

Nordecon’s revenue for the first quarter of 2017 amounted to 41,604 thousand
euros, a roughly 50% increase on the 27,731 thousand euros generated in the
first quarter of 2016. Revenues increased in both the Buildings and the
Infrastructure segment. The general contraction of the infrastructure
construction market has also influenced our revenue structure. In the first
quarter of 2017, our Buildings segment and Infrastructure segment generated
revenue of 36,711 thousand euros and 4,487 thousand euros respectively. The
corresponding figures for the first quarter of 2016 were 24,411 thousand euros
and 3,108 thousand euros (see note 8). Our order book has a similar structure:
at the end of the first quarter 77% of contracts secured but not yet performed
was attributable to the Buildings segment (Q1 2016: 70%). 

Operating segments*  Q1  2017  Q1  2016  Q1  2015  2016
-------------------------------------------------------
-------------------------------------------------------
Buildings                 89%       88%       78%   73%
Infrastructure            11%       12%       22%   27%

* 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 are allocated in both parts of the interim report based on the nature
of the work. 

Sub-segment revenues

In the Buildings segment, the strongest revenue contributors were the apartment
buildings and the public buildings sub-segments where most of the Group’s
revenue resulted from general contracting. In Estonia, a substantial share of
our apartment building projects is located in Tallinn. In the first quarter,
the main revenue contributors were the Meerhof 2.0 apartment building complex
at Pirita tee 20a and apartment buildings at Kopli 4a, Kopli 6 and Virbi 10.
The contributions of foreign markets sustained growth. In Ukraine, we continued
to build a residential quarter in the city of Brovary in the Kiev region. In
Sweden, we continued to build two apartment buildings and began preparations
for the design and construction of a third, 8-floor apartment building in
Stockholm. 

We continue to build our own developments (reported in the apartment buildings
sub-segment) in both Tartu and Tallinn. We have completed 5 apartment buildings
in the first four phases of our Tammelinn project in Tartu and sales have been
highly successful. By the reporting date, all completed apartments were sold.
In the first quarter of 2017, we began building phase V which comprises a
four-floor apartment building with 24 apartments and launched preparations for
phase VI (www.tammelinn.ee). In phase V, which will be completed in August
2017, 23 of the 24 apartments are covered with pre-sale agreements or
reservations and in phase VI, which will be completed in December 2017, around
half of the apartments have already been reserved. In the first quarter, we
completed the fifth and last terraced house in our Magasini 29 development
project in Tallinn (www.magasini.ee). We continue to build two apartment
buildings with a total of 30 apartments in Hane street in Tallinn. In carrying
out our development activities, we monitor carefully potential risks in the
housing development market that stem from rapid growth in the supply of new
housing as well as a relative increase in input prices. 

The key factor which influenced the results of the public buildings sub-segment
was growth in the state’s investment in national defence. In the first quarter,
we continued the design and construction of the Lintsi warehouse complex and
the construction of a depot, infrastructure for armoured vehicles, a canteen
and a barracks at the Tapa military base. In addition, we delivered to the
customer Ugala Theatre in Viljandi. 

The revenues of the commercial buildings sub-segment grew somewhat compared
with the first quarter of 2016.  We continued to build the office and retail
complex Viimsi Äritare and an office building at Lõõtsa 12 in Ülemiste City and
to renovate the machinery hall of the historical Luther furniture factory into
a modern office building. Based on our order book, we expect the commercial
buildings sub-segment to post year-on-year revenue growth. 

The revenues of the industrial and warehouse facilities sub-segment decreased
year on year. The period’s largest projects were the construction of Harmet’s
production and warehouse facilities at Kumna, near Tallinn, the construction of
a co-generation plant at Kehra and phase III (fourth floor) in the
reconstruction of the pig fattening unit of Rakvere Farmid AS (EKSEKO). We
began preparations for building the Metsä Wood plywood factory in Pärnu. 

