Börsiteade

Pealkiri

2017 III quarter and 9 months consolidated interim report (unaudited)

Teade

This announcement includes Nordecon AS’s consolidated financial statements for
the third quarter and nine months 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                                           30 September      31 December
                                                           2017             2016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                 8,062            9,786
Trade and other receivables                              47,283           21,055
Prepayments                                               2,717            1,644
Inventories                                              26,471           22,992
Total current assets                                     84,533           55,477
Non-current assets                                                              
Investments in equity-accounted investees                 1,920            1,640
Other investments                                            26               26
Trade and other receivables                               9,327           10,816
Investment property                                       4,929            4,929
Property plant and equipment                             11,792           11,111
Intangible assets                                        14,643           14,623
Total non-current assets                                 42,637           43,145
TOTAL ASSETS                                            127,170           98,622
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Borrowings                                               21,525            6,297
Trade payables                                           46,023           29,811
Other payables                                            7,208            5,389
Deferred income                                           5,905            4,128
Provisions                                                  379              753
Total current liabilities                                81,040           46,378
Non-current liabilities                                                         
Borrowings                                                7,501           13,102
Trade payables                                               98               98
Other payables                                              118              117
Provisions                                                1,111              881
Total non-current liabilities                             8,828           14,198
TOTAL LIABILITIES                                        89,868           60,576
                                                                                
EQUITY                                                                          
Share capital                                            18,263           19,720
Own (treasury) shares                                    -1,349           -1,550
Share premium                                               589              564
Statutory capital reserve                                 2,554            2,554
Translation reserve                                       1,808            1,549
Retained earnings                                        14,685           13,091
Total equity attributable to owners of the               36,550           35,928
 parent                                                                         
Non-controlling interests                                   752            2,118
TOTAL EQUITY                                             37,302           38,046
TOTAL LIABILITIES AND EQUITY                            127,170           98,622



Condensed consolidated interim statement of comprehensive income

EUR ‘000                           9M 2017  Q3 2017   9M 2016  Q3 2016      2016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                            174,909   71,408   133,570   59,741   183,329
Cost of sales                     -168,141  -67,779  -124,979  -55,303  -172,350
Gross profit                         6,768    3,629     8,591    4,438    10,979
                                                                                
Marketing and distribution            -448     -114      -279      -61      -413
 expenses                                                                       
Administrative expenses             -5,375   -2,297    -4,629   -1,847    -6,106
Other operating income                  98       44       148       51       362
Other operating expenses              -130      -23      -539      -79      -614
Operating profit                       913    1,239     3,292    2,502     4,208
                                                                                
Finance income                       2,802    2,598       336      101       463
Finance costs                         -726     -298      -785     -319    -1,088
Net finance income/costs             2,076    2,300      -449     -218      -625
                                                                                
Share of profit of                     518      325       717      233       609
 equity-accounted investees                                                     
                                                                                
Profit before income tax             3,507    3,864     3,560    2,517     4,192
Income tax expense                    -791     -251      -245        0      -259
Profit for the period                2,716    3,613     3,315    2,517     3,933
                                                                                
Other comprehensive income                                                      
Items that may be reclassified                                                  
 subsequently to profit or loss                                                 
Exchange differences on                259      132       239      127       191
 translating foreign operations                                                 
Total other comprehensive income       259      132       239      127       191
TOTAL COMPREHENSIVE INCOME           2,975    3,745     3,554    2,644     4,124
                                                                                
Profit attributable to:                                                         
- Owners of the parent               2,978    3,868     2,437    2,011     3,044
- Non-controlling interests           -262     -255       878      506       889
Profit for the period                2,716    3,613     3,315    2,517     3,933
                                                                                
Total comprehensive income                                                      
 attributable to:                                                               
- Owners of the parent               3,237    4,000     2,676    2,138     3,235
- Non-controlling interests           -262     -255       878      506       889
Total comprehensive income for       2,975    3,745     3,554    2,644     4,124
 the period                                                                     
                                                                                
Earnings per share attributable                                                 
 to owners of the parent:                                                       
Basic earnings per share (EUR)        0.10     0.12      0.08     0.07      0.10
Diluted earnings per share (EUR)      0.10     0.12      0.08     0.07      0.10