Revenue breakdown in Buildings segment  Q1  2017  Q1  2016  Q1  2015  2016
--------------------------------------------------------------------------
Apartment buildings                          33%       28%       19%   34%
Public buildings                             28%       35%       12%   30%
Commercial buildings                         26%       20%       58%   16%
Industrial and warehouse facilities          13%       17%       11%   20%

For a long time, the main revenue source in the Infrastructure segment has been
road construction and in the first quarter of 2017 its revenue contribution
(compared to a year earlier) grew even further. We continued to render road
maintenance services in the Järva and Hiiu counties and the Keila and Kose
maintenance areas of the Harju county. The period’s road construction projects
were small: we continued the reconstruction of Logi street in Tallinn and
construction work at the Old City Harbour. A large share of the period’s
revenues resulted from forest road improvement services provided to the State
Forest Management Centre. We believe that road construction will remain the
main revenue source in the Infrastructure segment through 2017. In contrast to
the two previous years, when most of the segment’s revenues resulted from small
or medium-sized reconstruction or rehabilitation projects, this year we have
two large contracts:  construction of a 2+1 road (a road with passing lanes) on
the Ääsmäe-Kohatu section of the Tallinn-Pärnu-Ikla road which was secured at
the end of 2016 and reconstruction of the Haabersti intersection which was
secured after the end of the reporting period in April 2017. 

The contracts secured by the environmental engineering and other engineering
(utility network construction) sub-segments are small and growth of the
sub-segments’ revenues is unlikely. At the date of release of this report,
there is no sign of any major hydraulic engineering projects to be announced
and demand for other complex engineering work also tends to be irregular. 

Revenue breakdown in Infrastructure segment           Q1       Q1       Q1  2016
                                                    2017     2016     2015      
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    82%      65%      79%   86%
Other engineering                                    10%      30%      15%    9%
Environmental engineering                             8%       5%       5%    5%
Specialist engineering (including hydraulic           0%       0%       1%    0%
 engineering)                                                                   



Order book

At 31 March 2017, the Group’s order book (backlog of contracts signed but not
yet performed) stood at 130,109 thousand euros, an 8% increase year on year. 

For the period         31 March 2017  31 March 2016  31 March  2015  31 Dec 2016
--------------------------------------------------------------------------------
Order book (EUR ‘000)        130,109        120,702          72,689      131,335

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 77% and 23% of the Group’s order book
respectively (31 March 2016: 70% and 30% respectively). 

Compared with a year earlier, the order book of the Buildings segment has grown
by around 18%. The order books of the commercial buildings and the industrial
and warehouse facilities sub-segments have increased substantially, the first
one primarily through contracts for the construction of an office building at
Lõõtsa 12 and a multi-storey car par at Lõõtsa 11 in Ülemiste City in Tallinn
and the Martens house in Pärnu. In the first quarter of 2017, we secured a
contract for building a plywood factory for Metsä Wood in Pärnu, which
increased the order book of the industrial and warehouse facilities
sub-segment. The order books of the public buildings and the apartment
buildings sub-segments have decreased slightly but the order book of the
apartment buildings sub-segment is still the largest. The order book of the
apartment buildings sub-segment is influenced by large contracts secured in
2016 including projects for the construction of the Meerhof 2.0 apartment
building complex at Pirita tee 20a, apartment buildings at Virbi 10 and
Sõjakooli 12, and five apartment buildings in the city of Brovary in the Kiev
region in Ukraine. At the beginning of 2017, we secured a contract for building
an eight-floor apartment building (Väsby Terrass) in Sweden. The largest
contracts in the order book of the public buildings sub-segment are those for
the construction of a depot, infrastructure for armoured vehicles, a canteen
and a barracks for the Tapa military base. 

Compared with a year ago, the order book of the Infrastructure segment has
decreased by around 16%. 83% of the segment’s order book is made up of work
awarded to the road construction and maintenance sub-segment whose order book
has also decreased slightly compared with a year earlier. A major project in
the road construction portfolio is the contract signed for building a 2+1 road
(a road with passing lanes) on the Ääsmäe-Kohatu section of the
Tallinn-Pärnu-Ikla road which was secured in 2016. We continue to provide road
maintenance services in four road maintenance areas: Keila, Järva, Hiiu, and
Kose. According to our estimates, in 2017 the volume of public investment will
not increase substantially compared with 2016. Thus, we expect that in 2017 the
revenues of the Infrastructure segment will remain more or less at the same
level as in 2016 (for further information, see the Business risks section of
the chapter Description of the main risks). 

Based on growth in the Group’s order book and developments in our selected
markets, we forecast year-on-year revenue growth for 2017. In an environment of
exceptionally stiff competition, we have tried to avoid taking unjustified
risks whose realisation in the contract performance phase would have an adverse
impact on the Group’s results. Instead, our policy is to keep costs under
control and monitor market developments with due care. 

Between the reporting date (31 March 2017) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 33,263 thousand euros. 



People

Employees and personnel expenses

In the first quarter of 2017, the Group (the parent and the subsidiaries)
employed, on average, 716 people including 413 engineers and technical
personnel (ETP). The number of employees, particularly the ETP staff, has
increased year on year by around 10% in connection with growth in Group’s
business operations. 

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

               Q1  2017  Q1  2016  Q1  2015  2016
-------------------------------------------------
-------------------------------------------------
ETP                 413       353       362   381
Workers             303       299       349   303
Total average       716       652       711   684

Our personnel expenses for the first quarter of 2017 including all taxes
totalled 4,479 thousand euros (Q1 2016: 4,109 thousand euros), a roughly 9%
increase year on year. The growth in personnel expenses is mainly attributable
to a larger headcount. 

The service fees of the members of the council of Nordecon AS for the first
quarter of 2017 amounted to 34 thousand euros and associated social security
charges totalled 11 thousand euros (Q1 2016: 34 thousand euros and 11 thousand
euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 94
thousand euros and associated social security charges totalled 31 thousand
euros (Q1 2016: 87 thousand euros and 28 thousand euros respectively). 

Labour productivity and labour cost efficiency

We measure the efficiency of our operating activities using the following
productivity and efficiency indicators, which are based on the number of
employees and personnel expenses incurred: 

                                             Q1  2017  Q1  2016  Q1  2015   2016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling), (EUR     281.9     216.4     224.5  268.0
 ’000)                                                                          
Change against the comparative period           30.4%     -3.6%     -1.4%    27%
                                                                                
Nominal labour cost efficiency (rolling),         9.5       8.0       8.2    9.0
 (EUR)                                                                          
Change against the comparative period           20.7%     -4.4%     -2.1%  12.8%


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

The Group’s nominal labour productivity and labour cost efficiency increased
year on year, mainly through revenue growth. 



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. 

Competition continues to be stiff in all segments of the construction market
and in 2017 public investment is not expected to grow substantially compared
with 2016. Thus, builders’ bid prices are under strong competitive pressure in
a situation where the prices of construction inputs have been trending upwards
moderately but consistently for several quarters. Bidders include not only
well-known general contractors but also former subcontractors. This is mainly
attributable to the state and local governments’ policy to keep the
qualification requirements of public procurement tenders low, which sometimes
results in the sacrifice of quality to the lowest possible price. We
acknowledge the risks inherent in the performance of contracts signed in an
environment of stiff competition and rising input prices. Securing a long-term
construction contract at an unreasonably low price in a situation where input
prices cannot be lowered noticeably and competition is tough is risky because
negative developments in the economy may quickly render the contract onerous.
In setting our prices in such an environment, we focus on ensuring a reasonable
balance of contract performance risks and tight cost control. 

Demand for construction services continues to be strongly influenced by the
volume of public investment, which in turn depends on the co-financing received
from the EU structural funds. Total support allocated to Estonia during the
current EU budget period (2014-2020) amounts to 5.9 billion euros, exceeding
the figure of the previous financial framework, but the amounts earmarked for
construction work are substantially smaller. Projects supported by the EU began
to have a limited impact on the construction sector in the second half of 2016
and in the next periods the process is expected to accelerate. 

In the light of the above factors, we see some opportunities for achieving
year-on-year business growth in 2017: business growth in Estonia is supported
by positive developments in our selected foreign markets. Our action plan
foresees flexible resource allocation aimed at finding more profitable
contracts and performing them effectively. According to its business model,
Nordecon operates in all segments of the construction market. Therefore, we are
somewhat better positioned than companies that operate in one narrow (and in
the current market situation particularly some infrastructure) segment. 