Condensed consolidated interim statement of cash flows

EUR ‘000                                                      9M 2017   9M 2016
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Cash flows from operating activities                                           
Cash receipts from customers1                                 183,759   137,502
Cash paid to suppliers2                                      -170,133  -119,130
VAT paid                                                       -4,479    -4,643
Cash paid to and for employees                                -17,063   -14,832
Income tax paid                                                  -325      -245
Net cash used in operating activities                          -8,241    -1,348
                                                                               
Cash flows from investing activities                                           
Paid on acquisition of property, plant and equipment             -292      -145
Paid on acquisition of intangible assets                           -5       -25
Proceeds from sale of property, plant and                          48        97
equipment                                                                      
Disposal of investments in subsidiaries and a joint venture     2,744         6
Loans provided                                                    -38       -40
Repayment of loans provided                                     1,487        40
Dividends received                                                153       153
Interest received                                                 377         0
Sale of own shares                                                153         0
Net cash from investing activities                              4,627        86
                                                                               
Cash flows from financing activities                                           
Proceeds from loans received                                    7,457     7,166
Repayment of loans received                                      -720    -1,520
Finance lease principal paid                                   -1,758    -1,831
Interest paid                                                    -589      -523
Dividends paid                                                 -2,488    -1,068
Net cash from financing activities                              1,902     2,224
                                                                               
Net cash flow                                                  -1,712       962
                                                                               
Cash and cash equivalents at beginning of period                9,786     6,332
Effect of movements in foreign exchange rates                     -12        -6
Decrease in cash and cash equivalents                          -1,712       962
Cash and cash equivalents at end of period                      8,062     7,288

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 nine months of 2017 with a gross profit of 6,768
thousand euros (9M 2016: 8,591 thousand euros) and a gross margin of 3.9% (9M
2016: 6.4%). The weakening of the gross margin stemmed mainly from the
Buildings segment whose gross margin dropped to 4.3% (9M 2016: 8.1%). The
year-on-year decline in the gross margin is attributable to growth in input
costs, particularly materials and labour. Our performance is strongly
influenced by the insufficient availability of skilled labour and thus also the
shortage of subcontractors in the building construction segment where the
number of buildings under construction is large for the Estonian market. This
allows subcontractors to raise their prices, which puts pressure on general
contractors’ profit margins. We have been highlighting the fact that market
forces are undermining profitability since the second half of 2016. The
weakening of the gross margin is also attributable to the loss of the Swedish
subsidiary that incurred some interior work costs in the final stage of its
first construction contract which could not be sufficiently accurately
estimated in the new market. The performance of our Infrastructure segment
improved somewhat compared to the same period last year, its gross margin
rising to 3.9% (9M 2016: 3.7%). 

Administrative expenses for the first nine months of 2017 totalled 5,375
thousand euros. Compared with a year earlier, administrative expenses grew
substantially (9M 2016: 4,629 thousand euros), mainly through the termination
benefits paid to two board members of Nordecon AS that stepped down and the
council’s decision to increase the number of the company’s board members.
Despite changes in the composition of the board, structural streamlining, and
sustained investment in foreign markets which in the start-up phase is
inevitably accompanied by planned growth in administrative expenses, 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. The
ratio of administrative expenses to revenue (12 months rolling) was 3.0% (9M
2016: 3.8%). 

Operating profit for the first nine months of 2017 amounted to 913 thousand
euros (9M 2016: 3,292 thousand euros). EBITDA was positive at 2,419 thousand
euros (9M 2016: 4,723 thousand euros). 

Finance income for the period amounted to 2,802 thousand euros (9M 2016: 336
thousand euros). A significant share of this resulted from the sale of our
investments in the joint venture Unigate OÜ and the subsidiaries Paekalda 2 OÜ,
Paekalda 3 OÜ, Paekalda 7 OÜ and Paekalda 9 OÜ, which generated a gain of 2,527
thousand euros. 