Our business is also influenced by seasonal changes in weather conditions,
which have the strongest impact on infrastructure construction 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. Our strategy is to counteract the seasonality of
infrastructure operations with building construction that is less exposed to
seasonal fluctuations. Our long-term goal is to be flexible and keep our two
operating segments in relative balance (see also the chapter Performance by
business line). Where possible, our entities implement different technical
solutions that allow working efficiently also in changeable 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
insurance 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 due until
the contract has been completed. To remedy construction deficiencies which may
be detected during the warranty period, Group companies create warranty
provisions based on their historical experience. At 31 March 2017, the Group’s
warranty provisions (including current and non-current ones) totalled 1,176
thousand euros (31 March 2016: 1,137 thousand euros). 

In addition to managing the risks directly related to construction operations,
in recent years we have also 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

During the period, we recognised credit losses of 30 thousand euros. In the
comparative period, there were no credit losses. The overall credit risk
exposure of receivables is low because the solvency of prospective customers is
evaluated, the share of public sector customers is large, and customers’
settlement behaviour is consistently monitored. The main indicator of the
realisation of credit risk is settlement default that exceeds 180 days along
with no activity on the part of the debtor that would confirm the intent to
settle. 

Liquidity risk

The Group remains exposed to higher than usual liquidity risk. At the reporting
date, the Group’s current assets exceeded its current liabilities 1.01-fold (31
March 2016: 1.02-fold). The key factor which influences the current ratio is
the classification of the Group’s loans to its Ukrainian associates as
non-current assets and the banks’ general policy not to refinance
interest-bearing liabilities (particularly overdrafts) for a period exceeding
twelve months. 

Because the political and economic situation in Ukraine is still complicated,
we believe that the Group’s Ukrainian investment properties cannot be realised
in the short term. Accordingly, as at the reporting date the Group’s loans to
its Ukrainian associates of 8,716 thousand euros are classified as non-current
assets. 

For better cash flow management, we use overdraft facilities and factoring by
which we counter the mismatch between the settlement terms agreed with
customers and subcontractors.  Under IFRS EU, borrowings have to be classified
into current and non-current based on contract terms in force at the reporting
date. At 31 March 2017, the Group’s short-term borrowings totalled 17,504
thousand euros. After the end of the reporting period, we have refinanced
short-term borrowings of 5,763 thousand euros, of which settlement of 3,913
thousand euros has been deferred to 2018 and settlement of 1,850 thousand euros
has been deferred to 2019. 

At the reporting date, the Group’s cash and cash equivalents totalled 5,917
thousand euros (31 March 2016: 4,236 thousand euros). 

Interest rate risk

Our 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. Compared with the same period
last year, interest-bearing borrowings grew by 3,169 thousand euros. Both loan
and finance lease liabilities increased (see also the section Liquidity risk).
At 31 March 2017, interest-bearing borrowings totalled 23,649 thousand euros
(31 March 2016: 20,480 thousand euros). Interest expense for the first quarter
of 2017 amounted to 128 thousand euros (Q1 2016: 147 thousand euros). 

The main source of interest rate risk is a possible rise in the variable
component of floating interest rates (EURIBOR, EONIA or the creditor’s own base
rate). In the light of the Group’s relatively heavy loan burden this would
cause a significant rise in interest expense, which would have an adverse
impact on profit. We mitigate the risk by pursuing a policy of entering, where
possible, into fixed-rate contracts when the market interest rates are low. As
regards loan products offered by banks, observance of the policy has proved
difficult and most new contracts have a floating interest rate. We have entered
into a derivative contract to manage the risks resulting from changes in the
interest rates of the finance lease contract for the acquisition of a new
asphalt concrete plant. 

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), Ukrainian hryvnias
(UAH), and Swedish kronas (SEK). 