The Group’s exchange losses from adverse movements in the euro/Ukrainian
hryvnia exchange rate were similar to a year earlier. In the first nine months
of 2017, the Ukrainian currency weakened against the euro by around 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 247 thousand euros (9M 2016: 251 thousand euros). The same
movements in the exchange rate increased the translation reserve in equity by
259 thousand euros (9M 2016: 239 thousand euros) and the net effect of the
exchange differences on the Group’s net assets was a gain of 12 thousand euros
(9M 2016: a loss of 12 thousand euros). 

The Group’s net profit amounted to 2,716 thousand euros (9M 2016: 3,315
thousand euros), of which net profit attributable to owners of the parent,
Nordecon AS, was 2,978 thousand euros (9M 2016: 2,437 thousand euros). 

Cash flows

In the first nine months of 2017, operating activities produced a net cash
outflow of 8,241 thousand euros (9M 2016: a net outflow of 1,348 thousand
euros). Although cash receipts from customers exceeded cash paid to suppliers,
operating cash flow proved negative due to VAT paid and payments made to and
for employees. Operating cash flow continues to be strongly affected by the
fact that neither public nor private sector customers have the obligation to
make advance payments while the Group has to make prepayments to
subcontractors, materials suppliers, etc. In addition, cash inflow is reduced
by contractual retentions, which extend from 5 to 10% of the contract price and
are released at the end of the construction period only. 

Investing activities produced a net cash inflow of 4,627 thousand euros (9M
2016: an inflow of 86 thousand euros). Cash flows from investing activities
were strongly influenced by the sale of the investment in the joint venture
Unigate OÜ for 2,744 thousand euros and loan principal and interest of 1,461
thousand euros and 329 thousand euros respectively collected through the
transaction. Investments in property, plant and equipment and intangible assets
totalled 297 thousand euros (9M 2016: 170 thousand euros) and dividends
received amounted to 153 thousand euros (9M 2016: 153 thousand euros). Own
shares sold during the reporting period generated income of 153 thousand euros. 

Financing activities generated a net cash inflow of 1,902 thousand euros (9M
2016: an inflow of 2,224 thousand euros). Our financing cash flow is strongly
influenced by loan and finance lease transactions. Proceeds from loans received
amounted to 7,457 thousand euros, consisting of development loans received and
the use of overdraft facilities (9M 2016: 7,166 thousand euros). Loan
repayments totalled 720 thousand euros (9M 2016: 1,520 thousand euros)
consisting of scheduled repayments of long-term investment and development
loans. Finance lease payments decreased slightly, amounting to 1,758 thousand
euros (9M 2016: 1,831 thousand euros). Dividends paid in the first nine months
of 2017 totalled 2,488 thousand euros (9M 2016: 1,068 thousand euros). 

At 30 September 2017, the Group’s cash and cash equivalents totalled 8,062
thousand euros (30 September 2016: 7,288 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          9M 2017     9M 2016     9M 2015        2016
--------------------------------------------------------------------------------
Revenue (EUR ‘000)                   174,909     133,570     113,553     183,329
Revenue change                         30.9%       17.6%       -6.1%         26%
Net profit (EUR ‘000)                  2,716       3,315       2,317       3,933
Net profit attributable to             2,978       2,437       2,482       3,044
 owners of the parent (EUR ‘000)                                                
Weighted average number of        30,913,031  30,756,728  30,756,728  30,756,728
 shares                                                                         
Earnings per share (EUR)                0.10        0.08        0.08        0.10
                                                                                
Administrative expenses to              3.1%        3.5%        3.0%        3.3%
 revenue                                                                        
Administrative expenses to              3.0%        3.8%        3.3%        3.3%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR ‘000)                      2,419       4,723       4,187       6,017
EBITDA margin                           1.4%        3.5%        3.7%        3.3%
Gross margin                            3.9%        6.4%        5.5%        6.0%
Operating margin                        0.5%        2.5%        2.5%        2.3%
Operating margin excluding gain         0.5%        2.4%        2.3%        2.2%
 on asset sales                                                                 
Net margin                              1.6%        2.5%        2.0%        2.1%
Return on invested capital              6.5%        6.8%        5.0%        8.5%
Return on equity                        7.2%        9.0%        6.2%       10.6%
Equity ratio                           29.3%       33.2%       35.9%       28.6%
Return on assets                        2.4%        3.3%        2.3%        4.2%
Gearing                                31.6%       28.3%       33.4%       16.7%
Current ratio                           1.04        1.05        1.07        1.20
                                                                                
As at                                30 Sept     30 Sept     30 Sept      31 Dec
                                        2017        2016        2015        2016
--------------------------------------------------------------------------------
Order book (EUR ’000)                142,553     133,846      76,261     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 nine months of 2017, Nordecon earned around 5% of its revenue
outside Estonia, compared with 7% in the same period last year. In terms of
foreign markets, the strongest revenue contributor was Sweden where we
completed two apartment buildings and continued the design and construction of
a third, an 8-floor apartment building. The share of our Ukrainian revenues and
business volumes decreased somewhat compared with a year earlier: during the
period, we provided services under two building construction contracts. Our
Finnish revenues resulted from concrete works in the building construction
segment. 

         9M 2017  9M 2016  9M 2015  2016
----------------------------------------
----------------------------------------
Estonia      95%      93%      96%   93%
Sweden        3%       4%       0%    4%
Ukraine       1%       2%       3%    4%
Finland       1%       1%       1%    1%

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 the Group’s 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, for example when the operating volumes of a sub-segment decline
sharply. 

Nordecon’s revenue for the first nine months of 2017 amounted to 174,909
thousand euros, a roughly 31% increase on the 133,570 thousand euros generated
in the first nine months of 2016. Although revenue increased in both the
Buildings and the Infrastructure segment, the main growth driver was the
Buildings segment where growth was underpinned by a rise in the volume of
contracts secured from the private sector. The downturn in infrastructure
construction, which is affecting the entire Estonian construction market (and
the Group’s chosen strategy), has also left its mark on our revenue structure. 

In the first nine months of 2017, our Buildings segment and Infrastructure
segment generated revenue of 130,618 thousand euros and 42,303 thousand euros
respectively. The corresponding figures for the same period in 2016 were 96,647
thousand euros and 34,923 thousand euros (see note 8). Our order book has a
similar structure: at the end of the period, 70% of contracts secured but not
yet performed was attributable to the Buildings segment (9M 2016: 78%). 

Operating segments*  9M 2017  9M 2016  9M 2015  2016
----------------------------------------------------
----------------------------------------------------
Buildings                75%      72%      61%   73%
Infrastructure           25%      28%      39%   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 revenue contributions of all sub-segments were
quite similar. Only the revenue of the apartment buildings sub-segment, where
we earned most of our revenue as a general contractor, was slightly larger than
the rest. In Estonia, a substantial share of our apartment building projects is
located in Tallinn. During the period under review, the largest projects were
the Meerhof 2.0 apartment building complex at Pirita tee 20a and apartment
buildings at Sõjakooli 12 (phase 2) and Virbi 10. The contribution 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 completed two
apartment buildings and continued the design and construction of a third, an
8-floor apartment building, in Stockholm. 

We continued work on our own housing development projects (reported in the
apartment buildings sub-segment) in Tartu and Tallinn. In the Tammelinn project
in Tartu, we completed phase 5, which consists of a four-floor building with 24
apartments, continued work on phase 6 and made preparations for launching the
construction of phase 7 (www.tammelinn.ee). In Tallinn, we completed the fifth
and last terraced house in our Magasini 29 development project
(www.magasini.ee) and two apartment buildings with a total of 30 apartments in
Hane street. The period’s housing development revenues totalled 4,431 thousand
euros (9M 2016: 3,012 thousand euros). In carrying out development activities,
we monitor closely potential risks in the housing development market that stem
from rapid growth in the supply of new housing and growth in input prices. 

The revenues of the commercial buildings sub-segment grew considerably compared
with the first nine months of 2016. We completed the renovation of the
machinery hall of the historical Luther furniture factory into a modern office
building and the construction of the office and commercial complex Viimsi
Äritare. We continued to build an office building at Lõõtsa 12, the Öpiku B
building and a multi-storey car park at Lõõtsa 11 in Ülemiste City and the
Martens house in Pärnu. Based on our order book, we expect the commercial
buildings sub-segment to post year-on-year revenue growth at the year-end. 