The exchange rate of the hryvnia has been unstable because the political and
economic environment in Ukraine continues to be complicated due to the conflict
between Ukraine and Russia which broke out at the beginning of 2014 and at the
beginning of 2015 the National Bank of Ukraine decided to discontinue
determination of the national currency’s indicative exchange rate. In the first
quarter of 2017, the hryvnia/euro exchange rate was relatively stable: the
hryvnia weakened against the euro by around 1.9%. For our Ukrainian
subsidiaries, this meant additional foreign exchange losses from the
translation of their euro-denominated loans into the local currency. Relevant
exchange losses totalled 49 thousand euros (Q1 2016: 291 thousand euros).
Exchange gains and losses on financial instruments are recognised in Finance
income and Finance costs respectively. Translation of receivables and
liabilities from operating activities did not give rise to any exchange gains
or losses. 

The reciprocal receivables and liabilities of our Ukrainian and non-Ukrainian
entities which are connected with the construction business and denominated in
hryvnias do not give rise to exchange losses. Nor do the loans provided to the 
Ukrainian associates in euros give rise to exchange losses that ought to be
recognised in the Group’s accounts. 

Due to movements in the Swedish krona/euro exchange rate in the first quarter
of 2017, translation of operating receivables and payables did not result in
any exchange gain or loss (Q1 2016: an exchange loss of 2 thousand euros). The
prior period exchange loss was recognised in Other operating expenses. 

We do not use derivatives to hedge currency risk.



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market

  -- In 2017, public investment should grow slightly but the extent to which
     relevant projects can be realised is still unclear. Although in the
     2014-2020 EU budget period the support allocated to Estonia will increase
     to 5.9 billion euros (2007-2013: 4.6 billion euros), the portion that will
     influence the construction market will not increase. Instead, compared with
     the previous period, there will be a rise in allocations to intangible
     areas.
  -- In the context of the market as a whole, investments made by the largest
     public sector customers (e.g., state-owned real estate company Riigi
     Kinnisvara AS and the National Road Administration) which reach signature
     of a construction contract in 2017 will not increase substantially. The
     Ministry of Defence has been a positive exception for builders as its
     activities in carrying out new procurement tenders have made, and hopefully
     will continue to make, a significant contribution to market revival. Hence,
     the Estonian construction market as a whole (particularly infrastructure
     construction segments) will remain in relative stagnation. So far, the
     situation has been mitigated by the positive level of private investment in
     building construction but the latest developments reflect a certain
     slowdown also in the latter.
  -- The long and painful process of construction market consolidation will
     continue, albeit slowly. In particular, this applies to general contracting
     in building construction where the number of medium-sized general
     contractors (annual turnover of around 15-40 million euros) is too large.
     Based on recent years’ experience it is likely that stiff competition and
     insufficient demand will cause some general contractors to go slowly out of
     business or shrink in size rather than merge or exit the market. News about
     the difficulties of some construction companies, published at the end of
     2016, show that the problems of weaker market players are escalating.
     According to our assessment, one reason why market consolidation has
     decelerated in recent years is customers’ (including public sector
     customers’) increasing desire to loosen tendering requirements to increase
     competition and lower the price even though this increases the risks
     related to security, quality, adherence to deadlines, and the builder’s
     liability.
  -- Competition is stiff in all segments of the construction market,
     intensifying in line with market developments. The rise in the average
     number of bidders for a contract reflects this. However, the gap between
     the lowest bids made by winners and the average ones is narrowing, which
     shows that the quality of procurement documents is gradually improving and
     bidders’ prices are evening up. It is clear that in the current market
     situation where the prices of construction inputs have started to rise
     efficiency is the key to success. Regrettably, the number of materials
     producers, suppliers, and subcontractors that are trying to survive or
     succeed in a difficult environment by dishonest means, e.g., by supplying
     goods with concealed defects or considerably lower quality than the one
     recorded in the product certificate, has increased quite rapidly. If the
     trend continues, both construction service providers and end-customers will
     have to apply strict and thorough quality control measures to make sure
     that the outcome meets their expectations. Unfair competition is putting
     visible pressure on prices and the quality of the construction service.
     Unfortunately, the problem is also underpinned by the customers’ (including
     state institutions’ and state-owned companies’) increasing tendency to
     lower the bidders’ qualification requirements and prioritise quality more
     on paper than in practice.
  -- 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, set sales prices that are affordable for prospective
     buyers. Although new apartments are relatively expensive compared to the
     standard of living and the banks’ lending terms are strict, the housing
     market continued to grow also in the first quarter of 2017. At  the date of
     release of this report, there are signs that the market may be steadying.
     Hopefully the market will stabilise.
  -- There is a growing contrast between the stringent terms of public
     contracts, which require the builder to agree to extensive obligations,
     strict sanctions, various financial guarantees, long settlement terms,
     etc., and the modest participation requirements. Lenient qualification
     requirements and the precondition of making a low bid have made it
     relatively easy for an increasing number of builders to win a contract but
     have heightened the risks taken by customers in terms of funding, deadlines
     and quality during both the contract performance phase and the subsequent
     warranty period.
  -- In the second half of 2016, the prices of construction inputs, particularly
     in some specific building construction sub-segments  (e.g., finishing and
     concrete works, etc.), began to rise. So far, general contractors have been
     able to absorb this by making margin concessions but their capacity for
     doing this is decreasing. The construction market includes an increasing
     number of areas where changes in the environment may trigger a sharp price
     increase (e.g., materials producers’ rapid and successful entry into
     foreign markets). The rise in housing construction has lengthened the
     supply periods of various essential materials and services considerably,
     making it impossible to carry out all processes in the former optimistic
     timeframes. As a result, activities require more extensive planning or may
     need to be postponed.
  -- Persisting shortage of skilled labour (including project and site managers)
     may start restricting companies’ performance capacities, which may affect
     different aspects of the construction process including quality. Labour
     migration to the Nordic countries will remain steady and the number of job
     seekers who return to the Estonian construction market is not likely to
     increase considerably. All of the above will sustain pressure for a wage
     increase, particularly in the category of the younger and less experienced
     workforce whose mobility and willingness to change jobs is naturally
     higher.