The revenues of the industrial and warehouse facilities sub-segment grew year
on year. The period’s largest projects were the construction of Harmet’s
production and warehouse facilities at Kumna, near Tallinn, a co-generation
plant at Kehra, a cattle shed complex at Kogula, and the Metsä Wood plywood
factory in Pärnu. 

The revenue contribution of the public buildings sub-segment decreased compared
with a year earlier. The revenues of this sub-segment have been strongly
influenced by growth in the state’s investment in national defence. During the
period, we delivered to the customers the building of Ugala Theatre in
Viljandi, the Lintsi warehouse complex, and a depot, infrastructure for
armoured vehicles, a canteen and a barracks at the Tapa military base. We began
building an academic building for the Estonian Academy of Security Sciences. 

Revenue breakdown in the Buildings segment  9M 2017  9M 2016  9M 2015  2016
---------------------------------------------------------------------------
Apartment buildings                             31%      32%      20%   34%
Commercial buildings                            24%      15%      56%   16%
Industrial and warehouse facilities             23%      22%      11%   20%
Public buildings                                22%      31%      13%   30%

For a long time, the main revenue source in the Infrastructure segment has been
road construction and maintenance, which posted 17% year on year revenue growth
in the first nine months of 2017 although its contribution to the
Infrastructure segment’s revenues decreased somewhat. In contrast to two
previous years, when most of the sub-segment’s revenues resulted from small or
medium-sized reconstruction or rehabilitation projects, this year we have been
working on four major contracts: the 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 the reconstruction of the Haabersti
intersection in Tallinn, the construction of a 2+1 road on the
Valmaotsa–Kärevere section of the Tallinn–Tartu–Võru–Luhamaa road, and the
reconstruction of a section of the Tallinn ring road (km 0.6-2.8) which were
secured in 2017. We continued to render road maintenance services in Järva and
Hiiu counties and the Keila and Kose maintenance areas in Harju county. A
substantial share of the period’s revenues also resulted from forest road
improvement services provided to the State Forest Management Centre. 

The contracts secured by the environmental engineering and other engineering
(utility network construction) sub-segments are small and significant 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 and large-scale engineering work also tends to be
irregular. 

Revenue breakdown in the Infrastructure segment  9M 2017  9M 2016  9M 2015  2016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    84%      86%      82%   86%
Other engineering                                    12%       9%      13%    9%
Environmental engineering                             4%       5%       4%    5%
Specialist engineering (including hydraulic           0%       0%       1%    0%
 engineering)                                                                   



Order book

At 30 September 2017, the Group’s order book (backlog of contracts signed but
not yet performed) stood at 142,553 thousand euros, 7% up on a year ago. In the
third quarter, we secured new contracts of 66,371 thousand euros. 

As at                  30 Sept 2017  30 Sept 2016  30 Sept 2015  31 Dec 2016
----------------------------------------------------------------------------
Order book (EUR ‘000)       142,553       133,846        76,261      131,335

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 70% and 30% of the Group’s order book
respectively (30 September 2016: 78% and 22% respectively). 

Compared with the same period in 2016, the order book of the Buildings segment
decreased by around 5%. The order books of the public buildings and the
apartment buildings sub-segments declined at a similar rate. Despite that, the
order book of the apartment buildings sub-segment is the second-largest after
that of the commercial buildings sub-segment. The order book of the apartment
buildings sub-segment is influenced by large contracts secured in 2016 for the
construction of the Meerhof 2.0 apartment building complex at Pirita tee 20a
and apartment buildings at Sõjakooli 12 in Tallinn and five apartment buildings
in the city of Brovary in Kiev region in Ukraine. In 2017, we have increased
our order book with contracts for the construction of an eight-floor apartment
building (Väsby Terrass) in Sweden and the design and construction of three
apartment buildings at Kakumäe in Tallinn. The largest contracts in the order
book of the public buildings sub-segment are the construction of an academic
building for the Estonian Academy of Security Sciences and the Abja Health
Centre building which were secured in the third quarter of 2017. The order
books of the commercial buildings and the industrial and warehouse facilities
sub-segments have increased substantially, the first primarily through the
contracts for the construction of a multi-storey car park at Sepise 8 in
Ülemiste City and the design and construction of a 14-floor commercial and
residential building at Mustamäe tee 3 in the WoHo quarter in Tallinn. The
sub-segment’s order book has also grown through the contract for the
construction of a 7-floor office building in the Unit City innovation park in
Kiev, which was signed in the third quarter. 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. Orders placed by the agricultural sector have increased as well. 