Ukraine

In Ukraine, we provide general contracting and project management services to
private sector customers in the segment of building construction. Political and
economic instability continues to restrict the adoption of business decisions
but construction activity in Kiev and the surrounding area has not halted. In
2017, we will continue our operations in Ukraine primarily in the Kiev region.
Based on our order book as at the end of 2016, we expect that in 2017 our
operating volumes will remain at a level comparable to 2016. Despite the
military conflict in eastern Ukraine, for Nordecon the market situation in Kiev
has not deteriorated compared with a year or two ago. Hard times have reduced
the number of inefficient local (construction) companies and when the economy
normalises we will have considerably better prospects for increasing our
operations and profitability. The Ukrainian government’s recent crackdown on
cash-in-hand work is definitely a step in the right direction, which in the
long term should also improve our position in the Ukrainian construction
market. We assess the situation in the Ukrainian market regularly and
critically and are ready to restructure our operations as and when necessary.
Should the crisis in eastern Ukraine spread to Kiev (which at the date of
release of this report is highly unlikely), we can suspend our operations
immediately. We continue to seek opportunities for exiting our two real estate
projects which have been put on hold or signing a construction contract with a
prospective new owner. 

Finland

In Finland, we have provided mainly subcontracting services in the concrete
segment but, based on experience gained, have started preparations for
expanding into the general contracting market. The local concrete work market
allows competing for projects where the customer wishes to source all concrete
works from one reliable partner. Our policy is to maintain a rational approach
and avoid taking excessive risks. 

Sweden

We entered the Swedish market in July 2015, when we acquired a 100% stake in
SWENCN AB, a company registered in the Kingdom of Sweden. In the Swedish market
we intend to offer mainly the construction of residential and non-residential
buildings, particularly in central Sweden. On gaining experience in the new
market, we have prioritised quality and observance of deadlines and have
therefore accepted a certain decrease in profitability. As regards our
longer-term goals and the plan to build a viable and strong organisation that
would compete successfully in the Swedish market, we are positive about the
developments so far and see potential for sustaining business growth. 



Nordecon (www.nordecon.com) 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, Finland and Sweden. 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 2016 was 183 million euros. Currently Nordecon Group
employs close to 720 people. Since 18 May 2006 the company's shares have been
quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange. 


         Andri Hõbemägi
         Nordecon AS
         Head of Investor Relations
         Tel: +372 6272 022
         Email: [email protected]
         www.nordecon.com