Compared with a year ago, the order book of the Infrastructure segment has
grown by around 45%. Most of the increase is attributable to the road
construction and maintenance sub-segment whose order book accounts for 91% of
the segment’s order book. The largest projects in the road construction order
book are the contracts signed in 2017 for the reconstruction of the Haabersti
intersection in Tallinn, the reconstruction of a section of the Tallinn ring
road (km 0.6-2.8) and the construction of a 2+1 road on the Valmaotsa–Kärevere
section of the Tallinn–Tartu–Võru–Luhamaa road. We continue to provide road
maintenance services in four road maintenance areas: Keila, Järva, Hiiu, and
Kose. The order book of the environmental engineering sub-segment has been
supplemented with a contract for the construction of a water treatment plant in
Kiev, Ukraine. According to our projections, in 2017 public investments will
not increase substantially. Nevertheless, based on our order book as at the
reporting date we expect that in 2017 the revenue of the Infrastructure segment
will grow slightly compared to 2016 (for further information, see the Business
risks section of the chapter Description of the main risks). 

Based on the size of the Group’s order book and known developments in our
selected markets, we project year-on-year revenue growth for 2017. In an
environment of stiff competition, we try to avoid taking unjustified risks
whose realisation in the contract performance phase would have an adverse
impact on our results. Despite this, where suitable opportunities arise, we
strive to counteract market-triggered margin compression by increasing the
portfolio. Our preferred policy is to keep fixed costs under control and
monitor market developments. 

Between the reporting date (30 September 2017) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 35,060 thousand euros. 



People

Employees and personnel expenses

In the first nine months of 2017, the Group (the parent and the subsidiaries)
employed, on average, 739 people including 425 engineers and technical
personnel (ETP). The number of employees, particularly the ETP staff, has
increased year on year by around 9% in connection with growth in the Group’s
business operations. 

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

               9M 2017  9M 2016  9M 2015  2016
----------------------------------------------
----------------------------------------------
ETP                425      374      357   381
Workers            314      305      342   303
Total average      739      679      699   684

Our personnel expenses for the first nine months of 2017 including all taxes
totalled 16,343 thousand euros (9M 2016: 14,898 thousand euros), a roughly 10%
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
nine months of 2017 amounted to 120 thousand euros and associated social
security charges totalled 40 thousand euros (9M 2016: 145 thousand euros and 48
thousand euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 923
thousand euros and associated social security charges totalled 272 thousand
euros (9M 2016: 480 thousand euros and 158 thousand euros respectively). The
figures include termination benefits of 550 thousand euros paid to two board
members in the third quarter and associated social security charges of 182
thousand euros (9M 2016: nil euros). In addition, the board’s compensation has
grown because the number of board members has increased. 



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: 

                                                9M 2017  9M 2016  9M 2015   2016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling), (EUR       308.1    245.1    217.5  268.0
 ‘000)                                                                          
Change against the comparative period             25.7%    12.7%    -0.6%    27%
                                                                                
Nominal labour cost efficiency (rolling),          10.3      8.2      8.2    9.0
 (EUR)                                                                          
Change against the comparative period             24.8%     0.6%     9.8%  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 (see the section Employees and
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. 

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
rival 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 and adherence to deadlines 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. Although the
amount exceeds the figure for the previous financial framework, the amounts
earmarked for construction work are substantially smaller than in the previous
budget period. Projects supported by the EU during the 2014-2020 financial
framework began to have some impact on the construction sector in the second
half of 2016 and in the following years 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 and 2018: business growth in Estonia is
also 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 30 September 2017, the
Group’s warranty provisions (including current and non-current ones) totalled
1,085 thousand euros (30 September 2016: 1,117 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 37 thousand euros. A year
earlier, credit losses totalled 506 thousand euros, comprising impairment
losses on trade receivables of 97 thousand euros and impairment losses on other
receivables of 409 thousand euros. 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 1.04-fold (30
September 2016: 1.05-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, at the reporting date the Group’s loans to its
Ukrainian associates of 8,867 thousand euros were 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. As at 30 September 2017, the Group’s short-term borrowings totalled
21,525 thousand euros, including factoring liabilities of 5,000 thousand euros.
Based on our prior experience with banks, out of the above amount contracts of
13,759 thousand euros will be extended when their maturity dates arrive. 

At the reporting date, the Group’s cash and cash equivalents totalled 8,062
thousand euros (30 September 2016: 7,288 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. During the period,
interest-bearing borrowings grew by 4,018 thousand euros year on year.
Factoring liabilities increased whereas loan and finance lease liabilities
decreased slightly (see also the section Liquidity risk). At 30 September 2017,
interest-bearing borrowings totalled 29,011 thousand euros (30 September 2016:
24,993 thousand euros). Interest expense for the first nine months of 2017
amounted to 487 thousand euros (9M 2016: 501 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. Moreover,
at the beginning of 2015 the National Bank of Ukraine decided to discontinue
determining the national currency’s indicative exchange rate. In the first nine
months of 2017, the hryvnia weakened against the euro by around 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 247 thousand euros (9M 2016: 251 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. 

Our Ukrainian and non-Ukrainian entities’ reciprocal receivables and
liabilities which are related to 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 nine
months of 2017, translation of operating receivables and payables resulted in
an exchange loss of 8 thousand euros (9M 2016: an exchange loss of 5 thousand
euros). The exchange loss has been recognised in Other operating expenses. 

We have not acquired derivatives to hedge currency risk.



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market

  -- At the end of 2017 and in 2018, public investment should grow slightly.
     However, it is still unclear for companies in which segments of the
     construction market and to what extent the state will be able to realise
     its investment plans. 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 in general, investments made by the largest
     public sector customers (e.g., state-owned real estate company Riigi
     Kinnisvara AS and the National Road Administration) which will 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 needs and activity in carrying out new procurement tenders
     and placing orders through a single agency, the Centre for Defence
     Investment, have made 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 private sector’s buoyant 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 the experience of the last major crisis it is likely that in an
     environment of stiff competition and rising input prices some general
     contractors may run into difficulties which will be passed on to several
     other market participants.
  -- Competition remains stiff across the construction market, intensifying in
     different segments in line with market developments. The rise in the
     average number of bidders for a contract reflects this. It is clear that in
     the new environment of rising input prices that has emerged in the past
     year, 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 set sales prices that are affordable for prospective buyers.
     Despite the market situation, the housing market sustained growth also in
     the first nine months of 2017, accounting for a somewhat disproportionately
     large share of the total construction market and thus amplifying associated
     risks.
  -- 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 the contract performance phase and the subsequent
     warranty period.
  -- The past year has brought a rise in the prices of construction inputs,
     particularly in building construction. At first, general contractors tried
     to absorb the cost increase by making margin concessions but their capacity
     for doing this has been practically exhausted. The construction market
     includes an increasing number of areas where changes in the environment
     (including materials producers’ rapid and successful entry into foreign
     markets) may trigger a sharp price increase. The rise in housing
     construction has lengthened the supply terms 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.
  -- The persisting shortage of skilled labour (including project and site
     managers) is restricting companies’ performance capacities, affecting
     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 sustains 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 offer 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 Ukrainian operations primarily in the Kiev region
but the preparations made in western Ukraine are also bearing fruit: in
October, we signed a large-scale contract in Lviv. Based on our order book, 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 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 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 (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
work 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 the observance of
deadlines and have therefore accepted lower 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 and
operating profitably in a large market when we have been able to stabilise
order book growth at the desired level. 



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. The consolidated revenue of
the Group in 2016 was 183 million euros. Currently Nordecon Group employs close
to 740 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